Strategic Management PDF

Business Policy and Strategic Management Concept of Strategy
BUSINESS POLICY
AND STRATEGIC
MANAGEMENT
Concept of Strategy
Learning Objective:
 Define strategy and understand its meaning;

 Understand the essence of strategy;
 Distinguish between strategy, policy, tactics, programs, procedures and rules;
 Understand strategic decisions and its difference with operational decisions;
 Understand different levels of strategy; and
 To know the importance of strategy.
Introduction
The top management of an organization is concerned with selection of a course of action from among
different alternatives to meet the organizational objectives. The process by which objectives are formulated
and achieved is known as strategic management and strategy acts as the means to achieve the objective.
Strategy is the grand design or an overall 'plan' which an organization chooses in order to move or react
towards the set objectives by using its resources. Strategies most often devote a general program of action
and an implied deployment of emphasis and resources to attain comprehensive objectives. An organization
is considered efficient and operationally effective if it is characterized by coordination between objectives
and strategies. There has to be integration of the parts into a complete structure. Strategy helps the
organization to meet its uncertain situations with due diligence. Without astrategy, the organization is like a
ship without rudder. It is like a tramp, which has no particular destination to go to. Without an appropriate
strategy effectively implemented, the future is always dark and hence, more are the chances of business
failure.
Meaning of Strategy
The word “Strategy” has entered in the field of management from the military services where it refers to
apply the forces against an enemy to win a war. Originally, the word strategy has been derived from Greek
'strategos' which means generalship. The word was used for the first time in around 400 BC. The word
strategy means the art of the general to fight in war.
The dictionary meaning of strategy is, "the art of so moving or disposing the instrument of warfare as to
impose upon enemy, the place time and conditions for fighting by one self."
In management, the concept of strategy is taken in more broad terms. According to Glueck, "Strategy is the
unified, comprehensive and integrated plan that relates the strategic advantage of the firm to the challenges
of the environment and is designed to ensure that basic objectives of the enterprise are achieved through
proper implementation process."
This definition of strategy lays stress on the following:

a) Unified comprehensive and integrated plan.
b) Strategic advantage related to challenges of environment.
c) Proper implementation ensuring achievement of basic objectives.
Another definition of strategy is given below which also relates strategy to its environment. "Strategy is
organization's pattern of response to its environment over a period of time to achieve its goals and mission."
This definition lays stress on the following:

a) It is organization's pattern of response to its environment.
b) The objective is to achieve its goals and mission.
However, various experts do not agree about the precise scope of strategy. Lack of consensus has lead to
two broad categories of definitions: strategy as action inclusive of objective setting and strategy as action
exclusive of objective setting.
Strategy as Action, Inclusive of Objective Setting
In 1960s, Chandler made an attempt to define strategy as "the determination of basic long term goals and
objective of an enterprise and the adoption of the courses of action and the allocation of resources
necessary for carrying out these goals."
This definition provides for three types of actions involved in strategy:
i) Determination of long term goals and objectives.

ii) Adoption of courses of action.
iii) Allocation of resources.
Strategy as Action Exclusive of Objective Setting
This is another view in which strategy has been defined. It states that strategy is a way in which the firm,
reacting to its environment, deploys its principal resources and marshalls its efforts in pursuit of its purpose.
Michael Porter has defined strategy as "Creation of a unique and valued position involving a different set of
activities. The company that is strategically positioned performs different activities fromrivals or performs
similar activities in different ways."
The people who believe this version of the definition call strategy a unified, comprehensive and integrated
plan relating to the strategic advantages of the firm to the challenges of the environment.
After considering both the views, strategy can simply be put as management's plan for achieving its
objectives. It basically includes determination and evaluation of alternative paths to an already established
mission or objective and eventually, choice of best alternative to be adopted.
Nature of Strategy
Based on the above definitions, we can understand the nature of strategy. A few aspects regarding nature of
strategy are as follows:
 Strategy is a major course of action through which an organization relates itself to its environment
particularly the external factors to facilitate all actions involved in meeting the objectives of the
organization.
 Strategy is the blend of internal and external factors. To meet the opportunities and threats
provided by the external factors, internal factors are matched with them.
 Strategy is the combination of actions aimed to meet a particular condition, to solve certain
problems or to achieve a desirable end. The actions are different for different situations.
 Due to its dependence on environmental variables, strategy may involve a contradictory action. An
organization may take contradictory actions either simultaneously or with a gap of time. For
example, a firm is engaged in closing down of some of its business and at the same time expanding
some.
 Strategy is future oriented. Strategic actions are required for new situations which have not arisen
before in the past.
 Strategy requires some systems and norms for its efficient adoption in any organization.
 Strategy provides overall framework for guiding enterprise thinking and action.
The purpose of strategy is to determine and communicate a picture of enterprise through a system of major
objectives and policies. Strategy is concerned with a unified direction and efficient allocation of an
organization's resources. A well-made strategy guides managerial action and thought. It provides an
integrated approach for the organization and aids in meeting the challenges posed by environment.
Essence of Strategy
Strategy, according to a survey conducted in 1974, includes the determination and evaluation of alternative
paths to an already established mission or objective and eventually, choice of the alternative to be adopted.
Strategy is characterized by four important aspects.
 Long-Tern objectives.
 Competitive Advantage.
 Vector.
 Synergy.
Long Term Objectives: Strategy is formulated keeping in mind the long term objectives of the organization.
It is so because it emphasizes on long term growth and development. Strategy is future oriented and
therefore concerned with the objectives which have a long term perspective.
The objectives give directions for implementing a strategy.
Competitive Advantage: Whenever strategy is formulated, managers have to keep in mind the competitors
of the organization. The environment has to be continuously monitored for forming a strategy. Strategy has
to be made in a sense that the firm may have competitive advantage. It makes the organization competent
enough to meet the external threats and profit from the environmental opportunities. The changes that
take place over a period of time in the environment have made the use of strategy more beneficial. While
making plans, competitors may be ignored but in strategy formulation, competitors are to be given due
importance.
Vector: Strategy involves adoption of the course of action and allocation of resource for meeting the long
term objectives. From among the various courses of action available, the, managers have to choose the one
which utilizes the resources of the organization in the best possible manner and helps in the ac1iievement of
the organizational objectives. A series of decisions are taken and they are in the same direction.
Strategy provides direction to the whole organization. When the objective has been set, they bring about
clarity to the whole organization. They provide clear direction to persons in the organization who are
responsible for implementing the various courses of action. Most people perform better if they know clearly
what they are expected to do and where the organization is going.
Synergy: Once we take a series of decisions to accomplish the objectives in the same direction, there will be
synergy. Strategies boost the prospects by providing synergy.
Let us now take an example to illustrate the essence of strategy in a firm dealing with chemicals. The scope
of the firm relating the product is basic chemicals and pharmaceuticals. The objectives of the firm can be:
 Return on Investment: Threshold 20%, goal 35%.
 Sales growth rate: Threshold 10%, goal 15%.
The strategy which comprises of the competitive advantage, growth vector and synergy can be:
 Competitive advantage: Patent protection and well developed R & D division.
 Growth vector: Product development and concentric diversification.
 Synergy: Use of the firm's research capabilities and production technology.
In this manner each firm can individually have its own strategy.
Strategy V/s. Policies and Tactics
Now we shall discuss the concept of Strategy V/s Policies and Tactics.
Strategy v/s Policies
Strategy has often been used as a synonym of policy. However, both are different and should not be used
interchangeably.
Policy is the guideline for decisions and actions on the part of subordinates. It is a general statement of
understanding made for achievement of objectives. Policies are statements or a commonly accepted
understanding of decision making. They are thought oriented. Power is delegated to the subordinates for
implementation of policies. In general terms, policy is concerned with course of action chosen for the
fulfillment of the set objectives. It is an overall guide that governs and controls managerial actions. Policies
may be general or specific, organizational or functional, written or implied. They should be clear and
consistent. Policies have to be integrated so that strategy is implemented successfully and effectively. For
example, when the performance of two employees is similar, the promotion policy may require the
promotion of the senior employee and hence lie would be eligible for promotion.
Strategies on the other hand are concerned with the direction in which human and physical resources are
deployed and applied in order to maximize the chances of achieving organizational objectives in the face of
environmental variable. Strategies are specific actions suggested to achieve the objectives. Strategies are
action oriented and everyone in the organization is empowered to implement them. Strategy cannot be
delegated downward because it may require last minute decisions.
Strategies and polices both are directed towards meeting organizational objectives. Strategy is a rule for
making decision while policy is contingent decision.
Strategy v/s Tactics
Strategies are on one end of the organizational decisions spectrum while tactics lie on the other end.
Carl Von Clausewitz, a Prussian army general and military scientist defines military strategy as making use of
battles in the furtherance of the war and the tactics as "the use of armed forces in battle". A few points of
distinction between the two are as follows:
i) Strategy determines the major plans to be undertaken while tactics is the means by which previously
determined plans are executed.
ii) The basic goal of strategy according to military science is to break the will of the army, deprive the enemy
of the means to fight, occupy his territory, destroy or obtain control of his resources or make him surrender.
The goal of tactics is to achieve success in a given action and this forms one part of a group of related
military action.
iii) Tactics decisions can be delegated to all the levels of an organization while strategic decisions cannot be
delegated too low in the organization. The authority is not delegated below the levels than those which
possess the perspective required for taking decisions effectively.
iv) Strategy is formulated in both a continuous as well as irregular manner. The decisions are taken on the
basis of opportunities, new ideas etc. Tactics is determined on a periodic basis by various organizations. A
fixed time table may be made for following tactics.
v) Strategy has a long term perspective and occasionally it may have a short term duration. Thus, the time
horizon in terms of strategy is flexible but in case of tactics, it is short run and definite.
vi) The decisions taken as part of strategy formulation and implementation have a high element of
uncertainty and are taken under the conditions of partial ignorance. In contrast tactical decisions are more
certain as they work upon the framework set by the strategy. So the evaluation of strategy is difficult than
the evaluation of tactics.
vii) Since an attempt is made in strategy to relate the organization with its environment, the requirement of
information is more than that required in tactics. Tactics use information available internally in an
organization.
viii) The formulation of strategy is affected considerably by the personal values of the person involved in the
process but the same is not the case in tactics implementation.
ix) Strategies are the most important factor of organization because they decide the future course of action
for organization as a whole. On the other hand, tactics are of less importance because they are concerned
with specific part of the organization.
Strategy v/s Programs, Procedure and Rules
Programs
A program is a single use comprehensive plan laying down the principle steps for accomplishing a specific
objective and sets an approximate time limit for each stage. It is basically concerned with providing answers
to questions like: By whom will the actions be taken up? When will the actions be taken? Where will the
actions be taken? Programs are guided by organization's objectives and strategies and cover many of the
other types of plans. Therefore, they provide a step by step approach to guide the action necessary to meet
the objectives as set in the strategy. Programs provide the sequence of activities in a proper order which are
designed to implement policies. Programs are the instruments for coordination as they require system,
thinking and action. They also involve integrated and coordinated planning efforts.
Procedure
In general terms, a procedure can be defined as "A series of functions or steps performed to accomplish a
specific task or undertaking." Strategies, programs, policies, budgets etc. need to be supplemented with
detailed specifications, i.e., how they are to operate or would operate. A procedure is a precise means of
making a step by step guide to action that operates within a policy framework. Most companies have
hundreds of procedures like selection, promotion, transfer etc. They are essential forsmooth operation of
the business activities. For example, procedure may include calling tenders for purchasing materials, keeping
them in stock room and issuing them against requisition slips. Procedures are concerned with
communication of tasks to be performed, organization interfaces and the responsibilities of the individuals
involved. The) describe the customary method for handling a future activity. It gives sequence of actions
directed at a single goal (usually short term) that is repeatedly pursued, i.e., adopting budget, making
procedures or granting sick leave to an employee against medical certificate etc. Procedures are more rigid
and allow no freedom as against strategies which are flexible and are not concerned with fixed steps.
Rules
A rule is principle to which an action or a procedure conforms or is intended to conform. It is a standard or a

norm to be followed in the conduct of a business in a particular situation. It is more rigid and demands a
specific action with respect to particular situation. It does not mention any kind of time estimate or
sequence as in the case of procedures. It is much more specific than a policy. It allows no liberty or leniency
and does not tolerate much deviation. Rules have to be strictly followed and non-compliance may entail
penalty or punishment. For example, "NO Smoking" is a rule which has to be adhered to, by all the levels of
management.
Levels of strategy
It is believed that strategic decision making is the responsibility of top management. However, it is
considered useful to distinguish between the levels of operation of the strategy. Strategy operates at
different levels vis-à-vis:
 Corporate Level
 Business Level
 Functional Level
There are basically two categories of companies- one, which have different businesses organized as different
directions or product groups known as profit centres or strategic business units (SBUs) and other, which
consists of companies which are single product companies. The example of first category can be that of
Reliance Industries Limited which is a highly integrated company producing textiles, yarn, and a variety of
petro chemical products and the example of the second category could be Ashok Leyland Limited which is
engaged in the manufacturing and selling of heavy commercial vehicles. The SBU concept was introduced by
General Electric Company (GEC) of USA to manage product business. The fundamental concept in the SBU is
the identification of discrete independent product/ market segments served by the organization. Because of
the different environments served by each product, a SBU is created for each independent product/
segment. Each and every SBU is different from another SBU due to the distinct business areas (DBAs) it is
serving. Each SBU has a clearly defined product / market segment and strategy. It develops its strategy
according to its own capabilities and needs with overall organizations capabilities and needs. Each SBU
allocates resources according to its individual requirements for the achievement of organizational
objectives. As against the multi-product organizations, the single product organizations have single Strategic
Business Unit. In these organizations, corporate level strategy serves the whole business. The strategy is
implanted at the next lower level by functional strategies. In multiple product company, a strategy is
formulated for each SBU (known as business level strategy) and such strategies lie between corporate and
functional level strategies.
The three levels are explained as follows:
Corporate Level Strategy
At the corporate level, strategies are formulated according to organization wise polices. These are value
oriented, conceptual and less concrete than decisions at the other two levels. These are characterized by
greater risk, cost and profit potential as well as flexibility. Mostly, corporate level strategies are futuristic,
innovative and pervasive in nature. They occupy the highest level of strategic decision making and cover the
actions dealing with the objectives of the organization. Such decisions are made by top management of the
firm. The example of such strategies include acquisition decisions, diversification, structural redesigning etc.
The board of Directors and the Chief Executive Officer are the primary groups involved in this level of
strategy making. In small & family owned businesses, the entrepreneur is both the general manager and
chief strategic manager.
Business Level strategy
The strategies formulated by each SBU to make best use of its resources given the environment it faces,
come under the gamut of business level strategies. At such a level, strategy is a comprehensive plan
providing objectives for SBUs, allocation of resources among functional areas and coordination between
them for achievement of corporate level objectives. These strategies operate within the overall
organizational strategies i.e. within the broad constraints and polices and long term objectives set by the
corporate strategy. The SBU managers are involved in this level of strategy. The strategies are related with a
unit within the organization. The SBU operates within the defined scope of operations by the corporate level
strategy and is limited by the assignment of resources by the corporate level. However, corporate strategy is
not the sum total of business strategies of the organization. Business strategy relates with the "how" and
the corporate strategy relates with the "what"' Business strategy defines the choice of product or service
and market of individual business within the firm. The corporate strategy has impact on business strategy.
Functional Level Strategy
This strategy relates to a single functional operation and the activities involved therein. This level is at the
operating end of the organization. The decisions at this level within the organization are described as
tactical. The strategies are concerned with how different functions of the enterprise like marketing, finance,
manufacturing etc. contribute to the strategy of other levels. Functional strategy deals with a relatively
restricted plan providing objectives for specific function, allocation of resources among different operations
within the functional area and coordination between them for achievement of SBU and corporate level
objectives.
Sometimes a fourth level of strategy also exists. This level is known as the operating level. It comes below
the functional level strategy and involves actions relating to various sub functions of the major function. For
example, the functional level strategy of marketing function is divided into operating levels such as
marketing research, sales promotion etc.
Three levels of strategies have different characteristics as shown in the following table.
Levels
Dimensions
Corporate Business Functional
Impact Significant Major Insignificant
Risk Involved High Medium Low
Profit Potential High Medium Low
Time Horizon Long Medium Low
Flexibility High Medium Low
Adaptability Insignificant Medium Significant
Table: Strategic Decisions at Different Levels
Importance of strategy
With the increase in the pressure of external threats, companies have to make clear strategies and
implement them effectively so as to survive. There have been companies like Martin Burn, Jessops etc. that
have completely become extinct and some companies which were not existing before they became the
market leaders like Reliance, Infosys, Technologies etc. The basic factor responsible for differentiation has
not been governmental policies, infrastructure or labor relations but the type of strategic thinking that
different companies have shown in conducting the business.
Strategy provides various benefits to its users:
 Strategy helps an organization to take decisions on long range forecasts.

 It allows the firm to deal with a new trend and meet competition in an effective manner.
 With the help of strategy, the management becomes flexible to meet unanticipated changes.
 Efficient strategy formation and implementation result into financial benefits to the organization in
the form of increased profits.
 Strategy provides focus in terms of organizational objectives and thus provides clarity of direction
for achieving the objectives.
 Organizational effectiveness is ensured with effective implementation of the strategy.
 Strategy contributes towards organizational effectiveness by providing satisfaction to the personnel.
 It gets managers into the habit of thinking and thus makes them, proactive and more conscious of
their environment.
 It provides motivation to employees as it paves the way for them to shape their work in the context
of shared corporate goals and ultimately they work for the achievement of these goals.
 Strategy formulation & implementation gives an opportunity to the management to involve
different levels of management in the process.
 It improves corporate communication, coordination and allocation of resources.
With all the benefits listed above, it is quite clear that strategy forms an integral part of an organization and
is the means to achieve the end in an efficient and effective manner.
Summary
 Strategy is the conscious and rational management exercise which involves defining and achieving
an organization's objectives and implanting its mission.
 Strategy is a major course of action, a blend of internal &external factors and is particular to a
specific situation.
 Strategy is dependent on environmental variables and is futuristic in nature.
 Strategy has been misused with terms like policy, tactics, programs and procedures and rules. It is
differentiated with all these concepts.
 Strategy is operational at three levels - Corporate level, Business level and Functional level. There
may be a fourth level known as the Operations level as well.
Previous Years’ Questions of Vidyasagar University:
1. Write a note on the evolution of strategic management. (2016 – QP 404) (5)
Answer: In late 500, Sun Tzu authored a book called The Art of War, which contains 13 chapters that focus
on military strategies and tactics. According to Sun Tzu, the positioning of an army was important and while
doing so one should take into account the physical environment and subjective beliefs of one's opponents
on the field. He emphasized the importance of responding quickly to the environment in order to
appropriately meet changing conditions. In a static environment, planning works successfully, but in a
dynamic and changing environment plans rarely work.
Strategic management slowly blossomed into a distinct and important discipline over a five-decade
period. During the 1950s it was in the embryonic stage, where the focus of the top management team was
on budgetary planning and controls and key concepts revolved around financial control. To achieve control
over the budgeting, management made use of accounting tools such as capital budgeting and financial
planning. At this time companies achieved competitive advantage through coordination and control of
budgetary systems. During the 1960s through 1970s, management teams started focusing on corporate
planning. Most companies initiated corporate planning departments to plan for growth and diversification
and used forecasting as the primary tool to visualize growth. Companies embarking on growth attempted to
seek opportunities for diversification. By the 1970s, strategic management started evolving on a more
serious note, extending beyond the budgetary planning and control, and corporate planning, to include
positioning companies in relation to competitors. Corporations tried to jockey for power and focused on
selecting particular market segments and positioning for leadership. During this period, companies analyzed
industry to determine attractiveness in terms of entry barriers, available suppliers, and potential buyers.
Companies attempted to diversify and expand through entry into the global arena during this period. To
align structure with strategy, companies started slowly moving toward hybrid and matrix structures. By the
late 1980s through 1990s, the growth of strategic management as a separate discipline started taking its
own shape. This can be seen in terms of companies attempting to secure competitive advantage. The key
concepts of the companies concerned the sources of sustained competitive advantage (i.e., ways and means
of gaining success over potential rivals). Table 2.1 captures the timeline of evolution of strategic
management.
In the early stages of development, strategic management concepts revolved around microeconomics. As
the theory of firm addresses the question of why firms exist and what determines their scale and scope,
other theories also revolved around this basic theme. The initial answer was in terms of the neoclassical
theory of perfect competition that considers the firm as a combiner of inputs to produce desired outputs.
Firms aim at achieving the least among the cost combinations of inputs in the production process, equating
the marginal cost to the marginal revenue to determine the level of output that maximizes profit. The
inherent and highly restrictive assumptions are that resources are perfectly mobile and the buyers and
sellers have all necessary information. Most importantly, firms are small in size and produce single products,
and hence all firms are assumed to be identical. The firm's size is determined by technological and
managerial factors.
Gradually, researchers realized that these highly restrictive assumptions may not be applicable in real life.
Some degree of monopoly power exists in industry. The firms that have monopoly power are capable of
restraining output to maximize their profits. When power gets diluted, which can be seen in terms of low
industry concentration, firms compete for market share and engage in different strategies depending on the
context and purpose. The industry structure (called structure) as determined by the number of buyers and
sellers, entry barriers, product differentiation, and proportion of fixed to variable costs sets the tone for the
strategy (called conduct), which may be seen in advertisement wars and price wars between firms.
Performance is a close combination of these forces' structure conduct. Therefore, subsequent scholars (e.g.,
Bain 1954) in strategic management focused on examining the structure-conduct-performance relationship.
The first and foremost scholar who brought recognition to strategic management as a separate discipline
was Chandler after he wrote the book titled Strategy and Structure in 1962. Chandler explained how giant
corporations (such as General Motors, Standard Oil, and DuPont) have grown over the years in such a way
that senior managers had to direct their energies to make long-term decisions and move away from daily
routine decisions. He was the first to label a formal term—strategy—for these long-term plans. The term
actually was derived from the Greek word strategies (which means "art of the general").
Following Chandler, corporations resorted to making use of long-range planning in their strategic
decision-making agendas. The main focus was to examine budgetary proposals in light of the past data on
expenditures. Chandler also argued that organizations need to change their structure to follow the changes
in strategy. Firms gradually moved to organic structures (from traditional functional structures), which were
centered on work teams and groups to enhance productivity and performance.
Almost at the same time, Schumpeter (1950) argued that firms should try to capture the market by
innovation and make rivals' positions vulnerable. He was of the view that competition over innovation
would be more effective than the price competition. It is important to note that firms seeking radical
innovation eventually enjoy monopoly power. But a significant point is that this radical innovation is often
risky and the financial commitments involved in innovation may prohibit firms from venturing to implement
the innovation. In the process of innovation, firms are engaged in "creative destruction."
It is also important to take note of Ronald Coase's notion of the costs of negotiating contracts for the
factors of production. Based on Coase's framework, Williamson elaborately explained the transaction cost
economics (TCE) as relevant to strategic management. Most importantly, firms avoid the costs of
transactions through price mechanisms. The transaction cost approach is very much relevant under the
conditions where the potential for opportunistic behavior by the members in the transaction is very high.
Williamson emphasizes the existence of three conditions for this opportunistic behavior: asset specificity, a
small number of people involved in transactions, and imperfect information. Early in the 1980s, some other
scholars, such as Klein and Leffler, extended the framework of Williamson by stating that existence of
opportunistic potential is not adequate for deriving monopoly power. It is likely that both the parties may
engage in cooperative relationships to avoid diseconomies stemming from the mutual exploitation.
As history reveals, firms moved away from simple long-range planning to craft and implement strategies
to deal with the changing environment. Until the 1970s, companies did not face challenges from global
competition. Onset of technology paved the way for the Information Age and most of the U.S. companies
lost their ground to international firms. For example, the automobile industry in United States experienced
rapid decline in their market share due to intense competition from Japanese automobile companies.
2. Explain the term ‘Strategy’. (2016 – QP 404) (5)
Answer: The word “Strategy” has entered in the field of management from the military services where it
refers to apply the forces against an enemy to win a war. Originally, the word strategy has been derived
from Greek 'strategos' which means generalship. The word was used for the first time in around 400 BC. The
word strategy means the art of the general to fight in war.
The literal meaning of strategy is, "the art of so moving or disposing the instrument of warfare as to impose
upon enemy, the place time and conditions for fighting by one self."
In management, the concept of strategy is taken in more broad terms. According to Glueck, "Strategy is the
unified, comprehensive and integrated plan that relates the strategic advantage of the firm to the challenges
of the environment and is designed to ensure that basic objectives of the enterprise are achieved through
proper implementation process."
This definition of strategy lays stress on the following:

a) Unified comprehensive and integrated plan.
b) Strategic advantage related to challenges of environment.
c) Proper implementation ensuring achievement of basic objectives.
Another definition of strategy is: "Strategy is organization's pattern of response to its environment over a
period of time to achieve its goals and mission."
This definition lays stress on the following:

a) It is organization's pattern of response to its environment.
b) The objective is to achieve its goals and mission.
3. Value Chain Analysis is an important technique for taking decisions relating to process
reengineering and improvement. In this regard, discuss the model and its implications for
decision-makers. (2013 – QP206) (7+3)
Answer: Value chain analysis (VCA) is a process where a firm identifies its primary and support activities
that add value to its final product and then analyze these activities to reduce costs or increase
differentiation.
Value chain represents the internal activities a firm engages in when transforming inputs into outputs.
Understanding the tool
Value chain analysis is a strategy tool used to analyze internal firm activities. Its goal is to recognize, which
activities are the most valuable (i.e. are the source of cost or differentiation advantage) to the firm and
which ones could be improved to provide competitive advantage. In other words, by looking into internal
activities, the analysis reveals where a firm’s competitive advantages or disadvantages are. The firm that
competes through differentiation advantage will try to perform its activities better than competitors would
do. If it competes through cost advantage, it will try to perform internal activities at lower costs than
competitors would do. When a company is capable of producing goods at lower costs than the market price
or to provide superior products, it earns profits.
M. Porter introduced the generic value chain model in 1985. Value chain represents all the internal activities
a firm engages in to produce goods and services. VC is formed of primary activities that add value to the final
product directly and support activities that add value indirectly.
Porter’s Value Chain Model
Primary Activities
Support Activities
Although, primary activities add value directly to the production process, they are not necessarily more
important than support activities. Nowadays, competitive advantage mainly derives from technological
improvements or innovations in business models or processes. Therefore, such support activities as
‘information systems’, ‘R&D’ or ‘general management’ are usually the most important source of
differentiation advantage. On the other hand, primary activities are usually the source of cost advantage,
where costs can be easily identified for each activity and properly managed.
Firm’s VC is a part of a larger industry VC. The more activities a company undertakes compared to industry
VC, the more vertically integrated it is. Below you can find an industry value chain and its relation to a firm
level VC.
Using the tool
There are two different approaches on how to perform the analysis, which depend on what type
of competitive advantage a company wants to create (cost or differentiation advantage). The table below
lists all the steps needed to achieve cost or differentiation advantage using VCA.
Competitive advantage types

Cost advantage Differentiation
advantage
This approach is used when organizations try to compete on costs and The firms that
want to understand the sources of their cost advantage or disadvantage strive to create
and what factors drive those costs. superior products
or services use
differentiation
advantage
approach.
 Step 1. Identify the firm’s primary and support activities.  Step 1. Identify the
 Step 2. Establish the relative importance of each activity in the total cost of customers’ value-
the product. creating activities.
 Step 3. Identify cost drivers for each activity.  Step 2. Evaluate
 Step 4. Identify links between activities. the differentiation
 Step 5. Identify opportunities for reducing costs. strategies for
improving
customer value.
 Step 3. Identify the
best sustainable
differentiation.
Cost advantage
To gain cost advantage a firm has to go through 5 analysis steps:
Step 1. Identify the firm’s primary and support activities. All the activities (from receiving and storing
materials to marketing, selling and after sales support) that are undertaken to produce goods or services
have to be clearly identified and separated from each other. This requires an adequate knowledge of
company’s operations because value chain activities are not organized in the same way as the company
itself. The managers who identify value chain activities have to look into how work is done to deliver
customer value.
Step 2. Establish the relative importance of each activity in the total cost of the product. The total costs of
producing a product or service must be broken down and assigned to each activity. Activity based costing is
used to calculate costs for each process. Activities that are the major sources of cost or done inefficiently
(when benchmarked against competitors) must be addressed first.
Step 3. Identify cost drivers for each activity. Only by understanding what factors drive the costs, managers
can focus on improving them. Costs for labor-intensive activities will be driven by work hours, work speed,
wage rate, etc. Different activities will have different cost drivers.
Step 4. Identify links between activities. Reduction of costs in one activity may lead to further cost
reductions in subsequent activities. For example, fewer components in the product design may lead to less
faulty parts and lower service costs. Therefore, identifying the links between activities will lead to better
understanding how cost improvements would affect he whole value chain. Sometimes, cost reductions in
one activity lead to higher costs for other activities.
Step 5. Identify opportunities for reducing costs. When the company knows its inefficient activities and cost
drivers, it can plan on how to improve them. Too high wage rates can be dealt with by increasing production
speed, outsourcing jobs to low wage countries or installing more automated processes.
Differentiation advantage
VCA is done differently when a firm competes on differentiation rather than costs. This is because the
source of differentiation advantage comes from creating superior products, adding more features and
satisfying varying customer needs, which results in higher cost structure.
Step 1. Identify the customers’ value-creating activities. After identifying all value chain activities,
managers have to focus on those activities that contribute the most to creating customer value. For
example, Apple products’ success mainly comes not from great product features (other companies have
high-quality offerings too) but from successful marketing activities.
Step 2. Evaluate the differentiation strategies for improving customer value. Managers can use the
following strategies to increase product differentiation and customer value:
 Add more product features;

 Focus on customer service and responsiveness;
 Increase customization;
 Offer complementary products.
Step 3. Identify the best sustainable differentiation. Usually, superior differentiation and customer value
will be the result of many interrelated activities and strategies used. The best combination of them should
be used to pursue sustainable differentiation advantage.
Example
This example is partially adopted from R. M. Grant’s book ‘Contemporary Strategy Analysis’ p.241. It
illustrates the basic VCA for an automobile manufacturing company that competes on cost advantage. This
analysis doesn’t include support activities that are essential to any firm’s value chain, thus the analysis itself
is not complete.
Value Chain Analysis Example
Step 1 - Firm's primary activities
Design and Purchasing Assembly Testing and Sales and Distribution and
engineering materials and quality control marketing dealer support
components
Step 2 - Toal cost and importance
$164 M $410 M $524 M $10 M $384 M $230 M

less very important very not important important less important
important important
Step 3 - Cost drivers
 Number  Order size  Scale of  Level of quality  Size of  Number of

and  Average value plants targets advertising dealers
frequency of purchases  Capacity  Frequency of budget  Sales per dealer
of new per supplier utilization defects  Strength of  Frequency of
models  Location of  Location of existing defects requiring
 Sales per suppliers plants reputation repair recalls
model  Sales Volume
Step 4 - Links between activities
1. High-quality assembling process reduces defects and costs in quality control and dealer support activities.
2. Locating plants near the cluster of suppliers or dealers reduces purchasing and distribution costs.
3. Fewer model designs reduce assembling costs.
4. Higher order sizes increase warehousing costs.
Step 5 - Opportunities for reducing costs
1. Create just one model design for different regions to cut costs in designing and engineering, to increase
order sizes of the same materials, to simplify assembling and quality control processes and to lower
marketing costs.
2. Manufacture components inside the company to eliminate transaction costs of buying them in the
market and to optimize plant utilization. This would also lead to greater economies of scale.
Business Policy and Strategic Management Process of Strategy
Process of Strategy
Learning Objective:
 Understanding the process of strategy;

 Identifying various steps of strategy formulation;
 Understanding the role played by different participants in the process;
 To know the sequence of activities involved in the process.
Introduction
There are two dimensions of every action – substantive and procedural. The former involves determination
of what to do and the latter is concerned with determination of how to do. Both of these dimensions are
interdependent and taken together help in achieving the objectives for which the action is contemplated. In
the context of an organization engaged in strategy formulation and implementation, the substantive
dimension deals with the determination of strategy or set of strategies and procedural dimension deals with
putting a strategy into operation. Besides these, it has to be decided that who will do what in completing the
action. The logic of a process is that its particular elements are undertaken in a sequence over a period. The
strategy process involved in strategy includes a number of elements. The process can be defined as a set of
management decisions and actions which determines the long run direction and performance of the
organization. It is a dynamic and continuous process. However, there are two problems in identifying and
sequencing the elements:
i) There is no unanimity among various authors about the elements and their interaction.
ii) After the elements have been identified, their sequential arrangement is another problem.
Both these problems highlight the complexity of strategic process. The process includes definition of
organizational vision, mission and objectives, environmental analysis, identification and evaluation of
strategic alternatives, making a choice, implementing it and evaluating and controlling the strategy.
Process of Strategy
The process of strategy is cyclical in nature. The elements within it interact among themselves. Figures 2.1
and 2.2 present the process for single SBU firm and multiple SBU firm respectively. The process has to be
adjusted for multiple SBU firms because there it is conducted at corporate level as well as SBU levels as
these firm’s insert SBU strategy between corporate strategy and functional strategy. Initially, the process of
strategy was discussed in terms of four phases which are:
A. Identification phase
B. Development phase
C. Implementation phase
D. Monitoring phase
The process of strategy does not have the same steps as stated by different authors.
According to C.K. Prahalad, the process comprises of five steps. They are:
1. Strategic Intent
2. Environmental Analysis
3. Evaluation of strategic alternatives and choice
4. Strategy Implementation
5. Strategy Evaluation and Control
For our understanding, the process has been divided into the following steps:
a. Strategic Intent
b. Environmental and Organizational Analysis
c. Identification of Strategic Alternatives
d. Choice of Strategy Defining Vision, Mission &
e. Implementation of Strategy Business
f. Evaluation and Control
Environmental Analysis Organizational Analysis
Setting Objectives & Goals

Reset, if
Reqd.
Identifying Alternative Strategies
Reformula Choice of Strategy

te, if Reqd.
Reimplemen Implementation of Strategy

t, if Reqd.
Strategy Evaluation & Control
Feedback
Fig. 2.1: Strategic Process in a Single SBU Firm

Defining Mission, Vision Setting SBU Objectives

and Business Organizational
Long-Term
Objectives
Environmental Analysis for Environmental Analysis for

Present & Potential SBUs SBU
Organizational and SBU Analysis of SBU

Analysis
Strategic Alternatives Strategic Alternatives
Choice of Strategy Choice of Strategy
Implementation of Implementation of
Strategy Strategy
Evaluation of Organization Evaluation of SBU Results

& SBU Results
Feedback Feedback
Figure 2.2: Strategic Management Processing in a Multiple SBU Firm

Strategic Intent
Setting of organizational vision, mission and objectives is the starting point of strategy formulation. The
organizations strive for achieving the end results which are ‘vision’, ‘mission’, ‘purpose’, ‘objective’, ‘goals’,
‘targets’ etc. The hierarchy of strategic intent lays the foundation for the strategic management of any
organization. The strategic intent makes clear what an organization stands for. It is reflected through vision,
mission, business definition and objectives. Vision serves the purpose of stating what an organization wishes
to achieve in long run. The process of assigning a part of a mission to a particular department and then
further sub dividing the assignment among sections and individuals creates a hierarchy of objectives. The
objectives of the sub unit contribute to the objectives of the larger unit of which it is a part. From strategy
formulation point of view, an organization must define ‘why’ it exists, ‘how’ it justifies that existence, and
‘when’ it justifies the reasons for that existence. The answers to these questions lie in the organization’s
mission, business definition, objectives and goals. These terms become the base for strategic decisions and
actions.
Mission: The vision of an organization is the expectation of the owner of the organization and putting this
vision into action is mission. Often these terms are used interchangeably, but both are different. The
dictionary meaning of mission is that, “mission relates to that aspect for which an individual has been or
seems to have been sent into the world”. Mission is relatively less abstract, subjective, qualitative,
philosophical and non-imaginative. Mission has a societal orientation and is a statement which reveals what
an organization intends to do for a society. It is a public statement which gives direction for different
activities which organizations have to carry on. It motivates employees to work in the interest of the
organization.
Business Definition: The answer to the question that ‘how’ does an organization justify its existence is
defining business of the organization. A business definition is the clear cut statement of the business or a set
of businesses, the organization engages or wishes to pursue in the future. It also defines the scope of the
organization. An organization can face its competitors not by doing what they do but by doing it differently.
Business can be defined along three dimensions vis-à-vis product, customer and technology. In whatever
dimensions, it is defined, it must reflect two features:
1. Focus
2. Differentiation
Focus of business is defined in terms of the kind of functions the business performs rather than the broad
spectrum of industry in which the organization operates. A sharp focus on business definition provides
direction to a company to take suitable actions including positioning of the company’s business.
The next feature involved in business definition is differentiation i.e. how an organization differentiates itself
from others so that the business concentrates on achieving superior performance in the market.
Differentiation can be on several bases like quality, price, delivery, service or any other factor which the
concerned market segment values. For example, an organization can charge comparatively lower price as
compared to its competitors in the same product quality segment, then price is not the differentiating
factor. As against this, if the organization is charging a much lower price in the same product group
excluding quality, price becomes a differentiating factor. For example, in synthetic detergent market, HLL
and Nirma provide for such a differentiation.
Objectives and Goals: Once the organization’s mission has been determined, its objective, desired future
positions that it wishes to reach, should be identified. Organizational objectives are defined as ends which
the organization seeks to achieve by its existence and operation. Objectives represent desired results which
the organization wishes to attain. They indicate the specific sphere of aims, activities and accomplishments.
An organization can have objectives in terms of profitability and productivity. Objectives provide a direction
to the organization and all the divisions work towards the attainment of the set objectives. Objectives and
goals are the terms which are used interchangeably.
It is necessary for the organization to assess the process identifying the objectives of each functional area.
After accomplishment of these objectives, the overall objectives of the organization are achieved.
Organization’s mission becomes the cornerstone for strategy. Objectives are other factors which determine
the strategy. By choosing its objectives, an organization commits itself for these.
Environmental and organizational analysis
Every organization operates within an environment. This environment may be internal or external. For
conducting an environmental analysis, the strategic intent has to be very clear. This clarity in definition of
mission and objectives helps in the detailed analysis of the environment. Environmental analysis, also known
as environmental scanning or appraisal, is the process through which an organization monitors and
comprehends various environmental factors and determines the opportunities and threats that are provided
by these factors. There are two aspects involved in environmental analysis:
A) Monitoring the environment i.e. environmental search and

B) Identifying opportunities and threats based on environmental monitoring, i.e., environmental diagnosis.
Environmental analysis is an exercise in which total view of environment is taken. The environment is
divided into different components to find out their nature, function and relationship for searching
opportunities and threats and determining where they come from, ultimately the analysis of these
components is aggregated to have a total view of the environment. Some elements indicate opportunities
while others may indicate threats.
A large part of the process of environmental analysis seeks to explore the unknown terrain, the dimensions
of future. The analysis emphasizes on what could happen and not necessarily what will happen. The factors
which comprise firm’s environment are of two types:
a) factors which influence environment directly including suppliers, customers and competitors, and
b) factors which influence the firm indirectly including social, technological, political, legal, economic factors
etc.
The environmental analysis plays a very important role in the process of strategy formulation. The
environment has to be analyzed to determine what factors in the environment present opportunities for
greater accomplishment of organizational objectives and what factors present threats. Environmental
analysis provides time to anticipate the opportunities and plan to meet the challenges. It also warns the
organization about the threats. The analysis provides for elimination of alternatives which are inconsistent
with the organizations objectives. Due to the element of uncertainty, environmental analysis provides for
certain anticipated changes in the organization’s network. The organization equips itself to meet the
unanticipated changes and face the ever increasing competition.
For doing the environmental analysis, there can be the strategic advantage profile which provides for
analysis of internal environment, and the organization capability profile as well. For analyzing the external
environment, environmental threat and opportunity profile could be adopted. An organization has to
continuously grow in term of its core business and develop core competencies.
Through organizational analysis, the organization has to understand its strengths and weaknesses. It has to
identify the strengths and emphasize on them. At the same time, it has to identify its weaknesses and
improve them or try to eliminate them.
Organizational threats and opportunities, strengths and weaknesses help in identifying the relevant
environmental factors for detailed analysis.
Identification of strategic alternatives
After environmental analysis, the next step is to identify the various strategic alternatives. After the
identification of strategic alternatives, they have to be evaluated to match them with the environmental
analysis. According to Glueck & Jauch, “strategic alternatives revolve around the question whether to
continue or change the business, the enterprise is currently improving the efficiency or effectiveness with
which the firm achieves its corporate objectives in its chosen business sector” the process may result into
large number of alternatives through which an organization relates itself to the environment. All alternatives
cannot be chosen even if all of these provide the same results. Obviously, managers evaluate them and limit
themselves.
According to Glueck, there are basically four grand strategic alternatives:
A) Stability
B) Expansion
C) Retrenchment
D) Combination
These are together known as stability strategies/ basic strategies.
Stability: In this, the company does not go beyond what it is doing now. The company serves with same
product, in same market and with the existing technology. This is possible when environment is relatively
stable. Modernization, improved customer service and special facility may be adopted in stability.
Expansion: This is adopted when environment demands increase in pace of activity. Company broadens its
customer groups, customer functions and the technology. These may be broadened either singly or jointly.
This kind of a strategy has a substantial impact on internal functioning of the organization.
Retrenchment: If the organization is going for this strategy, then it has to reduce its scope in terms of
customer group, customer function or alternative technology. It involves partial or total withdrawal from
three things. For example, L & T getting out of the cement business. The objective varies from company to
company.
Combination: When all the three strategies are taken together, this is known as combination strategy. This
kind of strategy is possible for organizations with large number of portfolios.
Apart from these four grand strategies, different strategies which are used commonly are as follows:
Modernization: In this, technology is used as the strategic tool to increase production and productivity or
reduce cost. Through modernization, the company aims to gain competitive and strategic strength.
Integration: The company starts producing new products and services of its own either creating facility or
killing others. Integration can either be forward or background in terms of vertical integration. In forward
integration it gains ownership over distribution or retailers, thus moving towards customers while in
backward integration the company seeks ownership over firm’s suppliers thus moving towards raw
materials. When the organization gains ownership over competitors, it is engaged in horizontal integration.
Diversification: Diversification involves change in business definition either in terms of customer functions,
customer groups or alternative technology. It is done to minimize the risk by spreading over several
businesses, to capitalize organization strength and minimize weaknesses, to minimize threats, to avoid
current instability in profit & sales and to facilitate higher utilization of resources. Diversification can be
either related or unrelated, horizontal or vertical, active or passive, internal or external. It is of the following
types:
X) Concentric diversification
Y) Conglomerate diversification
Z) Horizontal diversification.
Joint Ventures: In joint ventures, two or more companies form a temporary partnership ( consortium).
Companies opt for joint venture for synergistic advantages to share risk, to diversify and expand, to bring
distinctive competences, to manage political and cultural difficulty, to take technological advantage and to
explore unexplored market.
Strategic Alliance: When two or more companies unite to pursue a set agreed upon goals but remain
independent it is known as strategic alliance. The firms share the benefits of the alliance and control the
performance of assigned tasks. The pooling of resources, investment and risks occur for mutual gain.
Mergers: It is an external approach to expansion involving two or more than two organizations. Companies
go for merger to become larger, to gain competitive advantage, to overcome weaknesses and sometimes to
get tax benefits. Merger takes place with mutual consent and common goals.
Acquisition: For the organization which acquires another, it is acquisition and for organization which is
acquired, it is merger.
Takeovers: In takeovers, there is a strong motive to acquire others for quick growth and diversification.
Divestment: In divestment, the company which is divesting has no ownership and control in that business
and is engaged in complete selling of a unit. It is referred to the disposing off a part of the business.
Turnaround Strategy: When the company is sick and continuously making losses, it goes for turnaround
strategy. It is the efforts in reversing a negative trend and it is the efforts to keep an organization alive.
Choice of strategy
The next logical step after evaluation of strategic alternatives is choice of the most suitable alternative. For a
business group, it may be possible to choose all strategic alternatives but for a single company it is quite
difficult. The strategic alternatives have to be matched with the problem. While making a choice, two types
of factors have to be considered:
1. Objective factors
2. Subjective factors
Objective factors are the ones which can be quantified while subjective factors are the ones which cannot
be quantified and are based on experience and opinion of people. Strategic choice is like a decision making
process. There are three objective ways to make a choice:
A) Corporate Portfolio Analysis

B) Competitor Analysis
C) Industry Analysis
Corporate Portfolio Analysis
When the company is in more than one business, it can select more than one strategic alternative
depending upon demand of the situation prevailing in the different portfolios. It is necessary to analyze the
position of different business of the business house which is done by corporate portfolio analysis. This
analysis can be done by using any of the seven technologies given below:
a) Experience curve
b) PLC concept
c) BCG Matrix
d) GE nine cell Matrix
e) Space Diagram
f) Hofer’s product market evaluation matrix
g) Directional Policy Matrix
In the experience curve technique, the experience of the strategist enables him to decide which businesses
to enter or quit.
Depending upon the stage of the product life cycle of the business, one can make a strategic choice for
different portfolio.
Boston consultancy developed a matrix called BCG Matrix which is helpful to make strategic choice. In this,
the products are positioned based on various external and internal factors to know the continuity, growth
and discontinuing product. The factors given are specific in nature and attempt has been made to quantify
them.
The GE Nine Cell Matrix is a matrix in which nine positions are defined in terms of business strength factors
and industry attractiveness factors. The business strength factors include market share, profit margin, ability
to compete, market knowledge, competitive position, technology, and management caliber and the industry
attractiveness factor includes market size, growth rate, profit, competition, economics of scales, technology
and other environmental factors. Nine cells are divided into three zones and depicted by different colours
i.e. green, yellow and red. Each zone of matrix presents a specific type of strategy or set of strategies.
The strategic position and action evaluation (SPACE) is an extension of two dimensional portfolio analysis
which helps an organization to hammer out an appropriate strategic posture. It involves consideration of
dimensions like organization’s competitive advantage, organization’s financial strength, environmental
stability etc. Various SPACE factors are measured in terms of degrees, often quantified from 0 to 5 with 0
indicating most unfavorable and 5 indicating most favorable. On basis of four dimensions, organization can
choose its strategy.
Hofer and Schendel suggested the product market evaluation matrix. They constructed a 15 cell matrix
taking competitive position and stages of product / market evolution dimensions.
The directional policy matrix was developed by shell chemicals, U.K. It used two dimensions – business
sector prospects and company’s competitive capabilities to choose strategies. Each dimension is further
divided into unattractive, average and attractive (for business sector prospects) and weak, average and
strong (for company’s competitive capabilities. Each quadrant shows a different strategy which the
organization may adopt.
Competitor Analysis
In this analysis, we try to assess what the competitor has and what he does not have. We explore everything
with respect to the competitor. In competitor analysis, focus is on external environment as one of the
components of external environment is the competitor. The difference between SWOT analysis and
competitor analysis is that in competitor analysis we are concerned with only one component of the
environment i.e. competitor while in SWOT analysis we take about all the factors of the environment.
Industry Analysis
In industry analysis, all the competitors belonging to the particular industry with which the organization is
associated are looked at. All the members of the industry are considered as a whole. In competitive analysis,
only the major competitors are assessed while in industry analysis all the competitors belonging to the
industry are looked at.
The strategic choice is a decision making process which looks into the following steps:
A) Focusing on strategic alternatives
B) Evaluating strategic alternatives
C) Considering decision factors – objective factors and subjective factors.
D) Finally, making the strategic choice.
Implementation of strategy
After the evaluation of the alternatives, the choice of strategy is made. This choice now needs to be
implemented i.e. strategy is now put into action. This step of strategy process is the implementation step.
This includes the activation of the strategic alternatives chosen. Strategy making and strategy
implementation are two different things. Strategy making requires person with vision while strategy
implementation requires a person with administrative ability. If the strategy made is not implemented
properly then the objectives would be lost. Strategy implementation is as good as starting a new business.
The stage requires looking at the problems and eliminating them. In strategy implementation, one has to
pass through different steps:
i) Project Implementation
ii)Procedural Implementation
iii) Resource Allocation
iv) Structural Implementation
v) Functional Implementation
vi) Behavioural Implementation
Project implementation is a comprehensive plan of action from acquiring land to the installation of
machinery within a time frame.
Procedural implementation takes place by following the “Law of the Land” i.e. the rules and regulation in
terms of wastage cost, utility etc. It involves completing all those procedural formalities that have been
prescribed by the governments both central and state. A procedure is a series of related tasks that make up
the chronological sequence and the established way of performing the work to be accomplished. Procedural
implementation involves different steps. These steps vary from industry to industry. Also these may change
as per the changes in the government policies. The major procedural requirements are:
I) Licensing Requirements
II) FEMA Requirements
III) Foreign Collabouration Procedure
IV) Capital Issue Requirements
V) Import and Export requirements
VI) Incentives and benefits
Resource allocation comes after Procedural Implementation. The organization has to allocate resource both
inside the company and outside the company. It has to make decisions regarding short term and long term
allocation. The problems associated with resource allocation is the problem involved in the process. The
problems emerge because:
A) Resources are limited.

B) There are competing organizational units with each trying to have the major portion.
C) Organization’s past commitment.
The structural implementation of strategy involves designing of the organization structure and interlinking
various units and sub units of the organization. It involves issues like
A) How the work of the organization will be divided?

B) How will the work be assigned among various positions, groups, department, divisions, etc.?
C) The coordination among these for achievement of organizational objectives.
There are basically two aspects:

A) Differentiation and
B) Integration
Differentiation refers to, “the differences in cognitive and emotional orientations among managers in
different functional departments.”
Integration refers to, “the quality of the state of collaboration that are required to achieve unity of efforts in
the organization.”
The organization has to emphasize on both aspects and therefore, it must design organization structure and
provide systems for integration and coordination among organization’s parts and members.
Functional implementation deals with the development of policies and plans in different areas of functions
which an organization undertakes. The major functions of the organization include:
a) Production
b) Marketing
c) Finance
d) Personnel
Each and every function makes its own policies and plans in tune with the whole organization’s strategy and
then implements to fulfill the objectives. For example, the production function may involve decisions
relating to size and location of plants, technology to be used, cost factor, production capacity, quality of the
product, research and development etc. Similarly marketing function may include the decisions relating to
type of products, price of products, product distribution and product promotion.
The financial function deals with decisions like sources of funds, usage of funds and management of
earnings. Likewise, the major consideration in personnel policies include recruitment of right personnel,
development of personnel, motivation system, retaining personnel, personnel mobility, industrial relations
etc.
Behavioural implementation deals with those aspects of strategy implementation that have impact on
behaviour of people in the organizations. Since human resources form an integral part of the organization,
their activities and behavior need to be directed in a certain way. Any departure may lead to the failure of
strategy. The five issues in this context relevant to strategy implementation are:
A) Leadership
B) Organization Culture
C) Values and Ethics
D) Corporate Governance, and
E) Organizational Politics.
Leadership Implementation:
Leadership is about more than leadership behavior and leadership style, or telling people what to do.
Increasing complexity and the role of knowledge work means that people now plan their own work - and
make their own decisions.
Effective leadership involves a lot of management - managing the people processes in the organization so
that people can align themselves to the strategy. Henry Mintzberg makes the case that too many problems
in organizations are caused by separating the leadership and management roles ("Community-ship is the
answer" Financial Times).
Leaders are responsible for formulating and communicating the strategy - but responsibility doesn't stop
there. They must also manage the alignment of people for strategy implementation. They need to ensure
that the people in the organization understand the strategy, buy into it, and align their decisions and actions
accordingly. And this alignment needs to be measured and monitored.
Aligning your people for strategy implementation

In the most basic terms, a strategy is nothing more than a definition of what you will sell, to whom you will
sell it, how you will sell it and where you will sell it. Taken together, these also define your customer value
proposition.
Have a clear strategy and understand its implications throughout your company
The four dominant types of strategies - Price, Product, Product+ (premium / high end) and Customer Specific
Solutions - should all be based on a clear customer value proposition. Different strategies require different
organizational behaviours - and therefore different leadership skills.
Communicate the strategy and get buy-in

Effective leadership means communicating the strategy in a language that the people in an organization
understand. Effective leaders check to ensure people know what the strategy means for them and their job,
that they buy in to the strategy, and then support it.
Align the organization to implement the strategy
The attitudes and behaviors of the people in any organization are driven by six dimensions of people
processes: customer proposition, strategy commitment, processes & structure, behavior of leaders,
performance metrics and culture. Leaders lead and manage strategy implementation by aligning people
using these levers.
Measure and monitor the alignment of people to the strategy

Effective leaders check their assumptions by ensuring people alignment is measured and monitored.
Effective measurements are in line with the strategic objectives, and actions taken in one or more areas
must be supported by actions in the other areas to get the right result.
The way to achieve strategy implementation is not just by telling people what to do. It's by communicating
the strategy in a way that everyone can understand and buy into, and see how they can contribute.
Then you put the people processes in place to enable and encourage strategy implementation. Effective
leadership is not only a matter of behavior and style. Effective leadership is also about formulating the
strategy and strategy implementation.
Evaluation and control
This is the last step of the strategy making process. This is an ongoing process and evaluation and control
have to be done for future course of action as well. To get successful results and to achieve organizational
objectives, there has to be continuous monitoring of the implementation of strategy. The evaluation and
control of strategy may result in various actions that the organization may have to take for successful well-
being, such actions may involve any kind of corrective measures concerned with any of the steps involved in
the whole process be it choice for setting mission or objectives. The process of strategy formulation is
considered as a dynamic process wherein corrective actions are taken and change is brought in any of the
factors affecting strategy.
Evaluation of strategy is done by the top managers to determine whether their strategic choice is
implemented in a manner that it is meeting the organization’s objectives. Evaluation emphasizes
measurement of results of a strategic action. On the other hand, control emphasizes on taking necessary
action in the light of gap that exists between intended results and actual results in the strategic action.
When evaluation and control is carried out efficiently, it contributes in three basic areas:
i) Measurement of organizational process,
ii) Feedback for future actions, and
iii) Linking performance and rewards.
The board of directors, the chief executive and other managers all play a very important role in strategy
evaluation and control. Control can be of three types:
I) Control of inputs that are required in an action, known as feed forward control.
II) Control at different stages of action process, known as concurrent control.
III) Past action control based on feedback from completed action known as feedback control.
Control is exercised by mangers in the form of four steps:

A) Setting performance standards
B) Measuring actual performance
C) Analyzing variance
D) Taking corrective actions
After evaluation and control, the strategy process continues in an efficient manner. The effectiveness could
be assessed only when the strategy helps in the fulfillment of organizational objectives.
Summary
 A good strategy is one which helps in the accomplishment of the organization’s objectives.
 The first step is the development of strategic intent i.e. the setting of organizational mission and
objectives
 The second step is that the organization has to assess its environment external to it and which
affects its strategy. It has to assess the opportunities and threats in the environment.
 Along with the environmental analysis, the organization has to go for an organizational analysis as
well, through which it assesses its own strengths and weakness and then incorporates them in the
strategy being formulated.
 It becomes necessary for the organization to identify the various strategic alternatives and choose
from them the one which is most compatible with the organizational objectives.
 The strategic choice has to be implemented in a manner that the organization’s culture and
structure support the implementation.
 After implementing the strategy, strategic evaluation and control is carried out so that the firm is
successful in meeting its objectives.
1. Define ‘Strategic Management’. Also explain the concept of Strategic Management.

(2016 – QP 404) (5)
Answer: Strategic management is the process of formulating, implementing and evaluating strategies to
accomplish long-term goals and sustain competitive advantage. It is the management of an organization’s
resources to achieve its goals and objectives. Strategic management involves setting objectives, analyzing
the competitive environment, analyzing the internal organization, evaluating strategies and ensuring that
management rolls out the strategies across the organization. At its heart, strategic management involves
identifying how the organization stacks up compared to its competitors and recognizing opportunities and
threats facing an organization, whether they come from within the organization or from competitors.
Several key concepts characterize strategic management and the development of organizational goals.
a. Goal Setting - At the core of the strategic management process is the creation of goals, a mission
statement, values and organizational objectives. Organizational goals, the mission statement, values and
objectives guide the organization in its pursuit of strategic opportunities. It is also through goal setting that
managers make strategic decisions such as how to meet sales targets and higher revenue generation.
Through goal setting, organizations plan how to compete in an increasingly competitive and global business
arena.
b. Analysis Strategy Formation - Analysis of an organization's strengths and weaknesses is a key
concept of strategic management. Other than the internal analysis, an organization also undertakes external
analysis of factors such as emerging technology and new competition. Through internal and external
analysis, the organization creates goals and objectives that will turn weaknesses to strengths. The analyses
also facilitate in strategizing ways of adapting to changing technology and emerging markets.
c. Strategy Formation - Strategy formation is a concept that entails developing specific actions that will
enable an organization to meet its goals. Strategy formation entails using the information from the analyses,
prioritizing and making decisions on how to address key issues facing the organization. Additionally, through
strategy formulation an organization seeks to find ways of maximizing profitability and maintaining a
competitive advantage.
d. Strategy Implementation - Strategy implementation is putting the actual strategy into practice to
meet organizational goals. The idea behind this concept is to gather all the available and necessary
resources required to bring the strategic plan to life. Organizations implement strategies through creating
budgets, programs and policies to meet financial, management, human resources and operational goals. For
the successful implementation of a strategic plan, cooperation between management and other personnel is
absolutely necessary.
e. Strategy Monitoring - A final concept is monitoring of the strategy after its implementation. Strategy
monitoring entails evaluating the strategy to determine if it yields the anticipated results as espoused in the
organizational goals. Here, an organization determines what areas of the plan to measure and the methods
of measuring these areas, and then compares the anticipated results with the actual ones. Through
monitoring, an organization is able to understand when and how to adjust the plan to adapt to changing
trends.
2. Discuss the strategic management process. (2016 – QP 404) (10)
Answer: Strategic Management Process is defined as the way an organization defines its strategy. It is more
than just a set of rules to follow. It is a philosophical approach to business. Upper management must think
strategically first, then apply that thought to a process. The strategic management process is best
implemented when everyone within the business understands the strategy. The five stages of the process
are goal-setting, analysis, strategy formation, strategy implementation and strategy monitoring.
i. Goal Setting:
The purpose of goal-setting is to clarify the vision for your business. This stage consists of identifying three
key facets: First, define both short- and long-term objectives. Second, identify the process of how to
accomplish your objective. Finally, customize the process for your staff, give each person a task with which
he can succeed. Keep in mind during this process your goals to be detailed, realistic and match the values of
your vision. Typically, the final step in this stage is to write a mission statement that succinctly
communicates your goals to both your shareholders and your staff.
ii. Analysis:
Analysis is a key stage because the information gained in this stage will shape the next two stages. In this
stage, gather as much information and data relevant to accomplishing your vision. The focus of the analysis
should be on understanding the needs of the business as a sustainable entity, its strategic direction and
identifying initiatives that will help your business grow. Examine any external or internal issues that can
affect your goals and objectives. Make sure to identify both the strengths and weaknesses of your
organization as well as any threats and opportunities that may arise along the path.
iii. Strategy Formulation:
The first step in forming a strategy is to review the information gleaned from completing the analysis.
Determine what resources the business currently has that can help reach the defined goals and objectives.
Identify any areas of which the business must seek external resources. The issues facing the company should
be prioritized by their importance to your success. Once prioritized, begin formulating the strategy. Because
business and economic situations are fluid, it is critical in this stage to develop alternative approaches that
target each step of the plan.
iv. Strategy Implementation:
Successful strategy implementation is critical to the success of the business venture. This is the action stage
of the strategic management process. If the overall strategy does not work with the business' current
structure, a new structure should be installed at the beginning of this stage. Everyone within the
organization must be made clear of their responsibilities and duties, and how that fits in with the overall
goal. Additionally, any resources or funding for the venture must be secured at this point. Once the funding
is in place and the employees are ready, execute the plan.
v. Strategy Evaluation:
Strategy evaluation and control actions include performance measurements, consistent review of internal
and external issues and making corrective actions when necessary. Any successful evaluation of the strategy
begins with defining the parameters to be measured. These parameters should mirror the goals set in Stage
1. Determine your progress by measuring the actual results versus the plan. Monitoring internal and
external issues will also enable you to react to any substantial change in your business environment. If you
determine that the strategy is not moving the company toward its goal, take corrective actions. If those
actions are not successful, then repeat the strategic management process. Because internal and external
issues are constantly evolving, any data gained in this stage should be retained to help with any future
strategies.
As shown in the figure, the five stages are not stand-alone and constantly interact with each other in order
to ensure better management of the business.
3. What do you understand by a Strategic Business Unit? (2014 – QP206) (5)
Answer: A strategic business unit is a fully functional and distinct unit of a business that develops its own
strategic vision and direction. Within large companies, there are several smaller specialized divisions that
work towards specific projects and goals, and we see this organizational setup frequently in global
companies. These strategic business units, often referred to as an SBU, remains an important component of
the company and are responsible for their own profit or loss but are answerable to the top management.
Typically, they will operate as an independent organization with a specific focus on target markets and are
large enough to maintain internal divisions such as finance, HR, and so forth.
There are many great examples of SBUs that we can relate to. For instance, General Electric has 49 SBUs in
such markets as appliances, aerospace, electronics, and so on. LG operates along the same lines, with SBUs
competing in electronics and appliances, among others. So, these SBUs differentiate from each other but
still belong to the same organization
Differences in SBUs
When GE, LG, or any other company initiates a strategic business unit, there are clearly some distinct
differences from the traditional pyramidal, hierarchical structure that businesses take. It can be difficult for
the pyramid setup to have the ability to outline a business strategy that will encompass all aspects of the
markets the company is present in. This typically results in elements of the business being overlooked or
never quite as detailed as they need to be. As a result, firms begin initiating SBUs, which have their own
separate ability to craft industry-specific strategy as it relates to their function. This allows for the SBU to
perform competitive analysis on their market positions and develop goods and services that meet the needs
of the target audience.
This approach also benefits the organization as a whole. In the pyramid setup, it can be difficult to
understand which business activities are contributing the maximum value to the organization and which
should be evaluated. When an organization adopts the strategic business unit approach, they enable the
unit the ability to make decisions based on resources and efficiencies and it becomes clearer how each SBU
performs in relation to the overall organization.
Advantages of Strategic Business Units
Strategic Business Units offer organizations a greater level of flexibility and a dynamic approach to business
changes as they relate to specific industries. There are several advantages of strategic business units in an
organization.
a. Responsibility – One of the first role of strategic business units is to assign responsibility and
more importantly outsource responsibility to others. With this, the top management has an
overview of work being done in each individual unit and they do not have to get involved in
day to day activities for these strategic business units.
b. Accountability – When handling multiple brands or products, it is easier if there are

separate business units which are accountable for the success or failure of the business or
product. By making these business units accountable, the company can directly take a call
when hard decisions are to be taken.
c. Accountancy – Profit and loss and balance sheets will look prettier and more manageable if
the statements are prepared separately for separate strategic business units. This makes the
accountancy more transparent and at the same time, when companies have to make
investment decision than this accountancy will come in use for the company.
d. Strategy – Companies like Nestle have 4 different strategic units. One SBU like Maggi deals
in Food products, another deals in Dairy products like Nestle milkmaid, the third SBU deals
in Chocolate products like Kitkat so on and so forth. Thus, in the above example, it is very
simple to change strategy for each business unit because the strategy for each is
independent of the other.
e. Independence – The managers of the strategic business units get more independence to
manage their own unit which gives them the opportunity to be more creative and
innovative and empowers them for making decisions. The best thing that can happen for
SBU’s are fast decision making which is possible only when these SBU’s are given
independence to work by themselves.
f. Funds allocation – The last but not the least advantage of strategic business units are that
funds allocation becomes simpler for the parent company. Depending on the performance
of the SBU, funds allocation can be done on priority.
Thus, there are many advantages of having strategic business units and it is highly recommended that any
firm which has multiple products adopt strategic business units in its organization structure.
4. Business strategy formulation is a continuous process. Give your comments. (2013 – QP206) (5)
Answer: Strategy formulation refers to the process of choosing the most appropriate course of action for
the realization of organizational goals and objectives and thereby achieving the organizational vision.
Basic strategic planning is comprised of several components that build upon the previous piece of the plan,
and operates much like a flow chart. However, prior to embarking on this process, it is important to consider
the players involved. There must be a commitment from the highest office in the organizational hierarchy.
Without buy-in from the head of a company, it is unlikely that other members will be supportive in the
planning and eventual implementation process, thereby dooming the plan before it ever takes shape.
Commitment and support of the strategic-planning initiative must spread from the president and/or CEO all
the way down through the ranks to the line worker on the factory floor.
Just as importantly, the strategic-planning team should be composed of top-level managers who are capable
of representing the interests, concerns, and opinions of all members of the organization. As well,
organizational theory dictates that there should be no more than twelve members of the team. This allows
group dynamics to function at their optimal level.
The components of the strategic-planning process read much like a laundry list, with one exception: each
piece of the process must be kept in its sequential order since each part builds upon the previous one. This
is where the similarity to a flow chart is most evident, as can be seen in the following illustration.
The only exceptions to this are environmental scanning and continuous implementation, which are
continuous processes throughout.
Environmental Scanning - This element of strategy formulation is one of the two continuous processes.
Consistently scanning its surroundings serves the distinct purpose of allowing a company to survey a variety
of constituents that affect its performance, and which are necessary in order to conduct subsequent pieces
of the planning process. There are several specific areas that should be considered, including the overall
environment, the specific industry itself, competition, and the internal environment of the firm. The
resulting consequence of regular inspection of the environment is that an organization readily notes
changes and is able to adapt its strategy accordingly. This leads to the development of a real advantage in
the form of accurate responses to internal and external stimuli so as to keep pace with the competition.
Continuous Implementation - The idea behind this continual process is that each step of the planning
process requires some degree of implementation before the next stage can begin. This naturally dictates
that all implementation cannot be postponed until completion of the plan, but must be initiated along the
way. Implementation procedures specific to each phase of planning must be completed during that phase in
order for the next stage to be started.
5. What is a ‘Strategic Business Unit’? At what organizational levels different types of strategies are
considered? Give a brief description of those different levels and their corresponding focus areas.
(2016 – QP404) (2+2+6)
Answer: A strategic business unit, popularly known as SBU, is a fully-functional unit of a business that has its
own vision and direction. It is a relatively autonomous division of a large company that operates as an
independent enterprise with responsibility for a particular range of products or activities. These strategic
business units are responsible for their own profit or loss but are answerable to the top management.
It is believed that strategic decision making is the responsibility of top management. However, it is
considered useful to distinguish between the levels of operation of the strategy. Strategy operates at
different levels vis-à-vis:
Levels at which different strategies are considered and its different types
Corporate Level 1. Value – Creating Strategy

2. Value – Neutral Strategy
3. Value – Reducing Strategy
Business Level 1. Coordinate Unit Activities
2. Utilize Human Resources
3. Develop Distinctive Advantages
4. Identify Market Niches
5. Monitor Product Strategies
Functional Level 1. Operational Strategy

2. Merging Strategy
Further explaining the different levels of strategies:
 Corporate Level - At the corporate level, strategies are formulated according to organisation
policies. These are value oriented, conceptual and less concrete than decisions at the other two
levels. These are characterized by greater risk, cost and profit potential as well as flexibility. Mostly,
corporate level strategies are futuristic, innovative and pervasive in nature. They occupy the highest
level of strategic decision making and cover the actions dealing with the objectives of the
organisation. Such decisions are made by top management of the firm. The example of such
strategies include acquisition decisions, diversification, structural redesigning etc. The board of
Directors and the Chief Executive Officer are the primary groups involved in this level of strategy
making. In small & family owned businesses, the entrepreneur is both the general manager and
chief strategic manager.
 Business Level – The strategies formulated by each SBU to make best use of its resources given the
environment it faces, come under the gamut of business level strategies. At such a level, strategy is
a comprehensive plan providing objectives for SBUs, allocation of resources among functional areas
and coordination between them for achievement of corporate level objectives. These strategies
operate within the overall organizational strategies i.e. within the broad constraints and policies and
long term objectives set by the corporate strategy. The SBU managers are involved in this level of
strategy. The strategies are related with a unit within the organization. The SBU operates within the
defined scope of operations by the corporate level strategy and is limited by the assignment of
resources by the corporate level. However, corporate strategy is not the sum total of business
strategies of the organization. Business strategy relates with the "how" and the corporate strategy
relates with the "what". Business strategy defines the choice of product or service and market of
individual business within the firm. The corporate strategy has impact on business strategy.
 Functional Level - This strategy relates to a single functional operation and the activities involved
therein. This level is at the operating end of the organization. The decisions at this level within the
organization are described as tactical. The strategies are concerned with how different functions of
the enterprise like marketing, finance, manufacturing etc. contribute to the strategy of other levels.
Functional strategy deals with a relatively restricted plan providing objectives for specific function,
allocation of resources among different operations within the functional area and coordination
between them for achievement of SBU and corporate level objectives.
Sometimes a fourth level of strategy also exists. This level is known as the operating level. It comes below
the functional level strategy and involves actions relating to various sub functions of the major function. For
example, the functional level strategy of marketing function is divided into operating levels such as
marketing research, sales promotion etc.
6. Distinguish between strategy formulation and strategy implementation. (2014 – QP206)

(5)
Answer: Difference between strategy formulation and strategy implementation:
Strategy Formulation Strategy Implementation
Strategy Formulation includes planning and decision- Strategy Implementation involves all those means
making involved in developing organization’s related to executing the strategic plans.
strategic goals and plans.
In short, Strategy Formulation is placing the Forces In short, Strategy Implementation is managing forces
before the action. during the action.
Strategy Formulation is an Entrepreneurial Strategic Implementation is mainly an Administrative

Activity based on strategic decision-making. Task based on strategic and operational decisions.
Strategy Formulation emphasizes on effectiveness. Strategy Implementation emphasizes on efficiency.
Strategy Formulation is a rational process. Strategy Implementation is basically an operational

process.
Strategy Formulation requires co-ordination among Strategy Implementation requires co-ordination

few individuals. among many individuals.
Strategy Formulation requires a great deal Strategy Implementation requires

of initiative and logical skills. specific motivational and leadership traits.
Strategic Formulation precedes Strategy Strategy Implementation follows Strategy

Implementation. Formulation.
Business Policy and Strategic Management Strategic Framework
Strategic Framework
Learning Objective:
 Understand the meaning & intent of vision;

 Understand the issues related to core values & core purpose;
 To know the concept of mission & its characteristics;
 Appreciate the process of formulating mission statements;
 Discuss the characteristics, need & issues with respect to objectives; and
 Distinguish the concepts of vision & mission, objectives & goals and intent & vision.
Introduction
Strategies are involved in the formulation, implementation and evaluation of process. The hierarchy of
strategic intent lays the foundation for strategic management process. The process of establishing the
hierarchy of strategic intent is very complex. In this hierarchy, the vision, mission, business definition and
objectives are established. Formulation of strategies is possible only when strategic intent is clearly set up.
This step is mostly philosophical in nature. It will have long term impact on the organization.
Strategic intent
The foundation for the strategic management is laid by the hierarchy of strategic intent. The concept of
strategic intent makes clear WHAT AN ORGANISATION STANDS FOR, Harvard Business Review, 1989
described the concept in its infancy. Hamed and Prahalad coined the term strategic intent. A few aspects
about strategic intent are as follows:
 It is an obsession with an organization.

 This obsession may even be out of proportion to their resources and capabilities.
 It envisions a derived leadership position and establishes the criterion, the organization will use to
chart its progress.
 It involves the following:
 Creating and Communicating a vision
 Designing a mission statement
 Defining the business
 Setting objectives
Vision serves the purpose of stating what an organization wishes to achieve in the long run.
Mission relates an organization to society.
Business explains the business of an organization in terms of customer needs, customer groups and
alternative technologies.
Objectives state what is to be achieved in a given time period.
1. The strategic intent concept also encompasses an active management process that includes focusing the
organization’s attention on the essence of winning.
2. The concept of stretch and leverage is relevant in this context.
Stretch is a misfit between resources and aspirations.

Leverage concentrates, accumulates, conserves and recovers resources so that a meagre resource base
can be stretched. Leverage reduces the stretch and focuses mainly on efficient utilization of resources.
A) The strategic fit matches organizational resources and environment. This positions the firm by assessing
organizational capabilities and environmental opportunities.
B) Under fit, the strategic intent would seem to be more realistic.
C) It is hierarchy of intentions ranging from a board vision through mission and purpose down to specific
objectives.
Vision
It is at the top in the hierarchy of strategic intent. It is what the firm would ultimately like to become. A few
definitions are as follows:
Kotter “description of something (an organization, corporate culture, a business, a technology, an activity) in
the future. The definition itself is comprehensive and states clearly the futuristic position.
Miller and Dess defined vision as the “category of intentions that are broad, all-inclusive and forward
thinking”
The definition lays stress on the following:
 broad and all-inclusive intentions;
 vision is forward thinking process.
A few important aspects regarding vision are as follows:

 It is more of a dream than articulated idea.
 It is an aspiration of organization. Organization has to strive and exert to achieve it.
 It is powerful motivator to action.
 Vision articulates the position of an organization which it may attain in distant future.
Envisioning
This is the process of creating vision. It is a difficult and complex task. A well-conceived vision must have:
 Core Ideology
 Envisioned Future
Core Ideology will remain unchanged. It has the enduring character. It consists of core values and core
purpose. Core values are essential tenets of an organization. Core purpose is related to the reasoning of the
existence of an organization.
Envisioned Future will basically deal with following:

 The long term objectives of the organization.
 Clear description of articulated future.
Advantages of having a Vision
A few benefits accruing to an organization having a vision are as follows:

A) They foster experimentation.
B) Vision promotes long term thinking.
C) Visions foster risk taking.
D) They can be used for the benefit of people.
E) They make organizations competitive, original and unique.
F) Good vision represent integrity.
G They are inspiring and motivating to people working in an organization.
Core values and core purpose
These concepts are very important in the process of envisioning. Collins and Porras have developed this
concept for better philosophical perspective. As has already been discussed, a well conceived vision consists
of core ideology and envisioned future. Core ideology rests on core values and core purpose.
Core Values are the essential and enduring tenets of an organization. They may be beliefs of top
management regarding employee’s welfare, costumer’s interest and shareholder’s wealth. The beliefs may
have economic orientation or social orientation. Evidences clearly indicate that the core values of Tata’s are
different from core values of Birla’s or Reliance. The entire organization structure revolves around the
philosophy coming out of core values.
Core Purpose is the reason for existence of the organization. Its reasoning needs to be spelt.
A few characteristics of core purpose are as follows:
i) It is the overall reason for the existence of organization.

ii) It is why of an organization.
iii) This mainly addresses to the issue which organization desires to achieve internally.
iv) It is the broad philosophical long term rationale.
v) It is the linkage of organization with its own people.
Mission
The mission statements stage the role that organization plays in society. It is one of the popular
philosophical issue which is being looked into business managers since last two decades.
Definition
A few definitions of mission are as follows:
Hynger and Wheelen “purpose or reason for the organization’s existence.”
David F. Harvey states “A mission provides the basis of awareness of a sense of purpose, the competitive
environment, degree to which the firm’s mission fits its capabilities and the opportunities which the
government offers.”
Thompson states mission as the “ essential purpose of the organization, concerning particularly why it is in
existence, the nature of the business it is in, and the customers it seeks to serve and satisfy.
The above definition reveals the following:

i) It is the essential purpose of organization.
ii) It answers “ why the organization is in existence”.
iii) It is the basis of awareness of a sense of purpose.
iv) It fits its capabilities and the opportunities which government offers.
Nature
A few points regarding nature of mission statement are as follows:
 It gives social reasoning. It specifies the role which the organization plays in society. It is the basic
reason for existence.
 It is philosophical and visionary and relates to top management values. It has long term
perspective.
 It legitimizes societal existence.
 It has stylistic objectives. It reflects corporate philosophy, identity, character and image of
organization.
Characteristics
In order to be effective, a mission statement should posses the following characteristics.
i) A mission statement should be realistic and achievable. Impossible statements do not motivate people.
Aims should be developed in such a way so that may become feasible.
ii) It should neither be too broad nor be too narrow. If it is broad, it will become meaningless. A narrower
mission statement restricts the activities of organization. The mission statement should be precise.
iii) A mission statement should not be ambiguous. It must be clear for action. Highly philosophical
statements do not give clarity.
iv) A mission statement should be distinct. If it is not distinct, it will not have any impact. Copied mission
statements do not create any impression.
v) It should have societal linkage. Linking the organization to society will build long term perspective in a
better way.
vi) It should not be static. To cope up with ever changing environment, dynamic aspects be looked into.
vii) It should be motivating for members of the organization and of society. The employees of the
organization may enthuse themselves with mission statement.
viii) The mission statement should indicate the process of accomplishing objectives. The clues to achieve the
mission will be guiding force.
Examples of Mission Statement
A few examples of mission statement (academically not accepted) are as follows:
1. India Today “The complete new magazine”.

2. Bajaj Auto, “Value for Money for Years”.
3. HCL, “To be a world class Competitor”.
4. HMT, “Timekeepers of the Nation”.
Some experts argue that these are the publicity slogans. They are not mission statements. A few other
examples are as follows:
Ranbaxy Industries “To become a research based international Pharmaceuticals Company”.
Eicher Consultancy “To make India an economic power in the lifetime, about 10 to 15 years, of its founding
senior managers.”
ICICI Bank:
We will leverage our people, technology, speed and financial capital to:
 be the banker of first choice for our customers by delivering high quality, world-class products and
services.
 expand the frontiers of our business globally.
 play a proactive role in the full realisation of India’s potential.
 maintain a healthy financial profile and diversify our earnings across businesses and geographies.
 maintain high standards of governance and ethics.
 contribute positively to the various countries and markets in which we operate.
 create value for our stakeholders.
HDFC Bank “To provide a package of attractive financial services for housing purposes through a competent
and motivated team of employees using the state of the art technology to maintain financial stability and
growth of the organization whilst contributing to the national goal of providing decent housing to all.”
Canara Bank “To provide quality banking services with good customer care, create value for all stakeholders
and continue as a responsive corporate social citizen.”
Formulation of Mission Statements

The mission statements are formulated from the following sources:
i) National Priorities projected in plan documents and industrial policy statements.
ii) Corporate philosophy as developed over the years.
iii) Major strategists have vision to develop mission statements.
iv) The services of consultants may be hired.
Mission v/s Purpose

The term purpose was used by some strategists. At some places, it was used as synonymous to mission. A
few major points of distinction are as follows:
i) Mission is the societal reasoning while the purpose is the overall reason.
ii) Mission is external reasoning and relates to external environment. Purpose is internal reasoning and
relates to internal environment.
iii) Mission is for outsiders while purpose is for its own employees.
Business definition
It explains the business of an organization in terms of customer needs, customer groups and alternative
technologies.
OerikAbell suggests defining business along the three dimension of customer groups. Customer functions
and alternative technologies. They are developed as follows:
i) Customer groups are created according to the identity of the customers.

ii) Customer functions are based on provision of goods/services to customers.
iii) Alternative Technologies describe the manner in which a particular function can be performed for a
customer.
For a watch making business, these dimensions may be outlined as follows:

A) Customer groups are individual customers, commercial organizations, sports organizations, educational
institutions etc.
B) Customer functions are record time, finding time, alarm service etc. It may be a gift item also.
C) Alternative technologies are manual, mechanical and automatic.
A clear business definition is helpful in identifying several strategic choices. The choices regarding various
customer groups, various customer functions and alternative technologies give the strategists various
strategic alternatives. The diversification, mergers and turnaround depend upon the business definition.
Customer oriented approach of business makes the organization competitive. On the same lines, product /
service concept could also give strategic alternatives from a different angle. Business can be defined at the
corporate or SBU levels. At the corporate level, it will concern itself with the wider meaning of customer
groups, customer functions and alternative technologies. If strategic alternatives are linked through a
business definition, it results in considerable amount of synergic advantage.
Objectives and Goals
Objectives refer to the ultimate end results which are to be accomplished by the overall plan over a
specified period of time. The vision, mission and business definition determine the business philosophy to
be adopted in the long run. The goals and objectives are set to achieve them.
Meaning
 Objectives are open ended attributes denoting a future state or out come and are stated in general
terms.
 When the objectives are stated in specific terms, they become goals to be attained.
 In strategic management, sometimes, a different viewpoint is taken.
 Goals denote a broad category of financial and non-financial issues that a firm sets for itself.
 Objectives are the ends that state specifically how the goals shall be achieved.
 It is to be noted that objectives are the manifestation of goals whether specifically stated or not.
Difference between objectives and goals
The points of difference between the two are as follows:

 The goals are broad while objectives are specific.
 The goals are set for a relatively longer period of time.
 Goals are more influenced by external environment.
 Goals are not quantified while objectives are quantified.
Broadly, it is more convenient to use one term rather than both. The difference between the two is simply a
matter of degree and it may vary widely.
Need for Establishing Objectives
The following points specifically emphasize the need for establishing objectives:
 Objectives provide yardstick to measure performance of a department or SBU or organization.

 Objectives serve as a motivating force. All people work to achieve the objectives.
 Objectives help the organization to pursue its vision and mission. Long term perspective is
translated in short-term goals.
 Objectives define the relationship of organization with internal and external environment.
 Objectives provide a basis for decision-making. All decisions taken at all levels of management are
oriented towards accomplishment of objectives.
What Objectives should be set?
According to Peter Drucker, objectives should be set in the area of market standing, innovation productivity,
physical and financial resources, profitability, manager performance and development, worker performance
and attitude and public responsibility.
Researchers have identified the following areas for setting objectives:
Profit Objective: It is the most important objective for any business enterprise. In order to earn a profit, an
enterprise has to set multiple objectives in key result areas such as market share, new product
development, quality of service etc. Ackoff calls them performance objectives.
Marketing Objective may be expressed as: “to increase market share to 20 percent within five years” or “to
increase total sales by 10 percent annually”. They are related to a functional area.
Productivity Objective may be expressed in terms of ratio of input to output. This objective may also be
stated in terms of cost per unit of production.
Product Objective may be expressed in terms of product development, product diversification, branding etc.
Social Objective may be described in terms of social orientation. It may be tree plantation or provision of
drinking water or development of parks or setting up of community centers.
Financial Objective relates to cash flow, debt equity ratio, working capital, new issues, stock exchange
operations, collection periods, debt instruments etc. For example a company may state to decrease the
collection period to 30 days by the end of this year.
Human resource Objective may be described in terms of absenteeism, turnover, number of grievances,
strikes and lockouts etc. An example may be “to reduce absenteeism to less than 10 percent by the end of
six months”.
Characteristics of Objectives
The following are the characteristics of corporate objectives:
i) They form a hierarchy. It begins with broad statement of vision and mission and ends with key specific
goals. These objectives are made achievable at the lower level.
ii) It is impossible to identify even one major objective that could cover all possible relationships and needs.
Organizational problems and relationship cover a multiplicity of variables and cannot be integrated into one
objectives. They may be economic objectives, social objectives, political objectives etc. Hence, multiplicity
of objectives forces the strategists to balance those diverse interests.
iii) A specific time horizon must be laid for effective objectives. This timeframe helps the strategists to fix
targets.
iv) Objectives must be within reach and is also challenging for the employees. If objectives set are beyond
the reach of managers, they will adopt a defeatist attitude. Attainable objectives act as a motivator in the
organization.
v) Objectives should be understandable. Clarity and simple language should be the hallmarks. Vague and
ambiguous objectives may lead to wrong course of action.
vi) Objectives must be concrete. For that they need to be quantified. Measurable objectives help the
strategists to monitor the performance in a better way.
vii) There are many constraints internal as well as external which have to be considered in objective setting.
As different objectives compete for scarce resources, objectives should be set within constraints.
Process of Setting Objectives
Glueck identifies four factors that should be considered for objective setting. These factors are: the forces in
the environment, realities of an enterprise’s resources and internal power relations, the value system of top
executives and awareness by the management of the past objectives. They are briefly narrated below:
i) Environmental forces, both internal and external, may influence the interests of various stake holders.
Further, these forces are dynamic by nature. Hence objective setting must consider their influence on its
process.
ii) As objectives should be realistic, the efforts be made to set the objectives in such a way so that objectives
may become attainable. For that, existing resources of enterprise and internal power structure be
examined carefully.
iii) The values of the top management influence the choice of objectives. A philanthropic attitude may lead
to setting of socially oriented objectives while economic orientation of top management may force them to
go for profitability objective.
iv) Past is important for strategic reasons. Organizations cannot deviate much from the past. Unnecessary
deviations will bring problems relating to resistance to change. Management must understand the past so
that it may integrate its objectives in an effective way.
Summary
 Strategic intent refers to the purpose for which the organization strives for. It is the philosophical
framework of strategic management process.
 The hierarchy of strategic intent covers the vision and mission, business definition and the goals and
objectives.
 Stretch is misfit between resources and aspirations. Leverage stretches the meager resource base to
meet the aspirations. The fit positions the firm by matching its organizational resources to its
environment.
 Vision constitutes future aspirations. This articulates the position that a firm would like to attain in
the distant future.
 Mission is the social reasoning of organization. It has external orientation. It legitimizes social
existence.
4. Point out the basic features of Vision’ and ‘Mission’ statements. Give at least two
examples each of Vision’ and ‘Mission’ statements. (2016 – QP 404) (4+1)
Answer: Characteristics of a ‘Good’ Mission Statement:

There are no hard and fast rules to developing a mission. What follows though are some general principles
that we could bear-in-mind:
a. Make it as succinct as possible: A mission statement should be as short and snappy as possible -
preferably brief enough to be printed on the back of a business card. The detail which underpins it should be
mapped out elsewhere.
b. Make it memorable: Obviously partially linked to the above, but try to make it something that people will
be able to remember the key elements of, even if not the exact wording
c. Make it unique to you: Focus on what it is that you strive to do differently: how you achieve excellence,
why you value your staff or what it is about the quality experience that sets you apart from the rest.
d. Make it realistic: Remember, your mission statement is supposed to be a summary of why you exist and
what you do. It is a description of the present, not a vision for the future. If it bears little or no resemblance
to the organization that your staff know, it will achieve little.
e. Make sure it's current: Though it is not something which should be changed regularly, neither should it be
set in stone. Your institution's priorities and focus may change significantly over time - perhaps in response
to a change of direction set by a new, or major changes in state/federal policy. On such occasions the
question should at least be asked: 'does our current mission statement still stand?'
Characteristics of a ‘Good’ Vision Statement: There is no one formula to develop a vision. What matters is
its appropriateness and the direction it sets for the organisation. There are though some general principles
that may be helpful to us:
a. Be inspirational: The vision statement is supposed to challenge, enthuse and inspire. Use powerful words
and vivid phrases to articulate the kind of organisation you are trying to become. This is your chance to lift
your organisation's gaze above the grind of day-to-day gripes and problems and to focus attention on 'the
bigger picture' and the potential rewards that await.
b. Be ambitious: If you set your sights on being 'within the top 10' the chances are that the best you will
come is 10th. If your real aim is to hit the top 5, why not say so and go for broke? What targets you set and
how high you aim will, in themselves, also say something about you as an organization. Ambitious, perhaps
even audacious targets will help create the impression of an organization that is going places, that aims high
and demands high standards from its staff in a way that comfortable, 'middle-of-the-road' benchmarks will
not.
c. Be realistic: This may sound odd following on immediately from a call to 'Be ambitious', perhaps even
contradictory, but it is an important part of the balancing act that is required. For just as the purpose of the
vision is to inspire and enthuse, it is equally important that this ambition is tempered by an underlying sense
of realism. People need to believe that what is envisaged is actually achievable; otherwise there is no reason
for them to believe or buy in to it. It is perfectly possible to be both ambitious and realistic and it is through
successfully marrying these two forces that the best vision statements will be formed. Stating that you will
become 'ranked in the top 3 within 5 years' may be both ambitious and realistic if you currently sit at
number 7, but sound far less convincing if you currently reside at number 574.
d. Be creative: Albert Einstein once said that 'imagination is more important than knowledge.' Of course,
there is nothing wrong with saying that you will 'deliver world-class products but it is probably a safe bet
that at least a dozen other organisations will be saying the same thing. Just as a commercial company may
need to think creatively in order to identify gaps in the market, so too you may need to think imaginatively
about what your vision is and how you describe it to help stand out from the crowd.
e. Be descriptive: Unlike with your mission statement, there is no pressure to pare your vision down to the
bone. Of course you want to be concise (indeed many of the best examples of memorable visions to tend to
be so), but there is no need to enforce an arbitrary limit on its length. Take as much space as you need to get
your vision across.
f. Be clear: As with your mission statement it pays to avoid jargon, keep sentences short and to the point
and use precise, uncluttered language. Otherwise you risk diluting or losing your message amongst the
background 'noise'.
g. Be consistent: Though bearing in mind their different purposes, there should still be an element of
continuity between your mission and vision statements, or at least some careful thought and discussion
given as to why this is not the case. At the same time, the vision need not be constrained by the current
remit of the mission. Perhaps the institution is keen to explore new areas in the future: to become the
region's conference venue of choice, for example, in which case this would need to be reflected in the
mission statement in due course
2 examples of ‘Mission’ Statements:
a. ‘To organize the world’s information and make it universally accessible and useful’ – Google
b. ‘To give ordinary folk the chance to buy the same thing as rich people’ – Wal-Mart
2 examples of ‘Vision’ Statements:
a. ‘There will be a personal computer on every desk running Microsoft software.’ *Short, simple,
unequivocal, memorable and long term] – Microsoft
b. ‘Our vision is every book ever printed in any language all available in 60 seconds’ – [Simple, clear,
bold, inspiring] - Amazon Kindle
5. What role do vision and mission statements play in organizations? (2014 – QP206) (5)
Answer: One of the first things that any observer of management thought and practice asks, is, whether a
particular organization has a vision and mission statement. It has been found in studies that organizations
that have lucid, coherent, and meaningful vision and mission statements return more than double the
numbers in shareholder benefits when compared to the organizations that do not have vision and mission
statements.
Key Roles of Mission and Vision:
Some of the benefits of having a vision and mission statement are:
 Above everything else, vision and mission statements provide unanimity of purpose to organizations
and imbue the employees with a sense of belonging and identity. Indeed, vision and mission
statements are embodiments of organizational identity and carry the organizations creed and
motto. For this purpose, they are also called as statements of creed.
 Vision and mission statements spell out the context in which the organization operates and provides
the employees with a tone that is to be followed in the organizational climate. Since they define the
reason for existence of the organization, they are indicators of the direction in which the
organization must move to actualize the goals in the vision and mission statements.
 The vision and mission statements serve as focal points for individuals to identify themselves with
the organizational processes and to give them a sense of direction while at the same time deterring
those who do not wish to follow them from participating in the organization’s activities.
 The vision and mission statements help to translate the objectives of the organization into work
structures and to assign tasks to the elements in the organization that are responsible for actualizing
them in practice.
 To specify the core structure on which the organizational edifice stands and to help in the
translation of objectives into actionable cost, performance, and time related measures.
 Finally, vision and mission statements provide a philosophy of existence to the employees, which is
very crucial because as humans, we need meaning from the work to do and the vision and mission
statements provide the necessary meaning for working in a particular organization.
As can be seen from the above, articulate, coherent, and meaningful vision and mission statements go a
long way in setting the base performance and actionable parameters and embody the spirit of the
organization. In other words, vision and mission statements are as important as the various identities that
individuals have in their everyday lives.
It is for this reason that organizations spend a lot of time in defining their vision and mission statements and
ensure that they come up with the statements that provide meaning instead of being mere sentences that
are devoid of any meaning.
Business Policy and Strategic Management Competitive Forces
Environmental and Internal Analysis
Learning Objective:
 To understand the importance of environmental analysis;

 The relevant broad dimensions in a general environment;
 The relationship between general environment and strategy;
 The PESTEL framework for analysis and the implications of its factors;
 Internal Analysis – Concept and Importance
 Strategic Advantage Profile
 SWOT Analysis
 McKinsey’s 7S framework & its role in analysis;
 The structural drivers of change; and
 The differential impact of environmental influences.
Introduction
ENVIRONMENT ANALYSIS is the study of the organizational environment to pinpoint environmental factors
that can significantly influence organizational operations. The environment in which business operates has a
greater influence on their successes or failures. There is a strong linkage between the changing
environment, the strategic response of the business to such changes and the performance. It is therefore
important to understand the forces of external environment the way they influence this linkage. The
external environment which is dynamic and changing holds both opportunities and threats for the
organizations. The organizations while attempting at strategic realignments, try to capture these
opportunities and avoid the emerging threats. At the same time the changes, in the environment affect the
attractiveness or risk levels of various investments of the organizations or the investors.
Broad dimensions of external environment
The macro environment in which all organizations operate broadly consist of the economic environment,
the political and legal environment, the socio cultural aspects and the environment related issues like
pollution, sustainability etc. The technological temper and its progress has been the key driver behind the
major changes witnessed in the external environment making it increasingly complex.
These factors often overlap and the developments in one area may influence developments in other. For
example, the opening up of economy integrated the markets globally and increased the competition
between private and public firms. This forced the Indian government to revisit its economic policies. Under
its new liberalization policy and economic reforms of 1991, regulations like MRTP, which restricted the size
Of the business and therefore inhibited their efficiency and competitive levels, were removed with a positive
impact on the indigenous industries. However, the delay in addressing to the policies like Indian Companies
Act, 1956 or EXIM policies, organizations both from domestic and abroad still find the Indian business
environment not so conducive for business. The current political developments are sure, to have moved
uncertainties from the minds of business people regarding the future policy direction in certain sectors. That
is the reason we are seeing a sigh of relief across all industrial sectors and companies are showing healthy
developments in the market space. The social considerations in the context of a developing country like
India also play a critical role in deciding the broad dynamics of the business environment. The clash of
ideologies between preserving the Indian ethos and culture and giving a freedom of choice to people often
create problems and confusion for business.
Environment Threat and Opportunity Profile (ETOP)
The Environmental factors are quite complex and it may be difficult for strategy managers to classify them
into neat categories to interpret them as opportunities and threats. A matrix of comparison is drawn where
one item or factor is compared with other items after which the scores arrived at are added and ranked for
each factor and total weight age score calculated for prioritizing each of the factors.
This is achieved by brainstorming. And finally the strategy manger uses his judgment to place various
environmental issues in clear perspective to create the environmental threat and opportunity profile.
Although the technique of dividing various environmental factors into specific sectors and evaluating them
as opportunities and threats is suggested by some authors, it must be carefully noted that each sector is not
exclusive of the other.
Each of the major factors pertaining to a particular sector of environment may be divided into sub-sectors
and their effects studied. The field force analysis goes hand in glove with ETOP, as here also the contribution
with regard to opportunities and threats posed by the environment is also a necessary part of study.
ETOP Preparation:
The preparation of ETOP involves dividing the environment into different sectors and then analyzing the
impact of each sector on the organization. A comprehensive ETOP requires subdividing each environmental
sector into sub factors and then the impact of each sub factor on the organization is described in the form of
a statement.
A summary ETOP may only show the major factors for the sake of simplicity. The table 1 provides an
example of an ETOP prepared for an established company, which is in the Two Wheeler industry.
The main business of the company is in Motor Bike manufacturing for the domestic and exports markets.
This example relates to a hypothetical company but the illustration is realistic based on the current Indian
business environment.
Table 1: Environmental Threat and Opportunity Profile (ETOP) for a Motor Bike company:
Impact of each sector
Environmental Sectors
Customer preference for motorbike,
which are fashionable, easy to ride
Social (↑) and durable.
Political (→) No significant factor.
Growing affluence among urban
Economic (↑) consumers; Exports potential high.
Two Wheeler industry a thrust area
Regulatory (↑) for exports.
Industry growth rate is 10 to 12
percent per year, For motorbike
growth rate is 40 percent, largely
Market (↑) Unsaturated demand.

Mostly ancillaries and associated
companies supply parts and
components, REP licenses for
Supplier (↑) imported raw materials available.
Technological up gradation of
industry in progress. Import of
Technological (↑) machinery under OGL list possible.
As shown in the table motorbike manufacturing is an attractive proposition due to the many opportunities
operating in the environment. The company-can capitalize on the burgeoning demand by taking advantage
of the various government policies and concessions. It can also take advantage of the high exports potential
that already exists.
Since the company is an established manufacturer of motorbike, it has a favorable supplier as well as
technological environment. But contrast the implications of this ETOP for a new manufacturer who is
planning to enter this industry.
Though the market environment would still be favorable, much would depend on the extent to which the
company is able to ensure the supply of raw materials and components, and have access to the latest
technology and have the facilities to use it. The preparation of an ETOP provides a clear picture for
organization to formulate strategies to take advantage of the opportunities and counter the threats in its
environment.
The strategic managers should keep focus on the following dimensions,

1. Issue Selection:
Focus on issues, which have been selected, should not be missed since there is a likelihood of arriving at
incorrect priorities. Some of the impotent issues may be those related to market share, competitive pricing,
customer preferences, technological changes, economic policies, competitive trends, etc.
2. Accuracy of Data:
Data should be collected from good sources otherwise the entire process of environmental scanning may go
waste. The relevance, importance, manageability, variability and low cost of data are some of the important
factors, which must be kept in focus.
3. Impact Studies:
Impact studies should be conducted focusing on the various opportunities and threats and the critical issues
selected. It may include study of probable effects on the company’s strengths and weaknesses, operating
and remote environment, competitive position, accomplishment of mission and vision etc. Efforts should be
taken to make assessments more objective wherever possible.
4. Flexibility in Operations:
There are number of uncertainties exist in a business situation and so a company can be greatly benefited
buy devising proactive and flexible strategies in their plans, structures, strategy etc. The optimum level of
flexibility should be maintained.
Some of the key elements for increasing the flexibility are as follows:
(a) The strategy for flexibility must be stated to enable managers adopt it during unique situations.
(b) Strategies must be reviewed and changed if required.
(c) Exceptions to decided strategies must be handled beforehand. This would enable managers to violate
strategies when it is necessary.

(d) Flexibility may be quite costly for an organization in terms of changes and compressed plans; however, it
is equally important for companies to meet urgent challenges.
PESTEL Framework
The external forces can be classified into six broad categories: Political, Economic, Social, Technological,
Environmental and Legal Forces. Changes in these external forces affect the changes in consumer demand
for both industrial and consumer products and services. These external forces affect the types of products
produced the nature of positioning them and market segmentation strategies, the types of services offered,
and choice of business. Therefore, it becomes important for the organizations to identify and evaluate
external opportunities and threats so as to develop a clear mission, designing strategies to achieve long-
term objectives and develop policies to achieve short-term goals. Here, we will discuss all the six forces
individually and then try to come to the conclusion regarding environmental analysis. Few indicative points
are listed to guide you to find the key forces at work in the general environment. While the framework may
be used to understand the most important factors at the present time, it should be primarily used to look
into the future impact which may be different from their present or past impact.
The PESTEL Framework- Macro-environmental influences. The framework primarily involves the following
two areas:
1. The environmental factors affecting the organization;
2. The important factors relevant in the present context and in the years to come.
Political
1. Government stability
2. Political values and beliefs shaping policies
3. Regulations towards trade and global business
4. Taxation policies
5. Priorities ill social sector
Economic Factors
1. GNP trends
2. Interest rates/savings rate
3. Money supply
4. Inflation rate
5. Unemployment
6. Disposable income
7. Business cycles
8. Trade deficit/surplus
Socio-cultural Factors
1. Population demographics
 ethnic composition
 aging of population
 regional changes in population growth and decline
2. Social mobility
3. Lifestyle changes
4. Attitudes to work and leisure
5. Education - spread or erosion of educational standards
6. Health and fitness awareness
7. Multiple income families
Technological
1. Biotechnology
2. Process innovation
3. Digital revolution
4. Government spending on research
5. Government and industry focus on technological effort
6. New discoveries/development
7. Speed of technology transfer
8. Rates of obsolescence
Legal
1. Monopolies legislation/Antitrust regulation

2. Employment law
3. Health and safety
4. Product safety
Common Economic Indicators:
A. National Income
GNP
Personal Disposable Income
Personal Consumption
B. Policy Initiatives
Monetary policy
Fiscal policy
Labour and employment policy
C. Savings
Personal savings
Corporate savings
Balance of Payments
D. Foreign Sector
Exchange rates
Exports/Imports
E. Industry
Industry Investment
FDI flows
Services
Infrastructure
F. Sectoral Growth
Agriculture
Industry
G. Capital Market
Equity Market
Bond Market
H. Prices, Wages, Productivity

Inflation
Labor Productivity
Economic factors throw light on the nature and direction of the economy in which a firm operates. The firms
must focus on economic trends in segments that affect their industry. For example, the present trend of low
interest rates on personal savings may compel individuals to move towards equity and bond markets leading
to a boom in the capital market activity and the mutual fund industry. Consumption patterns are usually
governed by the relative affluence of market segments and firms must understand them through the level of
disposable income and the tendency of people to spend. Interest rates, inflation rates, unemployment rates
and trends in the gross national product, government policies and sectoral growth rates are other economic
influences it must consider.
The services sector's contribution to national income is increasing year after year and the family incomes are
rising faster than individual incomes, job opportunities are more diverse and therefore these speak for
different types of opportunities and challenges which are emerging before the business. With the opening
up of the economy, trends in global market need a careful look.
The above needs to be analyzed and incorporated in your inferences for the general environment and its
other forces and how all these together may influence business.
Demographic Factors: Demographic characteristics such as population, age distribution, literacy levels,
inter-state migration, rural-urban mobility, income distribution etc. are the key indicators for understanding
the demographic impact on environment. The shifts in age distribution caused by improved birth control
methods have created opportunities for youth centric products ranging from clothes to entertainment to
media. The growing number of senior citizens and their livelihood needs have been highlighted and the
government is being forced to pay more attention in the form of social security benefits etc.
Considering Literacy and the composition of literates in the country creates opportunities for particular type
of industries and type of jobs. For example, on one hand, the presence of a large number of English speaking
engineers encouraged many software giants to set up shops in India and on the other, the availability of
cheap labor, India becomes a destination for labor intensive projects. Moreover, large labor mobility across
different occupations and regions, in recent times, has cut down wage differentials greatly and this has an
impact for business which needs to be understood.
Cultural Factors: Social attitudes, values, customs, beliefs, rituals and practices also influence business
practices in a major way. Festivals in India offer great business opportunity for certain industries like clothes
and garments, jewellery, gift items, sweetmeats and many others, the list could be endless.
Social values and beliefs are important as they affect our buying behavior. For example, McDonalds does not
serve the beef burgers in India because Indians do not have cow meat since the animal is considered holy
and sacred. A related example of Walt Disney also brings out clearly, the impact different cultures may bring
to business. Walt Disney which has been so successful in US market could not be so similarly successful in
the European countries because of the difference in the way in which people entertain themselves there.
Walt Disney had to customize its offerings in order to be successful in these markets. The spread of
consumerism, the rise of the middle class with high disposable income, the flashy lifestyles of people
working in software, telecom, media and multinational companies seem to have changed the socio-cultural
scenario and this needs to be understood deeply.
Values in society also determines the work culture, approach towards stakeholders and the various
responsibilities the organization thinks of owing to its stockholders and the society.
Technology: Technological factors represent major opportunities and threats which must be taken into
account while formulating strategies. Technological breakthroughs can dramatically influence the
organization's products, services markets, suppliers, distributors, competitors, customer, manufacturing
process, marketing practices and competitive position. Technological advancements can open up new
markets, change the relative position of all industry and render existing products and services obsolete.
Technological changes can reduce or eliminate cost barriers between businesses, create shorter production
runs, create shortages in technical skills and result in changing values and expectations of customers and
employees.
The impact of information technology (IT) which combines fruits of both telecommunications and computers
has been revolutionary in every field. Not only has it opened up new vistas of business but also has changed
the way the businesses are done. It has specificaIIy brought in another dimension 'Speed' which
organizations recognize as the additional source of competitive advantage beyond low cost and
differentiation. Manufacturers, bankers and retailers have used IT to carry out their traditional tasks at
lower costs and deliver higher value added products and services.
Environment: Environment conservation and protection is an issue, which has gained prominence because
of deteriorating environmental balance which is threatening the sustainability of life and nature. Largely,
business is also held responsible for such situations as emissions from industries polluting the air, excessive
chemical affluent drained out in water making it poisonous and unfit for use, usage of bio non-degradable
resources affecting the bio-chain adversely and exposure of employees to hazardous radiations bring their
life in danger. All these have been taken very seriously by different stakeholders in the society including the
Government and legislations and movements are creating pressure for an environment friendly business.
These have far reaching implications for business ranging from the kind of business, the product being
manufactured, how it is manufactured & how friendly it is for mankind and nature. Big companies like Coca
Cola and Pepsi have also come under the purview of the society regarding the environmental hazards. If the
charges on them of using chemicals beyond accepted levels for manufacturing of soft drink s are confirmed,
they will have a black spot on their names and business. So, it is important for the organizations to take care
of the environment as well.
Legal: Licensing policies, quota restrictions, import duties, Forex regulations, restrictions on FDI flows,
controls on distribution and pricing of commodities together made business difficult during license permit
raj before the liberalization policy of 1991. However, with economic reforms things have changed and legal
formalities have eased. Nevertheless with globalization, the rules of competition, trade mark rights and
patents, WTO rules and implications, price controls and product quality laws and a number of other legal
issues in individual countries have become important and therefore they need to be included while
understanding the general environment.
Internal Analysis
The Internal Analysis of strengths and weaknesses focuses on internal factors that give an organization
certain advantages and disadvantages in meeting the needs of its target market. Strengths refer to core
competencies that give the firm an advantage in meeting the needs of its target markets.
It is a review of an organization's strengths and weaknesses that focuses on those factors within its domain.
A detailed internal analysis will typically give a business a good sense of its basic competencies and the
desirable improvements that it can make to help meet the requirements of potential customers within its
intended market.
Strategic Advantage Profile (SAP)
Every firm has strategic advantages and disadvantages. For example, large firms have financial strength
but they tend to move slowly, compared to smaller firms, and often cannot react to changes
quickly. No firm is equally strong in all its functions. In other words, every firm has strengths as
well as weaknesses.
Strategists must be aware of the strategic advantages or strengths of the firm to be able to choose the best
opportunity for the firm. On the other hand, they must regularly analyze their strategic disadvantages or
weaknesses in order to face environmental threats effectively.
Example: The Strategist should look to see if the firm is stronger in these factors than its competitors. When a firm is strong in the
market, it has a strategic advantage in launching new products or services and increasing market share of present products and
services.
Strategic Advantage Factors: Marketing and Distribution

1. Competitive structure and market share: To what extent has the firm established a strong mark share in
the total market or its key sub markets?
2. Efficient and effective market research system.
3. The product-service mix: quality of products and services.
4. Product-service line: completeness of product-service line and product-service mix; phase of life-cycle the
main products and services are in.
5. Strong new-product and new-service leadership.
6. Patent protection (or equivalent legal protection for services).
7. Positive feelings about the firm and its products and services on the part of the ultimate consumer.
8. Efficient and effective packaging of products (or the equivalent for services).
9. Effective pricing strategy for products and services.

10. Efficient and effective sales force: close ties with key customers. How vulnerable are we in terms of concentrating on sales to
a few customers?
11. Effective advertising: Has it established the company's product or brand image to develop loyal
customers?
12. Efficient and effective marketing promotion activities other than advertising.
13. Efficient and effective service after purchase.
14. Efficient and effective channels of distribution and geographic coverage, including internal
efforts
R & D (Research and Development) and Engineering function can be a strategic advantage for two reasons:
1. It can lead to new or improved products for marketing

2. It can lead to the development of improved manufacturing or material processes to gain cost advantages through
efficiency.
Strategic Advantage Factors: R&D and Engineering

1. Basic research capabilities within the firm
2. Development capability for product engineering
3. Excellence in product design
4. Excellence in process design and improvements
5. Superior packaging developments being created
6. Improvements in the use of old or new materials
7. Ability to meet design goals and customer requirements
8. Well-equipped laboratories and testing facilities
9. Trained and experienced technicians and scientists
10. Work environment suited to creativity and innovation
11. Managers who can explain goals to researchers and research results to higher managers
12. Ability of unit to perform effective technological forecasting.
DIFFERENT APPROACHES TO DEVELOP AN COMPETITIVE ADVANTAGE:

1.The first approach is to compete based on existing strengths. This approach is called KFS,
abbreviated from Key Success Factors. The firm can gain strategic advantage if it focuses resources on one
crucial point.
2.The second approach is still based on existing strengths but avoids head-on competition.
The firm must look at its own strengths which are different or superior to that of the
competition and exploit this relative superiority to the fullest. For example, the strategist either (a) makes
use of the technology, sales network, and so on, of those of its products which are not directly competing with the
products of competitors or (b) makes use of other differences in the composition of assets. This avoids head-on competition.
3.The third approach is used for example to compete directly with a com
p e t i t o r i n a well-established, stagnant industry. Here an unconventional approach may be needed to
upset the key factors for success that the competitor has used to build an advantage. The starting point is to
challenge accepted assumptions about the way business is done and gain a novel advantage by creating new success factors.
4.Finally, a competitive advantage may be obtained by means of innovations which open new
markets or result in new products. This approach avoids head-on competition but requires
the firm to find new and creative strengths. Innovation often involves market segmentation and
finding new ways of satisfying the customer's utility function.
5.In each of these approaches the principal point is to avoid doing the same
t h i n g a s t h e competition on the same battleground. So the analyst needs to decide which
of these approaches might be pursued to develop a sustainable distinctive competence.
SWOT Analysis
SWOT Analysis is a useful technique for understanding your Strengths and Weaknesses, and for identifying
both the Opportunities open to you and the Threats you face.
How to Use the Tool
Originated by Albert S. Humphrey in the 1960s, the tool is as useful now as it was then. It can be used in two
ways – as a simple icebreaker helping people get together to "kick off" strategy formulation, or in a more
sophisticated way as a serious strategy tool.
Strengths and weaknesses are often internal to the organization, while opportunities and threats generally
relate to external factors. For this reason, SWOT is sometimes called Internal-External Analysis and the
SWOT Matrix is sometimes called an IE Matrix.
We can address the following questions and draw up a SWOT matrix:
Strengths
 What advantages does your organization have?
 What do you do better than anyone else?
 What unique or lowest-cost resources can you draw upon that others can't?
 What do people in your market see as your strengths?
 What factors mean that you "get the sale"?
 What is your organization's Unique Selling Proposition (USP)?
Weaknesses
 What could you improve?

 What should you avoid?
 What are people in your market likely to see as weaknesses?
 What factors lose you sales?
Opportunities
 What good opportunities can you spot?
 What interesting trends are you aware of?
Useful opportunities can come from such things as:
 Changes in technology and markets on both a broad and narrow scale.
 Changes in government policy related to your field.
 Changes in social patterns, population profiles, lifestyle changes, and so on.
 Local events.
Threats
 What obstacles do you face?
 What are your competitors doing?
 Are quality standards or specifications for your job, products or services changing?
 Is changing technology threatening your position?
 Do you have bad debt or cash-flow problems?
 Could any of your weaknesses seriously threaten your business?
Example
A small start-up consultancy might draw up the following SWOT Analysis:

Strengths
 We are able to respond very quickly as we have no red tape, and no need for higher management
approval.
 We are able to give really good customer care, as the current small amount of work means we have
plenty of time to devote to customers.
 Our lead consultant has a strong reputation in the market.
 We can change direction quickly if we find that our marketing is not working.
 We have low overheads, so we can offer good value to customers.
Weaknesses
 Our company has little market presence or reputation.
 We have a small staff, with a shallow skills base in many areas.
 We are vulnerable to vital staff being sick or leaving.
 Our cash flow will be unreliable in the early stages.
Opportunities
 Our business sector is expanding, with many future opportunities for success.
 Local government wants to encourage local businesses.
 Our competitors may be slow to adopt new technologies.
Threats
 Developments in technology may change this market beyond our ability to adapt.
 A small change in the focus of a large competitor might wipe out any market position we achieve.
As a result of their analysis, the consultancy may decide to specialize in rapid response, good value services
to local businesses and local government.
Marketing would be in selected local publications to get the greatest possible market presence for a set
advertising budget, and the consultancy should keep up-to-date with changes in technology where possible.
MCKINSEY'S 7s FRAMEWORK
“McKinsey 7s model is a tool that analyzes firm’s organizational design by looking at 7 key internal
elements: strategy, structure, systems, shared values, style, staff and skills, in order to identify if they are
effectively aligned and allow organization to achieve its objectives.”
McKinsey 7s model was developed in 1980s by McKinsey consultants Tom Peters, Robert Waterman and
Julien Philips with a help from Richard Pascale and Anthony G. Athos. Since the introduction, the model has
been widely used by academics and practitioners and remains one of the most popular strategic planning
tools. It sought to present an emphasis on human resources (Soft S), rather than the traditional mass
production tangibles of capital, infrastructure and equipment, as a key to higher organizational
performance. The goal of the model was to show how 7 elements of the company: Structure, Strategy, Skills,
Staff, Style, Systems, and Shared values, can be aligned together to achieve effectiveness in a company. The
key point of the model is that all the seven areas are interconnected and a change in one area requires
change in the rest of a firm for it to function effectively.
Below you can find the McKinsey model, which represents the connections between seven areas and divides
them into ‘Soft Ss’ and ‘Hard Ss’. The shape of the model emphasizes interconnectedness of the elements.
The model can be applied to many situations and is a valuable tool when organizational design is at
question. The most common uses of the framework are:
 To facilitate organizational change.
 To help implement new strategy.
 To identify how each area may change in a future.
 To facilitate the merger of organizations.
7s factors
In McKinsey model, the seven areas of organization are divided into the ‘soft’ and ‘hard’ areas. Strategy,
structure and systems are hard elements that are much easier to identify and manage when compared to
soft elements. On the other hand, soft areas, although harder to manage, are the foundation of the
organization and are more likely to create the sustained competitive advantage.
Hard S Soft S
Strategy Style
Structure Staff
Systems Skills
Shared Values
Strategy is a plan developed by a firm to achieve sustained competitive advantage and successfully compete
in the market. What does a well-aligned strategy mean in 7s McKinsey model? In general, a sound strategy is
the one that’s clearly articulated, is long-term, helps to achieve competitive advantage and is reinforced by
strong vision, mission and values. But it’s hard to tell if such strategy is well-aligned with other elements
when analyzed alone. So the key in 7s model is not to look at your company to find the great strategy,
structure, systems and etc. but to look if its aligned with other elements. For example, short-term strategy is
usually a poor choice for a company but if its aligned with other 6 elements, then it may provide strong
results.
Structure represents the way business divisions and units are organized and includes the information of who
is accountable to whom. In other words, structure is the organizational chart of the firm. It is also one of the
most visible and easy to change elements of the framework.
Systems are the processes and procedures of the company, which reveal business’ daily activities and how
decisions are made. Systems are the area of the firm that determines how business is done and it should be
the main focus for managers during organizational change.
Skills are the abilities that firm’s employees perform very well. They also include capabilities and
competences. During organizational change, the question often arises of what skills the company will really
need to reinforce its new strategy or new structure.
Staff element is concerned with what type and how many employees an organization will need and how
they will be recruited, trained, motivated and rewarded.
Style represents the way the company is managed by top-level managers, how they interact, what actions
do they take and their symbolic value. In other words, it is the management style of company’s leaders.
Shared Values are at the core of McKinsey 7s model. They are the norms and standards that guide
employee behavior and company actions and thus, are the foundation of every organization.
The authors of the framework emphasized that all elements must be given equal importance to achieve the
best results.
The 7s model can be used in two ways:

A) Considering the links between each of the Ss one can identify strengths and weaknesses of an
organization. No S is strength or a weakness in its own right; it is only its degree of support, or otherwise, for
the other Ss which is relevant. Any Ss that harmonizes with all the other Ss can be thought of as strengths
and weaknesses.
B) The model highlights how a change made in any one of the Ss will have an impact on all the others. Thus if
a planned change is to be effective, then changes in one S must be accompanied by complementary changes
in the others.
General environment and organizations' strategy
As a next important step the manager needs to analyze the kind of impact the change may bring in their
own industry as the impacts are never same for all industries. For example, the emerging younger
demographic profile of India will have very different consequences for businesses say in health care or
entertainment. While the former will face an adverse effect, the latter will have a positive effect and this
needs to be analyzed and integrated into strategic decision making. In response to these assessments of
differential impacts, managers will be able to take advantages of the opportunities or guard themselves of
the threats. The table below shows in how different ways various industries get affected by the different
environmental trends.
Environmental Trends Potentially +ve effects Probably neutral effects Probably –ve effects
1. Aging Population Medical Services Minerals Colleges & Schools
2. Multiple Income Fast Foods Machine Tools Grocer’s supplies
Families
3.Deregulation Shipping Financial Sector
4.Increased Waste Management Software Leather
environmental
legislation
5. Growing Global Telecommunication, Competition Mining
small scale handicrafts
Responding to these various impacts with new strategic initiatives the managers must take notice of the fact
that if the changes are significant, it may have the potential of changing the competitive rules of the game in
the industry. For example, in India the competitive rules of the game for sectors like telecom, banking and
insurance etc, in the post liberalization period changed specially in last two years. With the easing of FDI and
participation of major global players, norms have changed dramatically which is reflected in the strategies of
most of the firms in the sector. These changes can be seen in the area of technology and pricing, intensity of
advertising and promotions, their business alliances and network in the country.
Managers need to be cautious of the fact that there may be developments, which are not so easy to be
predicted and therefore need further attention so that they can be incorporated in their strategy. Inthe
global context, the managers must see the kind of impact any single change will have in different markets. It
is quite possible that they are very different both in degree and their nature.
Structural Drivers to Change
The PESTEL analysis gives a number of factors and their likely influences. However it is important to identify
the specific factors which may influence an industry and force them towards competitive adjustments.
These factors are termed as structural drivers of change which have the likely effect on the structure of an
industry or on the competitive environment.
As a first step based on PESTEL analysis, the key driving forces need to be identified and then impact of the
combined effect of these forces should also be made. Increasing globalization of the industry and the E
enabled era could be such driving forces capable of affecting the structure of an industry or its environment.
Environmental scanning
The factors or the forces understood under PESTEL framework put together, present a highly complex and
uncertain environment which are difficult to predict or foresee. From a long term view of strategy however,
reaching somewhat closer to such forces are important in understanding the key factors influencing the
success of such strategies.
Environmental scanning is one of the few ways to detect future driving forces early and this involves
studying and interpreting the developments of social, political, economic, ecological and technical events
that could become driving forces. It attempts to figure out few radical happenings or path breaking
developments which may be catching on and see their possible implications 5 to 20 years into the future.
The purpose of the environmental scanning is to raise the consciousness of managers about potential
developments that could have an impact on industry conditions and bring in new threats or opportunities.
Environmental scanning is normally accomplished by systematically monitoring and studying current events,
constructing scenarios and employing the Delphi method (a technique for finding consensus among a group
of knowledgeable experts). Constructing scenarios involves a detailed plausible view of how the business
environment of an organization might develop in the future based on the groupings of key environmental
influences and drivers of change about which there is high level of uncertainty. For example, in industries
like energy, transportation, defense equipment etc. there is a need for views of the business environment of
more than 10- 15 years and factors like raw materials, substitutes, consumption patterns, geo politics etc.
would be of crucial importance. Foreseeing precisely for such a longer duration may be very difficult but
drawing up possible futures may be possible. It is not unnatural to believe that several scenarios could
unfold over time and these need to be understood.
Summary
 Understanding of the general environment in which an organization operates is the foremost pre-
requisite towards strategy formulation.
 The six broad dimensions which the PESTEL framework provides of the environment-political,
economic, socio-cultural, technological, environmental and legal are capable of giving a
comprehensive overview of how things may be unfolding.
 The objective of the analysis out of this framework however should not only restrict to the present
and past but the real focus should be on projecting the trends into future in order to get the real
feel of the environment then.
 This shall enable the firm to proactively strategize for future considering the general environment; it
is going to face and the issues which will be of importance.
1. Explain the different approaches of environmental scanning. (2014 – QP206) (5)
Answer: After determining the sources of information the approach of environmental analysis should be
determined. There are mainly three approaches to environmental scanning. They are:
Systematic approach:
Under this approach, a systematic method is adopted for environmental scanning. The information
regarding market and customer, government policy, economic and social aspects are continuously collected.
In other words, the environment is monitored in a regular way. The timeliness and relevance of such
information enhances the decision making capacity of the management.
Ad-hoc Approach:
Under this, specific environmental components are only analyzed through survey and study. Ad-hoc
approach is useful for collecting information for specific project, evaluating the strategic alternative or
formulating new strategies. It is not a continuous process.
Processed form approach:
Under this, the information collected from internal and external sources are used after processing them.
Normally, the information obtained from secondary sources are processed and used as per the
requirements of the business.
2. Discuss the term 'Strategic Advantage Profile'. (2016 – QP404) (5)
Answer: Strategic Advantage Profile (SAP)
Every firm has strategic advantages and disadvantages. For example, large firms have financial strength
but they tend to move slowly, compared to smaller firms, and often cannot react to changes
quickly. No firm is equally strong in all its functions. In other words, every firm has strengths as
well as weaknesses.
Strategists must be aware of the strategic advantages or strengths of the firm to be able to choose the best
opportunity for the firm. On the other hand, they must regularly analyze their strategic disadvantages or
weaknesses in order to face environmental threats effectively.
Example: The Strategist should look to see if the firm is stronger in these factors than its competitors. When a firm is strong in the
market, it has a strategic advantage in launching new products or services and increasing market share of present products and
services.
Strategic Advantage Factors: Marketing and Distribution

15. Competitive structure and market share: To what extent has the firm established a strong mark share in
the total market or its key sub markets?
16. Efficient and effective market research system.
17. The product-service mix: quality of products and services.
18. Product-service line: completeness of product-service line and product-service mix; phase of life-cycle the
main products and services are in.
19. Strong new-product and new-service leadership.
20. Patent protection (or equivalent legal protection for services).
21. Positive feelings about the firm and its products and services on the part of the ultimate consumer.
22. Efficient and effective packaging of products (or the equivalent for services).
23. Effective pricing strategy for products and services.
24. Efficient and effective sales force: close ties with key customers. How vulnerable are we in terms of concentrating on sales to
a few customers?
25. Effective advertising: Has it established the company's product or brand image to develop loyal
customers?
26. Efficient and effective marketing promotion activities other than advertising.
27. Efficient and effective service after purchase.
28. Efficient and effective channels of distribution and geographic coverage, including internal
efforts
R & D (Research and Development) and Engineering function can be a strategic advantage for two reasons:
3. It can lead to new or improved products for marketing

4. It can lead to the development of improved manufacturing or material processes to gain cost advantages through
efficiency.
Strategic Advantage Factors: R&D and Engineering

13. Basic research capabilities within the firm
14. Development capability for product engineering
15. Excellence in product design
16. Excellence in process design and improvements
17. Superior packaging developments being created
18. Improvements in the use of old or new materials
19. Ability to meet design goals and customer requirements
20. Well-equipped laboratories and testing facilities
21. Trained and experienced technicians and scientists
22. Work environment suited to creativity and innovation
23. Managers who can explain goals to researchers and research results to higher managers
24. Ability of unit to perform effective technological forecasting.
DIFFERENT APPROACHES TO DEVELOP AN COMPETITIVE ADVANTAGE:

1.The first approach is to compete based on existing strengths. This approach is called KFS,
abbreviated from Key Success Factors. The firm can gain strategic advantage if it focuses resources on one
crucial point.
2.The second approach is still based on existing strengths but avoids head-on competition.
The firm must look at its own strengths which are different or superior to that of the
competition and exploit this relative superiority to the fullest. For example, the strategist either (a) makes
use of the technology, sales network, and so on, of those of its products which are not directly competing with the
products of competitors or (b) makes use of other differences in the composition of assets. This avoids head-on competition.
3.The third approach is used for example to compete directly with a com
p e t i t o r i n a well-established, stagnant industry. Here an unconventional approach may be needed to
upset the key factors for success that the competitor has used to build an advantage. The starting point is to
challenge accepted assumptions about the way business is done and gain a novel advantage by creating new success factors.
4.Finally, a competitive advantage may be obtained by means of innovations which open new
markets or result in new products. This approach avoids head-on competition but requires
the firm to find new and creative strengths. Innovation often involves market segmentation and
finding new ways of satisfying the customer's utility function.
5.In each of these approaches the principal point is to avoid doing the same
t h i n g a s t h e competition on the same battleground. So the analyst needs to decide which
of these approaches might be pursued to develop a sustainable distinctive competence.
3. Discuss the different sources for collecting information for environmental scanning. (2016
– QP404) (5)
Answer: Process of Environmental Scanning:

Environmental scanning is a useful managerial tool for assessing the environmental trend. The following
process is adopted for environmental scanning.
Study the forces and Nature of the Environment:

In the first step of environmental scanning, the forces of the environment that have got significant bearing
in the growth and development of the business should be identified. They may be political, economic,
sociology-cultural, technological, legal, physical environment and global components. After this, the nature
of the environmental components is studied. The nature of environment may be simple or complex. It may
also be stable or volatile. The nature of the environment affects a firm's ability to predict the future. Some
business may be operating in simple environment and others in complex. When there is a high level of
uncertainty and complexity in the environment, environmental scanning becomes more critical.
Determine the sources of Information:

After studying the process and nature of the environment, the sources of collecting information from the
environment should be determined. There are different sources through which information on business
environment may be collected. They are as follows:
Secondary sources:
Newspapers, book, research articles, industrial and trade publications, government publication, and annual
report of the competitors.
Mass media:
Radio, TV and Internet.
Internal sources:
Internal reports, management information system, data network, and employee.
External agencies:
Consumers, marketing intermediaries and suppliers.
Formal studies:
Formal research and study by employee, research agencies, and educational institutions.
Spying and surveillance of the competitors.
4. Discuss the ‘VRIO Model’ as given by Barney. (2016 – QP404) (5)
Answer: VRIO framework is the tool used to analyze firm’s internal resources and capabilities to find out if
they can be a source of sustained competitive advantage.
In order to understand the sources of competitive advantage firms are using many tools to analyze their
external (Porter’s 5 Forces, PEST analysis) and internal (Value Chain analysis, BCG Matrix) environments. One
of such tools that analyze firm’s internal resources is VRIO analysis. The tool was originally developed by
Barney, J. B. (1991) in his work ‘Firm Resources and Sustained Competitive Advantage’, where the author
identified four attributes that firm’s resources must possess in order to become a source of
sustained competitive advantage. According to him, the resources must be valuable, rare, imperfectly
imitable and non-substitutable. His original framework was called VRIN. In 1995, in his later work ‘Looking
Inside for Competitive Advantage’ Barney has introduced VRIO framework, which was the improvement of
VRIN model. VRIO analysis stands for four questions that ask if a resource is: valuable? rare? costly to
imitate? And is a firm organized to capture the value of the resources? A resource or capability that meets
all four requirements can bring sustained competitive advantage for the company.
Valuable
The first question of the framework asks if a resource adds value by enabling a firm to exploit opportunities
or defend against threats. If the answer is yes, then a resource is considered valuable. Resources are also
valuable if they help organizations to increase the perceived customer value. This is done by increasing
differentiation or/and decreasing the price of the product. The resources that cannot meet this condition,
lead to competitive disadvantage. It is important to continually review the value of the resources because
constantly changing internal or external conditions can make them less valuable or useless at all.
Rare
Resources that can only be acquired by one or very few companies are considered rare. Rare and valuable
resources grant temporary competitive advantage. On the other hand, the situation when more than few
companies have the same resource or uses the capability in the similar way, leads to competitive parity. This
is because firms can use identical resources to implement the same strategies and no organization can
achieve superior performance.
Even though competitive parity is not the desired position, a firm should not neglect the resources that are
valuable but common. Losing valuable resources and capabilities would hurt an organization because they
are essential for staying in the market.
Costly to Imitate
A resource is costly to imitate if other organizations that doesn’t have it can’t imitate, buy or substitute it at
a reasonable price. Imitation can occur in two ways: by directly imitating (duplicating) the resource or
providing the comparable product/service (substituting).
A firm that has valuable, rare and costly to imitate resources can (but not necessarily will) achieve sustained
competitive advantage. Barney has identified three reasons why resources can be hard to imitate:
 Historical conditions. Resources that were developed due to historical events or over a long period
usually are costly to imitate.
 Causal ambiguity. Companies can’t identify the particular resources that are the cause of
competitive advantage.
 Social Complexity. The resources and capabilities that are based on company’s culture or
interpersonal relationships.
Organized to Capture Value

The resources itself do not confer any advantage for a company if it’s not organized to capture the value
from them. A firm must organize its management systems, processes, policies, organizational structure and
culture to be able to fully realize the potential of its valuable, rare and costly to imitate resources and
capabilities. Only then the companies can achieve sustained competitive advantage.
Using the tool
Step 1. Identify valuable, rare and costly to imitate resources
There are two types of resources: tangible and intangible. Tangible assets are physical things like land,
buildings and machinery. Companies can easily by them in the market so tangible assets are rarely the
source of competitive advantage. On the other hand, intangible assets, such as brand reputation,
trademarks, intellectual property, unique training system or unique way of performing tasks, can’t be
acquired so easily and offer the benefits of sustained competitive advantage. Therefore, to find valuable,
rare and costly to imitate resources, you should first look at company’s intangible assets.
Finding valuable resources:
An easy way to identify such resources is to look at the value chain and SWOT analyses. Value chain analysis
identifies the most valuable activities, which are the source of cost or differentiation advantage. By looking
into the analysis, you can easily find the valuable resources or capabilities. In addition, SWOT analysis
recognizes the strengths of the company that are used to exploit opportunities or defend against threats
(which is exactly what a valuable resource does). If you still struggle finding valuable resources, you can
identify them by asking the following questions:
 Which activities lower the cost of production without decreasing perceived customer value?
 Which activities increase product or service differentiation and perceived customer value?
 Have your company won an award or been recognized as the best in something? (most innovative,
best employer, highest customer retention or best exporter)
 Do you have an access to scarce raw materials or hard to get in distribution channels?
 Do you have special relationship with your suppliers? Such as tightly integrated order and
distribution system powered by unique software?
 Do you have employees with unique skills and capabilities?
 Do you have brand reputation for quality, innovation, customer service?
 Do you do perform any tasks better than your competitors do? (Benchmarking is useful here)
 Does your company hold any other strengths compared to rivals?
Finding rare resources:
 How many other companies own a resource or can perform capability in the same way in your
industry?
 Can a resource be easily bought in the market by rivals?
 Can competitors obtain the resource or capability in the near future?
Finding costly to imitate resources:
 Do other companies can easily duplicate a resource?

 Can competitors easily develop a substitute resource?
 Do patents protect it?
 Is a resource or capability socially complex?
 Is it hard to identify the particular processes, tasks, or other factors that form the resource?
Step 2. Find out if your company is organized to exploit these resources
Following questions might be helpful:
 Does your company have an effective strategic management process in organization?

 Are there effective motivation and reward systems in place?
 Does your company’s culture reward innovative ideas?
 Is an organizational structure designed to use a resource?
 Are there excellent management and control systems?
Step 3. Protect the resources
When you identified a resource or capability that has all 4 VRIO attributes, you should protect it using all
possible means. After all, it is the source of your sustained competitive advantage. The first thing you should
do is to make the top management aware of such resource and suggest how it can be used to lower the
costs or to differentiate the products and services. Then you should think of ideas how to make it costlier to
imitate. If other companies won’t be able to imitate a resource at reasonable prices, it will stay rare for
much longer.
Step 4. Constantly review VRIO resources and capabilities
The value of the resources changes over time and they must be reviewed constantly to find out if they are as
valuable as they once were. Competitors are also keen to achieve the same competitive advantages so
they’ll be keen to replicate the resources, which means that they will no longer be rare. Often, new VRIO
resources or capabilities are developed inside an organization and by identifying them you can protect you
sources of competitive advantage more easily.
VRIO example
Google’s capability evaluated using VRIO framework
Google's VRIO capability
Excellent employee management
Valuable? Rare? Costly to Imitate? Is a company organized to exploit it?
Yes Yes Yes Yes
Result: sustained competitive advantage

Google’s ability to manage their people effectively is a source of both differentiation and cost advantages.
Unlike other companies, which rely on trust and relationship in people management, Google uses data
about its employees to manage them. This capability allows making correct (data based) decisions about
which people to hire and the best way to use their skills. As a result, Google is able to hire innovative
employees that are also very productive ($1 million in revenue per employee). Besides being valuable, it is
also a rare capability because no other company uses data based employee management so extensively.
Is it costly to imitate? It is costly to imitate, at least, in the near future.
First, companies should build the highly sophisticated software, which is both costly and hard to do.
Second, HR managers should be trained to make data based decisions and forget their old management
methods.
Is Google organized to capture value from this capability? Certainly, it has trained HR managers that know
how to use the data and manage people accordingly. It also has the needed IT skills to collect and manage
the data about its employees.
5. What is ‘SWOT’ analysis? Explain with an example. (2016 – QP404) (5)

Answer: SWOT Analysis is a useful technique for understanding your Strengths and Weaknesses, and for
identifying both the Opportunities open to you and the Threats you face.
SWOT Analysis of Amul
Amul is one of the largest milk and milk based products manufacturer in India. Known to be the founder of
the white revolution in India, Amul has some strong products and brands up its sleeves, strongest of them
being Amul ice cream. Similarly, the Milk & Dairy products company has a very in depth product portfolio
including cheese, butter, curd, chocolates, ice cream, and others. However, following are the points in the
SWOT analysis of Amul.
Strengths in the SWOT analysis of Amul
Very high market share in ice cream – Amul has the top market share in ice cream segment which further
helps it push other products into the market.
Excellent brand equity – amul is a beloved brand over the years and the contribution of amul girl and her
outdoor ads should specifically be mentioned here.
Excellent quality management – even though amul has such a wide and large distribution network, hardly
any quality complaints come for amul.
Strong distribution network – This is one company which is strong in urban as well as rural distribution.
You will find amul present even in small towns and villages.
Good product portfolio – Amul had a deep product portfolio when compared to any fmcg company. It has
many different variety of milk milk based food items like cheese, butter, milk, buttermilk, lassi and many
others. In ice creams too, amul has a large variety of flavours
Strong Supply chain – Vendors love Amul and amul is known for the white revolution in India.
Rural presence – Strong rural presence of Amul is its plus point. It is mentioned here separately because
this rural presence gives amul a strong competitive advantage.
Weaknesses in the SWOT analysis of Amul
Cost of Operations – Amul’s operation is huge. And so is the cost. Plus the sector is such that maintaining
margins becomes difficult day by day. Thus, to face international players, Amul needs to maintain the
operations in the same manner it is carrying out today. It is not a weakness but rather a constant challenge
for Amul. In fact, during summers, the brand faces severe shortage of supply.
Chocolates – Amuls expansion to chocolate has failed and hardly any product of Amul chocolates is selling
in the market. Amul needs further products to expand its product line and increase bottomline.
Opportunities in the SWOT analysis of Amul
Export – Amul can export its product to other countries thereby increasing its turnover and margins
exponentially.
Concentrate more on chocolate market – Amul has a no advertisement policy which creates a problem for
its foray into additional products. Amul should in fact have separate SBU’s and concentrate more on
increasing its product line through chocolates or other such products.
Threats in the SWOT analysis of Amul
Increasing competition in Ice cream segment – Many players, local and international, are entering the ice
cream market thereby taking away share of wallet from Amul. Kwality walls, Naturals, London dairy,
Havmor, Arun ice cream, Vadilal, Ramani, are some of the few brands who are directly in competition with
Amul.
6. What are the difficulties that are associated with the Resource Allocation? (2013 – QP206)
(5)
Answer: The following points highlight the five major problems of resource allocation in an economy. The
problems are: 1. What and How Much to Produce 2. How to Produce 3. To Determine Income Distribution
4. To Utilise Resources Fully 5. To Provide an Incentive to Growth.
Resource Allocation: Problem # 1.

What and How Much to Produce:
The first function of prices is to resolve the problem of what to produce and in what quantities. This involves
allocation of scarce resources in relation to the composition of total output in the economy.
Since resources are scarce, the society has to decide about the goods to be produced:
Wheat, cloth, roads, television, power, buildings, and so on. Once the nature of goods to be produced is
decided, then their quantities are to be decided.
How many kilos of wheat, how many million metres of cloth, how many kilometers of roads, how many
televisions, how many million kw of power, how many buildings, etc. Since the resources of the economy
are scarce, the problem of the nature of goods and their quantities has to be decided on the basis of
priorities or preferences of the society.
If the society gives priority to the production of more consumer goods now, it will have less in the future. A
higher priority on capital goods implies less consumer goods now and more in the future. This problem can
be explained with the help of the production possibility curve, as shown in Figure 1.
Suppose the economy produces capital goods and consumer goods. In deciding the total output of the
economy, the society has to choose that combination of capital and consumer goods which is in keeping
with its resources. It cannot choose the combination R which is inside the production possibility curve PP
because it reflects economic inefficiency of the system in the form of unemployment of resources.
Nor can it choose the combination К which is outside the current production possibilities of the society; the
society lacks the resources to produce this combination of capital and consumer goods. It will have,
therefore, to choose among the combinations В, C, or D which give the highest level of satisfaction.
If the society decides to have more capital goods, it will choose combination В; and if it wants more
consumer goods, it will choose combination D.
As a matter of fact, consumers have to pick and choose from the vast variety of goods offered to them. The
urgency of desire for certain goods means that the consumers are prepared to pay a large sum of money
and higher prices. It implies larger profits for producers producing these commodities. If consumers desire
goods less urgently, it shows their reluctance to spend more on them and they offer lower prices.
Expecting shrinkage in profits, producers also bring smaller quantities of their products in the market. If
producers increase the supply of a commodity without any regard to the wishes of consumers, it will have a
low value in their estimation and the lower will be its price.
A small supply, on the other hand, increases the prestige of the commodity in the minds of consumers and
they pay a higher price for it. Thus, the different prices which consumers pay for various commodities and
services reflect their comparative values to them Prices also change with consumers’ tastes and preferences.
Consumers register their preferences towards commodities by paying more for them and their distaste by
offering less. If consumers show preference for auto-rickshaws and taxis in place of cycle-rickshaws and
tongas, they offer lower prices for the latter.
Some of the persons engaged in the latter trades will seek other occupations or may even start plying auto-
rickshaws and taxis or open workshops if they have the requisite means. Thus consumers’ tastes and
preferences are also reflected in the prices of goods and services.
Generally, a change in the price of a commodity acts simultaneously as a beacon light and a warning signal
for the producer or the consumer as the case may be. If the price of a commodity rises, it warns the
consumers to buy less of it and at the same time it beckons the producer to produce more of it. High price
and prospects of larger profits attract new producers into the industry in the long-run.
Resource owners also shift their resources to this high priced industry. Thus when all firms in the industry
produce more, supply increases more than the demand and the price may tend to fall. On the other hand,
the withdrawal of resources from the low-priced commodity brings a fall in its output.
But the shifting of consumer-demand towards it tends to raise its price in the long-run. This tendency
continues till both the commodities are equally priced and offer the same profits to producers in the two
industries.
Contrariwise, if the price of a commodity falls, it is a warning to the producers to produce less and an
invitation to the consumers to buy a larger quantity of it. Low price and the consequent low profits will
induce producers to shift resources away from this industry to the high-priced industry. This long-run
tendency will reduce supply whereas the demand is on the increase.
Consequently, price tends to rise. On the other hand, supply increases in the high-priced industry as a result
of shifting of resources into it. Demand being less, price tends to fall. This long-run tendency continues till
the two commodities are so priced as to bring in equal profits to producers in both industries.
Thus the consumer is the sovereign. He sets the price and producers manufacture those commodities which
he wants more. The more the producers produce, the larger the profits they earn and so do the resource
owners. The fate of the producer is sealed if the consumer has no liking for his product and sets a low price.
The producer, therefore, at once reacts when the consumer acts and resource allocation takes place along
with the production of goods.

How to Produce:
The next task of prices is to determine the techniques to be used for the production of articles. Prices of
factor services are the rewards received by them. Wage is the price for the service of labour, rent is the price
for the service of land, interest for the service of capital and profit for the service of entrepreneur.
Thus wages, rent, interest and profit are the prices paid by the entrepreneur for the services of the factors
of production which make up the costs of production.
Every producer aims at using the most efficient productive process. An economically efficient production
process is one which produces goods with the minimum of costs. The choice of a production process will
depend upon the relative prices of the factor services and the quantity of goods to be produced.
A producer uses expensive factor services in smaller quantities relative to cheap resources. In order to
reduce costs of production he substitutes cheaper resources for the dearer. If capital is relatively cheaper
than labour, the producer will use a capital-intensive production process. Contrariwise, if labour is relatively
cheaper than capital, labor-intensive production processes will be used.
In underdeveloped countries where labour is relatively cheap, techniques involving more labour contribute
to least costs; while in developed economies where labour is relatively expensive, capital-using and labour-
saving techniques combine efficiency with minimum costs.
Since one price for a single commodity prevails in a free enterprise economy, only economically efficient
producers can continue in the industry. Those incapable of paying resources their minimum rewards (prices)
will either close down or shift to the manufacture of some other commodity.
The technique to be .used for the production of goods is explained in terms of Figure 2. Suppose there are
only two techniques of production in an economy thats is capital-intensive shown by the ray ОС and labour-
intensive shown by the ray OL. IABQ is the isoquant showing a unit-output level by using either of the
techniques.
Point A represents a unit output level produced with the capital-intensive technique and point В the same
output level produced with the labour-intensive technique.
MP and M1P1 are the iso-cost or cost-outlay lines which reflect the market prices of capital and labour. The
line MP shows that capital is cheap relative to labour and the optimal production will be at point A with the
capital-intensive technique. On the other hand, if labour is cheap relative to capital, as shown by the line
M1P1, the optimal production will be at point В with the labour-intensive technique.
The technique to be used also depends upon the type and quantity of goods to be produced: For producing
capital goods and large outputs, complicated and expensive machines and techniques are required. On the
other hand, simple consumer goods and small outputs require small and less expensive machines and
comparatively simple techniques.
Further, it has to be decided what goods and services are to be produced in the public sector and what
goods and services in the private sector.

To Determine Income Distribution:
Another function of prices is to determine the distribution of income. In a free enterprise economy product-
distribution and income-distribution are interdependent. It is a system of mutual exchanges where the
producers and consumers are largely the same people.
The owners of factors sell their services for money and then spend that money to buy the goods produced
by factor services. Producers sell goods and services to consumers for money and consumers receive
incomes as owners of factor services. Thus income flows from owners of resources (consumers) to
producers and back to consumers again. Such a circular flow of income is shown in Figure 3.
Prices play an important role in this income flow. When the consumers buy commodities, it is their cost of
living. When producers sell commodities, it is their business receipts. What consumers receive as owners of
factor-services, it is their personal income and when producers pay for factor-services, it is the cost of
production.
It follows that the income of an individual depends upon the amount of resources owned by him and the
evaluation of his resources in the minds of consumers. People owning large quantities of resources have
high incomes and/or they contribute more to the making of commodities which satisfy the consumers
much.
Contrariwise, people owning small quantities of resources have low incomes and/or they contribute little to
the making of commodities which add to consumer satisfaction. Such income differentials are, however,
self-correcting. No individual can afford to receive a low income for long. So workers in the low-income
category will seek employment in that industry which pays higher wages.
This movement of workers from the lower-paying industry to the higher-paying industry results in the
diminution of the supply of the former industry and increase in the supply of the latter industry. Reduction
in supply raises the price of the product, increases the profits of the producer and the incomes of the
workers.
On the other hand, increase in the supply of the other commodity lowers its price, reduces profits as well as
the incomes of the workers. This process will continue till income differentials disappear altogether. Thus
prices not only determine income distribution but also bring its equality.

To Utilise Resources Fully:
The price mechanism also helps in the full utilisation of the resources of an economy. Full utilisation of
resources implies their full employment. This requires increase in income through large investments, and
ultimately to the equality of saving and investment.
In a growing economy equality between saving and investment is brought about by reductions in interest
rates. When the economy is nearing the level of full employment by an efficient use of resources, income
grows at a rapid rate and so do savings. But investment lags behind which can be raised to the level of
savings by interest-rate reductions. Thus the rate of interest acts as an equilibrating mechanism.
However, the rate of interest cannot be relied upon exclusively for this purpose in an economy nearing full
employment. Therefore, monetary and fiscal measures, and physical controls are also required to influence
the decisions of consumers and producers regarding saving and investment.

To Provide an Incentive to Growth:
Lastly, prices are an important factor in providing for economic growth. The impetus for improvement,
innovation and development comes through the price mechanism. Higher prices and profits encourage large
industrial concerns to spend huge sums on research and experimentation to improve and develop better
techniques.
The adaptation of the economic system to change in wants, resources and technologies takes place through
prices. If consumers want more of one commodity in preference to the other the price of the former rises.
Resources move to that industry. Profits also increase.
Larger profits lead to the adoption of superior technology which lowers costs. Larger profits and low costs
attract new producers who provide new capital. All this leads to capital formation. No doubt economic
growth depends upon a number of other factors, yet prices play an important role in providing for economic
growth with stability.
This is explained in terms of Figure 4 where the economy is shown to be stagnant at point S inside the
production possibility curve PP. For its economic growth, it has to be moved on to point A of the production
possibility curve PP whereby the economy produces larger quantities of consumer and capital goods.
This is possible through a higher rate of capital formation which consists of replacing existing capital goods
with new and more productive ones by adopting more efficient production techniques or through
innovations.
More growth leads to the outward shifting of the production possibility curve from PP to P1 P1. The economy
moves, say after 5 years, from point A to В or С or D on the P1P1 curve. Point С represents this situation
where larger quantities of both consumer and capital goods are produced in the economy. Economic growth
enables the economy to have more of both the goods through higher prices, profits and incomes.
Conclusion:
Thus the price mechanism, working through supply and demand in a free enterprise economy acts as the
principal organizing force. It determines what to produce and how much to produce. It determines the
rewards of the factor services.
It brings about an equitable distribution of income by causing resources to be allocated in right directions. It
works to ration out the existing supplies of goods and services, utilizes the economy’s resources fully and
provides the means for economic growth.
7. What do you understand by a business environment? Explain the relevance of the

environment in strategy making by organizations. (2013 – QP206)
(5+5)
Answer: The word ‘Business Environment’ has been defined by various authors as follows,
“Business Environment encompasses the -climate’ or set of conditions, economic, social, political or
institutional in which business operations are Conducted.”—Arthur M. Weimer
“Environment contains the external factors that create opportunities and threats to the business. This
includes socio-economic conditions, technology and political conditions.” – William Gluck and Jauch
‘‘Business environment is the aggregate of all conditions, events and influences that surround and affect
it.”—Keith Davis
“The environment of business consists of all those external things to which it is exposed and by which it may
be influenced directly or indirectly”. —Reinecke and Schoell.
“The total of all things external to firms and industries that affect the function of the organisation is called
business environment.”—Wheeler
“Civilisations require challenges to survive. Thus environment also contains hostilities and dangers that may
be overcome by individuals and organisations.”—Arnold J. Toynbee
On the basis of the above definitions, it is very clear that the business environment is a mixture of complex,
dynamic and uncontrollable external factors within which a business is to be operated. It is the sum total of
all external and internal factors that influence a business. External factors and internal factors can influence
each other and work together to affect a business.
Nature of Business Environment:

The nature of Business Environment is simply and better explained by the following approaches:
(i) System Approach:

In original, business is a system by which it produces goods and services for the satisfaction of wants, by
using several inputs, such as, raw material, capital, labour etc. from the environment.
(ii) Social Responsibility Approach:
In this approach business should fulfill its responsibility towards several categories of the society such as
consumers, stockholders, employees, government etc.
(iii) Creative Approach:
As per this approach, business gives shape to the environment by facing the challenges and availing the
opportunities in time. The business brings about changes in the society by giving attention to the needs of
the people.
Significance of Business Environment:

Business Environment refers to the “Sum total of conditions which surround man at a given point in space
and time. In the past, the environment of man consisted of only the physical aspects of the planet Earth (air,
water and land) and the biotic communities. But in due course of time and advancement of society, man
extended his environment through his social, economic and political function.”
In a globalised economy, the business environment plays an important role in almost all business
enterprises. The significance of business environment is explained with the help of the following points:
(i) Help to understand internal Environment:
It is very much important for business enterprise to understand its internal environment, such as business
policy, organisation structure etc. In such case an effective management information system will help to
predict the business environmental changes.
(ii) Help to Understand Economic System:
The different kinds of economic systems influence the business in different ways. It is essential for a
businessman and business firm to know about the role of capitalists, socialist and mixed economy.
(iii) Help to Understand Economic Policy:
Economic policy has its own importance in business environment and it has an important place in business.
The business environment helps to understand government policies such as, export-import policy, price
policy; monetary policy, foreign exchange policy, industrial policy etc. have much effect on business.
(iv) Help to Understand Market Conditions:
It is necessary for an enterprise to have the knowledge of market structure and changes taking place in it.
The knowledge about increase and decrease in demand, supply, monopolistic practices, government
participation in business etc., is necessary for an enterprise.
8. Describe the TOWS Matrix. (2013 – QP206)

(5)
Answer: A TOWS analysis involves the same basic process of listing strengths, weaknesses, opportunities
and threats as a SWOT analysis, but with a TOWS analysis, threats and opportunities are examined first
and weaknesses and strengths are examined last.
The marketers find a strategic alternative to assist the company to facilitate the external environment in
correspondence to the company’s existing internal Strengths and Weaknesses. The TOWS Matrix acts as a
valuable method whether you are creating a marketing plan, marketing campaign etc.
With the help of a TOWS Matrix, a company can easily identify how to take advantage of the opportunities,
reduce threats, exploitation of the strengths and can prevail over the weaknesses.
In order to formulate different strategic alternatives, a company must consider the fact that a strategy is an
art for planning in order to bring about the desired success of an organization. By identifying the strategic
alternatives, a company comes across with various questions like:
-How to work effectively with the company’s strengths?
-How to overcome the weaknesses?
-Embrace some advantage of the opportunities?
-How to handle the threats?
The TOWS MATRIX does not only provide a list of strengths, weaknesses, threats and opportunities but
works as a matching tool that helps to make a pair of internal and external factors to bring out better
solutions in the current scenario of a company. The marketers/managers do not only evaluate the four
strategies but strives how to match together all the external and internal factors to execute them in a best
possible way.
According to Michael Watkins of Harvard Business Review, by focusing on the external factors i.e. the
threats and opportunities at first can lead to a more productive outcome that elucidate what’s happening in
the external settings rather to lay emphasis on the internal capabilities of a company.
THE TOWS MATRIX can be explained as the following:
1- STRENGTHS:
Those attributes that makes the company stronger against its competitors and can be effective to achieve
the desired objective. For example, a company who has the highest market share or produce the highest
quality of a product against its rivals.
2- WEAKNESSES:
Those internal factors that can be risky for the company to achieve success in the future. For example: A
company who possess an outdated technology and lacks innovation in products.
3- OPPORTUNITIES:
Those external conditions that can be helpful towards the attainment of the objective. For example: the
new economic growth or the social changes in the environment might be an advantage for a company.
4- THREATS:
Those external settings that could be risky and harmful towards achieving the objective. For example:
Changes in the consumer buying patterns or the competitor may come up with a product which has been
more in demand.
The TOWS MATRIX helps to identify the strategic alternatives for a company that works as a matching tool
by constructing four types of strategies such as:
- THE SO STRATEGY:
This is also known as Maxi –Maxi Strategy where a firm utilizes most of its internal strengths in order to grab
the right external opportunities. For instance: A firm whose financial position is quite strong and possesses
low market share is able to introduce many innovative products in the market by making investment in the
Research & development Department of the firm.
Mercedes Benz takes advantage of the external demand of their lavish vehicles and makes right use of the
technical skills and quality of their products.
- THE WO STRATEGY:
The WO STRATEGY is also known as Mini- Maxi Strategy that can be used to overcome the weaknesses of a
company by taking advantage of the opportunities, for instance: A firm who lacks skilled workers can utilize
the opportunity by updating new technology in order to increase production. The internal weaknesses of
any firm can also be improved by recruiting and training employees through learning additional technical
skills.
A company who faces a decline in the financial sector can avail the opportunity of merging with a
multinational company.
- THE ST STRATEGY:
The ST Strategy / Maxi-Mini Strategy is where a company through its strengths can avoid any kind of
external threats. Any organization can refrain from external threats by avoiding any copied ideas, innovation
in products of another organization. In a case with an organization that possess good quality of products but
is facing threats against competitors who offers low priced products can adopt ST strategy by mass
production of the products, therefore it will reduce the unit cost of production.
- THE WT STRATEGY:
The WT Strategy Or Mini- Mini Strategy are adopted by firms who needs to reduce the level of weaknesses
and avoids any external threats at the same time This can be considered as a defensive technique in a
situation where a company whose financial position is at the critical stage and the demand of its product
getting reduced, the only possible chance to sustain itself in the market is to adopt a retrenchment strategy
or decides for merger with an another company.
However, The WT Strategy is difficult to implement in a situation with a company whose distribution
channel tends to be weak, if it gets improved by chance, in that case it will be able to remove many external
threats easily.
Following are the steps to construct a TOWS Matrix:
1- You need to identify and make a list of all the existing strengths of the organization.
2- Identify and list down the most important weaknesses of the organization.
3- List down all the external threats that are faced by the organization.
4- Similarly, make a list of all the opportunities that can be advantageous for the organization.
5- Now, to implement the SO strategy in the SO cell, you need to match the appropriate internal strengths
with external opportunities.
6- In the same way, match the right internal weaknesses with external opportunities and type the correct
WO strategy in the WO cell.
7- Similarly, make a match of internal strengths with external threats to type the right ST Strategy in the
respective ST cell.
8- Match all internal weaknesses with external threats to construct the appropriate WT strategy.
The TOWS MATRIX is based on the fact as how a strategy can be implemented; it does not claim which
strategy can work best to put into action. While creating the matrix, it’s important to denote each strategy
with a notation as (S1, O2) which represents rationalization for each strategy that is being adopted.
9. Discuss the importance of environmental scanning in strategic management. (2013 –

QP206) (5)
Answer: The second component of environmental analysis is to develop information about the
environment. Information has two primary strategic roles - in objective setting and in strategy formulation.
As managers scan the environment, they interpret environmental influence in the light of their own
perceptions, expectations, and values.
Environmental scanning is the monitoring, evaluating, and disseminating of information from the external
and internal environment to key people within the corporation or organization. ... It is a process of
gathering, analyzing, and dispensing information for tactical or strategic purposes.
The basic purpose of environmental scanning is to help management determine the future direction of the
organization. The most widely accepted method for categorizing different forms of scanning divides into the
following three types:
1. Irregular scanning systems: These consist largely of ad hoc environmental studies.

2. Regular Scanning systems: These systems revolve around a regular review of the environment or
significant environmental components. This review is often made annually.
3. Continuous scanning systems: These systems constantly monitor components of the organizational
environment.
Macro-environmental and industry scanning are only marginally useful if all they do is reveal current
conditions. To be truly meaningful, such analyses must forecast future trends and changes.
Environmental forecasting is a technique whereby managers attempt to predict the future characteristics of
the organizational environment and hence make decisions today that will help the firm deal with the
environment of tomorrow.
Forecasting involves the use of statistical and non-statistical, or qualitative, techniques. Four techniques can
be particularly helpful: time series analysis, judgmental forecasting, multiple scenarios, and the Delphi
technique.
Before managers can begin to formulate an effective strategy, they must make a critical examination of the
firms's environment.
Assessing the strategic situation is the first phase in determining the content of the proper strategies for a
firm. This process begins with an assessment of the general environment of the firm, in terms of economic,
technological, social, and political/legal influences.
Analyzing the organization's industry is the second major aspect of assessing the firm's strategic situation.
An industry structure analysis identifies the major forces affecting competition in an industry and
determines the strengths and weaknesses of the business relative to the industry.
Michael Porter has identified five basic competitive industry forces: the threat of new entrants in the
industry, the intensity of rivalry among existing competitors, the pressure from producers of substitute
products or services, the bargaining power of buyers of the industry's outputs, and the bargaining power of
suppliers to the industry's companies.
Management must find for a firm a position in the industry from which it can best defend itself against these
competitive forces or can influence them to its advantages. Another major element of the industry
environment is the product/market life cycle which assumes that all products, and, therefore, industries,
move through stages of a life cycle.
In analyzing an industry, it is also useful to determine if the industry is a global industry, that is, an industry
that requires global operations to compete effectively.
The organization's internal environment is the third aspect of assessing the strategic situation, which must
be done before strategy alternatives are formulated.
Several techniques are available to help management develop a worthwhile environmental analysis.
Environmental scanning involves studying and interpreting social, political, ecological, and technological
events in an effort to spot budding trends and conditions that could affect the industry.
Strategic managers must not only understand the current state of the environment and their industry but
also be able to forecast its future states. Moreover, once having implemented the environmental analysis
process, management should continually evaluate and strive to improve it.
10. Resources can be a source for developing sustainable competitive advantage. Justify the
statement. (2013 – QP 206) (5)
Answer: In the 1980-90's a model was proposed by Wernerfelt (1984) and augmented by Barney (1991),
which tackled the problem related to the identification of the elements that comprised a firm's competitive
advantage. It is known as the Resource Based View of the Firm (Fahy & Smithee, 1999). This surmised that
firms can only create sustained high performance if they have superior "Resources" coupled with the
company's "Capabilities" and are constantly protected from migration. According to Gautam, Barney,
Muhanna and Ray (2004), Barney (1991) surmised that multiple resources and capabilities form the highest
of the competitive entry barriers. This model (Fig. 1) shows how resources and capabilities combine to
create differentiation that forms the basis of a sustained competitive advantage.
Fig (1) Resource & Capability Based View of the Firm
In order to create a true cost or differentiation advantage, Barney (1991) surmised that a firm's resources
and capabilities must be:
• Valuable - Resources that implement strategies that will improve the company efficiency or effectiveness
that outperforms its competitors or reduces its competitive weaknesses.
• Rare - Resources that are hard to find, unique and cannot found by other companies.
• Imperfectly Imitable - Resources that are very hard to imitate, allowing sustainably because, without huge
investment of limited resources, competitors find it difficult to enter the market.
• Non-Substitutable - Resources that have no real equivalence that itself is not rare or imitable.
This list is known as Barney's (1991) "VRIN" resource based view of the firm. Some examples of VRIN
resources could be highly cohesive leadership, physical assets, brand equity, installed customer base,
company reputation, company values, deep tacit knowledge, strong patents, trademarks, copyrights, trade
secrets, unique technologies, strong legal representation and inter/intra company, customer or
governmental relationships. The VRIN resource characteristics are individually necessary, but not sufficient
for a sustained competitive advantage. Grant, Collis and Amit (Grant, 1991; Collis, 1995; Amit &
Schoemaker, 1993) further extended this model where they introduced new factors such as durability,
transferability and competitive superiority, which then provided further levels of refinement to the basic
model. Empirical research was reported by Collins (2001) where he described the special "characteristics" of
successful (great) companies that have enjoyed sustained competitive advantage. He concluded that truly
good-to-great companies shared five commonalities, including:
• "Big Personality CEOs almost never lead good companies to greatness" - Good-to-Great leaders have a mix
of personal humility and professional will. He described these CEOs as "Level 5 leaders" that continually
focus on what it takes to sustain success in the long term.
• "Great things require Great People" -Good-to-great companies got the right people on the "bus" and then
built the strategy around the people's expertise and passion.
• "Simplicity is Key" - Good-to-Great company's leaders understand the passions of their organizations, the
drivers of their business, and where they can be (or not be) the best in the world.
• "Enterprise and Systemic Discipline is essential" -When you combine a culture of discipline with the ethics
of entrepreneurship you have a recipe to achieve great results. Collins (2001) found that bureaucratic
cultures arose in companies that had a lesser degree of competence and lack of discipline.
• "New Technology is a Business Accelerator" -Good-to-Great companies do not jump on the technology
bandwagon or chase after short-term fads. They determine what technology makes most sense to them and
then pioneer novel applications to enhance their business.
Fig. (2) shows the asserted interdependence between a company's strategy and its organizational design,
systems, culture, leadership and employee incentives, showing that there are many interlinked factors that
must be considered during corporate strategy development.
There are likely many contributing factors that influence a firm's competitive position and it is likely a
combination of many VRIN resources and capabilities that will determine the type of company product or
service differentiation. Porter's (1979) generic differentiation strategies highlight four possible company
strategies that could be adopted depending on the type of market and the type of company differentiation.
It is necessary for a firm to continuously identify and nurture the VRIN resources and their complementary
capabilities to a create product(s) that are continuously attractive in the highest value market segments in
order to be successful for the long term.
Fig (2) - Interdependence between Company Strategy and Competitive Advantage
Identifying the exact mixture of resources and capabilities that truly provide sustained differentiation is not
easy. These are likely embedded deep in the firm, influenced by many things, and will manifest themselves
as differentiated products, efficiencies, quality, innovation, or customer service (Hafeez, Zhang & Malak,
2002). Some of the major organizational levers that are highly likely to influence a company's competitive
advantage are:
• Leadership - Company Vision, Mission, Leadership and Governance
• Incentives - Reward and Performance management systems
• Organizational Culture - Corporate Orthodoxies and Values
• Organizational Design - Organizational Structure, Globalization, Collaboration Effects
• Organizational Systems - Strategic Planning, Information Technology Infrastructure
These organizational levers represent some of the fundamental control systems that can influence a firm's
competitive advantage. However, achieving differential performance on one of these areas will certainly not
guarantee sustained success. These elements in turn can be distilled down further to identify the
fundamental VRIN resources or capabilities, which are critical to sustaining a firms' competitive advantage.
Competitive Forces
Learning Objective:
 To understand the importance of competitive environment;

 To understand the competitive forces of the competitive environment
 Porter’s five forces framework to analyze competitive environment;
 Process for analyzing the external environment; and
 Concepts of strategic groups and scenario planning.
Introduction
In previous chapter, we discussed the first level of the external analysis i.e. understanding of the macro
environment, which have an influence on the success or failure of an organization’s strategies. However, it is
the immediate competitive environment which also influences an organization and therefore has to be
understood alongside the general environment. The impact of the changes of the macro environment is felt
on the organization and its strategies through their influences on the competitive forces of the competitive
environment. Hence an in depth understanding of the industry’s competitive character is the next important
step for an organization as part of its external analysis.
Competitive environment
The competitive environment refers to the situation which Organization’s face within its specific area of
operation, and this can be understood at an industry level or with respect to smaller groups called Strategic
groups. Generally understood, an industry in the economy is recognized as a group of firms producing the
same principal product or more broadly the group of firms producing products that are close substitutes for
each other and in a given industry different organizations have different intermediate basis of
understanding its relative position with respect to other organizations in the industry.
Organization within an industry with similar strategic characteristics, following similar strategies or
competing on similar bases are called strategic groups. These characteristics for a particular group will be
different from those in other strategic groups in the same industry or sector. There may be many different
characteristics, which distinguish between strategic groups. For example size, breadth of product range,
geographical coverage, quality or service levels or marketing spend. The concept of strategic groups when
used helps in understanding who are the most direct competitors of any given organization and on what
basis competitive rivalry is likely to take place within each strategic groups.
There are competitive forces beyond direct rivals which shape up the competitive environment that can be
better understood with the Five forces framework discussed below.
Porter’s five forces framework
Porter five forces analysis is a framework to analyze level of competition within an industry and business
strategy development. It draws upon industrial organization (IO) economics to derive five forces that
determine the competitive intensity and therefore attractiveness of a market. Attractiveness in this context
refers to the overall industry profitability. An "unattractive" industry is one in which the combination of
these five forces acts to drive down overall profitability. A very unattractive industry would be one
approaching "pure competition", in which available profits for all firms are driven to normal profit. This
analysis is associated with its principal innovator Michael E. Porter of Harvard University (as of 2014).
Porter referred to these forces as the micro environment, to contrast it with the more general term macro
environment. They consist of those forces close to a company that affect its ability to serve its customers
and make a profit. A change in any of the forces normally requires a business unit to re-assess
the marketplace given the overall change in industry information. The overall industry attractiveness does
not imply that every firm in the industry will return the same profitability. Firms are able to apply their core
competencies, business model or network to achieve a profit above the industry average. A clear example of
this is the airline industry. As an industry, profitability is low and yet individual companies, by applying
unique business models, have been able to make a return in excess of the industry average.
Porter's five forces include - three forces from 'horizontal' competition: the threat of substitute products or
services, the threat of established rivals, and the threat of new entrants; and two forces from 'vertical'
competition: the bargaining power of suppliers and the bargaining power of customers.
Porter developed his Five Forces analysis in reaction to the then-popular SWOT analysis, which he found
unrigorous and ad hoc. Porter's five forces is based on the Structure-Conduct-Performance
paradigm in industrial organizational economics. It has been applied to a diverse range of problems, from
helping businesses become more profitable to helping governments stabilize industries. Other Porter
strategic frameworks include the value chain and the generic strategies.
Threat of new entrants
Profitable markets that yield high returns will attract new firms. This results in many new entrants, which
eventually will decrease profitability for all firms in the industry. Unless the entry of new firms can be
blocked by incumbents (which in business refers to the largest company in a certain industry, for instance, in
telecommunications, the traditional phone company, typically called the "incumbent operator"), the
abnormal profit rate will trend towards zero (perfect competition).
The following factors can have an effect on how much of a threat new entrants may pose:
 The existence of barriers to entry (patents, rights, etc.). The most attractive segment is one in which
entry barriers are high and exit barriers are low. Few new firms can enter and non-performing firms
can exit easily.
 Government policy
 Capital requirements
 Absolute cost
 Cost disadvantages independent of size
 Economies of scale
 Economies of product differences
 Product differentiation
 Brand equity
 Switching costs or sunk costs
 Expected retaliation
 Access to distribution
 Customer loyalty to established brands
 Industry profitability (the more profitable the industry the more attractive it will be to new
competitors)
Threat of substitute products or services
The existence of products outside of the realm of the common product boundaries increases
the propensity of customers to switch to alternatives. For example, tap water might be considered a
substitute for Coke, whereas Pepsi is a competitor's similar product. Increased marketing for drinking tap
water might "shrink the pie" for both Coke and Pepsi, whereas increased Pepsi advertising would likely
"grow the pie" (increase consumption of all soft drinks), albeit while giving Pepsi a larger slice at Coke's
expense. Another example is the substitute of traditional phone with a smart phone.
Potential factors:
 Buyer propensity to substitute

 Relative price performance of substitute
 Buyer switching costs
 Perceived level of product differentiation
 Number of substitute products available in the market
 Ease of substitution
 Substandard product
 Quality depreciation
Bargaining power of customers (buyers)
The bargaining power of customers is also described as the market of outputs: the ability of customers to
put the firm under pressure, which also affects the customer's sensitivity to price changes. Firms can take
measures to reduce buyer power, such as implementing a loyalty program. The buyer power is high if the
buyer has many alternatives.
Potential factors:
 Buyer concentration to firm concentration ratio

 Degree of dependency upon existing channels of distribution
 Bargaining leverage, particularly in industries with high fixed costs
 Buyer switching costs relative to firm switching costs
 Buyer information availability
 Force down prices
 Availability of existing substitute products
 Buyer price sensitivity
 Differential advantage (uniqueness) of industry products
 RFM -- Recency, Frequency & Monetary Value (customer value) Analysis
 The total amount of trading
Bargaining power of suppliers
The bargaining power of suppliers is also described as the market of inputs. Suppliers of raw materials,
components, labour, and services (such as expertise) to the firm can be a source of power over the firm
when there are few substitutes. If you are making biscuits and there is only one person who sells flour, you
have no alternative but to buy it from them. Suppliers may refuse to work with the firm or charge
excessively high prices for unique resources.
Potential factors:
o Supplier switching costs relative to firm switching costs

o Degree of differentiation of inputs
o Impact of inputs on cost or differentiation
o Presence of substitute inputs
o Strength of distribution channel
o Supplier concentration to firm concentration ratio
o Employee solidarity (e.g. labour unions)
o Supplier competition: the ability to forward vertically integrate and cut out the buyer.
Intensity of competitive rivalry
For most industries the intensity of competitive rivalry is the major determinant of the competitiveness of
the industry.
Potential factors:
 Sustainable competitive advantage through innovation

 Competition between online and offline companies
 Level of advertising expense
 Powerful competitive strategy
 Firm concentration ratio
 Degree of transparency
Process for analyzing the external environment
Let us now see the process for analyzing the external environment. This consists of three steps which are as
follows:
 Step 1:
Identifying the firms – on industry as a whole or there may be sub focus groups called strategic groups.
 Step 2:
Intelligence gathering or environmental scanning on the general environment of the industry or strategic
group.
 Step 3:
Organizational Environment Information-Scenario planning is a process suitable for the purpose and form
the best inputs for the strategy formulation process.
The information can be gathered from the following sources:

i) Internal
ii) Newspaper/Magazine/Net
iii) Government
iv) Survey of Secondary Database
v) Customer and Suppliers
vi) Competition
Using these sources the environmental analysis for any organization can be done.
Summary
 The immediate competitive environment influences an organization and therefore has to be

understood alongside the general environment.
 The five forces model helps us in understanding any industry by identifying the strengths of each of
the five forces and the nature of competitive pressure that each force generates. It also enables an
understanding of the overall structure of competition.
 The competitive structure of an industry sounds unattractive when rivalry among firms are strong,
there exists low entry barriers and substitutes are more common along with, when both suppliers
and buyers command a higher bargaining power.
 In case of reverse position the competitive structure is found to be lucrative.
1.
Business Policy and Strategic Management Understanding Cost
Understanding Cost
Learning Objective:
 To understand the cost levels of Indian Industry;

 To understand the concept of experience curve; and
 To understand the concept of cost leadership.
Introduction
Cost analysis occupies an important place in business strategy. A firm must consider how the absolute
and relative cost of value activities will change over time independent of its strategy. Porter terms
this cost dynamics.
In order to gain and sustain competitive advantage, a firm should not only monitor its cost performance but
also should endeavor to control it. Several strategic decisions like fixation of competitive prices, provision of
after-sale services, quality of the products etc. depend upon relative cost level of the business firm. This unit
highlights the elements and role
of cost in overall business strategy. The unit begins by acquainting you first with the cost levels for some
industries in India. The role of cost in different market conditions is also examined. The unit also discusses
experience curve to explain the cost concept.
The most common sources of cost dynamics include: industry real growth, differential scale
sensitivity, different learning rates, differential technological change, relative inflation of costs, aging
(older offshore drilling rigs require more maintenance and insurance), market adjustment. Cost
dynamics can lead to significant changes in industry structure and relative cost position.
Michael Porter in his book Competitive Advantage suggested three generic competitive strategies aiming
to develop a dependable position in the long-run and out-perform the competitors. These three strategies
are: Cost Leadership; Differentiation; and Focus.
All the three strategies can either be used individually or in combination to each other.
Gaining Cost Advantage

A firm has a cost advantage if its cumulative cost of performing all value activities is lower than competitors'
costs. A firm's relative cost position is a function of:
 the composition if its value chain versus competitors'

 its relative position vis-a-vis the cost drives of each activity.
There are two major ways to achieve a cost advantage:
1. Control cost drivers. A firm can gain an advantage with respect to the cost drivers of value activities
representing a significant proportion of total costs.
2. Reconfigure the value chain. A firm can adopt a different and more efficient way to design, produce,
distribute, or market the product.
Controlling Cost Drivers
Some generalizations about how controlling each of the ten cost drivers can lead to cost advantage in an
activity are as follows:
Controlling scale.
Means for accomplishing this include:
 gain the appropriate type of scale

 set policies to reinforce scale economies in scale-sensitive activities
 exploit the types of scale economies where the firm is favored
 emphasize value activities driven by types of scale where the firm has an advantage
Controlling learning
 manage with the learning curve

 keep learning proprietary (such as backward integration to protect know-how, controlling
employee publications or other forms of information dissemination, retaining key
employees, strict non-disclosure provisions in employment contracts)
 learn from competitors
Controlling the effect of capacity utilization

 level throughput (such as peak load or contribution pricing, marketing activity, line
extensions into less cyclical products, or into products that can intermittently utilize excess
capacity, selecting buyers with more stable demand or demands that are counter seasonal
or countercyclical, ceding share in high demand periods and regaining it in low demand
periods, letting competitors serve fluctuating segments, sharing activities with sister
business units with a different pattern of needs)
 reduce the penalty of throughput fluctuations
Controlling linkages
These include:
 exploit cost linkages within the value chain

 work with suppliers and channels to exploit vertical linkages
Controlling interrelationships
 share appropriate activities

 transfer know-how in managing similar activities
 Controlling integration. Both integration and deintegration offer the potential of lowering
costs.
Controlling timing
Some of important ways for accomplishing this include:
 exploit first-mover or later-mover advantages

 time purchases in the business cycle
Controlling discretionary policies

 modify expensive policies that do not contribute to differentiation

 invest in technology to skew cost drivers in the firm's favor (e.g., developing low-cost
processes, facilitating automation, low-cost product designs)
 avoid frills
Controlling location
The optimal location of activities changes overtime.
Controlling institutional factors
Firms can influence institutional factors such as government policies and unionization.
Procurement and cost advantage
A number of possible changes in procurement can reduce costs:
 tune specifications of purchased inputs to meet needs more precisely

 enhance bargaining leverage through purchasing policies
 select appropriate suppliers and manage their cots
Reconfiguring the Value Chain

Reconfiguring value chains stem from a number of sources, including: a different production
process, differences in automation, direct sales instead of indirect sales, a new raw material, major
differences in forward or backward vertical integration, shifting the location of facilities relative to
suppliers and customers, new advertising media.
Reconfiguration downstream
Reconfiguration of downstream activities can reduce cost substantially.
Cost advantage through focus
A focus strategy may also provide a means for achieving a cost advantage that rests on using focus
to control cost drivers, reconfiguring the value chain, or both.
Sustainability Of Cost Advantage
Cost advantage will result in above-average performance only if the firm can sustain it. Sustainability varies
for different cost drivers and from one industry to another. Timing and integration can also be sources of
sustainable cost advantage.
Moreover, sustainability stems not only from the sources of the cost advantage, but also from their number.
Cost levels in India
It is widely accepted by the industrialists as well as the planners that Indian economy and industry are
becoming increasingly high cost-oriented. This narrowed down our domestic market particularly for
consumer durables and also impeded Indian products from competing in the international markets in the
80s but in the post-liberalization era, the scene changed. With multinationals coming to the country, the
demand for Indian goods reduced. To understand this observation, let us consider some specific examples of
different industrial sectors in India.
Textile Industry
Clothing is one of the three basic human needs alongwith food and shelter. Further, India was once known
all over the world for its fine clothes made from silk and cotton, and was a major supplier of textiles to the
rest of the world. But today our own people can’t afford to have cloth at reasonable prices because of our
high cost of production.
Tyre and Tube Industry
Road transportation represents an important component in the life-line of economic activity of any country,
and tyres and tubes form a significant input of the operating costs in this section. A comparison between the
costs for the raw materials which go into the production of tyres and tubes. Again we see that these inputs
cost the Indian tyre and tube manufacturers much more, and in turn this is reflected in the tyres and tubes
as paid by the prices of transporters. The cost is then passed on to the industrial customers using the
services of the transporters. Thus, there is a cascading effect whereby costs get accumulated over different
stages and the final consumers have to bear the cumulative costs.
Of course, as regards tyre industry, it is often observed that the leading tyre manufacturers have operated
like a cartel in supplying and pricing their products. To make up for shortages and to provide price
competition the Government allowed substantial imports of tyres recently.
Aluminum Industry
In aluminum industry also, considered today the parameter for determining the industrial development of a
nation, the Indian costs are much higher than the international prices. This is despite the fact that India has
an advantage in this sector because of the natural resources. But, even without the excise duty and taxes,
the prices of aluminum in India are higher than in U.K. (indicating international levels).
Causes and effects of high costs in India
The cost differences mentioned above for some sectors of the Indian industry are illustrative of a somewhat
general situation prevailing in India. A large number of factors go into the high costs of Indian products, such
as the growing excise, customs and sales tax levels etc. But a significant component of these high costs may
be due to uneconomic production levels, use of obsolete technology, high fixed or variable costs, high break-
even points or excessive dependence on imports of semi-finished goods, etc.
It is pertinent for us to consider the effects of such high costs in India. As the component of government
imposed levels in the prices increase, the rising prices cause a shrinkage in consumption and demand. For
instance, in terms of 1970-71 prices, the average household expenditure on essential consumer goods like
sugar, clothing and footwear etc. has actually declined from Rs. 2,802 in 1977-78 to Rs. 2,778. Similarly, for
the industrial goods, the household expenditure correspondingly declined from Rs. 1,106 to Rs. 1,092. A
recent manifestation of such high cost of production and the corresponding shrinkage in demand created
havoc in the Light Commercial Vehicle (LCV) industry where there was an added burden of high exchange
rate between Yen and Rupee on the imported components from Japan. The present situation has changed
with companies trying to develop products indigenously in an effort to reduce costs.
Changing role of cost in different market conditions
Cost is an important aspect of running any business operation. It is a major level for running the business
activities, and has its influence on the progress of an organization. Acceleration, stagnation or deceleration
in progress are affected by it.
Cost in Sellers’ Market
While the markets are operating as sellers’ markets, the cost may not be considered so critical in
determining the profits of a running organization. Under sellers’ market conditions, price is fixed on cost
plus basis. So whatever is the internal cost, the desired profit margin is added to it by the business firm, and
the price is derived accordingly.
Thus, Price of a Product = Internal Cost + Desired Profit Margin.
Here, the price of the product is the derived variable, and the cost is an independent variable. The customer
in the market is forced to pay the price so derived by the sellers. If the cost moves up, due to certain
unavoidable factors like scarcity of raw material, labour problems or additional taxation, the
manufacturer/seller merely takes the boosted cost figures, adds his/her desirable profit margin and sells the
goods at the enhanced price. In the sellers’ market conditions (say due to shortage in emergency conditions
or man-made), the customer has no choice but to buy goods at the new prices. Under these conditions, the
seller is not much worried about the costs or their upward movements, as he can pass on these additional
burdens to the customers.
Cost in Buyers’ Markets
On the other hand, as the number of suppliers grow due to conspicuous profits in sellers’ markets, the
competition from the internal (or external) sources may increase. A surplus supply of goods in the market
may be created, if the demand does not move at the corresponding rate. In such conditions the buyers get a
choice to pick and choose from. The markets are thus governed by the buyers and the way their preferences
change. Under these competitive conditions, the manufacturer or supplier is no more free to choose
whatever price s/he wishes. The equilibrium equation changes to:
Profit Margin = Permissible Price – Internal Cost
Or
Tolerable Cost = Permissible Price – Acceptable Profit
Under the new conditions, the price of a product is decided outside the organization in the market place
and, not according to the wishes of the manufacturer or supplier.
The price becomes an independent variable decided by the competition in the market place. Each
competitor, in general, may choose a different level of acceptable profit for himself or fix the price matching
with the market requirements. As the competitors become more and more active there will be a downward
push on these permissible profits, unless the firm activates itself for effective cost reduction. Thus, unlike in
the sellers’ market conditions, now the cost or profit margin becomes the derived variable. If the firm can’t
do much about the cost of manufacture or supply, then the profit margin also gets fixed by the market
forces, and the firm has to decide whether it can survive at the prescribed level.
The other alternative for the organization is to fix a minimum acceptable profit (or contribution), and then
determine its tolerable level of cost. The next step is to do a careful introspection and see what are the
different variables getting into the cost of goods, and find ways and means to reduce the cost so as to
improve its profitability.
One way of doing this is to make use of the Experience Curve, and the other way is to carefully consider its
break-even point and operate well above this level.
The Experience Curve (or, Learning Curve)
Introduction: In today‘s dynamic workplace, change occurs rapidly. Where there is change, there also is
learning. With instruction and repetition, workers learn to perform jobs more efficiently and thereby reduce
the number of direct labour hours per unit. Like workers, organizations learn.
Organizational learning involves gaining experience with products and processes, achieving greater
efficiency through automation and other capital investments, and making other improvements in
administrative methods or personnel. Productivity improvements may be gained from better work methods,
tools, product design, or supervision, as well as from individual worker learning. These improvements mean
that existing standards must be continually evaluated and new ones set.
Background: Although the origins of the learning curve go back to the beginning of the 20th century, the
first reported observation of the learning curve in manufacturing occurred in 1925 when managers noticed
that the number of man hours to assemble planes decreased as more planes were produced. T.P. Wright
subsequently established from his research of the aircraft industry in the 1920s and 30s that it is possible to
accurately predict how much labour time will be required to produce planes in the future. While US
government contractors used the learning curve during World War II to predict cost and time for ship and
plane construction, private sector companies only gradually adopted it after the war.
We are familiar with the concept of economies of scale, i.e., costs fall when goods are made in a bigger
batch size or in larger facilities. However, the learning effect is not concerned with the fall in unit cost due to
economies of scale. The learning effect recognizes that the time required to make a product (or provide a
service) reduces the more times it is made by the same person or group of workers. The learning effect is
consequently concerned with cumulative production over time of products, not the production of a single
product or batch at a particular moment in time.
Definition: The learning effect can be represented by a line called a learning curve, which displays the
relationship between the total direct labour per unit and the cumulative quantity of a product or service
produced. The learning curve relates to a repetitive job or task and represents the relationship between
experience and productivity: The time required to produce a unit decreases as the operator or firm
produces more units. The terms manufacturing progress function and experience curve also have been used
to describe this relationship, although the experience curve typically refers to total value-added costs per
unit rather than labour hours. The principles underlying these curves are identical to those of the learning
curve, however. Here we use the term learning curve to depict reductions in either total direct labour per
unit or total value-added costs per unit.
Cost
per
Unit
Experience Curve
Cumulative Volume
Learning Curves and Competitive Strategy
• Learning curves enable managers to project the manufacturing cost per unit for any cumulative
production quantity.
• Firms that choose to emphasize low price as a competitive strategy rely on high volumes to
maintain profit margins.
• These firms strive to move down the learning curve (lower labour hours per unit or lower costs per
unit) by increasing volume.
• This tactic makes entry into a market by competitors difficult. For example, in the electronics
component industry, the cost of developing an integrated circuit is so large that the first units
produced must be priced high.
• As cumulative production increases, costs (and prices) fall.
• The first companies in the market have a big advantage because newcomers must start selling at
lower prices and suffer large initial losses.
Uses of Learning Curves or Experience Curves:
Bid Preparation
Estimating labour costs is an important part of preparing bids for large jobs. Knowing the learning rate, the
number of units to be produced, and wage rates, the estimator can arrive at the cost of labour by using a
learning curve. After calculating expected labour and materials costs, the estimator adds the desired profit
to obtain the total bid amount.
Financial Planning
Learning curves can be used in financial planning to help the financial planner determine the amount of cash
needed to finance operations. Learning curves provide a basis for comparing prices and costs. They can be
used to project periods of financial drain, when expenditures exceed receipts. They can also be used to
determine a contract price by identifying the average direct labour costs per unit for the number of
contracted units. In the early stages of production, the direct labour costs will exceed that average, whereas
in the later stages of production the reverse will be true. This information enables the financial planner to
arrange financing for certain phases of operations.
Labour Requirement Estimation
For a given production schedule, the analyst can use learning curves to project direct labour requirements.
This information can be used to estimate training requirements and develop production and staffing plans.
Causes of Experience Curve effect
In order to fully utilise the experience curve effect, it is important to fully grasp what causes this effect. With
increase in accumulated production of a standardized product, the experience curve effect of systematic
reduction in cost is caused due to management synergy, as follows:
Improved Productivity of Labour
As the accumulated production of standardized product increases, the labour force acquires the skills to do
their task more efficiently. This may be in the form of memorising the steps involved, or developing reflex
actions for doing the needed operations. However, as the experience accumulates, not only the direct
labour, but also the supervisory staff as well as managers must successively streamline the needed
operation to improve the efficiency.
It is important to note that to consolidate the above gains for a sustained improvement, adequate training
facilities have to be provided to the new entrants.
Increased Specialisation
Increased volume of standardized production may also merit specialisation of individual or a group of skills
among different employees.
Thus as the production volume increases, individual components may also become viable to be produced in
different profit centres. Alternatively, suitable vendors for ancillaries may be developed to shift the
overheads and other non-productive expenses away from the organisation. For example, a large vehicle
plant can procure engines, transmission train, drive, wheel, gear boxes etc. from outside, and do their
assembly only within their plants.
Innovation in Production Methods

With accumulated experience and higher specialisation, the concerned workers are likely to come across
innovative ways of improving the production processes.
For instance, Japanese engineering workers evolve unique jigs and fixtures which facilitate their working and
smooth flow of operations. However, fixed investments in such jigs and fixtures are viable only at high
volumes of production, and they can’t be utilised at low production volumes. On enlarged volumes, the unit
fixed cost per item reduces substantially, and benefits far exceed the cost.
Value Engineering and Fine Tuning
As the experience with the production as well as usage of a product accumulates, newer ideas based on
value engineering may be adopted to cut down the unnecessary material consumption and other under-
utilised inputs.
For instance, for conduction of electricity, copper wires are often the preferred choice. However, by now it
has been also scientifically demonstrated that in copper conductors, the current flows only on the surface of
the conductors. Thus, to save cost without compromising performance, the lead conductors coated on the
surface by copper have been successfully substituted with substantial economies in initial costs and
replacement costs. But such coating operations would necessarily require high volume of production.
Balancing Production Line
Sometimes, by mere addition of balancing equipments, substantial increases in capacities can be increased
without incurring the proportionate new investments. Thus, all these factors have an accumulated
integrated influence of reducing the cost with accumulated experience, and the manager must facilitate and
promote these factors to get the desired reduction in cost.
In the absence of the above, cost economies would not come about.
Methods and System Rationalisation
The standardisation in production, marketing and administrative procedures results in efficiencies over time.
Also, more up-to-date technology with better economies of scale can be inducted as the volume increases.
Limitations of Experience Curve
The experience curve, a simple conceptual model, has its own difficulties in application, though it might look
otherwise. To understand this let us take an example.
While compiling costs, the managers may come to know that the costs of the products manufactured in
their plants are not being separately accounted for, and are instead being lumped together department-
wise, or division-wise. Over the experience scale also, the systematic cost data may not be available, but
may instead be accounted batch-wise or lot-wise. Sometimes, the accounting practices may be changed
over the years or the cost allocations may be modified.
For determining the data regarding competitors, the problems are further compounded. Generally, in highly
competitive markets, installed production capacities are not disclosed by the manufacturers openly. Besides,
each competitor has a different starting point, so the respective cost data may have to be adjusted
accordingly. The cost differences between different manufacturers are of critical importance for developing
an effective strategic plan, but these are very difficult to obtain in reality.
In terms of the experience curve effect a late entrant, in order to survive in the competitive world, firms
must necessarily operate at lower initial cost than the competitors who entered earlier. To be profitable, the
late entrants have to learn about the business and develop technological advantage regarding their
equipment etc. over their predecessors. They may also acquire the experience of others by offering higher
incentives to the experienced employees, thus snatching them from the earlier entrants. A manager must
utilise the experience curve effect most effectively, keeping in mind the inherent limitations of the
phenomenon as well as the organization under consideration.
The experience curve cannot be termed as a strategy or even a base for formulating a strategy – instead it is
a way to understand how the costs in the competitive market may shift. By now we all very well know that
strategy is developed based on competitive differences and we also know that no two competitors can have
the same way of living. If they do have the same way, then it is not for a longer period of time because
having exactly the same ways cannot have competition. This shows that a successful competitor only
dominates his/her own segment and this is an observable fact. Similarly, is the fact that experience curve is
observable. Thus, it is very clear the main aim of the strategy is to differentiate the segments competitively
so as to increase both absolute amount and its value in the marketplace.
Cost Leadership
The firms operating in this highly competitive environment are always on the move to become successful. To
strive in this competitive environment, the firms should have an edge over the competitors. To develop
competitive advantage, the firms should produce good quality products at minimum costs etc. This means
that the firms should provide high quality at low cost so that the customer gets the best value for the
product he/she is buying. Therefore, it becomes necessary for the firms to have a strategic edge towards its
competitors. One such competitive strategy is overall cost leadership, which aims at producing and
delivering the product or service at a low cost relative to its competitors at the same time maintaining the
quality. According to Porter, following are the prerequisites of cost leadership (Cherunilam, 2004):
1) Aggressive construction of efficient scale facilities;

2) Vigorous pursuit of cost reduction from experience;
3) Tight cost and overhead control;
4) Avoidance of marginal customer accounts;
5) Cost minimization.
According to Porter cost leadership is perhaps the clearest of the three generic or business level strategies
(Bolten & McManus, 1999). To sustain the cost leadership throughout, the firm must be clear about its
accomplishment through different elements of the value chain. The figure below shows a matrix of the three
generic competitive strategies and their interrelationship given by Porter.
The low-cost leadership strategy at times enables the firm to defend itself against each of five competitive
forces. If we see the concept of cost-leadership in the Indian context, we find that it had worked wonders
with industries like Reliance, Ranbaxy, Arvind Mills etc.
A cost leader, however, cannot ignore the bases of differentiation (Porter, 1985).
Though, low cost can be one of the most important competitive advantages enjoyed by firms all over the
globe but it does have its drawbacks. Some of the drawbacks can be listed as follows:
A) initiation by the competitive firms;
B) threat of competitive firms from other countries;
D) firm losing cost leadership due to fast technological changes, which require high capital investment;
E) threat by competitors to capture still lower cost segments;
F) competition based on other than cost.
Looking at these drawbacks, one can say that cost leadership strategy has to be adopted keeping in mind,
the risks involved and develop an overall effective cost strategy.
1. Cost Leadership
In cost leadership, a firm sets out to become the low cost producer in its industry. The sources of cost
advantage are varied and depend on the structure of the industry. They may include the pursuit of
economies of scale, proprietary technology, preferential access to raw materials and other factors. A low
cost producer must find and exploit all sources of cost advantage. if a firm can achieve and sustain overall
cost leadership, then it will be an above average performer in its industry, provided it can command prices
at or near the industry average.
2. Differentiation
In a differentiation strategy a firm seeks to be unique in its industry along some dimensions that are widely
valued by buyers. It selects one or more attributes that many buyers in an industry perceive as important,
and uniquely positions itself to meet those needs. It is rewarded for its uniqueness with a premium price.
3. Focus
The generic strategy of focus rests on the choice of a narrow competitive scope within an industry. The
focuser selects a segment or group of segments in the industry and tailors its strategy to serving them to the
exclusion of others.
The focus strategy has two variants:
(a) In cost focus a firm seeks a cost advantage in its target segment, while in (b) differentiation focus a firm
seeks differentiation in its target segment. Both variants of the focus strategy rest on differences between a
focuser's target segment and other segments in the industry. The target segments must either have buyers
with unusual needs or else the production and delivery system that best serves the target segment must
differ from that of other industry segments. Cost focus exploits differences in cost behavior in some
segments, while differentiation focus exploits the special needs of buyers in certain segments.
Summary
 The cost levels in Indian industry in general are high and this is having an adverse effect on the
demand of the products, both in the domestic and the international markets.
 What would be the role of cost depends upon the nature of the market, i.e., whether it is buyers’
market or sellers’ market.
 While cost is of critical importance to a producer operating in a buyers’ market, it is relatively of
little significance where s/he is operating in a sellers’ market.
 The Experience Curve, developed by the Boston Consulting Group, is a method of understanding the
behavior of costs which is based on accumulated experience of the past.
 We also discussed the concept of low cost competitive strategy known as cost leadership and how it
helps the firms to defend themselves against the five competitive forces.
1. Give the underlying concept of strategic cost management. (2014 – QP206) (5)
Answer: Meaning of Strategic Cost Management:
In global competitive environment, the most efficient firms view all of their spending as an investment. They
make efficient spending decisions based on a strategic vision and their internal capabilities to deliver value
from that investment. Traditionally firms have been under pressure to cut costs in the short term without
really thinking about sustainable growth and integration with the overall business strategy.
In today’s business environment of increased global competition, new markets, increasing regulation and
changing demographics, successful companies must develop a multifaceted cost competence. It has been
observed that traditional firm’s tactical solutions, despite consuming considerable resources, have failed to
deliver the planned reduction of costs and have not resulted into competitive advantage.
In many cases the cost savings achieved in the short term have leaked away and the cost base has returned
to previous high levels and considerable damage to corporate structure, image, culture and morale has been
done.
Therefore, it should be understood that ‘Cost’ is a strategic issue. There is a need to continuously strive to
optimize the same in the context of the entire business model of the firm. Execution of any chosen strategy
has to be carefully managed to ensure the appropriate balance between revenue growth and cost.
It has also been observed that firms that are taking the investment approach to managing cost are thriving
in this new environment, striking a balance between a competitive cost structure, cost effective strategy
execution and investment in the future. They are delivering a very good response to the cost challenge. Thus
it becomes necessary to link the Cost Management to strategies of the organization.
It is quite natural that most important objectives for any organization are its long term growth and survival.
Profit maximization is the key to attainment of these objectives, which in turn depends on how efficiently
the revenues are bolstered and how effectively the costs are minimized.
Due to volatile and constantly declining revenue stream, organizations are forced to realign their cost
structure and to invest in effective cost management strategy so as to improve their bottom lines.
Many of the cost systems followed in the organizations are desperately obsolete, so they have to get rid of
these systems and to redesign them or to attune them to the changed requirements. Effective cost
management helps companies to achieve business performance improvement.
Fueled by these requirements, the cost management scenario, of late has witnessed the emergence of a
new perspective of strategy namely Strategic Cost Management as an important player for solving cost
related problems.
Strategic Cost Management is the provision and analysis of Cost and Management Accounting data about a
firm and its competitors for use in developing and monitoring the business strategy. Strategic Cost
Management focuses on the cost reduction and continuous improvement and change than cost
containment only.
It has been observed that the traditional cost control systems mostly maintain status quo and the ways of
performing the existing activities are not reviewed. Hence the strategic cost Management goes a step ahead
and uses several approaches for efficient management of cost.
The basic aim of strategic cost Management is to help the organization to achieve the cost leadership and as
per Michael Porter’s model, get the sustainable competitive advantage.
A well-conceived cost reduction strategy enables the managers to capture maximum value in the form of
direct savings. It is an effective way of reducing cost, increasing revenue and facilitating survival in the
competitive world.
There is no doubt however that accounting information plays a vital role in determining the most
appropriate strategic direction for the organization; particularly cost information is a critical type of
information needed for effective management.
In short, Strategic cost management is the development of cost management information for strategic
management purpose. Strategic cost management can be defined as “scrutinizing every process within
your organisation, knocking down departmental barriers, understanding your suppliers’ business, and
helping improve their processes.”
Michael Porter in competitive advantage prepared the way for a strategic emphasis in cost management by
developing a framework for identifying a firm’s competitive strategy.
Porter’s concepts of cost leadership and differentiation have had a strong influence on management
education. These concepts provide the basis on which the strategic approach to cost management is based
because they explain what a firm should do to succeed.
Thus there are two steps in Strategic Cost Management: first, to identify (using Porter’s framework) what
managers must do to make the firm succeed, and second, to develop cost management methods and
practices to facilitate management’s efforts.
Importance of Strategic Cost Management:
Strategic cost management has become an essential area now a day. While formulating the strategy for the
accomplishment of organizational overall objectives, different cost drivers should be clearly identified.
Identification of key cost drivers helps companies to focus on key activities that will constitute almost 90% of
the total costs.
In view of this, the importance of strategic cost management should not be underestimated. This implies
that an organization should be installing appropriate framework of strategic cost management to reduce its
costs in key areas on which the success of organization is mainly dependent. Strategic cost management is
understood in different ways in literature.
Strategic cost management can be defined as “scrutinizing every process within your organisation,
knocking down departmental barriers, understanding your suppliers’ business, and helping improve their
processes” Cooper and Slagmulder argued that strategic cost management is “the application of cost
management techniques so that they simultaneously improve the strategic position of a firm and reduce
costs”.
The Framework of Strategic Cost Management provides a clear plan of attack for addressing costs and
decisions that affect them. Following are the three core components of this framework.
1. Core Functions:
Core functions lay emphasis on the nature of the business. It answers the very obvious question what type
of business are we in? At this stage the firm has to clearly identify its courses of actions with respect to
strategy planning, research and development, and product development.
2. Customer Delivery Function:
This step emphasizes more on value addition with various activities such as marketing, sales, manufacturing,
quality assurance and control, sourcing, procurement, engineering and maintenance, customer service and
technical support etc. Excellence in these activities can create a sort of competitive advantage for the firm if
it could harness its resources intelligently than its competitors.
3. Support Functions:
As the name suggests, to support the core activities of business some secondary activities are to be carried
out which include IT, Finance and Accounting, HR management, General administration etc.
These activities will facilitate the performance of the core activities in a way that goals of the firm can be
accomplished successfully without wasting limited resources. They will also help in synchronizing the
different tasks which are to be carried out simultaneously to become cost leader.
Advantages of Strategic Cost Management:

Strategic Cost Management provides number of benefits to different organizations. It has provided the
business with an improved understanding of its sources of profits.
Some benefits are given below:

(i) It has developed a framework for reviewing the strategic allocation of resources across the business
based on core business processes and activities.
(ii) It has improved the businesses understanding of its cost drivers leading to improved articulation of its
strategic plans in cost terms.
(iii) It has enabled the business to assess, at a high level, how activity-based techniques can be deployed at
different levels in the business to improve its cost management process, such as in budgeting and in process
improvement.
2.
Business Policy and Strategic Management Differentiation and Focus
Differentiation & Focus
Learning Objective:
 To understand the concept of differentiation;

 Distinguish between tangible & intangible differentiation; and
 Explain the advantages & disadvantages of differentiation;
 To understand the concept of focus; and
 To grasp the different variants of focus.
Introduction
Strategy and competitive advantage exist to defend against competitive forces and securing the consumers.
Competition in modern times have become a part and parcel of any activity. It has become the deciding
factor of regarding the success and failure of any business organization. With competition, the performance
of any firm’s activities be it creativity, innovation, R & D, organization culture, etc. can be determined.
Taking this into view the competitive strategy has been developed. Basically it aims at establishing a
profitable and sustainable position against the forces that determine industry competition (Porter, 1985).
Strategy and competitive advantage go hand in hand, hence competitive strategy is formulated. Porter has
defined business level strategy as competitive strategy and classified it into three basic strategies, vis-à-vis
overall cost leadership, differentiation and focus.
Cost leadership stresses on producing quality products at low cost for the consumers who are price
sensitive. Differentiation is a strategy, which is directed at producing goods and services considered unique
in its industry and directed at consumers who are relatively price-insensitive. Focus strategy concentrates on
producing products and services that fulfill the needs of small groups of consumers (David, 1997) and is
based on segmentation. To gain competitive advantage, it is essential for the firms to transfer skills and
expertise among autonomous business units effectively. The competitive advantages in cost leadership
differentiation and focus can be achieved depending on factors like; type of industry, size of firm, and nature
of competition.
Differentiation strategy is more of a positioning strategy whereby the firm tries to be unique in its industry
by positioning itself along certain dimensions. The degree of differentiation varies with different strategies.
Differentiation is industry-wide whereas focus strategy is based on a segment or group of segments in the
industry. There are two variants of focus strategy, which are cost focus and differentiation focus.
Concept of differentiation
Every individual customer is unique in itself so is his/her preferences regarding tastes, preferences,
attitudes, etc. These needs of the customers are fulfilled by the firms by producing differentiated products.
In our day-to-day life we see many such examples of differentiated products. Most of the fast moving
consumer goods like; biscuits, soaps, toothpastes, oils, etc. come under the category of differentiated
products. To satisfy the diverse needs of the customers, it becomes essential for the firms to adopt a
Business Policy and Strategic Management Growth Strategies - 1
differentiation strategy. To make this strategy successful, it is necessary for the firms to do extensive
research to study the different needs of the customers. A firm is able to differentiate from its competitors if
it is able to position itself uniquely at something that is valuable to buyers. Differentiation can lead to
Differential advantage in which the firm gets the premium in the market, which is more than the cost of
providing differentiation. The extent to which the differentiation occurs depends on the overall strategy of
the firm. Previously differentiation was viewed narrowly by the firms, but in the present scenario it has
become one of the essential components of the firm’s strategy. Reliance Infocomm, offers varied products
like; different facilities to its customers in the CDMA telephones. This is differentiation.
When we talk of differentiation, it can be said that virtually any product can be differentiated (Sadler, 2004).
The greatest potential of differentiation lies in products, which are of complex nature but do not have to
adhere to strict regulatory standards, but the success of a differentiation strategy depends on the firm’s
commitment towards customers and the understanding of customer needs as differentiation is all about
perceiving on the part of the customer of something unique. Differentiation can be said to have more
competitive advantage than the cost advantage as it is quite difficult to imitate the differentiated products.
Even if the initiation is done in terms of concept, then also a particular product remains unique regarding its
value, style, packaging, etc. Therefore, when we talk about differentiation, it is important to understand the
demand of the customers and fulfilling this demand keeping in mind the differentiation advantage. In this
case, one thing the firms should concentrate on its creativity and innovativeness than on market research.
We have discussed about the concept of differentiation as a whole but we need to know the why aspect of
differentiation, i.e., why do the firms need differentiation?
Need
There are a number of reasons depending on the nature of firm to adopt a differentiation strategy. It is not
necessary that the firm should and must go for differentiation strategy if it does not require one. The
requirement is need based and depends on the firm’s position in the market. There are a number of factors
which result in differentiation. Some of them are as follows:
A) to compete against the rivals;

B) to create entry barriers for newcomers by building a unique product;
C) to reduce the threats arising from the substitutes;
D) to develop a differentiation advantage.
Types of Differentiation
Differentiation can be classified into two basic types:

A) Tangible differentiation &
B) Intangible differentiation.
As the name suggests, tangible means, something which is real and can be seen, touched, etc. whereas
intangible means, something which is abstract in nature and cannot be touched, it can just be felt. We have
already discussed the tangible aspect. In fact most of the time while discussing differentiation, we actually
discuss the tangible differentiation. The following table shows some of the opportunities available for
creating uniqueness within the firm. These opportunities in one way or the other measure the performance
of the firm, but when these opportunities are related to the customer’s psychology, the intangible aspect to
differentiation comes into the picture.
Activity Differentiation Opportunity

Purchasing Quality of components and material acquired
Design Aesthetic appeal
Robustness of performance
Ease of maintenance
Manufacturing Minimization of defects
Delivery Speed in fulfilling customer orders
Reliability in meeting promised delivery items
HRM Improved training and motivation increases customer service capability
Technology Mgt. Permits responsiveness to the needs of specific customers
Financial Mgt. Improves stability of the firm
Marketing Building of product and company reputation through advertising
Customer Service Providing pre-sales information to customers
Table: Opportunity for Creating Uniqueness within the Firm
Projecting an image about a particular product is one form of intangible differentiation. This can be done
with the help of packaging, style, etc. This shows that tangible as well as intangible go hand in hand and
either of them cannot exist independently. Following exhibit shows some tangible and intangible
components, which result in differentiation of a particular product.
Tangible Intangible
Design Image
Packaging Brand
Style Company Reputation
Quality Customer Preference
Composition
Intangible differentiation is more effective in those cases where the customer has once experienced the
product, for example, chocolates. Every brand has a unique taste, different packaging style, etc. This is the
case where quality can be judged only after using the product once but in case where the quality cannot be
judged by experience, e.g., medical services, the intangible differentiation is not that effective. In short, it
can be said that intangible differentiation is accompanied by tangible differentiation.
Sources of Differentiation
It is not only the low price at which different products are offered, which creates differentiation, instead the
firm can differentiate from its competitors by providing something unique, which is valuable to the
customers of that product. Differentiation occurs from the specific activities a firm performs and how they
affect the buyer.
Value Chain: It shows that differentiation occurs out of the firm’s value chain (Porter, 1985). The value
activity determines the uniqueness of the product. The value chain consists of a set of value activities
resulting in the production of a specified product. The value activities for each differentiated product differs
depending on the nature of the product. The steps of value activity range from procurement of raw material
to the sale of product. Each differentiated product has its own value activities. To understand this concept,
let us take an illustration.
Illustration
Cadbury, a well-known company of dairy products, manufactures different brands of chocolates, i.e., it has a
set of differentiated products regarding chocolates. In India, it offers brands like; Dairy Milk, Five Star, Perk,
etc. Each product is manufactured through a different set of activities as the taste of each is different.
If we compare the products at the global level, then also they are differentiated. For example, dairy milk in
India is eggless whereas in other parts of the globe, it has egg as one of its ingredient. This shows that the
product can be differentiated keeping in mind a set of value activities comprising of both tangible and
intangible components of differentiation. These activities include all kinds of activities like; marketing
activities, financial activities, HR activities, production activities. If these activities are performed properly,
then only a differentiated product can satisfy the customers and get premium over the cost of the product.
There can be more differentiating factors. Some of them are as follows (Porter, 1985):
A) ability to serve customers needs anywhere;
B) simplified maintenance for the customers;
C) single point at which the buyer can purchase;
D) superior compatibility among products.
One thing is important here that these factors require consistency and proper coordination to achieve them.
Uniqueness
There are a number of factors, which determine the uniqueness of a firm in a value activity. Apart from cost
factor, there are many more factors, which are responsible for differentiated products. The following are the
factors or drives (according to Porter):
A) Policy Choice
B) Links
C) Timing
D) Location
E) Inter-relationships
F) Learning
G) Integration
H) Scale
I) Institutional factors
Policy Choice: Every firm decides its own policies regarding the activities to be performed and the activities
to be ignored. The policy choices are basically related to the type of services to be provided to the
customers, the credit policy, to what extent a particular activity (like; advertising spend) be adopted, the
content of activity, skill and experience required by the employees, etc.
Links: The uniqueness of a product depends to a large extent on the links within the value chain with
suppliers and distribution channel, the firm deals with. If the firm has a good link with suppliers and has a
sound distribution channel, then it becomes easy for the firm to produce and supply the products to the
end-users.
Timing: The firms can achieve uniqueness by en-cashing the opportunities at the right time. If the timing is
perfect then a successful differentiation strategy can be adopted.
Location: This is one of the important factors for the firms to have uniqueness. For example, a bank may
have its branch which is accessible to the customers, then the bank will gain an edge towards other banks.
Interrelationships: A better service can be offered to the customers by sharing certain activities, e.g., sales
force with the firm’s sister concerns.
Learning: To perform better and better, continuous improvement is necessary and this comes through
continuous learning.
Integration: The firm can be termed as unique, if its level of integration is high. The integration level means
the coordination level of value activities.
Scale: Larger the scale, more will be the uniqueness. If small volumes of products are produced, then the
uniqueness of the product will be lost over a longer period of time.
A very good example can be home-delivery services. The type of scale leading to differentiation varies
depending on the individual firm’s activities.
Institutional factors: This factor sometimes plays a role in making a firm unique, like relationship of
management with employees.
Looking at these factors one can say that differentiation is governed by value activities in a value chain and
these activities in turn are governed by certain driving factors, which makes the firm unique.
Cost of Differentiation
Differentiation is normally costly. The differentiation adds costs as it involves added features to cater to the
needs of the customers. Usually the cost is incurred in the following cases:
1. Increased expenditure on training;

2. Increased advertising spend to promote the product;
3. Cost of hiring highly skilled sales-force;
4. Use of more expensive material to improve the quality of the product, etc.
There can be many more cost drivers depending on the nature of the firm’s activity. It is not necessary that
differentiation is always costly. Some differentiations are surely costly but if the value activities are
coordinated properly, the cost can be minimized. The cost of maximizing profits by minimizing costs can
surely be achieved. It is believed that differentiation in having more product features can be costlier than
having different but more desired features. Similarly, for bigger products, differentiation is likely to be less
costly than for the small products like soaps. The cost of differentiation more or less depends on the cost
drivers. The cost drivers determine the uniqueness of the differentiation activity for a particular firm. The
different forms of differentiation have different effect of cost drivers. But the crux of the whole concept is
that the cost be minimized to achieve an appropriate differentiation strategy, which gives a premium price
for the product. Though it is very difficult to develop a trade-off between differentiation and cost efficiency
but not impossible. This practice is very popular in case of automobile industry where different firms have
many variants but the difference is basically related to the features of the product.
With the world becoming smaller due to high technological innovations, differentiation strategies adopted
by many firms is accompanied by computer aided work culture. Though application of modern technology
increases the cost but on the other hand, the labour cost is reduced to a large extent and technical efficiency
achieved is very high. The economies of scale can be exploited to a large extent with the help of a trade-off
between cost and differentiation.
Advantages and Disadvantages of Differentiation
Everything is accompanied by advantages and disadvantages and so is differentiation.
Let us first discuss the advantages of differentiation followed by disadvantages.
Advantages
a) Premium price for the firm;
b) Increase in number of units sold;
c) Increase in brand loyalty by the customers;
d) Sustaining competitive advantage.
Premium price for the firm: When the firm is able to exploit all sources of differentiation that are less costly
or are not costly, then the firm can differentiate from its rival firms. There can be many examples like
changing the mix of product features than adding more features, which are less costly but differentiate the
product giving a competitive advantage, i.e., the price premium to the firm.
Increase in number of units sold: If the product is unique then the demand for it increases, henceforth
increasing the number of units sold. A very good example is of Maggie noodles, which has competition from
big companies like Top Ramen, but is still considered to be different from its rivals. Here, the number of
customers are won by smart differentiating strategy, thereby increasing the number of units sold.
Increase in brand loyalty by the customers: A well-positioned and differentiated product gains the brand
loyalty of the customers. For example, Nescafe. It has developed a brand loyalty amongst coffee lovers.
First, it came in powdered form, but it differentiated itself by coming in granular form, maintaining the
quality. Once experienced, the brand loyalty or customer loyalty for a particular brand is developed.
Sustaining competitive advantage: Last, but not the least, this is the crux of the differentiation. This can be
achieved by optimizing cost and increasing profits. It is more often known as low-cost differentiation
strategy. It is the combination of all three advantages discussed above.
Looking at these advantages, one can say that en-cashing the buyer/customer value is the must. The firms
must concentrate on those activities which affect the customer value than the ones which do not.
Disadvantages
It is not necessary that every time the firm goes for differentiation strategy, it is successful. At times there
are disadvantages associated with it. Some of the most common disadvantages are:
A) Uniqueness of the product not valued by buyers;

B) Excess amount of differentiation;
C) Loss due to differentiation.
Uniqueness of the product not valued by buyers: There are a number of cases where the differentiated
product has not gained importance by the customers, hence failed to position itself in the market.
Uniqueness necessarily does not lead to differentiation. More important is the perception of buyers
regarding a particular product.
Excess amount of differentiation: Too much of anything is bad. Same is the case with differentiation. If the
firm is unable to understand the customer needs and preferences but goes on differentiating the product,
then the firm loses its market value. Unnecessary differentiation results in failure.
Loss due to differentiation: In certain cases the firm while differentiating does not realize the importance of
coordinated activities in the value chain, which results in high costs. Considering the fact that differentiation
always leads to profitability is absolute nonsense. This results in loss to the firms.
The disadvantages associated with differentiation should be looked upon with utmost care by the firms
going in for differentiation.
FOCUS: A CONCEPT
The third business level strategy is focus. Focus is different from other business strategies as it is segment
based and has narrow competitive scope. This strategy involves the selection of a market segment, or group
of segments, in the industry and meeting the needs of that preferred segment (or niche) better than the
other market competitors (Bolter &Mcmanus, 1999). This is also known as a niche strategy. In focus
strategy, the competitive advantage can be achieved by optimizing strategy for the target segments.
Focus strategy has two variants. They are:

I) Cost Focus; and
II) Differentiation Focus.
Cost focus is where a firm seeks a cost advantage in the target segment; and
Differentiation focus where a firm seeks differentiation in the target segment (Cherumilan, 2004).
When we talk about focus strategy as a niche strategy, it means that a market niche is chosen where
customers have distinct preferences or requirements. According to Thompson and Strickland the term
‘niche’ is defined as “geographic uniqueness, by specialised requirements in using the product or by special
product attributes that appeal only to niche members” (Rao, 2004).
The success of the focus strategy depends on the difference of the target segment from other segments. To
explain this concept, let us take example of soft drink market. Coca Cola and Pepsi are the major players in
the Indian market and are rivals but each has developed a competitive advantage by serving different
segments offering flavoured drinks as well. Coca Cola has different brands like; Thums Up, Limca and Pepsi
has brands like Lehar Pepsi and Sprite catering different market segments. The focuser can also have an
above average level of performance by having an appropriate cost-focus and differentiation focus strategies.
Focus strategy can be effective in certain situations only. According to Rao (2004), following can be the
situations where a focus strategy is efficient:
i) Market segment large enough to be profitable;

ii) Market segment has good growth potential;
iii) Market segment is not significant to the success of major competitors;
iv) Focuser has efficient resources;
v) focuser is able to defend against challenges;
vi) High costs are difficult to the competitors to meet the specialised needs of the niche;
vii) Focuser is able to choose from different segments.
There can be more situations depending on the need of the focuser.
Focus/niche strategy has certain advantages as well as disadvantages or risks associated with it.
Advantages
Focus strategy, if implemented properly, has following advantages:

A) Focuser can defend against Porters competitive forces;
B) Focuser can reduce competition from new firms by creating a niche of its own;
C) Threat from producers producing substitute products is reduced;
D) The bargaining power of the powerful customers is reduced;
E) Focus strategy, if combined with low-cost and differentiation strategy, would increase market share and
profitability.
Risks
The risks associated with focus strategy can be:

1. Market segment may not be large enough to generate profits;
2. Segment’s need may become less distinct from the main market;
3. Competition may take over the target-segment.
We can very well say that the main objective of the focus/niche strategy is to perform a better job of serving
buyers in the target market niche than rivals.
Let us now discuss the two variants of focus.
Cost Focus
This is basically a niche-low cost strategy whereby a cost advantage is achieved in focusers’ target segment.
According to Porter, cost focus exploits differences in cost behavior in some segments. In this the focuser
concentrates on a narrow buyer segment and out-competes rivals on the basis of lower cost.
Differentiation Focus
In this, the firm offers niche buyers something different from rivals. Here, the firm seeks differentiation in its
target segment. Differentiation focus exploits the special needs of buyers in specified segments. A very good
example of differentiation focus is the newly launched MayBach luxury car. This car is targeted to a certain
segment where the customers can afford to pay a sum as large as Rs. 6 crore. This is just one example, there
can be many more examples where the cost of the product may not be so high.
After understanding all these business/generic strategies, we can say that if all the three are combined and
the cost is optimized, then the market share and profitability can be increased. The figure below explains
this concept.
Focus strategy can be a tool to help the management team define and rebuild their business strategy, in
turn helping them gain an edge over their competitors.
Fig: The Relationship between Market Share vis-à-vis Profitability (i.e., ROI)
Summary:
 The three business/generic strategies, viz. an overall cost leadership, differentiation and focus, play
an important role in the success of a business.
 All the three strategies can be used individually or in combination to create a sustainable
competitive
advantage.
 Porter has specifically suggested that these strategies can be used to defend against the competitive
forces.
 In differentiation, the firm tries to be unique in the industry whereas in focus, the firm tries to
concentrate on a specific segment or a niche market.
1.
Growth Strategies -- I
Learning Objective:
 To understand the concept of corporate strategy;

 To understand various generic corporate strategies;
 To explain the nature, scope and approaches to implementation of stability and growth strategies;
and
 To grasp the rationale for adopting these strategies.
Introduction
Strategic management deals with the issues, concepts, theories approaches and action choices related to an
organization’s interaction with the external environment. Strategy, in general, refers to how a given
objective will be achieved. Strategy, therefore, is mainly concerned with the relationships between ends and
means, that is, between the results we seek and the resources at our disposal. For the most part, strategy is
concerned with deploying the resources at your disposal whereas tactics is concerned with employing them.
Together, strategy and tactics bridge the gap between ends and means.
Some organizations are groups of different business and functional units, each of them must be having its
own set of goals, which may not necessarily be same as the goals of the corporate headquarters looking
after the interests of the entire organization. Since the goals are different and the means to achieve them
are different, strategies are likely to be different. This understanding has led to the hierarchical division of
strategy at two levels: a business-level (competitive) strategy and a company-wide strategy (corporate
strategy) (Porter, 1987). In addition to these strategies, many authors also mention functional strategies,
practiced by the functional units of a business unit, as another level of strategy.
Corporate Strategies: These are concerned with the broad, long-term questions of “what businesses are we
in, and what do we want to do with these businesses?” The corporate strategy sets the overall direction the
organization will follow. It matters whether a firm is engaged in one or several businesses. This will influence
the overall strategic direction, what corporate strategy is followed, and how that strategy is implemented
and managed. Corporate strategies vary from drastic retrenchment through aggressive growth. Top
management need to carefully assess the environment before choosing the fundamental strategies the
organization will use to achieve the corporate objectives.
Competitive Strategies: Those decisions that determine how the firm will compete in a specific business or
industry. This involves deciding how the company will compete within each line of business or strategic
business unit (SBU). Competitive strategies include being a low-cost leader, differentiator, or focuser.
Formulating a specific competitive strategy requires understanding the competitive forces that determine
how intense the competitive forces are and how best to compete.
Functional Strategies: Also called operational strategies, are the short-term (less than one year), goal-
directed decisions and actions of the organization’s various functional departments. These are more
localized and shorter-horizon strategies and deal with how each functional area and unit will carry out its
functional activities to be effective and maximize resource productivity. Functional strategies identify the
basic courses of action that each functional department in a strategic business unit will pursue to contribute
to the attainment of its goals.
In a nutshell, corporate-level strategy identifies the portfolio of businesses that in total will comprise the
corporation and the ways in which these businesses will relate. The competitive strategy identifies how to
build and strengthen the business’s long-term competitive position in the marketplace while the functional
strategies identify the basic courses of action that each department will pursue to contribute to the
attainment of its goals.
Corporate Strategy
Corporate strategy is essentially a blueprint for the growth of the firm. The corporate strategy sets the
overall direction for the organization to follow. It also spells out the extent, pace and timing of the firm’s
growth. Corporate strategy is mainly concerned with the choice of businesses, products and markets. The
competitive and functional strategies of the firm are formulated to synchronize with the corporate strategy
to enable it to reach its desired objectives. Defined formally, a corporate-level strategy is an action taken to
gain a competitive advantage through the selection and management of a mix of businesses competing in
several industries or product markets. Corporate strategies are normally expected to help the firm earn
above-average returns and create value for the shareholders (Markides, 1997). Corporate strategy
addresses the issues of a multi-business enterprise as a whole. Corporate strategy addresses issues relating
to the intent, scope and nature of the enterprise and in particular has to provide answers to the following
questions:
A) What should be the nature and values of the enterprise in the broadest sense? What are the aims in
terms of creating value for stakeholders?
B) What kind of businesses should we be in? What should be the scope of activity in the future so what
should we divest and what should we seek to add?\
C) What structure, systems and processes will be necessary to link the various businesses to each other and
to the corporate centre?
D) How can the corporate centre add value to make the whole worth more than the sum of the parts?
A primary approach to corporate level strategy is diversification, which requires the top-level executives to
craft a multi-business strategy. In fact, one reason for the use of a diversification strategy is that managers
of diversified firms possess unique management skills that can be used to develop multi-business strategies
and enhance a firm’s competitiveness (Collins and Montgomery, 1998).
Most corporate level strategies have three major components:
a) Growth or directional strategy, outlines the growth objectives ranging from drastic retrenchment
through stability to varying degrees of growth and methods and approaches to accomplish these objectives.
b) Corporations are responsible for creating value through their businesses. They do so by using a portfolio
strategy to manage their portfolio of businesses, ensure that the businesses are successful over the long-
term, develop business units, and ensure that each business is compatible with others in the portfolio.
Portfolio strategy plans the necessary moves to establish positions in different businesses and achieve an
appropriate amount and kind of diversification. Portfolio strategy is an important component of corporate
strategy in a multi-business corporation. The top management views its product lines and business unit as a
portfolio of investments from which it expects a profitable return. A key part of corporate strategy is making
decisions on how many, what types, and which specific lines of business the company should be in. This may
involve decisions to increase or decrease the breadth of diversification by closing out some lines of business,
adding others, and changing emphasis among the portfolio of businesses. A portfolio strategy is concerned
not only about choice of business portfolio, but also about portfolio of geographical markets for acquisition
of inputs, locating various value chain activities and selling of outputs. In short, a portfolio strategy facilitates
efficient allocation of corporate resources, links the businesses and geographically dispersed activities and
builds synergy leading to corporate or parenting advantage.
c) Corporate parenting strategy, which tries to capture valuable cross-business strategic fits in a portfolio of
business and turn them into competitive advantages, especially transferring and sharing related technology,
procurement leverage, operating facilities, distribution channels, and/or customers. In other words, it
decides how we allocate resources and manage capabilities and activities across the portfolio — where do
we put special emphasis, and how much do we integrate our various lines of business. Corporate parenting
views the corporation in terms of resources and capabilities that can be used to build business units value as
well as generate synergies across business units. Corporate parenting generates corporate strategy by
focusing on the core competencies of the parent corporation and on the value create from the relationship
between the parent and its businesses. To achieve corporate parenting advantage a corporation needs to do
at least the following.
A) Better choice of business to compete.

B) Superior acquisition and development of corporate resources.
C) Effective deployment, monitoring and controlling of corporate resources.
D) Sharing and transferring of resources from one business to other leading to synergy.
Nature and Scope of Corporate Strategies
Growth is essential for an organization. Organizations go through an inevitable progression from growth
through maturity, revival, and eventually decline. The broad corporate strategy alternatives, sometimes
referred to as grand strategies, are: stability/consolidation, expansion/growth, divestment/retrenchment
and combination strategies. During the organizational life cycle, managements choose between growth,
stability, or retrenchment strategies to overcome deteriorating trends in performance.
Just as every product or business unit must follow a business strategy to improve its competitive position,
every corporation must decide its orientation towards growth by asking the following three questions:
A) Should we expand, cut back, or continue our operations unchanged?

B) Should we concentrate our activities within our current industry or should we diversify into other
industries?
C) If we want to grow and expand nationally and/or globally, should we do so through internal development
or through external acquisitions, mergers, or strategic alliances?
At the core of corporate strategy must be a clear logic of how the corporate objectives, will be achieved.
Most of the strategic choices of successful corporations have a central economic logic that serves as the
fulcrum for profit creation. Some of the major economic reasons for choosing a particular type corporate
strategy are:
a) Exploiting operational economies and financial economies of scope.

b) Uncertainty avoidance and efficiency.

c) Possession of management skills that help create corporate advantage.
d) Overcoming the inefficiency in factor markets and
e) Long term profit potential of a business.
The non-economic reasons for the choice of corporate strategy elements include a) dominant view of the
top management, b) employee incentives to diversify (maximizing management compensation), c) desire for
more power and management control, d) ethical considerations and e) corporate social responsibility.
There are four types of generic corporate strategies. They are:
1. Stability strategies: make no change to the company’s current activities

2. Growth strategies: expand the company’s activities
3. Retrenchment strategies: reduce the company’s level of activities
4. Combination strategies: a combination of above strategies
Each one of the above strategies has a specific objective. For instance, a concentration strategy seeks to
increase the growth of a single product line while a diversification strategy seeks to alter a firm’s strategic
track by adding new product lines. A stability strategy is utilized by a firm to achieve steady, but slow
improvements in growth while a retrenchment strategy (which includes harvesting, turnaround, divestiture,
or liquidation strategies) is used to reverse poor-organizational performance. Once a strategic direction has
been identified, it then becomes necessary for management to examine business and functional level
strategies of the firm to make sure that all units are moving towards the achievement of the company-wide
corporate strategy.
Stability Strategy
Stability strategy is a strategy in which the organization retains its present strategy at the corporate level
and continues focusing on its present products and markets. The firm stays with its current business and
product markets; maintains the existing level of effort; and is satisfied with incremental growth. It does not
seek to invest in new factories and capital assets, gain market share, or invade new geographical territories.
Organizations choose this strategy when the industry in which it operates or the state of the economy is in
turmoil or when the industry faces slow or no growth prospects. They also choose this strategy when they
go through a period of rapid expansion and need to consolidate their operations before going for another
bout of expansion.
Growth Strategy
Firms choose expansion strategy when their perceptions of resource availability and past financial
performance are both high. The most common growth strategies are diversification at the corporate level
and concentration at the business level. Reliance Industry, a vertically integrated company covering the
complete textile value chain has been repositioning itself to be a diversified conglomerate by entering into a
range of business such as power generation and distribution, insurance, telecommunication, and
information and communication technology services. Diversification is defined as the entry of a firm into
new lines of activity, through internal or external modes. The primary reason a firm pursues increased
diversification are value creation through economies of scale and scope, or market dominance. In some
cases firms choose diversification because of government policy, performance problems and uncertainty
about future cash flow. In one sense, diversification is a risk management tool, in that its successful use
reduces a firm’s vulnerability to the consequences of competing in a single market or industry. Risk plays a
very vital role in selecting a strategy and hence, continuous evaluation of risk is linked with a firm’s ability to
achieve strategic advantage (Simons, 1999). Internal development can take the form of investments in new
products, services, customer segments, or geographic markets including international expansion.
Diversification is accomplished through external modes through acquisitions and joint ventures.
Concentration can be achieved through vertical or horizontal growth. Vertical growth occurs when a firm
takes over a function previously provided by a supplier or a distributor. Horizontal growth occurs when the
firm expands products into new geographic areas or increases the range of products and services in current
markets.
Retrenchment Strategy
Many firms experience deteriorating financial performance resulting from market erosion and wrong
decisions by management. Managers respond by selecting corporate strategies that redirect their attempt
to turnaround the company by improving their firm’s competitive position or divest or wind up the business
if a turnaround is not possible. Turnaround strategy is a form of retrenchment strategy, which focuses on
operational improvement when the state of decline is not severe. Other possible corporate level strategic
responses to decline include growth and stability.
Combination Strategy
The three generic strategies can be used in combination; they can be sequenced, for instance growth
followed by stability, or pursued simultaneously in different parts of the business unit. Combination Strategy
is designed to mix growth, retrenchment, and stability strategies and apply them across a corporation’s
business units. A firm adopting the combination strategy may apply the combination either simultaneously
(across the different businesses) or sequentially. For instance, Tata Iron & Steel Company (TISCO) had first
consolidated its position in the core steel business, then divested some of its non-core businesses. Reliance
Industries, while consolidating its position in the existing businesses such as textile and petrochemicals,
aggressively entered new areas such as Information Technology.
Nature of Stability Strategy
A firm following stability strategy maintains its current business and product portfolios; maintains the
existing level of effort; and is satisfied with incremental growth. It focuses on fine-tuning its business
operations and improving functional efficiencies through better deployment of resources. In other words, a
firm is said to follow stability/ consolidation strategy if:
A) It decides to serve the same markets with the same products;

B) It continues to pursue the same objectives with a strategic thrust on incremental improvement of
functional performances; and
C) It concentrates its resources in a narrow product-market sphere for developing a meaningful competitive
advantage.
Adopting a stability strategy does not mean that a firm lacks concern for business growth. It only means that
their growth targets are modest and that they wish to maintain a status quo. Since products, markets and
functions remain unchanged, stability strategy is basically a defensive strategy. A stability strategy is ideal in
stable business environments where an organization can devote its efforts to improving its efficiency while
not being threatened with external change. In some cases, organizations are constrained by regulations or
the expectations of key stakeholders and hence they have no option except to follow stability strategy.
Generally large firms with a sizeable portfolio of businesses do not usually depend on the stability strategy
as a main route, though they may use it under certain special circumstances. They normally use it in
combination with the other generic strategies, adopting stability for some businesses while pursuing
expansion for the others. However, small firms find this a very useful approach since they can reduce their
risk and defend their positions by adopting this strategy. Niche players also prefer this strategy for the same
reasons.
Conditions Favoring Stability Strategy
Stability strategy does entail changing the way the business is run, however, the range of products offered
and the markets served remain unchanged or narrowly focused. Hence, the stability strategy is perceived as
a non-growth strategy. As a matter of fact, stability strategy does provide room for growth, though to a
limited extent, in the existing product-market area to achieve current business objectives. Implementing
stability strategy does not imply stagnation since the basic thrust is on maintaining the current level of
performance with incremental growth in ensuing periods. An organization’s strategists might choose
stability when:
1. The industry or the economy is in turmoil or the environment is volatile. Uncertain conditions might
convince strategists to be conservative until they became more certain.
2. Environmental turbulence is minimal and the firm does not foresee any major threat to itself and the
industry concerned as a whole.
3. The organization just finished a period of rapid growth and needs to consolidate its gains before pursuing
more growth.
4. The firm’s growth ambitions are very modest and it is content with incremental growth
5. The industry is in a mature stage with few or no growth prospects and the firm is currently in a
comfortable position in the industry.
Rationale for Using Stability Strategy
There are a number of circumstances in which the most appropriate growth stance for a company is stability
rather than growth. Stability strategy is normally followed for a brief period to consolidate the gains of its
expansion and needs a breathing spell before embarking on the next round of expansion. Organizations
need to ‘cool off’ for a while after an aggressive phase of expansion and must stabilize for a while or they
will become inefficient and unmanageable. India Cements went through a rapid expansion by acquiring
other cement companies before stabilizing and consolidating its operations. Videocon and BPL had first
diversified into new businesses and then started consolidating once faced with stiff competition.
Managers pursue stability strategy when they feel that the enterprise has been performing well and wish to
maintain the same trend in subsequent years. They would prefer to adopt the existing product-market
posture and avoid departing from it. Sometimes, the management is content with the status quo because
the company enjoys a distinct competitive advantage and hence does not perceive an immediate threat.
Stability strategy is also adopted in a number of organizations because the management is not interested in
taking risks by venturing into unknown terrain. In fact they do not consider any other option as long as the
pursuit of existing business activity produces the desired results. Conservative managers believe product
development, market development or new ways of doing business entail great risk and therefore, avoid
taking decisions, which can endanger the company. A number of managers also pursue consolidation
strategy involuntarily. In fact, they do not react to environmental changes and avoid drastic changes in the
current strategy unless warranted by extraordinary circumstances.
Sometimes environmental forces compel an organization to follow the strategy of status quo. This is
particularly true for bigger organizations, which have acquired dominant market share. Such organizations
are usually not permitted by the government to expand because it may lead to monopolistic and restrictive
trade practices detrimental to public interest.
Approaches to Stability Strategy
There are various approaches to developing stability/consolidation strategy. The Management has to select
the one that best suits the corporate objective. Some of these approaches are discussed below. In all these
approaches, the fundamental course of action remains the same, but the circumstances in which the firms
choose various options differ.
Holding Strategy: This alternative may be appropriate in two situations: (a) the need for an opportunity to
rest, digest, and consolidate after growth or some turbulent events - before continuing a growth strategy, or
(b) an uncertain or hostile environment in which it is prudent to stay in a “holding pattern” until there is
change in or more clarity about the future in the environment. With a holding strategy the company
continues at its present rate of development. The aim is to retain current market share. Although growth is
not pursued as such, this will occur if the size of the market grows. The current level of resource input and
managerial effort will not be increased, which means that the functional strategies will continue at previous
levels. This approach suits a firm, which does not have requisite resources to pursue increased growth for a
longer period of time. At times, environmental changes prohibit a continuation in growth.
Stable Growth: This alternative essentially involves avoiding change, representing indecision or timidity in
making a choice for change. Alternatively, it may be a comfortable, even long-term strategy in a mature,
rather stable environment, e.g., a small business in a small town with few competitors. It simply means that
the firm’s strategy does not include any bold initiatives. It will just seek to do what it already does, but a
little better. In this approach, the firm concentrates on one product or service line. It grows slowly but
surely, increasingly its market penetration by steadily adding new products or services and carefully
expanding its market.
Harvesting Strategy: Where a firm has the dominant market share, it may seek to take advantage of this
position and generate cash for future business expansion. This is termed has harvesting strategy and is
usually associated, with cost cutting and price increases to generate extra profits. This approach is most
suitable to a firm whose main objective is to generate cash. Even market share may be sacrificed to earn
profits and generate funds. A number of ways can be used to accomplish the objective of making profits and
generating funds. Some of these are selective price increases and reducing costs without reducing price. In
this approach, selected products are milked rather than nourished and defended. Hindustan Lever’s
Lifebuoy soap is an example in point. It yielded large profits under careful management.
Profit or Endgame Strategy: A profit strategy is one that capitalizes on a situation in which old and obsolete
product or technology is being replaced by a new one. This type of strategy does not require new
investment, so it is not a growth strategy. Firms adopting this strategy decide to follow the same technology,
at least partially, while transiting into new technological domains. Strategists in these firms reason that the
huge number of product based on older technologies on the market would create an aftermarket for spare
parts that would last for years. Sylvania, RCA, and GE are among the firms that followed this strategy. They
decided to stay in the vacuum tube market until the “end of the game.” As with most business decisions,
timing is critical. All competitors eventually must shelve the old assets at some point of time and move to
the new product or technology. The critical question is, “Can we make more money by using these assets or
by selling them?” The answer to that question changes as time passes.
Expansion Strategies
Every enterprise seeks growth as its long-term goal to avoid annihilation in a relentless and ruthless
competitive environment. Growth offers ample opportunities to everyone in the organization and is crucial
for the survival of the enterprise. However, this is possible only when fundamental conditions of expansion
have been met. Expansion strategies are designed to allow enterprises to maintain their competitive
position in rapidly growing national and international markets. Hence to successfully compete, survive and
flourish, an enterprise has to pursue an expansion strategy. Expansion strategy is an important strategic
option, which enterprises follow to fulfill their long-term growth objectives. They pursue it to gain significant
growth as opposed to incremental growth envisaged in stability strategy. Expansion strategy is adopted to
accelerate the rate of growth of sales, profits and market share faster by entering new markets, acquiring
new resources, developing new technologies and creating new managerial capabilities.
Expansion strategy provides a blueprint for business enterprises to achieve their long-term growth
objectives. It allows them to maintain their competitive advantage even in the advanced stages of product
and market evolution. Growth offers economies of scale and scope to an organization, which reduce
operating costs and improve earnings. Apart from these advantages the organization gains a greater control
over the immediate environment because of its size. This influence is crucial for survival in mature markets
where competitors aggressively defend their market shares.
Conditions for Opting for Expansion Strategy
Firms opt for expansion strategy under the following circumstances:
1. When the firm has lofty growth objectives and desires fast and continuous growth in assets, income and
profits. Expansion through diversification would be especially useful to firms that are eager to achieve large
and rapid growth since it involves exploiting new opportunities outside the domain of current operations.
2. When enormous new opportunities are emerging in the environment and the firm is ready and willing to
expand its business scope
3. Firms find expansion irresistible since sheer size translates into superior clout.
4. When a firm is a leader in its industry and wants to protect its dominant position.
5. Expansion strategy is opted in volatile situations. Substantive growth would act as a cushion in such
conditions.
6. When the firm has surplus resources, it may find it sensible to grow by levering on its strengths and
resources.
7. When the environment, especially the regulatory scenario, blocks the growth of the firm in its existing
businesses, it may resort to diversification to meets its growth objectives.
8. When the firm enjoys synergy that ensues by tapping certain opportunities in the environment, it opts for
expansion strategies. Economies of scale and scope and competitive advantage may accrue through such
synergistic operations. Over the last decade, in response to economic liberalisation, some companies in
India expanded the scale of existing businesses as well as diversified into many new businesses.
Growth of a business enterprise entails realignment of its strategies in product – market environment. This
is achieved through the basic growth approaches of intensive expansion, integration (horizontal and vertical
integration), diversification and international operations. Firms following intensification strategy
concentrate on their primary line of business and look for ways to meet their growth objectives by
increasing their size of operations in this primary business. A company may expand externally by integrating
with other companies. An organization expands its operations by moving into a different industry by
pursuing diversification strategies. An organization can grow by “going international”, i.e., by crossing
domestic borders by employing any of the expansion strategies discussed so far.
Expansion Through Intensification
Intensification involves expansion within the existing line of business. Intensive expansion strategy involves
safeguarding the present position and expanding in the current product-market space to achieve growth
targets. Such an approach is very useful for enterprises that have not fully exploited the opportunities
existing in their current products-market domain. A firm selecting an intensification strategy concentrates
on its primary line of business and looks for ways to meet its growth objectives by increasing its size of
operations in its primary business. Intensive expansion of a firm can be accomplished in three ways, namely,
market penetration, market development and product development first suggested in Ansoff’s model.
Intensification strategy is followed when adequate growth opportunities exist in the firm’s current products-
market space. However, while going in for internal expansion, the management should consider the
following factors:
A) While there are a number of expansion options, the one with the highest net present value should be the
first choice.
B) Competitive behavior should be predicted in order to determine how and when the competitors would
respond to the firm’s actions. The firm must also assess its strengths and weaknesses against its competitors
to ascertain its competitive advantages.
C) The conditions prevailing in the environment should be carefully examined to determine the demand for
the product and the price customers are willing to pay.
D) The firm must have adequate financial, technological and managerial capabilities to expand the way it
chooses.
E) Technological, social and demographic trends should be carefully monitored before implementing
product or market development strategies. This is very crucial, especially, in a volatile business environment.
Ansoff’s Product-Market Expansion Grid

The product/market grid first presented by Igor Ansoff (1968), shown in the following exhibit, has proven to
be very useful in discovering growth opportunities. This grid best illustrates the various intensification
options available to a firm. The product/market grid has two dimensions, namely, products and markets.
Combinations of these two dimensions result in four growth strategies. According to Ansoff’s Grid, three
distinct strategiesare possible for achieving growth through the intensification route.
These are:
A) Market Penetration: The firm seeks to achieve growth with existing products in their current market
segments, aiming to increase its markets share.
B) Market Development: The firm seeks growth by targeting its existing products to new market segments.
C) Product Development: The firm develops new products targeted to its existing market segments.
D) Diversification: The firm grows by diversifying into new businesses by developing new products for new
markets.
Market Penetration
When a firm believes that there exist ample opportunities by aggressively exploiting its current products and
current markets, it pursues market penetration approach. Market penetration involves achieving growth
through existing products in existing markets and a firm can achieve this by:
1. Motivating the existing customers to buy its product more frequently and in larger quantities. Market
penetration strategy generally focuses on changing the infrequent users of the firm’s products or services to
frequent users and frequent users to heavy users. Typical schemes used for this purpose are volume
discounts, bonus cards, price promotion, heavy advertising, regular publicity, wider distribution and
obviously through retention of customers by means of an effective customer relationship management.
2. Increasing its efforts to attract its competitors’ customers. For this purpose, the firm must develop
significant competitive advantages. Attractive product design, high product quality, attractive prices,
stronger advertising, and wider distribution can assist an enterprise in gaining lead over its competitors. All
these require heavy investment, which only firms with substantial resources, can afford. Firms less endowed
may search for niche segments. Many small manufacturers, for instance, survive by seeking out and
cultivating profitable niches in the market. They may also grow by developing highly specialized and unique
skills to cater to a small segment of exclusive customers with special requirements.
C) Targeting new customers in its current markets. Price concessions, better customer service, increasing
publicity and other techniques can be useful in this effort.
In a growing market, simply maintaining market share will result in growth, and there may exist
opportunities to increase market share if competitors reach capacity limits. While following market
penetration strategy, the firm continues to operate in the same markets offering the same products. Growth
is achieved by increasing its market share with existing products. However, market penetration has limits,
and once the market approaches saturation another strategy must be pursued if the firm is to continue to
grow. Unless there is an intrinsic growth in its current market, this strategy necessarily entails snatching
business away from competitors. The market penetration strategy is the least risky since it leverages many
of the firm’s existing resources and capabilities. Another advantage of this strategy is that it does not require
additional investment for developing new products.
Market Development Strategy
Market Development strategy tries to achieve growth by introducing existing products in new markets.
Market development options include the pursuit of additional market segments or geographical regions. The
development of new markets for the product may be a good strategy if the firm’s core competencies are
related more to the specific product than to its experience with a specific market segment or when new
markets offer better growth prospects compared to the existing ones. Because the firm is expanding into a
new market, a market development strategy typically has more risk than a market penetration strategy. This
is because managers do not normally possess sound knowledge of new markets, which may result in
inaccurate market assessment and wrong marketing decisions.
In market development approach, a firm seeks to increase its sales by taking its product into new markets.
The two possible methods of implementing market development strategy are, (a) the firm can move its
present product into new geographical areas. This is done by increasing its sales force, appointing new
channel partners, sales agents or manufacturing representatives and by franchising its operation; or (b) the
firm can expand sales by attracting new market segments. Making minor modifications in the existing
products that appeal to new segments can do the trick.
Product Development Strategy

Expansion through product development involves development of new or improved products for its current
markets. The firm remains in its present markets but develops new products for these markets. Growth will
accrue if the new products yield additional sales and market share. This strategy is likely to succeed for
products that have low brand loyalty and/or short product life cycles. A Product development strategy may
also be appropriate if the firm’s strengths are related to its specific customers rather than to the specific
product itself. In this situation, it can leverage its strengths by developing a new product targeted to its
existing customers. Although the firm operates in familiar markets, product development strategy carries
more risk than simply attempting to increase market share since there are inherent risks normally
associated with new product development.
The three possible ways of implementing the product development strategy are:
A) The company can expand sales through developing new products.

B) The company can create different or improved versions of the current products.
C) The company can make necessary changes in its existing products to suit the different likes and dislikes of
the customers.
Combination Strategy
Combination strategy combines the intensification strategy variants i.e., market penetration, market
development and product development to grow. In the market development and market penetration
strategy, the firm continues with its current product portfolio, while the product development strategy
involves developing new or improved products, which will satisfy the current markets.
Expansion Through Integration
In contrast to the intensive growth, integration strategy involves expanding externally by combining with
other firms. Combination involves association and integration among different firms and is essentially driven
by need for survival and also for growth by building synergies. Combination of firms may take the merger or
Consolidation route. Merger implies a combination of two or more concerns into one final entity. The
merged concerns go out of existence and their assets and liabilities are taken over by the acquiring
company. A consolidation is a combination of two or more business units to form an entirely new company.
All the original business entities cease to exist after the combination. Since mergers and consolidations
involve the combination of two or more companies into a single company, the term merger is commonly
used to refer to both forms of external growth. As is the case in all the strategies, acquisition is a choice a
firm has made regarding how it intends to compete (Markides, 1999). Firms use integration to (1) increase
market share, (2) avoid the costs of developing new products internally and bringing them to the market, (4)
reduce the risk of entering new business, (5) speed up the process of entering the market, (6) become more
diversified and (7) quite possibly to reduce the intensity of competition by taking over the competitor’s
business. The costs of integration include reduced flexibility as the organization is locked into specific
products and technology, financial costs of acquiring another company and difficulties in integrating various
operations. There are many forms of integration, but the two major ones are vertical and horizontal
integration.
i) Vertical Integration: Vertical integration refers to the integration of firms involved in different stages of
the supply chain. Thus, a vertically integrated firm has units operating in different stages of supply chain
starting from raw material to delivery of final product to the end customer. An organization tries to gain
control of its inputs (called backwards integration) or its outputs (called forward integration) or both.
Vertical integration may take the form of backward or forward integration or both. The concept of vertical
integration can be visualized using the value chain. Consider a firm whose products are made via an
assembly process. Such a firm may consider backward integrating into intermediate manufacturing or
forward integrating into distribution. Backward integration sometimes is referred to as upstream integration
and forward integration as downstream integration. For instance, Nirma undertook backward integration by
setting up plant to manufacture soda ash and linear alkyl benzene, both important inputs for detergents and
washing soaps, to strengthen its hold in the lower-end detergents market. Forward integration refers to
moving closer to the ultimate customer by increasing control over distribution activities. For example, a
personal computer assembler could own a chain of retail stores from which it sells its machines (forward
integration). Many firms in India such as DCM, Mafatlal and National Textile Corporation have set up their
own retail distribution systems to have better control over their distribution activities.
Some companies expand vertically backwards and forward. Reliance Petrochemicals grew by leveraging
backward and forward integration: it began with manufacturing of textiles and fibres, moved to polymers
and other intermediates then went into the manufacture of fibres, then to petrochemicals and oil refining.
In power, Reliance Energy wants to do the same thing and the catchphrase that for this vertical integration is
‘ from well-head to wall-socket’. Reliance Energy’s strategy is to straddle the entire value chain in the power
business. It plans to generate power by using the group’s production of gas, transmit and distribute it to the
domestic and industrial consumers, reaping the returns of not just generating power using its own gas but
selling what it generates not as a bulk supplier but to the end user.
In essence, a firm seeks to grow through vertical integration by taking control of the business operations at
various stages of the supply chain to gain advantage over its rivals. The record of vertical integration is
mixed and hence, decisions should be taken after a comprehensive and careful consideration of all aspects
of this form of integration. In most cases the initial investments may be very high and exiting an
arrangement that does not prove beneficial may be hard. Vertical integration also requires an organization
to develop additional product market and technology capabilities, which it may not currently possess.
Factors conducive for vertical integration include (1) taxes and regulations on market transactions, (2)
obstacles to the formulation and monitoring of contracts, (3) similarity between the vertically-related
activities, (4) sufficient large production quantities so that the firm can benefit from economies of scale and
(5) reluctance of other firms to make investments specific to the transaction. Vertical integration may not
yield the desired benefit if, (1) the quantity required from a supplier is much less than the minimum efficient
scale for producing the product. (2) the product is widely available commodity and its production cost
decreases significantly as cumulative quantity increases, (3) the core competencies between the activities
are very different, (4) the vertically adjacent activities are in very different types of industries (For example,
manufacturing is very different from retailing.) and (5) the addition of the new activity places the firm in
competition with another player with which it needs to cooperate. The firm then may be viewed as a
competitor rather than a partner.
Firms integrate vertically to (1) reduce transportation costs if common ownership results in closer
geographic proximity, (2) improve supply chain coordination, (3) capture upstream or downstream profit
margins, (4) increase entry barriers to potential competitors, for example, if the firm can gain sole access to
scarce resource, (5) gain access to downstream distribution channels that otherwise would be inaccessible,
(6) facilitate investment in highly specialized assets in which upstream or downstream players may be
reluctant to invest and (7) facilitate investment in highly specialized assets in which upstream or
downstream players may be reluctant to invest.
The downside risks of an integration strategy to a company include (1) difficulty of effectively integrating the
firms involved, (2) incorrect evaluation of target firm’s value, (3) overestimating the potential for synergy
between the companies involved, (4) creating a combination too large to control, (5) the huge financial
burden that acquisition entails, (6) capacity balancing issues. (For instance, the firm may need to build
excess upstream capacity to ensure that its downstream operations have sufficient supply under all demand
conditions), (7) potentially higher costs due to low efficiencies resulting from lack of supplier competition,
(8) decreased flexibility due to previous upstream or downstream investments, (however, that flexibility to
coordinate vertically –related activities may increase.), (9) decreased ability of increase product variety if
significant in-house development is required, and (10) developing new core competencies may compromise
existing competencies.
There are alternatives to vertical integration that may provide some of the same benefits with fewer
drawbacks. The following are a few of these alternatives for relationships between vertically related
organizations.
A) Long-term explicit contracts

B) Franchise agreements
C) Joint ventures
D) Co-location of facilities
E) Implicit contracts (relying on firm’s reputation)
The following figure shows backward & forward integration followed by an illustration
Illustration: Digital Giants to Accelerate Vertical Integration
Samsung Electronics and LG Electronics plan to streamline production lines in cooperation with their
affiliates to reduce factors of uncertainty in the procurement of components. The two South Korean giants
seek to manufacture top-of-the-line products like cell phones and digital TVs in a self-sufficient fashion. LG
Group will invest 30 trillion won by 2010 to develop certain electronic components that include system
integrated chips, plasma displays and camera modules. Samsung Electronics already retains a strong
portfolio, comprising Samsung Corning (display-specific glass), Samsung SDI (displays) and Samsung Electro-
Mechanics (camera modules), and aims to further hone its push for vertical integration.
So-called vertical integration refers to the degree to which a company owns or controls its upstream
suppliers, subcontractors or affiliates and its downstream buyers. The advantage of the strategy is the
expansion of core competencies by reducing risks in the supply of components as well as the slashing of
transportation costs. Some experts have said vertical integration is vital to the improvement of these two
giant digital firms’ competitiveness despite criticism that such expansion would increase the entry barriers
for industry newcomers.
Source: Korean Times
ii) Horizontal Combination / Integration: The acquisition of additional business in the same line of business
or at the same level of the value chain (combining with competitors) is referred to as horizontal integration.
Horizontal growth can be achieved by internal expansion or by external expansion through mergers and
acquisitions of firms offering similar products and services. A firm may diversify by growing horizontally into
unrelated business. Integration of oil companies, Exxon and Mobil, is an example of horizontal integration.
Aditya Birla Group’s acquisition of L&T Cements from Reliance to increase its market dominance is an
example of horizontal integration. This sort of integration is sought to reduce intensity of competition and
also to build synergies.
Benefits of Horizontal Integration
The following are some benefits of horizontal integration:
a) Economies of scale-achieved by selling more of the same product, for example, by geographic expansion.
b) Economies of scope – achieved by sharing resources common to different products. Commonly referred
to as ‘synergies’.
c) Increased bargaining power over suppliers and downstream channel members.
d) Reduction in the cost of global operations made possible by operating plants in foreign markets.
e) Synergy achieved by using the same brand name to promote multiple products.
Hazards of Horizontal Integration
Horizontal integration by acquisition of a competitor will increase a firm’s market share. However, if the
industry concentration increases significantly then anti-trust issues may arise. Aside from legal issues,
another concern is whether the anticipated economic gains will materialize. Before expanding the scope of
the firm through horizontal integration, management should be sure that the imagined benefits are real.
Many blunders have been made by firms that broadened their horizontal scope to achieve synergies that did
not exist, for example, computer hardware manufacturers who entered the software business on the
premise that there were synergies between hardware and software. However, a connection between two
products does not necessarily imply realizable economies of scope. Finally, even when the potential benefits
of horizontal integration exist, they do not materialize spontaneously. There must be an explicit horizontal
strategy in place. Such strategies generally do not arise from the bottom –up, but rather, must be
formulated by corporate management.
International Expansion
An organization can “go international” by crossing domestic borders as it employs any of the strategies
discussed above. International expansion involves establishing significant market interests and operations
outside a company’s home country. Foreign markets provide additional sales opportunities for a firm that
may be constrained by the relatively small size of its domestic market and also reduces the firm’s
dependence on a single national market. Firms expand globally to seek opportunity to earn a return on large
investments such as plant and capital equipment or research and development, or enhance market share
and achieve scale economies, and also to enjoy advantages of locations. Other motives for international
expansion include extending the product life cycle, securing key resources and using low-cost labour.
However, to mold their firms into truly global companies, managers must develop global mind-sets.
Traditional means of operating with little cultural diversity and without global competition are no longer
effective firms (Kedia and Mukherji, 1999).
International expansion is fraught with various risks such as, political risks (e.g. instability of host nations)
and economic risks (e.g. fluctuations in the value of the country’s currency). International expansions
increases coordination and distribution costs, and managing a global enterprise entails problems of
overcoming trade barriers, logistics costs, cultural diversity, etc.
There are several methods for going international. Each method of entering an overseas market has its own
advantages and disadvantages that must be carefully assessed. Different international entry modes involve a
tradeoff between level of risk and the amount of foreign control the organization’s managers are willing to
allow. It is common for a firm to begin with exporting, progress to licensing, then to franchising finally
leading to direct investment. As the firm achieves success at each stage, it moves to the next. If it
experiences problems at any of these stages, it may not progress further. If adverse conditions prevail or if
operations do not yield the desired returns in a reasonable time period, the firm may withdraw from the
foreign market. The decision to enter a foreign market can have a significant impact on a firm.
Expansion into foreign markets can be achieved through:

A. Exporting
B. Licensing
C. Joint Venture
D. Direct Investment
Exporting: Exporting is marketing of domestically produced goods in a foreign country and is a traditional
and well-established method of entering foreign markets. It does not entail new investment since exporting
does not require separate production facilities in the target country. Most of the costs incurred for exporting
products are marketing expenses.
Licensing: Licensing permits a company in the target country to use the property of the licensor. Such
property usually is intangible, such as trademarks, patents, and production techniques. The licensee pays a
fee in exchange for the rights to use the intangible property and possible for technical assistance. Licensing
has the potential to provide a very large ROI since this mode of foreign entry also does require additional
investments. However, since the licensee produces and markets the product, potential returns from
manufacturing and marketing activities may be lost.
Joint Venture: There are five common objectives in a joint venture: market entry, risk/reward sharing,
technology sharing and joint product development, and conforming to government regulations. Other
benefits include political connections and distribution channel access that may depend on relationships.
Joint ventures are favoured when:

A) The partners’ strategic goals converge while their competitive goals diverge;
B) The partners’ size, market power, and resources are small compared to the industry leaders; and
C) Partners’ are able to learn from one another while limiting access to their own proprietary skills.
The critical issues to consider in a joint venture are ownership, control, length of agreement, pricing,
technology transfer, local firm capabilities and resources, and government intentions. Potential problems
include, conflict over asymmetric investments, mistrust over proprietary knowledge, performance ambiguity
– how to share the profits and losses, lack of parent firm support, cultural conflicts, and finally, when and
how when to terminate the relationship.
Joint ventures have conflicting pressures to cooperate and compete:
i) Strategic imperative; the partners want to maximize the advantage gained for the joint venture, but they
also want to maximize their own competitive position.
ii) The joint venture attempts to develop shared resources, but each firm wants to develop and protect its
own proprietary resources.
iii)The joint venture is controlled through negotiations and coordination processes, while each firm would
like to have hierarchical control.
Direct Investment: Direct investment is the ownership of facilities in the target country. It involves the
transfer of resources including capital, technology, and personnel. Direct investment may be made through
the acquisition of an existing entity or the establishment of a new enterprise. Direct ownership provides a
high degree of control in the operations and the ability to better know the consumers and competitive
environment. However, it requires a high degree of commitment and substantial resources. The following
table compares different International Market Entry Modes.
There are three major strategy options for going international:
Multi-domestic: The organization decentralizes operational decisions and activities to each country in which
it is operating and customizes its products and services to each market. For years, U.S. auto manufacturers
maintained decentralized overseas units that produced cars adapted to different countries and regions.
General Motors produced Opel in Germany and Vauxhall in Great Britain while Chrysler produced the Simca
in France and Ford offered a Canadian Ford.
Global: The organization offers standardized products and uses integrated operations. Example: Ford is
treating its Contour as a car for all world markets—one that can be produced and sold in any industrialized
nation.
Transnational: The organization seeks the best of both the multi-domestic and global strategies by globally
integrating operations while tailoring products and services to the local market. In other words a company
‘thinks globally but acts locally’. Many authors refer to this concept as ‘Glocalization’. Global electronic
communications and connectivity can help integrate operations while flexible manufacturing enables firms
to produce multiple versions of products from the same assembly line, tailoring them to different markets.
This gives more choice in locating facilities to take advantage of cheaper labour or to get the best of other
factors of production
Managing Global Supply Chains to Enhance Competitiveness

Logistics capabilities (the movement of supplies and goods) make or mar global operations. Global
operations involve highly coordinated international flow of goods, information, cash, and work processes.
Setting up a global supply chain to support producing and selling products in many countries at the right cost
and service levels is a very difficult task. However the benefits of managing this difficult task has many
benefits, which include rationalization of global operations by setting up right number of factories and
distribution centers and integration of far-flung operations under a unified command to better manage
inventory and order filling activities. Optimizing global supply chain operations can cut the delivery times
and costs drastically and improve global competitiveness. Smart supply chain planning may result in locating
facilities where they make the most logistical sense, while saving on taxes. This is better than simply locating
where labour is cheapest, but where taxes and other cost may not be most favourable
Summary:
 Strategy refers to how a given objective will be achieved. Therefore, strategy is concerned with the
relationships between ends and means, that is, between the results we seek and the resources at
our disposal.
 There are three levels of strategy, namely, corporate strategies, competitive strategies and
functional strategies.
 Corporate strategies are concerned with the broad, long-term questions of “what businesses are we
in, and what do we want to do with these businesses?”
 On the other hand, competitive strategies determine how the firm will compete in a specific
business or industry. This involves deciding how the company will compete within each line of
business.
 Functional strategies, also referred to as operational strategies, are the short-term (less than one
year), goal directed decisions and actions of the organization’s various functional departments.
 There are various approaches to developing stability strategy. They are holding strategy, stable
growth, harvesting strategy, profit or endgame strategy.
 Growth of business enterprises implies realignment of its business operations to different product –
market environments. This is achieved through the basic growth approaches of intensive expansion,
integration (horizontal and vertical integration), diversification and international operations.
1. What is ‘Expansion Strategy’? When does a company go for this kind of strategy? What are the
different forms of expansion strategy? (2016 – QP404) (1+2+2)
Answer: Definition: The Expansion Strategy is adopted by an organization when it attempts to achieve a
high growth as compared to its past achievements. In other words, when a firm aims to grow considerably
by broadening the scope of one of its business operations in the perspective of customer groups, customer
functions and technology alternatives, either individually or jointly, then it follows the Expansion Strategy.
The reasons for the expansion could be survival, higher profits, increased prestige, economies of scale,
larger market share, social benefits, etc. The expansion strategy is adopted by those firms who have
managers with a high degree of achievement and recognition. Their aim is to grow, irrespective of the risk
and the hurdles coming in the way.
The firm can follow either of the five expansion strategies to accomplish its objectives:
Expansion through Concentration

Definition: The Expansion through Concentration is the first level form of Expansion Grand strategy that
involves the investment of resources in the product line, catering to the needs of the identified market with
the help of proven and tested technology.
Simply, the strategy followed when an organization coincides its resources into one or more of its businesses
in the context of customer needs, functions and technology alternatives, either individually or collectively, is
called as expansion through concentration.
The organization may follow any of the ways to practice Expansion through concentration:
 Market penetration strategy: The firm focusing intensely on the existing market with its present product.
 Market Development type of concentration: Attracting new customers for the existing product.
 Product Development type of Concentration: Introducing new products in the existing market.
The firms prefer expansion through concentration because they are required to do things what they are
already doing. Due to the familiarity with the industry the firm likes to invest in the known businesses rather
than a new one. Also, through concentration strategy, no major changes are made in the organizational
structure, and expertise is gained due to an in-depth knowledge about one or more businesses.
However, the expansion through concentration is risky since these strategies are highly dependent on the
industry, so any adverse conditions in the industry can affect the business drastically. Also, the huge
investments made in a particular business may suffer losses due the invention of new technology, market
fickleness, and product obsolescence.
Expansion through Diversification

Definition: The Expansion through Diversification is followed when an organization aims at changing the
business definition, i.e. either developing a new product or expanding into a new market, either individually
or jointly. A firm adopts the expansion through diversification strategy, to prepare itself to overcome the
economic downturns.
Generally, the diversification is made to set off the losses of one business with the profits of the other; that
may have got affected due to the adverse market conditions. There are mainly two types of diversification
strategies undertaken by the organization:
1. Concentric Diversification: When an organization acquires or develops a new product or service that are
closely related to the organization’s existing range of products and services is called as a concentric
diversification. For example, the shoe manufacturing company may acquire the leather manufacturing
company with a view to entering into the new consumer markets and escalate sales.
2. Conglomerate Diversification: When an organization expands itself into different areas, whether related or
unrelated to its core business is called as a conglomerate diversification. Simply, conglomerate
diversification is when the firm acquires or develops the product and services that may or may not be
related to the existing range of product and services.
Generally, the firm follows this type of diversification through a merger or takeover or if the company wants
to expand to cover the distinct market segments. ITC is the best example of conglomerate diversification.
Expansion through Integration

Definition: The Expansion through Integration means combining one or more present operation of the
business with no change in the customer groups. This combination can be done through a value chain.
The value chain comprises of interlinked activities performed by an organization right from the procurement
of raw materials to the marketing of finished goods. Thus, a firm may move up or down the value chain to
focus more comprehensively on the needs of the existing customers.
The expansion through integration widens the scope of the business and thus considered as the grand
expansion strategy. There are two ways of integration:
Vertical integration: The vertical integration is of two types: forward and backward. When an organization
moves close to the ultimate customers, i.e. facilitate the sale of the finished goods is said to have made a
forward integration. Example, the manufacturing firm open up its retail outlet.
Whereas, if the organization retreats to the source of raw materials, is said to have made a backward
integration. Example, the shoe company manufactures its own raw material such as leather through its
subsidiary firm.
Horizontal Integration: A firm is said to have made a horizontal integration when it takes over the same kind
of product with similar marketing and production levels. Example, the pharmaceutical company takes over
its rival pharmaceutical company.
Expansion through Cooperation

Definition: The Expansion through Cooperation is a strategy followed when an organization enters into a
mutual agreement with the competitor to carry out the business operations and compete with one another
at the same time, with the objective to expand the market potential.
The expansion through cooperation can be done by following any of the strategies as explained below:
1. Merger: The merger is the combination of two or more firms wherein one acquires the assets and liabilities
of the other in the exchange of cash or shares, or both the organizations get dissolved, and a new
organization came into the existence.
The firm that acquires another is said to have made an acquisition, whereas, for the other firm that gets
acquired, it is a merger.
2. Takeover: Takeover strategy is the other method of expansion through cooperation. In this, one firm
acquires the other in such a way, that it becomes responsible for all the acquired firm’s operations.
The takeovers can either be friendly or hostile. In the former, both the companies agree for a takeover and
feels it is beneficial for both. However, in the case of a hostile takeover, a firm try to take on the operations
of the other firm forcefully either known or unknown to the target firm.
3. Joint Venture: Under the joint venture, both the firms agree to combine and carry out the business
operations jointly. The joint venture is generally done, to capitalize the strengths of both the firms. The joint
ventures are usually temporary; that lasts till the particular task is accomplished.
4. Strategic Alliance: Under this strategy of expansion through cooperation, the firms unite or combine to
perform a set of business operations, but function independently and pursue the individualized goals.
Generally, the strategic alliance is formed to capitalize on the expertise in technology or manpower of either
of the firm.
Thus, a firm can adopt either of the cooperation strategies depending on the nature of business line it deals
in and the pursued objectives.
Expansion through Internationalization

Definition: The Expansion through Internationalization is the strategy followed by an organization when it
aims to expand beyond the national market. The need for the Expansion through Internationalization arises
when an organization has explored all the potential to expand domestically and look for the expansion
opportunities beyond the national boundaries.
But however, going global is not an easy task, the organization has to comply with the stringent benchmarks
of price, quality and timely delivery of goods and services, that may vary from country to country.
The expansion through internationalization could be done by adopting either of the following strategies:
1. International Strategy: The firms adopt an international strategy to create value by offering those products
and services to the foreign markets where these are not available. This can be done, by practicing a tight
control over the operations in the overseas and providing the standardized products with little or no
differentiation.
2. Multidomestic Strategy: Under this strategy, the multi-domestic firms offer the customized products and
services that match the local conditions operating in the foreign markets. Obviously, this could be a costly
affair because the research and development, production and marketing are to be done keeping in mind the
local conditions prevailing in different countries.
3. Global Strategy: The global firms rely on low-cost structure and offer those products and services to the
selected foreign markets in which they have the expertise. Thus, a standardized product or service is offered
to the selected countries around the world.
4. Transnational Strategy: Under this strategy, the firms adopt the combined approach of multi-domestic and
global strategy. The firms rely on both the low-cost structure and the local responsiveness i.e. according to
the local conditions. Thus, a firm offers its standardized products and services and at the same time makes
sure that it is in line with the local conditions prevailing in the country, where it is operating.
So, in order to globalize, the firm should assess the international environment first, and then should
evaluate its own capabilities and plan the strategies accordingly to enter into the foreign markets.
Growth Strategies -- II
Learning Objective:
 To understand the various diversification strategies;

 To understand the reasons behind to pursue diversification strategies;
 To explain the various routes to diversification;
 To make clear the mechanics of M & A & the basic steps involved in M & A;
 Explain the rationale behind M & A;
 To identify the attributes of successful & effective acquisitions;
 To provide you with a brief overview of the M & A scenario in India.
Diversification
Diversification involves moving into new lines of business. When an industry consolidates and becomes
mature, most of the firms in that industry would have reached the limits of growth using vertical and
horizontal growth strategies. If they want to continue growing any further the only option available to them
is diversification by expanding their operations into a different industry. Diversification strategies also apply
to the more general case of spreading market risks: adding products to the existing lines of business can be
viewed as analogous to an investor who invests in multiple stocks to “spread the risks”. Diversification into
other lines of business can especially make sense when the firm faces uncertain conditions in its core
product-market domain.
While intensification limits the growth of the firm to the existing businesses of the firm, diversification takes
it beyond the confines of the current product-market domain to uncharted and unfamiliar products- market
territory. In other words, this strategy steers the organization away from both its present products and its
present market simultaneously. Of the various routes to expansion, diversification is definitely the most
complex and risky route. Diversification approach to expansion is complex since it seeks to enter new
product lines, processes, services or markets which involve different skills, processes and knowledge from
those required for the current business. It is risky since it involves deviating from familiar territory: familiar
products and familiar markets.
Diversification of a firm can take the form of concentric and conglomerate diversification. Concentric
(Related) diversification is appropriate when a firm has a strong competitive position but industry
attractiveness is low. Conglomerate (unrelated) diversification is an appropriate strategy when current
industry is unattractive and that the firm lacks exceptional and outstanding capabilities or skills in related
products or services. Generally, related diversification strategies have been demonstrated to achieve higher
value creation (profitability and stock value) than unrelated diversification strategies (conglomerates). The
interpretation of this finding is that there must be some advantage achieved through shared resources,
experience, competencies, technologies, or other value-creating factors. This is the so called synergy effect
of diversification i.e., ‘the whole is greater than the sum of its parts’. While it is difficult to predict what is a
“synergistic” match of a business to an existing corporate portfolio, the test must be that the business
creates new value when it is added to a corporation’s line of existing businesses.
Related Diversification (Concentric Diversification)
In this alternative, a company expands into a related industry, one having synergy with the company’s
existing lines of business, creating a situation in which the existing and new lines of business share and gain
special advantages from commonalities such as technology, customers, distribution, location, product or
manufacturing similarities, and government access. In essence, in concentric diversification, the new
industry is related in some way to the current one. This is often an appropriate corporate strategy when a
company has a strong competitive position and distinctive competencies, but its existing industry is not very
attractive. Thus, a firm is said to have pursued concentric diversification strategy when it enters into new
product or service area belonging to different industry category but the new product or service is similar to
the existing one with respect to technology or production or marketing channels or customers. Such
diversification may be possible in two ways: internal development through product and market expansion
utilizing the existing resources and capabilities or through external acquisitions operating in the same
market space. Addition of lease financing activity in India is a case of market-related concentric
diversification. Another type of concentric diversification is technology related in which the firm employs
similar technology to manufacture new products. Addition of tomato ketchup and sauce to the existing
‘Maggi’ brand processed items of Food Specialities Ltd. is an instance of technological-related concentric
diversification.
Unrelated Diversification (Conglomerate Diversification)
Conglomerate diversification is a growth strategy in which a company seeks to grow by adding entirely
unrelated products and markets to its existing business. A company that consists of a grouping of businesses
from unrelated streams is called a conglomerate. In conglomerate diversification, a firm generally introduces
new products using different technologies in new markets. A conglomerate consists of a number of product
divisions, which sell different products, principally to their own markets rather than to each other.
Conglomerates diversify their business risk through profit gained from profit centers in various lines of
business. However, some may become so diversified and complicated that they are too difficult to manage
efficiently. However, since their huge popularity in the 1960s to 80s, many conglomerates have reduced
their business lines by restricting to a choice few. The reasons for considering this alternative are primarily
to seek more attractive opportunities for growth, spread the risk across different industries, and/or to exit
an existing line of business. Further, this may be an appropriate strategy when, not only the present industry
is unattractive, but the company also lacks outstanding competencies that it could transfer to related
products or industries. However, since it is difficult to manage and excel in unrelated business units, it is
often difficult to realize the expected and anticipated results.
In India, a large number of companies diversified their operations following economic liberalization. Gujarat
Narmada Valley Fertilizers Ltd. has diversified from fertilizers to personal transport, chemicals and electronic
industries, while Arvind group, hitherto confined to textiles, diversified into unrelated activities such as
manufacturing of agro- products, floriculture and export of fresh fruits. Likewise, BPL has decided to venture
into sectors like power generators, cement, steel and agricultural inputs in a big way. Wipro is another
company with wide ranging business interests encompassing vegetable oils, computer hardware, and
software, medical equipment, hydraulic systems, consumer products, lighting, export of leather shoe
nippers and has recently entered into financial services.
Rationale for Diversification
Under strict assumptions of an efficient market theory, there is no convincing rationale for one company to
acquire another, especially less efficient or unrelated businesses. Since the markets are imperfect and do
not follow the norms of efficient market theory, companies do diversify for several reasons given below:
Economies of Scale and Scope (Synergy): The merger of two companies producing similar products should
allow the combined firms to pool resources and attain lower operating costs. By making optimal use of
existing marketing, investment, operating and managerial facilities of the two combining firms and
eliminating redundant and overlapping activities, the combined entity can lower the operating costs and
increase operational efficiency. The saving may come from reduced overheads or the ability to spread a
larger amount of production over lower (consolidated) fixed costs. There may also be differential
management capabilities: an efficiently managed firm may acquire a less efficient firm with the intent of
bringing better management to the business. Efficiencies can also be gained through pooled financial
resources or simply through pooled risk.
Widen Market Base and Enhance Market Power: Large number of collabourations and acquisitions are
aimed at expanding the market for the firm’s products. For instance, HCL and Hewlett Packard Ltd., Tata-
IBM, Ranbaxy Labouratories and Eli Lilly Company, Hindustan Motors and General Motors and Tata Tea and
Tetley of USA, entered into tie-up arrangements mainly to exploit the market opportunities. Mergers and
acquisitions can increase a firm’s market share when both firms are in the same business. But, market share
does not necessarily translate to higher profits or greater value for owners unless the merger substantially
reduces the inter-firm rivalry in the industry.
Profit Stability: Acquisition of new business can reduce variations in corporate profits by expanding the
company’s lines of business. This typically occurs when the core business depends on sales that are seasonal
or cyclical. A large number of organizations pursue diversification strategy just to avoid instability in sales
and profits which can result from events such as cyclical and seasonal shifts in demand, changes in the life
cycles and other destabilizing forces in the micro and macro environment.
Improve Financial Performance: Large firms generate cash that can be invested in other ventures. The firm
acts as a banker of an internal capital market. The core business sustains itself on its moneymaking ventures,
and uses this cash flow to create new ventures that generate additional profits. A firm may also be tempted
to exploit diversification opportunities because it has liquid resources far in excess of the total expansion
needs. Sometimes a company may seek a merger with another organization with the intention of tiding over
its financial problems.
Growth: Diversification is basically a way to grow. Indeed, managers often cite growth as the principle
reason for diversification. The most important factor that motivates management to diversify is to achieve
higher growth rate than which is possible with intensification strategy. If the management feels that the
existing products and markets do not have the potential to deliver expected growth, the only alternative
they have is to diversify into new territories. Unlike organic growth, which is slow, an acquisition or merger
(inorganic) can deliver the results rather quickly since resources, skills, other factors essential for faster
growth are immediately available.
Counter Competitive Threats: Organizations are driven at times towards external diversification through
merger by competitive pressures. Such a strategic move is expected to counter the competitive threats by
reducing the intensity of competition.
Access to Latest Technology: Many Indian firms enter into strategic alliances with foreign firms to gain
access to the latest technologies without spending huge amount of money on R&D. For instance, Johnson
and Nicholson India Ltd., a leading domestic paint manufacturer, has strengthened its position in the Indian
market and also diversified into industrial electronics along with its German partner, Carl Schevek AG of
Germany.
Regulatory Factors: A large number of organizations have diversified their operations geographically to
exploit opportunities in different regions and countries and also to take advantage of the incentives being
offered by the various governments to attract investment. Many companies enter other countries to avoid
restrictions placed by the regulators in their host country.
Alternative Routes to Diversification
Once a firm opts for diversification, it must select one of the options discussed below.
There are three broad ways to implement diversification strategies:
Mergers and Acquisitions

A merger is a legal transaction in which two or more organizations combine operations through an exchange
of stock. In a merger only one organization entity will eventually remain. An acquisition is a purchase of one
organization by another. In recent years, there were quite a few acquisitions in which the target firms
resisted the take-over bids. These acquisitions are referred to as hostile takeovers. It is natural for the target
organization’s management to try to defend against the takeover. Although they are used synonymously,
there is a slight distinction between the terms ‘merger’ and ‘acquisition’.
Strategic Partnering
Strategic partnering occurs when two or more organizations establish a relationship that combines their
resources, capabilities, and core competencies to achieve some business objective. The three major types of
strategic partnerships: joint ventures, long-term partnerships, and strategic alliances are discussed below:
Joint Ventures: In a joint venture, two or more organizations form a separate, independent organization for
strategic purposes. Such partnerships are usually focused on accomplishing a specific market objective. They
may last from a few months to a few years and often involve a cross-border relationship. One firm may
purchase a percentage of the stock in the other partner, but not a controlling share. The joint ventures
between various Indian and foreign companies such Hindustan Motors and General Motors, Hero Cycles
with Honda Motor Company, Wipro and General Electric, etc are examples of such strategic partnering.
Long-Term Contracts: In this arrangement, two or more organizations enter a legal contract for a specific
business purpose. Long-term contracts are common between a buyer and a supplier. Many strategists
consider them more flexible and less inhibiting than vertical integration. It is usually easier to end an
unsatisfactory long-term contract than to end a joint venture. A good example is the change in supplier
relationships that Chrysler’s management undertook after 1989, when it launched the LH project to create a
new generation of cars. Supplier relationships are critical at Chrysler since outsourced components
constitute about 70 percent of Chrysler’s cars, compared to about 50 percent for GM and Ford. Japanese
automakers also enter into such arrangements with their vendors frequently.
Strategic Alliances: In a strategic alliance, two or more organizations share resources, capabilities, or
distinctive competencies to pursue some business purpose. Strategic alliances often transcend the narrower
focus and shorter duration of joint ventures. These alliances may be aimed at world market dominance
within a product category. While the partners cooperate within the boundaries of the alliance relationship,
they often compete fiercely in other parts of their businesses.
Mergers and Acquisitions (M & A)
Mergers and acquisitions and corporate restructuring—or M&A for short—are a big part of the corporate
finance. One plus one makes three: this equation is the special alchemy of a merger or acquisition. The key
principle behind buying a company is to create shareholder value over and above that of the sum of the two
companies. Two companies together are more valuable than two separate companies—at least, that’s the
reasoning behind M&A. This idea is particularly attractive to companies when times are tough. Strong
companies will act to buy other companies to create a more competitive, cost-efficient company. The
companies will come together hoping to gain a greater market share or achieve greater efficiency. Because
of these potential benefits, target companies will often agree to be purchased when they know they cannot
survive alone.
A corporate merger is essentially a combination of the assets and liabilities of two firms to form a single
business entity. Although they are used synonymously, there is a slight distinction between the terms
‘merger’ and ‘acquisition’. Strictly speaking, only a corporate combination in which one of the companies
survives as a legal entity is called a merger. In a merger of firms that are approximate equals, there is often
an exchange of stock in which one firm issues new shares to the shareholders of the other firm at a certain
ratio. In other words, a merger happens when two firms, often about the same size, agree to unite as a new
single company rather than remain as separate units. This kind of action is more precisely referred to as a
“merger of equals.” Both companies’ stocks are surrendered, and new company stock is issued in its place.
When a company takes over another to become the new owner of the target company, the purchase is
called an acquisition. From the legal angle, the ‘target company’ ceases to exist and the buyer “gulps down”
the business and stock of the buyer continues to be traded.
In summary, “acquisition” is generally used when a larger firm absorbs a smaller firm and “merger” is used
when the combination is portrayed to be between equals. For the sake of discussion, the firm whose shares
continue to exist (possibly under a different company name) will be referred to as the acquiring firm and the
firm’s whose shares are being replaced by the acquiring firm will be referred to as the target firm. However,
a merger of equals doesn’t happen very often in practice. Frequently, a company buying another allows the
acquired firm to proclaim that it is a merger of equals, even though it is technically an acquisition. This is
done to overcome some legal restrictions on acquisitions.
Synergy is the main reason cited for many M&As. Synergy takes the form of revenue enhancement and cost
savings. By merging, the companies hope to benefit through staff reductions, economies of scale, acquisition
of technology, improved market reach and industry visibility. Having said that, achieving synergy is easier
said than done-synergy is not routinely realized once two companies merge. Obviously, when two
businesses are combined, it should result in improved economies of scale, but sometimes it works in
reverse. In many cases, one and one add up to less than two.
Excluding any synergies resulting from the merger, the total post-merger value of the two firms is equal to
the pre-merger value, if the ‘synergistic values’ of the merger activity are not measured. However, the post-
merger value of each individual firm is likely to be different from the pre-merger value because the
exchange ratio of the shares will not exactly reflect the firms’ values compared to each other. The exchange
ration is distorted because the target firm’s shareholders are paid a premium for their shares. Synergy takes
the form of revenue enhancement and cost savings. When two companies in the same industry merge, the
revenue will decline to the extent that the businesses overlap. Hence, for the merger to make sense for the
acquiring firm’s shareholders, the synergies resulting from the merger must be more than the value lost
initially.
Different forms of Mergers
There are a whole host of different mergers depending on the relationship between the two companies that
are merging.
These are:
A) Horizontal Merger: Merger of two companies that are in direct competition in the same product
categories and markets.
B) Vertical Merger: Merger of two companies which are in different stages of the supply chain. This is also
referred to as vertical integration. A company taking over its supplier’s firm or a company taking control of
its distribution by acquiring the business of its distributors or channel partners are examples of this type of
merger.
C) Market-extension Merger: Merger of two companies that sell the same products in different markets.
D) Product-extension Merger: Merger of two companies selling different but related products in the same
market.
E) Conglomeration: Merger of two companies that have no common business areas.
From the finance standpoint, there are three types of mergers: pooling of interests, purchase mergers and
consolidation mergers. Each has certain implications for the companies and investors involved:
Pooling of Interests: A pooling of interests is generally accomplished by a common stock swap at a specified
ratio. This is sometimes called a tax-free merger. Such mergers are only allowed if they meet certain legal
requirements. A pooling of interests is generally accomplished by a common stock swap at a specified ratio.
Pooling of interests is less common than purchase acquisitions.
Purchase Mergers: As the name suggests, this kind of merger occurs when one company purchases another
one. The purchase is made by cash or through the issue of some kind of debt investment, and the sale is
taxable. Acquiring companies often prefer this type of merger because it can provide them with a tax
benefit. Acquired assets can be “written up” to the actual purchase price, and the difference between book
value and purchase price of the assets can depreciate annually, reducing taxes payable by the acquiring
company. Purchase acquisitions involve one company purchasing the common stock or assets of another
company. In a purchase acquisition, one company decides to acquire another, and offers to purchase the
acquisition target’s stock at a given price in cash, securities or both. This offer is called a tender offer
because the acquiring company offers to pay a certain price if the target’s shareholders will surrender or
tender their shares of stock. Typically, this tender offer is higher than the stock’s current price to encourage
the shareholders to tender the stock. The difference between the share price and the tender price is called
the acquisition premium. These premiums can sometimes be quite high.
Consolidation Mergers: In a consolidation, the existing companies are dissolved, a new company is formed
to combine the assets of the combining companies and the stock of the consolidated company is issued to
the shareholders of both companies. The tax terms are the same as those of a purchase merger. The Exxon
merger with Mobil Oil Company is technically a consolidation.
Acquisitions: An acquisition is only slightly different from a merger. Like mergers, acquisitions are actions
through which companies seek economies of scale, efficiencies, and enhanced market visibility. Unlike all
mergers, all acquisitions involve one firm purchasing another—there is no exchanging of stock or
consolidating as a new company. In an acquisition, a company can buy another company with cash, stock, or
a combination of the two. In smaller deals, it is common for one company to acquire all the assets of
another company. Another type of acquisition is a reverse merger, a deal that enables a private company to
get publicly listed in a relatively short time period. A reverse merger occurs when a private company that
has strong prospects and is eager to raise finance buys a publicly listed shell company, usually one with no
business and limited assets. The private company reverse merges into the public company and together they
become an entirely new public corporation with tradable shares. Regardless of the type of combination, all
mergers and acquisitions have one thing in common: they are all meant to create synergy and the success of
a merger or acquisition hinges on how well this synergy is achieved.
Merger and Acquisition Strategy
There are a number of reasons that mergers and acquisitions take place. These issues generally relate to
business concerns such as competition, efficiency, marketing, product, resource and tax issues. They can
also occur because of some very personal reasons such as retirement and family concerns. Some people are
of the opinion that mergers and acquisitions also occur because of corporate greed to acquire everything.
Various reasons for M&A include:
Reduce Competition: One major reason for companies to combine is to eliminate competition. Acquiring a
competitor is an excellent way to improve a firm’s position in the marketplace. It reduces competition and
allows the acquiring firm to use the target firm’s resources and expertise. However, combining for this
purpose is as such not legal and under the Antitrust Acts it is considered a predatory practice. Therefore,
whenever a merger is proposed, firms make an effort to explain that the merger is not anti-competitive and
is being done solely to better serve the consumer. Even if the merger is not for the stated purpose of
eliminating competition, regulatory agencies may conclude that a merger is anti-competitive. However,
there are a number of acceptable reasons for combining firms.
Cost Efficiency: Due to technology and market conditions, firms may benefit from economies of scale. The
general assumption is that larger firms are more cost effective than are smaller firms. It is, however, not
always cost effective to grow. In spite of the stated reason that merging will improve cost efficiency, larger
companies are not necessarily more efficient than smaller companies. Further, some large firms exhibit
diseconomies of scale, which means that the average cost per unit increases, as total assets grow too large.
Some industry analysts even suggest that the top management go in for mergers to increase its own
prestige. Certainly, managing a big company is more prestigious than managing a small company.
Avoid Being a Takeover Target: This is another reason that companies merge. If a firm has a large quantity
of liquid assets, it becomes an attractive takeover target because the acquiring firm can use the liquid assets
to expand the business, pay off shareholders, etc. If the targeted firm invests existing funds in a takeover, it
has the effect of discouraging other firms from targeting it because it is now larger in size, and will,
therefore, require a larger tender offer. Thus, the company has found a use for its excess liquid assets, and
made itself more difficult to acquire. Often firms will state that acquiring a company is the best investment
the company can find for its excess cash. This is the reason given for many conglomerate mergers.
Improve Earnings and Reduce Sales Variability: Improving earnings and sales stability can reduce corporate
risk. If a firm has earnings or sales instability, merging with another company may reduce or eliminate this
provided the latter company is more stable. If companies are approximately the same size and have
approximately the same revenues, then by merging, they can eliminate the seasonal instability. This is,
however, not a very inefficient way of eliminating instability in strict economic terms.
Market and Product Line Issues: Often mergers occur simply because one firm is in a market that the other
company wants to enter. All of the target firm’s experience and resources are readily available of immediate
use. This is a very common reason for acquisitions. Whatever may be the explanation offered for acquisition,
the dominant reason for a merger is always quick market entry or expansion. Product line issues also exert
powerful influence in merger decisions. A firm may wish to expand, balance, fill out or diversify its product
lines. For example, acquisition of Modern Foods by Hindustan Lever Limited is primarily related product line.
Acquire Resources: Firms wish to purchase the resources of other firms or to combine the resources of the
two firms. These may be tangible resources such as plant and equipment, or they may be intangible
resources such as trade secrets, patents, copyrights, leases, management and technical skills of target
company’s employees, etc. This only proves that the reasons for mergers and acquisitions are quite similar
to the reasons for buying any asset: to purchase an asset for its utility.
Synergy: Synergy popularly stated, as “two plus two equals five,” is similar to the concept of economies of
scope. Economies of scope would occur if two companies combine and the combined company was more
cost efficient at both activities because each requires the same resources and competencies. Although
synergy is often cited as the reason for conglomerate mergers, cost efficiencies due to synergy are difficult
to document.
Tax Savings: Although tax savings is not a primary motive for a combination, it can certainly “sweeten” the
deal. When a purchase of either the assets or common stock of a company takes place, the tender offer less
the stock’s purchase price represents a gain to the target company’s shareholders. Consequently, the target
firm’s shareholders will usually gain tax benefits. However, the acquiring company may reap tax savings
depending on the market value of the target company’s assets when compared to the purchase price. Also,
depending on the method of corporate combination, further tax savings may accrue to the owners of the
target company.
Cashing Out: For a family-owned business, when the owners wish to retire, or otherwise leave the business
and the next generation is uninterested in the business, the owners may decide to sell to another firm. For
purposes of retirement or cashing out, if the deal is structured correctly, there can be significant tax savings.
To summarize, firms take the M&A route to seize the opportunities for growth, accelerate the growth of the
firm, access capital and brands, gain complementary strengths, acquire new customers, expand into new
product- market domains, widen their portfolios and become a one-stop-shop or end-to end solution
provider of products and services.
Reasons for failure of Merger and Acquisition
The record of M&As world over has not been impressive. Advocates of M&As argue that they boost
revenues to justify the price premium. The notion of synergy, ‘1+1 = 3’, sounds great, but the assumptions
behind this notion are too simplistic. In real life things are not that simple and rosy. Past trends show that
roughly two thirds of all big mergers have not produced the desired results. Rationale behind mergers can
be flawed and efficiencies from economies of scale may prove elusive. Moreover, the problems associated
with trying to make merged entities work cannot be overcome easily. The conclusion that one may draw
from this discussion will be that “successful diversification would involve a well thought strategy in selecting
a target, avoiding over-paying, creating value in the integration process.”
The potential pitfalls that a firm is likely to encounter during diversification include:
Integration Difficulties: Integrating two companies following mergers and acquisition can be quite difficult.
Issues such as melding two disparate corporate cultures, linking different financial and control systems,
building effective financial and control systems, building effective working relationships, etc., will come to
the fore and they have to be contend with.
Faulty Assumptions: A booming stock market encourages mergers, which can spell danger. Deals done with
highly rated stock as currency appear easy and cheap, but underlying assumptions behind such deals is
seriously flawed. Many top managers try to imitate others in attempting mergers, which can be disastrous
for the company. Mergers are quite often more to do with personal glory than business growth. The
executive ego plays a major in M&A decisions, which is fuelled further by bankers, lawyers and other
advisers who stand to gain from the fat fees they collect from their clients engaged in mergers. Most CEOs
and top executives also get a big bonus for merger deals, no matter what happens to the share price later.
Mergers are also driven by fear psychosis: fear of globalization, rapid technological developments, or a
quickly changing economic scenario that increases uncertainty can all create a strong stimulus for defensive
mergers. Sometimes the management feels that they have no choice but to acquire a raider before being
acquired. The idea is that only big players will survive in a competitive world.
Failure to carry out effective due-diligence: The failure to complete due-diligence often results in the
acquiring firm paying excessive premiums. Due diligence involves a thorough review by the acquirer of a
target company’s internal books and operations. Transactions are often made contingent upon the
resolution of the due diligence process. An effective due-diligence process examines a large number of items
in areas as diverse as those of financing the intended transaction, differences in cultures between the two
firms, tax concessions of the transaction, etc.
Inordinate increase in debt: To finance acquisitions, some companies significantly raise their levels of debt.
This is likely to increase the likelihood of bankruptcy leading to downgrading of firm’s credit rating. Debt also
precludes investment in areas that contribute to a firm’s success such as R&D, human resources
development and marketing.
Too much diversification: The merger route can lead to strategic competitiveness and above-average
returns. On the flip-side, firms may lose their competitive edge due to over diversification. The threshold
level at which this happens varies across companies, the reason being that different companies have
different capabilities and resources that are required to make the mergers work. Crossing these threshold
limits can result in overstretching these capabilities and resources leading to deteriorating performance.
Evidence also suggests that a large size creates efficiencies in various organizational functions when the firm
is not too large. In other words, at some level the costs required to manage the larger firm exceed the
benefits of efficiency created by economies of scale.
Problems in making M&A work: Mergers can distract them from their core business, spelling doom for the
company. The chances for success are further hampered if the corporate cultures of the companies are very
different. When a company is acquired, the decision is typically based on product or market synergies, but
cultural differences are often ignored. It’s a mistake to assume that these issues are easily overcome. A
McKinsey study on mergers concludes that companies often focus too narrowly on cutting costs following
mergers, without paying attention to revenues and profits. The exclusive cost-cutting focus can divert
attention from the day-to-day business and poor customer service. This is the main reason for the failure of
mergers to create value for shareholders.
However, not all mergers fail. Size and global reach can be advantageous and tough managers can often
squeeze greater efficiency out of poorly run acquired companies. The success of mergers, however, depends
on how realistic the managers are and how well they can integrate the two companies without losing sight
of their existing businesses. Though the acquisition strategies do not consistently produce the desired
results, some studies suggest certain decisions and actions that firms may follow which can increase the
probability of success. The attributes leading to successful acquisition suggested by various studies are that
the:
a) Acquired firm has assets or resources that are complimentary to the acquiring firm’s core business.
b) Acquisition is friendly.
c) Acquiring firm selects target firms and conducts negotiation carefully and methodically.
d) Acquiring firm has adequate cash and fovourable debt position.
e) Merged firms maintains low to moderate debt position.
f) Acquiring firm has experience with change and is flexible and adaptable.
g) Acquiring firm maintains sustained and consistent emphasis on R&D and innovation.
Steps in Merger and Acquisition Deals
A firm that intends to take over another one must determine whether the purchase will be beneficial to the
firm. To do so, it must evaluate the real worth of being acquired. Logically speaking, both sides of an M&A
deal will have different ideas about the worth of a target company: the seller will tend to value the company
as high as possible, while the buyer will try to get the lowest price possible. There are, however, many ways
to assess the value of companies. The most common method is to look at comparable companies in an
industry, but a variety of other methods and tools are used to value a target company. A few of them are
listed below.
1) Comparative Ratios
The following are two examples of the many comparative measures on which acquirers may base their
offers:
P/E (price-to-earnings) Ratio: With the use of this ratio, an acquirer makes an offer as a multiple of the
earnings the target company is producing. Looking at the P/E for all the stocks within the same industry
group will give the acquirer good guidance for what the target’s P/E multiple should be.
EV/Sales (price-to-sales) Ratio: With this ratio, the acquiring company makes an offer as a multiple of the
revenues, again, while being aware of the P/S ratio of other companies in the industry.
2) Replacement Cost
In a few cases, acquisitions are based on the cost of replacing the target company. The value of a company is
simply assessed based on the sum of all its equipment and staffing costs without considering the intangible
aspects such as goodwill, management skills, etc. The acquiring company can literally order the target to sell
at that price, or it will create a competitor for the same cost. This method of establishing a price certainly
wouldn’t make much sense in a service industry where the key assets—people and ideas—are hard to value
and develop.
3) Discounted Cash Flow
An important valuation tool in M&A, the discounted cash flow analysis, determines a company’s current
value according to its estimated future cash flows. Future cash flows are discounted to a present value using
the company’s weighted average cost of capital. Though this method is a little difficult to use, very few tools
can rival this valuation method.
4) Synergy
Quite often, acquiring companies pay a substantial premium on the stock value of the companies they
acquire. The justification for this is the synergy factor: a merger benefits shareholders when a company’s
post-merger share price increases by the value of potential synergy. For buyers, the premium represents
part of the post-merger synergy they expect can be achieved. The following equation solves for the
minimum required synergy and offers a good way to think about synergy and how to determine if a deal
makes sense. In other words, the success of a merger is measured by whether the value of the buyer is
enhanced by the action. The equation:
(Pre-merger value of both firms + synergies)

—————————————————— = Pre-merger stock price
Post-merger number of shares
Here the pre-merger stock price refers to the price of the acquiring firm. Increase in the value of the
acquiring firm is a test of success of the merger. However, the practical aspects of mergers often prevent the
anticipated benefits from being fully realized and the expected synergy quite often falls short of
expectations.
Some more criteria to consider for valuation include:
1. A reasonable purchase price - A small premium of, say, 10% above the market price is reasonable.
2. Cash transactions- Companies that pay in cash tend to be more careful when calculating bids, and
valuations come closer to target. When stock is used for acquisition, discipline can be a casualty.
3. Sensible appetite – An acquirer should target a company that is smaller and in a business that the acquirer
knows intimately. Synergy is hard to create from disparate and unrelated businesses. And, sadly, companies
have a bad habit of biting off more than they can chew in mergers.
The Basics Steps in Mergers and Acquisitions
1) Initial Offer by the Intending Buyer
When a company decides to go for a merger or an acquisition, it starts with a tender offer. Working with
financial advisors and investment bankers, the acquiring company will arrive at an overall price that it’s
willing to pay for its target in cash, shares, or both. The tender offer is then frequently advertised in the
business press, stating the offer price and the deadline by which the shareholders in the target company
must accept (or reject) it.
2) Response from Target Company
Once the tender offer has been made, the target company can do one of the several things listed below:
Accept the Terms of the Offer: If the target firm’s management and shareholders are happy with the terms
of the transaction, they can go ahead with the deal.
Attempt to Negotiate: The tender offer price may not be high enough for the target company’s
shareholders to accept, or the specific terms of the deal may not be attractive. If target firm is not satisfied
with the terms laid out in the tender offer, the target’s management may try to work out more agreeable
terms. Naturally, highly sought-after target companies that are the object of several bidders will have
greater latitude for negotiation. Therefore, managers have more negotiating power if they can show that
they are crucial to the merger’s future success.
Execute a Poison pill or some other Hostile Takeover Defense: A target company can trigger a poison pill
scheme when a hostile suitor acquires a predetermined percentage of company stock. To execute its
defense, the target company grants all shareholders—except the acquirer—options to buy additional stock
at a hefty discount. This dilutes the acquirer’s share and stops its control of the company. It can also call in
government regulators to initiate an antitrust suit.
Find a White Knight: As an alternative, the target company’s management may seek out a friendly potential
acquirer, or white knight. If a white knight is found, it will offer an equal or higher price for the shares than
the hostile bidder.
3) Closing the Deal
Finally, once the target company agrees to the tender offer and regulatory requirements are met, the
merger deal will be executed by means of some transaction. In a merger in which one company buys
another, the acquirer will pay for the target company’s shares with cash, stock, or both. A cash-for-stock
transaction is fairly straightforward: target-company shareholders receive a cash payment for each share
purchased. This transaction is treated as a taxable sale of the shares of the target company. If the
transaction is made with stock instead of cash, then it’s not taxable. There is simply an exchange of share
certificates. The desire to steer clear of the taxman explains why so many M&A deals are carried out as cash-
for-stock transactions.
When a company is purchased with stock, new shares from the acquirer’s stock are issued directly to the
target company’s shareholders, or the new shares are sent to a broker who manages them for target-
company shareholders. Only when the shareholders of the target company sell their new shares are they
taxed. When the deal is closed, investors usually receive a new stock in their portfolio—the acquiring
company’s expanded stock. Sometimes investors will get new stock identifying a new corporate entity that
is created by the M&A deal.
Mergers and Acquisitions: The Indian Scenario
M&A activity had a slow take-off in India. Traditionally, Indian promoters have been very reluctant to sell
out their businesses since it was synonymous with failure and was never viewed as a sensible move. This
scenario changed dramatically in the 90s with the Tatas selling TOMCO and Lakme. Suddenly selling out had
become a sensible option. The second major reason for the slow take-off of M&A activity was due to the
fact that even while the companies continued to decline, the banks and financial institutions, normally the
biggest stakeholders in most Indian companies were reluctant to change the managements. Fortunately,
this situation has changed for the better. Worried about the spectre burgeoning NPAs, these institutions are
now willing to force the promoters to sell out. The FIs and banks are flushed with funds and they are willing
to assist big companies in acquiring new companies.
Indian cement industry was trendsetter in M&A in India. The cement industry was ripe for consolidation in
many ways. The industry comprised of four or five dominant players in addition to a number of small players
having economically viable capacities, but with very small market shares. Rapid expansion by the bigger
players in a capital-intensive industry meant that these small players would naturally be marginalized.
Moreover, the excess capacity due to rapid expansion of big players meant that the smaller players would
lose money. This situation naturally spurred the merger activity in the cement industry.
The past few years have been record years for M&A globally with mega deals dwarfing the previous records.
M&A has also become a buzzword among Indian companies as well. HDFC-Times Bank, Gujarat Ambuja-DLF
and ICICI Bank-Centurion Bank mergers have all been in the news recently for this reason. The merger wave
in the country was catalyzed by economic liberalization in 1991. M&A activity is on the rise and the Indian
industry has witnessed a spate of mergers and acquisitions in the past few years. Mergers and acquisitions
are here to stay and more are expected to follow in the near future.
Mergers and acquisitions in India, just as in other parts of the world, are primarily aimed at expanding a
company’s business and profits. Acquisitions bring in more customers and business, which in turn brings in
more money for the companies thus helping in its overall expansion and growth. More and more companies
are, therefore, moving towards acquisitions for a fast-paced growth. Consolidation has become a compelling
necessity to counter the effects of increasing globalization of businesses, declining tariff barriers, price
decontrols and to please the ever demanding and discerning customers. And these pressures are expected
to intensify and relentlessly batter every business in the future. The M&A activity is helping the companies
restructure, gain market share or access to markets, rationalize costs and acquire brands to counter these
threats. The shareholders of many companies are also supporting these moves and sharp increase in share
prices is an indication of this support.
Since size and focus are factors that matter for surviving the onslaught of competition, mergers and
acquisitions have emerged as key growth drivers of Indian business. Tax benefits were the sole reason to
justify mergers in the past but for many Indian promoters, that is no longer an incentive. Indian companies
have taken to M&A many reasons. Experts feel that Indian companies look at M&As due to the size factor,
the niche factor or for expanding their market reach. They are also of the opinion that acquisitions help in
the inorganic (and quicker) growth of the business of a company. Besides these factors, the pricing pressures
and consolidation of global companies by building offshore capabilities have made M&A relevant for Indian
enterprises.
Many Indian companies have also followed the M&A route to grow in size by adding manpower and to
facilitate overall expansion by moving into new market space. Another reason behind M&A has been to gain
new customers. For instance, vMoksha, an IT firm, saw a rise in the number of its customers due to
acquisitions as it expanded considerably in the US market and leveraged on the existing customer base.
Similarly, Mphasis added new customers in the Japanese and Chinese markets after the acquisition of
Navion. The need for skill enhancement seems to be another major reason for companies to merge and
make new acquisitions. The Polaris-OrbiTech merger helped in combining skill sets of both companies, which
consequently led to growth and expansion of the merged entity. Likewise, Wipro acquired GE Medical
Systems Information Techno-logy (India) to leverage its expertise in the health science domain.
Summary:
 Diversification involves moving into new lines of business. Of the various routes to expansion,
diversification is definitely the most complex and risky route.
 Diversification of a firm can take the form of concentric and conglomerate diversification.
 A firm is said to pursue concentric diversification strategy when it enters into new product or service
areas belonging to different industry category but the new product or service is similar to the
existing one in many respects.
 The two major routes to diversification are mergers and acquisitions and strategic partnering. One
plus one makes three: this equation is the special alchemy of a merger or acquisition.
 Although they are used synonymously, there is a slight distinction between the terms ‘merger’ and
‘acquisition’. The term acquisition is generally used when a larger firm absorbs a smaller firm and
merger is used when the combination is portrayed to be between equals.
 Firms take the M&A route mainly to seize the opportunities for growth, accelerate the growth of the
firm, access capital and brands, gain complementary strengths, acquire new customers, expand into
new product-market domains, widen their portfolios and become a one-stop-shop or end-to-end
solution provider of products and services. The three basic steps in the merger process are—offer by
the acquiring firm, response by the target firm and closing the deal.
 M and A activity had a slow take-off in India. However, M&A has become a buzzword among Indian
companies after the economic liberalization in 1991. M&A activity is on the rise and the Indian
industry has witnessed a spate of mergers and acquisitions in the past few years.
4. Write a short note on mergers and acquisitions strategy adopted by organizations. (2014 –
QP206) (5)
Answer: Mergers and acquisitions generally referred to as M&A are a very important means whereby
companies respond to the ever-changing strategic environment. ‘Many firms have no alternative but to
merge, acquire or be acquired’.
Simply put when organizations have no chance of survival they give themselves a last chance by merging or
by being acquired. The basic goal of businesses in today’s world is to grow or death is destined for you.
Companies that are successful that is those companies that are growing will snatch market share from their
competitors, will generate high economic profits and provide reasonable returns to shareholders. On the
other hand companies that experience stagnant growth lose both their customers and market share in
addition to destroying shareholder value. ‘Mergers and acquisitions (M&A) play a critical role in both sides
of this cycle.’
Mergers and acquisitions enable successful companies to grow faster than their competition by combining
the strengths of the companies that have merged. On the other hand, they lead to total extinction of the
weaker companies by having them acquired by other large and successful companies. ‘Mergers and
acquisitions are a vital part of any healthy economy and importantly, the primary way that companies are
able to provide returns to owners and investors.’ and also that ‘Merger and acquisitions are among the most
powerful and versatile growth tools employed by companies of all sizes and in all industries.’ This also
signifies the importance of mergers and acquisitions in that they are highly efficient growth tools employed
by organizations of all sizes and virtually in all industries. This depicts as M&As being a global trend.
The Reasons behind Mergers and Acquisitions
Companies and businesses use mergers and acquisitions for many reasons. Some are mentioned below:
Mergers and acquisitions can pave ways for entering new markets, Adding new product lines and increasing
the distribution reach—that is gaining a core competence to do more combinations.
Mergers and acquisitions are used to increase / enhance shareholder value. This is done by:
• Cost reductions that are achieved by combining departments, operations, and trimming the workforce—
this cost reduction in turn leads to increased profitability.
• Increasing revenue by absorbing a major competitor and thereby increasing market share.
• Cross-selling of products / services.
• Tax savings that are achieved when a profitable company merges with or takes over a moneyloser.
• Diversification that can stabilize earnings and boost investor confidence. Some mergers and acquisitions
take place when management of any business recognizes the need to transform corporate identity.
Mergers and acquisitions are also used for risk spreading. Acquisitions are undertaken to achieve vertical
and horizontal operational synergies where synergies signify that the whole is greater than the parts.
Some mergers and acquisitions take place for market dominance and reaching economies of scale.
Screening of potential Merger and Acquisition targets
As complexity of mergers and acquisitions has increased, the scope and effectiveness of due diligence is now
questionable.
To overcome the danger of making a wrong decision, it should be well understood that the potential buyer
of an organization needs to work out and act on a clear criterion when considering a potential merger or
acquisition.
Organizations considering a merger or acquisition should filter out their targets for the merger or acquisition
to be a success. They should rely on several metrics to triangulate vales, define and agree the criteria
upfront, rapidly filter out irrelevant organizations, and should take a stealth approach to determining the
size and performance of competitors.
Organizations should also plan for successful target engagement. To do so, they should clearly identify their
targets and offer compelling value proposition to potential target candidates.
5. What do you mean by ‘Corporate Restructuring’? What are the major types and forms of
corporate restructuring? What, according to you, may be the motives behind any business
combination? (2016 – QP404) (2+5+3)
Answer: The Corporate Restructuring is the process of making changes in the composition of a firm’s one or
more business portfolios in order to have a more profitable enterprise. Simply, reorganizing the structure of
the organization to fetch more profits from its operations or is best suited to the present situation.
Corporate Restructuring implies activities related to:
 Expansion / Contraction of a firm’s operation or
 Changes in its Assets or Financial or Ownership structure
 Changes in Corporate control
Forms of Corporate Restructuring:
It is essentially the process of re-designing one or more aspects of the company.

A. Mergers and Amalgamation – A merger is a combination of two or more distinct entities into one,
the desired effect being accumulation of assets and liabilities of district entities and several other
benefits such as, economies of scale, tax benefits, fast growth, synergy and diversification etc. The
merging entities cease to be in existence and merge into a single servicing entity.
Amalgamation is an arrangement, whereby the assets and liabilities of two or more companies become
vested in another company (amalgamated company) – without giving proportional ownership to the
shareholders of the acquired company. The amalgamating companies all lose their identity and emerge
as an amalgamated company, though in certain transaction structures, the amalgamated company may
or may not be the original companies.
Types of Mergers –
 Horizontal Merger – It takes place when two or more corporate firms dealing in similar
lines of activity combine together.
 Vertical Merger – It occurs when a firm acquires firm’s upstream form it and / or
downstream from it. It involves combination of two or more stages of Production /
Distribution that are usually separate. Usually, it occurs between companies producing
different products for one specific finished product.
 Conglomerate Merger – It takes place between firms which have unrelated business
activities. It is a combination in which a firm established in one industry combines with a
firm from an unrelated industry (firms engaged in different unrelated activities combine
together)
 Concentric Merger – It takes place between two companies which share some common
expertise that maybe mutually advantageous.

B. Acquisition/Takeovers – It implies acquisition of controlling interest in a company by another
company. It does not lead to dissolution of company whose shares are acquired. It can assume three
forms –
 Negotiated friendly – It is organized by the incumbent management with a view to
parting with the control of management to another group through negotiation.
 Open market/hostile – The taking over company acquire shares from the open market /
financial institutions / mutual funds and willing shareholders at a price higher than
prevailing market price.
 Bail out takeover – It is a takeover of a financially weak company by a profitable
company. Both the holding company and subsidiary retain separate legal entities and
maintain their separate book of accounts.
C. Demerger – It is a form of corporate restructuring in which a company transfers one or more of its
undertakings to another company in such a manner that –
 All the property/liabilities of the undertaking being transferred, becomes the part of the
resulting company
 All the property/liabilities of the undertakings are transferred at values appearing in the
books of account
 The resulting company issues its shares on a proportionate basis to the shareholders of
the demerged company
 Shareholders not holding more than 3/4th in the value of shares in the demerged
company become shareholders of the resulting company
 The transfer of undertaking is on a going concern basis
 The demerger is in accordance with the conditions, under Section 27 A by the Central
Government
Divestitures – It is a form of corporate restructuring which involves sale of segment of a
company for cash or securities. It involves sale of only some assets of the firm. These assets
may be a plant, division, product line, subsidiary and so on.
 Split up – Split or division of a company
 Sell off – selling off assets of a company in a declining market
 Spin off – It is the division of company into wholly owned subsidiary of parent
company by distribution of all its shares of the subsidiary company on a pro-rata
basis (New company from existing company).
D. Financial Restructuring – It is carried out internally with the consent of the various stakeholders by
corporates which have accumulated substantial losses. It is a suitable model for corporate firms
accumulating losses over a number of years. It is achieved by formulating appropriate restructuring
scheme involving a number of legal formalities. It implies significant change in the financial/capital
structure of a firm, leading to the change in the payment of fixed financial charges and change in the
pattern of ownership and control.
E. Buy outs – The Management Buy Out (MBO) involves the sale of the existing firm to the
management. The management maybe from the same firm, from outside or may assure a hybrid
form. When debt forms a substantial part of the total financing form outsiders, the buy out
transaction is called Leveraged buy out. Leveraged buy out implies acquisition of a firm that is
financed principally by borrowing on a secured basis.
F. Strategic Alliance – It is a voluntary formal agreement between two companies to pool their
resources to achieve a common set of objectives while remaining independent entities.
10 Reasons Why One Should Consider Restructuring

There are several reasons you may have to reorganize the operations and other structures of the
organization. Restructuring a company can improve efficiency, keep technology up to date, or implement
strategic or governance changes made by, or mandated to, company owners.
1. Changed Nature of Business

In today’s business environment, the only constant is change. Companies that refuse to change with the
times face the risk of their product line becoming obsolete. Because of this, businesses experiment with new
products, explore new markets, and reach out to new groups of customers on a continuous basis.
Businesses seek to diversify into new areas to increase sales, optimize their capacity, and conversely shed
off divisions that do not add much value, to concentrate on core competencies instead.
All such initiatives require restructuring. For instance, expansion to an overseas market may require changes
in the staff profile to better connect with the international market, and changes in work policies and
routines to ensure compliance with export regulations. Starting a new product line may require changes in
the system of work, hiring new experts familiar in the business line and placing them in positions of
authority, and other interventions. Hiving off unprofitable or unneeded business lines may require changes
to retain specific components of such divisions that the main business may wish to retain.
2. Downsizing
One common reason for restructuring a company is to downsize the workforce. The changing nature of
economy may force the business to adopt new strategies or alter their product mix, making staff redundant.
Similarly, cutthroat competition and pressure on margins from competitors who adopt a low price strategy
may force the company to adopt lean techniques, just in time inventory, and other measures to cut input
costs and achieve process efficiency.
In such situations, the organization will need to redo job descriptions, rework its team, group, and
communication structures and reporting relationships to ensure that the remaining workforce does the job
well. Very often, downsizing-induced restructuring leads to a flatter organizational structure, and broader
job descriptions and duties.
3. New Work Methods

Traditional organizational systems and controls cater to standard 9 AM to 5 PM office or factory based work.
Newer methods of work, especially outsourcing, telecommuting, and flex time require new systems,
policies, and structures in place, besides a change in culture, and such requirements may trigger
organizational restructuring.
The presence of telecommuting employees, temporary employees, and outsourcing work may require a
drastic overhaul of performance management parameters, compensation and benefits administration, and
other vital systems. The newer work methods may, for instance, require placing emphasis on the results
rather than the methods, flexible reporting relationships, and a strong communication policy.
4. New Management Methods

Traditional management science recommends highly centralized operations, and the top management
adopting a command and control style. The new behavioral approach to management considers human
resources a key driver of strategic advantage, and focuses on empowering the workforce and providing
considerate leeway to line managers in conducting day-to-day operations. The top management intervenes
only to set strategy and ensure compliance; strategic business units receive autonomy in functioning.
Traditional management structures were bureaucratic and hierarchical. Of late, management experts see
wisdom in flatter organizations with wider roles and responsibilities for each member of the team. Job
flexibility, enlargement and enrichment are key features of such new structures, but successful
implementation requires changes in the communication and reporting structures of the organization. While
new organizations can start with such new paradigms, old organizations have to restructure themselves to
keep up with these best practices to remain competitive.
5. Quality Management
Competitive pressures force most companies to have a serious look at the quality of their products and
services, and adopt quality interventions such as Six Sigma and Total Quality Management. Implementing
new quality standards may require changes in the organization. Most of the new quality applications strive
to imbibe quality in the actual work process rather than maintain a separate quality control department to
accept or reject output based on quality specifications.
In many cases, an organizational level audit precedes quality interventions, and such audits highlight
inefficiencies in the organizational structure that may impede quality in the first place. For instance,
reducing waste may require eliminating certain processes, and thereby reallocation of personnel
undertaking such activities.
6. Technology
Innovations in technology, work processes, materials and other factors that influence the business, may
require restructuring to keep up with the times. For instance, enterprise resource planning that links all
systems and procedures of an organizational by leveraging the power of information technology may initially
require a complete overhaul of the systems and procedures first.
Such technology-centric change may be part of a business process engineering exercise that involves
redesigning the business processes to maximize potential and value added, while minimizing everything
else. Failure to do so may result in the company systems and procedures turning obsolete and discordant
with the times.
7. Mergers and Acquisitions

In today’s corporate world, where survival of the fittest is the maxim, mergers and acquisitions are
commonplace and any merger or acquisition invariably heralds a restructuring exercise. The reasons for such
restructuring accompanying mergers and acquisitions are many. Some of the common reasons are:
 Reconciling the systems and procedures of the merged organizations to ensure that the new entity has
consistency of approach.
 Eliminating duplication of work or systems, such as two human resource or finance departments.
 Incorporating the preferences of the new owners, and more.
Joint ventures may also require formation of matrix teams, special task forces, or a new subsidiary.
8. Finance Related Issues

Very often, small and medium scale businesses have informal structures and reporting relationships, and an
ad-hoc style of decision-making. When such companies grow and want to raise fresh funds, venture
capitalists and regulations might demand a more professional set up, with formal written-down structures
and policies. A listed company may undertake a restructuring exercise to improve its efficiency and unlock
hidden value, and thereby show more profits to attract fresh investors.
Bankruptcy may force the business to shed excess flab such as workforce, land, or other resources, sell some
business lines to raise cash, and become lean and mean, to attract bail-outs or some other rescue package.
Companies may try to restructure out of court to avoid the high costs of a formal bankruptcy.
9. Buy Outs
At times, the restructuring exercise may be the result of the whims and fancies of the owners. For instance,
the company may have a new owner who wants to stamp his or her personal authority and style onto the
business. Restructuring allows the new owner to:
 Reshuffle key personnel and provide power to trusted lieutenants.
 Start with a clean state and thereby exert greater control.
 Preempt any inefficiencies that caused the previous owner to sell-out, and more.
With or without ownership change acting as a trigger, company owners may appoint a management
consultant to review the company and suggest macro-level changes, as a routine exercise.
10. Statutory and Legal Compliance

At times, restructuring may be a forced exercise, to conform to some legal or statutory requirements. For
instance, the government may mandate financial and healthcare institutions that deal with sensitive
personal data to monitor their computer networks. A new bill may require that private computer networks
adopt the same security measures that government networks adopt, to gain immunity from liability lawsuits
in the eventuality of cyber-attacks.
Any organizational restructuring is basically a change initiative. Success depends on managing resistance to
change by convincing the remaining workforce of the need for change and the possible benefits, an effective
communication system to lend clarity to the change process, and effective leadership.
6. Briefly discuss the different strategies adopted for organizational restructuring. (2013 –
QP206) (3+7)
Answer: No business can continue to function in the same way forever. With changing times and changing
business conditions, restructuring is one of the options for a business to stay on track. Here’s a quick look at
how businesses have used restructuring to come out of difficult situations.
Organizational restructuring involves making changes to the organizational setup. These changes have an
impact on the flow of authority, responsibility and information across the organization.
The reasons for restructuring vary from diversification and growth to minimizing losses and cutting down
costs. Organizational restructuring may be done because of external factors like merging up with some other
company, or because of internal factors such as high employee costs. Let’s take a look at some of the
commonly used restructuring strategies.
1. Downsizing
Call it downsizing, layoff, rightsizing or smart sizing; in essence, it is all one and the same thing. This
restructuring strategy is about reducing the manpower to keep employee costs under control. Take the case
of auto-giant General Motors, which in 1991 decided to shut down 21 plants and lay off 74,000 employees
to counter its losses.
Another example is that of IBM, which had never laid off staff ever since its incorporation, but had to layoff
85,000 employees to stay in business. This type of restructuring is tough to manage and is mostly adopted to
overcome adverse situations. Downsizing is not always a result of business losses; it may be needed even in
cases of takeovers, acquisitions and mergers, where duplicity of the staff propels this form of organizational
restructuring.
Whether you are acquiring a business or some other business is acquiring your business, restructuring will
be needed post acquisition. The business being acquired undergoes major restructuring to get in-line with
the organizational setup of the acquiring business.
When AT&T acquired BellSouth, BellSouth was restructured to fit into the organizational setup of AT&T. And
it wasn’t just BellSouth that was restructured, as AT&T too saw some restructuring to accommodate
BellSouth. Altogether, AT&T had to cut down 10,000 employees over a period of three years, following
acquisition of BellSouth.
Also, when two businesses decide to merge together, organizational restructuring is a must to unite the two
distinct organizations into one organization. When Glaxo Wellcome and SmithKline Beecham merged
together to form Glaxo SmithKline in 1999, both the companies had to undergo major restructuring, and
there was some major downsizing before as well as after the new company was formed.
2. Starburst
This restructuring strategy involves breaking a company into smaller independent business units for
increasing flexibility and productivity. This may be done either to dissect the business into manageable
chunks or when the business wants to diversify and foray into unrelated areas. One of the latest examples of
this strategy is Pfizer’s decision to spin off four non-pharmaceutical firms this year.
Starbursting may also be used for expansion of the existing business such as when a business decides to spin
off subsidiaries to handle business in different geographic areas.
3. Verticalization
This is the latest in restructuring trends, wherein an organization restructures itself to offer tailored
products and services to cater to the requirements of a specific industry. In 2002, HCL verticalized its
operations to meet the specific demands of five different industries: retail, media and telecom,
manufacturing, finance and life sciences. This type of restructuring opens up avenues for specialization.
4. De-layering
De-layering involves breaking down the classical pyramid setup into a flat organization. The main objective
of this type of restructuring is to thin out the top layer of unproductive and highly paid ‘white collar’ staff.
General Electric has reduced the number of management levels from ten to four in some of its work facilities
in order to improve overall productivity.
Hewlett Packard, on the other hand, has de-layered to promote innovation, build customer intimacy and
increase consumer satisfaction. The major advantage of de-layering is that the decision making process
becomes shorter and more effective.
5. Business Process Reengineering

This type of restructuring is carried out for making operational improvements. It begins with identifying how
things are being done currently and then it moves on to re-engineering the tasks to improve productivity.
Business process re-engineering usually results in changing roles. While at times BPR may lead to layoffs, it
can also create new employment opportunities.
When Ford Motor was trying to reduce its cost, it found that the process at its accounts payable department
needed to be re-engineered. The reengineering helped in simplifying the controls and maintaining the
financial information more accurately, that too after laying off 75 percent of the staff from the accounts
payable department.
6. Outsourcing
Today’s businesses prefer to outsource some of their processes to other firms. There are two ways
outsourcing benefits a business; first, it helps in reducing costs and second, it allows the business to
concentrate on its core business and leave the remaining tasks to outsourcing firms.
Whenever a business plans to outsource one of its processes, it will cause some major restructuring and
reshuffling within the company. Downsizing is common when a business outsources its processes.
7. Virtualization
Virtualization is the last on our list of restructuring strategies. This strategy involves pushing employees
outside the office to places where they are more needed like at the client’s site. It also involves upgrading to
technology, which allows unmanned virtual offices to be set up. For example, the ATMs offered by banks are
their virtual units.
Business Policy and Strategic Management Strategic Alliances
Strategic Alliances
Learning Objective:
 To understand the concept of strategic alliance;

 To get acquainted with the worldwide trends in this area;
 To explain the various routes to diversification;
 To explain the factors responsible for the rise of strategic alliance;
 To develop an awareness of costs & benefits of alliance arrangements;
 To understand the process of planning successful alliances; and
 To discuss the issue of corporate responsibility of alliance partners.
Introduction
Gallo, the world’s largest producer of wine, does not grow a single grape and likewise, Nike, the world’s
largest producer of athletic foot-wear, does not manufacture a single shoe, Boeing, the giant aircraft
manufacturer, makes little more than cockpits and wing bits (Quinn, 1995). “How is this possible?” These
companies, like many other companies these days, have entered into strategic alliances with their suppliers
to do much of their actual production and manufacturing for them.
From software to steel, aerospace to apparel, the pace of strategic alliances worldwide is accelerating.
Strategic alliances, broadly defined as arrangements in which two organizations conjoin to pursue common
interests, are a rapidly growing phenomenon in the contemporary business environment. Alliances
represent strategic responses to the powerful forces of deregulation, globalization, technological change,
and time-to-market concerns. These forces have made the business environment vastly more competitive,
complex, and uncertain than ever before. Companies are turning to strategic alliances in order to manage
their uncertainty and risk and specifically to access a wide range of competencies, technologies, and
markets.
A strategic alliance is an agreement between firms to do business together in ways that go beyond normal
company-to-company dealings, but fall short of a merger or a full partnership. Strategic alliances can be as
simple as two companies sharing their technological and/or marketing resources. In contrast, they can be
highly complex, involving several companies, located in different countries. These firms may in turn be
linked with other organizations in separate alliances. The result is a maze of intertwined companies, which
may be competing with each other in several product areas while collaborating in some. These alliances also
range from informal “handshake” agreements to formal agreements with lengthy contracts in which the
parties may also exchange equity, or contribute capital to form a joint venture corporation. Much of the
discussion in the literature on strategic alliances revolves around alliances between two companies, but
there is an increasing trend towards multi-company alliances. For instance, a six-company strategic alliance
was formed between Apple, Sony, Motorola, Philips, AT&T and Matsushita to form General Magic
Corporation to develop Telescript communications software.
In essence, strategic alliance, a form of corporate partnering, is the joining of two or more companies to
exchange resources, share risks, or divide rewards from a joint enterprise. It can take any number of forms
such as: a strong relationship with a major customer, a partnership with a source of distribution, a
relationship with a supplier of innovation or product, or an alliance in pursuit of a common goal. Sometimes
partners form a new jointly owned company. In other instances a firm purchases equity in another. Most
often the relationship is defined by a contract. Many features of strategic alliances are very similar to other
forms of partnering. The differences relate to the greater difficulty of achieving a good partnering
relationship or developing the strategic nature of an alliance. They are harder to do because of the need to
match the expectations of different cultures and business practices.
Strategic Alliance Trends
Generally, two or more companies collaborate to create a new product or a service in a strategic alliance.
Ideally this new product or service will bring a unique value proposition to the market as agreed by the
collaborating parties. The potential of strategic alliances’ strategy is enormous and if implemented correctly
can dramatically improve an organization’s operations and competitiveness (Brucellaria, 1997). According to
a survey conducted by Coopers & Lybrand, 54 percent of firms that formed alliances did so for joint
marketing and promotional purposes (Coopers and Lybrand, 1997). Companies are also forming alliances to
obtain technology, to gain access to specific markets, to reduce financial risk, to reduce political risk and to
achieve or ensure competitive advantage (Wheelen and Hungar, 2000). However, while many organizations
often rush to jump on the bandwagon of strategic alliances, few succeed (Soursac, 1996). The failure rate of
strategic alliances strategy is projected to be as high as 70 percent (Kalmbach and Roussel, 1999), and
hence, an appreciation of the factors that contribute to strategic alliance success and failure is critically
important.
Factors Promoting the Rise of Strategic Alliances
Since the 1980s, strategic alliances have been very popular. Alliances can be a powerful tool, particularly in
today’s world, due to the need to build differential capabilities in more areas than a company has resources
or time to develop. The legendary Jack Welch, who headed GE in the past, echoing this sentiment once said,
“If you think you can go it alone in today’s global economy, you are highly mistaken.” It is becoming more
difficult for organizations to remain self-sufficient in an international business environment that demands
both focus and flexibility. As companies are increasingly feeling the effects of global competition, they are
trying to achieve a sustainable competitive advantage through strategic alliances.
Competitive boundaries are blurring as advances in communication and the trend toward global markets
link formerly disparate products, markets, and geographical regions. Competition is no longer confined to a
single nation’s borders -making all firms vulnerable to threats posed by cooperative strategies. Both, rapid
technological shifts and the need for rapid product innovation, are putting pressure on management to act
faster and smarter with fewer resources. Effectively identifying, protecting, and enhancing one’s core
capabilities is the key challenge of our time. In this environment, successful companies need to select, build,
and deploy the critical capabilities that can come from strategic alliances, which will enable them to gain
competitive advantage, enhance customer value, and drive their markets.
The alliance approach better matches and responds to the uncertainties and complexities of today’s
globalized business environment. These partnerships allow access to skills and resources of other parties in
order to strengthen the organization’s competitive strategies. Alliance partnerships are initiated as effective
strategies to overcome the skill and resource gaps encountered in gaining access to global markets.
Establishing strategic alliance relationships provides access to new markets, accelerates the pace of entry,
encourages the sharing of research and development, manufacturing, and/or marketing costs, broadening
the product line/filling product; and learning new skills. Dowling et al, suggest “the partners pool, exchange,
or integrate specified business resources for mutual gain. Yet, the partners remain separate businesses”. In
today’s fast changing business landscape, strategic alliances enable business to gain competitive advantage
through access to a partner’s resources, including markets, technologies, capital and people. Teaming up
with others adds complementary resources and capabilities, enabling participants to grow and expand more
quickly and efficiently. Especially fast-growing companies rely heavily on alliances to extend their technical
and operational resources. In the process, they save time and boost productivity by not having to develop
their own, from scratch. They are thus freed to concentrate on innovation and their core business.
Many fast-growth technology companies use strategic alliances to benefit from more established channels
of distribution, marketing, or brand reputation of bigger, better known players. However, more-traditional
businesses tend to enter alliances for reasons such as geographic expansion, cost reduction, manufacturing,
and other supply chain synergies. As global markets open up and competition grows, midsize companies
need to be increasingly creative about how and with whom they align themselves to go to the market. All
these factors have hastened and highlighted the need for strategic alliances.
To summarize, few companies have everything they need to succeed in a competitive market place alone.
No matter what they need, there is someone who has it. They can, therefore, either buy what they need or
partner with others. Partnering is frequently quicker and less costly. While avoiding difficult and time-
consuming internal changes, partnering allows a company to:
1. Rapidly move to decisively seize opportunities before they disappear.

2. Respond more quickly to change with greater flexibility.
3. Increase your market share.
4. Gain access to a new market or beat others to that market.
5. Quickly shore up internal weaknesses.
6. Gain a new skill or area of competence.
7. Succeed although the company lacks key resources.
Types of Strategic Alliances
Firms can enter into a number of different types of strategic alliances. These could include comparatively
simple, more “distant” arrangements in which firms work with one another on a short-term or a
contractually defined basis where the two parties effectively do not combine their managers, value chains,
core technologies, or other skill sets. Examples of such simpler alliance vehicles include licensing, cross
marketing deals, limited forms of outsourcing, and loosely configured customer supply arrangements. On
the other hand, companies may seek to partner more closely in their cooperative ventures, combining
managers, technologies, products, processes, and other value-adding assets in varying ways to bring the
companies more closely together. Examples of alliance modes in this league include technology
development pacts, coproduction arrangements, and formal joint ventures in which the partners contribute
a defined amount of capital to form a third party entity. Finally, in even more complex strategic alliance
arrangements, partners can take significant equity stake holdings in one another, thus approximating many
organizational and strategic characteristics of an outright merger or acquisition.
Technology Associates and Alliances, a strategic alliance consulting company, lists the following
types of alliances:
Marketing and sales alliances:

A) joint marketing agreements;
B) value added resellers.
Product and manufacturing alliances:

A) procurement-supplier alliances;
B) joint manufacturing.
Technology and know-how alliances:

A) technology development;
B) university/industry joint research.
Technology Associates and Alliances, suggests that alliances can be hybrids between these different
types. For example, an R&D alliance may be a cross between a product and manufacturing alliance
and a technology and know-how alliance, and a collaborative marketing agreement is a cross
between a marketing and sales alliance and a product and manufacturing alliance. The important
thing to remember is that there are various types of alliances, and they may range from simple
licensing arrangement, ad hoc alliance, joint operations, joint venture, consortia, distribution, and
value-chain partnership alliances to more complex hybrid alliances.
The simplest form of strategic alliance is a contractual arrangement. Contractual based strategic
alliances generally are short-term arrangements that are appropriate when a formal management
structure is not required. While the specific provisions of the contract will depend upon the
business arrangement, the contract should address: (i) the duties and responsibilities of each party;
(ii) confidentiality and noncompetition; (iii) payment terms; (iv) scientific or technical milestones;
(v) ownership of intellectual property; (vi) remedies for breach; and (vii) termination. Examples of
contractual strategic alliances are license agreements, marketing, promotion, and distribution
agreements, development agreements, and service agreements.
The most complex form of strategic alliance is a joint venture. A joint venture involves creating a
separate legal entity (generally a corporation, limited liability company, or partnership) through
which the business of the alliance is conducted. A joint venture may be appropriate if: (i) the
parties intend a long-term alliance; (ii) the alliance will require a significant commitment of
resources by each party; (iii) the alliance will require significant interaction between the parties; (iv)
the alliance will require a separate management structure; or (v) if the business of the alliance may
be subject to unique regulatory issues. In addition, a joint venture will be appropriate if the parties
expect that the alliance ultimately may be able to function as a separate business that could be
sold or taken public.
Historically, information technology and life sciences companies have sought minority equity
investments from strategic commercial partners. This form of strategic alliance has gained
increased popularity in the current economic climate. In many cases, the equity investment will
also be accompanied by a contractual arrangement between the parties such as a license
agreement or a distribution agreement. From the company’s perspective, an equity investment

from a strategic commercial partner may be structured on more favorable terms than those obtained
from venture capitalists, and it may increase the company’s valuation and enhance the company’s ability to
secure future rounds of funding. Venture capitalists and underwriters generally view these types of strategic
alliances as validating an early stage company’s technology and business model. In some cases, they have
even become a condition to an underwriter taking a life science company public. The strategic commercial
partner may desire this form of alliance to gain a competitive advantage through access to new technologies
and to share in the upside of the other party’s business through equity ownership.
The following section will focus on three broad types of strategic alliances: licensing arrangements, joint
ventures, and cross-holding arrangements that include equity stakes and consortia among firms. Each broad
type of strategic alliance is implemented differently and imposes its own set of managerial skills, constraints,
and coordination requirements needed to build competitive advantage.
Licensing Arrangements
In most manufacturing industries, licensing represents a sale of technology or product based knowledge in
exchange for market entry. In service-based firms, licensing is the right to enter a market in exchange for a
fee or royalty. Licensing arrangements have become more pronounced across both categories. In many ways
they represent the least sophisticated and simplest form of strategic alliance. Licensing arrangements are
simple alliances because they allow the participants greater access to either a technology or market in
exchange for royalties or future technology sharing than either partner could do on its own. Within the
pharmaceutical industry, for example, many of the technology sharing arrangements that allow a licensee to
produce and sell products developed by the licensor. The relationship between the companies does not go
beyond this level. Unlike joint ventures or more complex cross-holding/equity stake consortia, licensing
arrangements provide no joint equity ownership in a new entity.
Companies enter into licensing agreements for several reasons. The primary reasons are (1) a need for help
in commercializing a new technology, and (2) global expansion of a brand franchise or marketing image.
Nicholas Piramal India Ltd (NPIL), for instance, has recently entered into a 5-year in licensing agreement with
Genzyme Corp, USA, for synvisc viscose supplementation in the Indian market. Synvisc, which is used for the
treatment of osteoarthritis of the knee, has sales of $250 million in international market. It expects the
market size in India to be about Rs.200 Million. Johnson &Johnson, is expanding involvement in and
commitment to biotechnology through new partnerships, licensing agreements, equity investments and
acquisitions. Through its excellence centres such as Centocor and Ortho Biotech, and its global research,
development and marketing operations to form an integrated enterprise that is well positioned to deliver
biotechnology’s extraordinary promise to patients and physicians around the world.
Joint Ventures
Joint ventures are more complex and formal than licensing arrangements. Unlike licensing, joint ventures
involve partners’ creation of a third entity representing the interests and capital of the two partners. Both
partners contribute capital, distinctive skills, managers, reporting systems, and technologies to the venture
in certain proportions. Joint ventures often entail complex coordination between partners in carrying out
value chain activities. Firms enter into joint ventures for four reasons: (1) seeking vertical integration, (2)
needing to learn a partner’s skills, (3) upgrading and improving skills, and (4) shaping future industry
evolution.
Vertical integration is a critical reason why many firms enter joint ventures. Vertical integration is designed
to help firms enlarge the scope of their operations within a single industry. Yet, for many firms, expanding
their set of activities within the value chain can be an expensive and time-consuming proposition. Joint
ventures can help firms achieve the benefits of vertical integration without saddling them with higher fixed
costs. This benefit is especially appealing when the core technology used in the industry is changing quickly.
Joint ventures can also help firms retain some degree of control over crucial supplies at a time when
investment funds are scarce and cannot be allocated to backward integration or when the company has
difficulty in accessing the raw material. By partnering with the suppliers to form a strategic alliance the firm
can increase the stability of its supplies. The organizations forming the alliance will have a common goal and
be better integrated. This will ensure that they all have a shared interest in making certain that the alliance
is successful, including ensuring the supplies of materials, information, advice or any other necessary input
to the alliance is met in a timely, efficient and consistent manner. A case in point is the Jindal Stainless Steel
Ltd (JSSL), which plans to source raw materials from abroad. The company is planning strategic alliances with
companies in South Africa, South East Asia and Europe for long- term supplies of ferro chrome, chrome ore
and nickel. The whole objective of the alliance is to ensure that supplies are managed efficiently with
resultant improvements in profitability. A strategic alliance can also rationalize supply chains. By selecting
integrated suppliers, the number of links in a supply chain can be significantly reduced.
Joint ventures are quite common in India. In the highly capital-intensive industries such as automobiles,
chemicals, pharmaceuticals and petroleum industries, joint ventures are becoming more widespread as
firms seek to overcome the high fixed costs required for managing ever more scale-intensive production
processes. In all these industries, production is highly committed in nature, which means that it is difficult
for firms on their own to build sufficient scale and profitability in products that often face highly volatile
pricing and deep cyclical downturns when markets collapse.
For instance, Telco (now rechristened as Tata Motors) is the leader in the commercial vehicle segment with
a 54% market share in Light Commercial Vehicle (LCV) and 63% market share in Medium & Heavy
Commercial Vehicle (M&HCV) (2003 figures). It garnered a market share of 21% in the utility vehicle (UV)
segment and a 9% market share in the passenger car industry in a short span of three years. The company is
open to alliances, but is not willing to enter into any alliance without a strong underlying reason. The view of
the top management is that a strategic alliance should bring complementary strengths together. Around
85% of the Indian market consists of small cars and this trend is expected to continue for the next 10-15
years. Tata Indica, which is one of the best and technologically contemporary value propositions available,
caters to this segment. Hence the company is primarily interested in an alliance with a global major who can
offer a better proposition in the small car market than the Indica and who already has a presence in India.
Second, the company is looking for a strategic alliance to enhance their product portfolio in the more
premium or niche segments and to open the overseas markets for them.
Firms often enter into joint ventures to learn another firm’s distinctive skills or capabilities. In many high-
technology industries, many years of development are required before a company possesses the proprietary
technologies and specialized processes needed to compete effectively on its own. These skills may already
be available in a potential partner. A joint venture can help firms learn these new skills without retracing the
steps of innovation at great cost. For example, Voltas plans on leveraging its technology-sharing alliances
with overseas collaborators, and in seeking fresh ones, for serving the domestic market. In the Air
Conditioning and Refrigeration business, Voltas a new generation of clientele, such as multiplexes, shopping
malls, entertainment centres, and establishments in the private telecom industry and hospitality. More than
mere cooling, these clients seek solutions encompassing controlled environments, with clean and pure air,
and energy-efficient systems. The company is well placed to deliver these solutions by leveraging the
competencies of its range of partners – for example, the success of the Vertis brand of room and split air
conditioners is yet another example of the success of alliances. The Vertis brand features advanced
technology from Fedders International Inc. USA, one of the world’s largest manufacturers of air
conditioners, with whom the company has a “manufacturing-only” joint venture. This alliance has resulted
in a brand, which has moved from fifth place to second place in the Indian market in the space of two years.
Joint ventures are instrumental in helping firms with similar skills improve and build upon each other’s
distinctive competences. Even though some of these joint ventures are likely to involve rivals competing
within the same industry, companies may still benefit from close cooperation in developing an underlying
cutting-edge technology that could transform the industry. In anticipation of WTO, MNCs are strengthening
their ranks in India (either setting up new 100% subsidiaries or marketing tie-ups with major domestic
players. Large local players are consolidating through brand acquisitions, co-marketing/ contract
manufacturing tie-ups with MNCs etc) and to counter this threat, Cadilla Healthcare Limited (CHL), for
instance, has formed joint ventures in some of the high growth areas with CHL bringing to table its strength
in manufacturing and marketing and JV partners bringing in the technology. Firms can cooperate in a joint
venture to develop and commercialize new technologies that may significantly influence an industry’s future
direction. The need to maintain industry dynamism and momentum in research is a motivating force that
drives drug companies to engage in joint ventures, even when they compete in existing product lines.
Cross-Holdings, Equity Stakes, and Consortia
The third category of strategic alliance includes some of the more complex forms of alliance arrangements.
These alliances bring together companies more closely than licensing and joint venture mechanism. Broadly
amalgamated together as consortia, these alliances represent highly complex and intricate linkages among
groups of companies. The term consortia is used to focus on two types of complex alliance evolution: (1)
multi-partner alliances designed to share an underlying technology and (2) formal groups of companies that
own large equity stakes in one another. In either case, consortia represent the most sophisticated form of
strategic alliance and involve complex coordination mechanisms that often go beyond the boundaries of
individual firms.
Benefits of Strategic Alliances
In the new economy, strategic alliances enable business to gain competitive advantage through access to a
partner’s resources, including markets, technologies, capital and people. Teaming up with others adds
complementary resources and capabilities, enabling participants to grow and expand more quickly and
efficiently. Strategic alliances also benefit companies by reducing manufacturing costs, and developing and
diffusing new technologies rapidly. Alliances are also used to accelerate product introduction and overcome
legal and trade barriers expeditiously. In this era of rapid technological changes and global markets forming
alliances is often the fastest, most effective method of achieving growth objectives. However, companies
must ensure that the objectives of the alliance are compatible and in tune with their existing businesses so
their expertise is transferable to the alliance.
Many fast-growth technology companies use strategic alliances to benefit from more established channels
of distribution, marketing, or brand reputation of bigger, better known players. However, more-traditional
businesses tend to enter alliances for reasons such as geographic expansion, cost reduction, manufacturing,
and other supply-chain synergies. As global market opens up and competition grows, midsize companies
need to be increasingly creative about how and with whom they align themselves to go to the market.
Firms often enter into alliances based on opportunity rather than linkage with their overall goals. This risk is
greatest when a company has a surplus of cash. In recent years, Mercedes-Benz and Toyota Motor
Corporation have been investing surplus funds into seemingly unrelated businesses, with Benz already
facing difficulties as a result. Especially fast-growing companies rely heavily on alliances to extend their
technical and operational resources. In the process, they save time and boost productivity by not having to
develop their own, from scratch. They are thus freed to concentrate on innovation and their core business.
Entering New Markets
The Coopers & Lybrand study rates growth strategies and entering new markets among the top reasons for
forming strategic alliances (Coopers and Lybrand, 1997). As Ohmae (1992) points out, (companies) simply do
not have the time to establish new markets one-by one. In today’s fast-paced world economy, this is
increasingly true. Therefore, forming an alliance with an existing company already in that marketplace is a
very appealing alternative. Partnering with an international company can make the expansion into
unfamiliar territory a lot easier and less stressful for a company. According to the Coopers & Lybrand (1997)
study, 50 percent of firms involved in alliances market their goods and services internationally versus 30
percent of non-allied participants. For instance, Tata Motors has short listed Brilliance Automotive Holdings
of China to set up a joint venture for producing cars. Tata Motors, which recently acquired the commercial
truck facility of Daewoo Motors in South Korea for Rs.465 crore, is also reported to be scouting for another
joint venture in Northern China in order to have a full-fledged presence in China.
Often a company that has a successful product or service has a desire to introduce it into a new market. Yet
perhaps the company recognizes that it lacks the necessary marketing expertise because it does not fully
understand customer needs, does not know how to promote the product or service effectively, or does not
understand or have access to the proper distribution channels. Rather than painstakingly trying to develop
this expertise internally, the company may identify another organization that possesses those desired
marketing skills. Then, by capitalizing on the product development skills of one company and the marketing
skills of the other, the resulting alliance can serve the market quickly and effectively. Alliances may be
particularly helpful when entering a foreign market for the first time because of the extensive cultural
differences that may abound. They may also be effective domestically when entering regional or ethnic
markets. Asian Paints, the largest paint-maker in India, acquired a strategic stake in Singapore-based Berger
International in 2002. Asian Paints now appears to be trying to gain control over the Berger brand in some
key regional markets like Pakistan. Berger International, which is now a subsidiary of Asian Paints, has
entered into a strategic alliance with Karachi-based Berger Paints Pakistan, which is owned by the Mahmood
family. Berger International will provide technical consultancy and strategic advice to Berger Pakistan, which
is the second largest paints company in Pakistan. Berger Pakistan will also have the right to import products
from Asian Paints.
Reducing Manufacturing Costs
Strategic alliances may allow companies to pool capital or existing facilities to gain economies of scale or
increase the use of facilities, thereby reducing manufacturing costs. In the increasingly competitive
European automobile market, when the Japanese are seeking to gain market share as they did in the U.S.
during the 1980s, many European companies have formed joint ventures to reduce manufacturing costs.
Ford and Volkswagen are jointly planning to make four-wheel-drive vehicles in Portugal, and Nissan and
Ford intent to build a plant in Spain to produce vans. These companies will benefit from cost sharing and will
reduce expenses by building and operating facilities in relatively low-cost countries, at least by West
European standards. Companies may also reduce costs through strategic alliances with suppliers or
customer reaching agreements to supply products or services for longer periods and working together, meet
customers’ needs, each partner may apply its expertise, and benefits may be shared in the form of lower
costs or new products.
Developing and Diffusing Technology
Alliances may also be used to build jointly on the technical expertise of two or more companies in
developing products technologically beyond the capability of the companies acting independently. Not all
companies can provide the technology that they need to effectively compete in their markets on their own.
Therefore, they are teaming up with other companies who do have the resources to provide the technology
or who can pool their resources so that together they can provide the needed technology. Both sides
receive benefit from the partnership. Technology transfer is not only viewed as being significant to the
success of a strategic alliance, according to Hsieh (1997): “host countries now demand more in the way of
technology transfer”. As evidence of this growing trend, Hsieh cites China as a prime example.
For example, Tata Consultancy Services (TCS) and ANSYS Inc, a global innovator of simulation software and
product development technology, have entered into an alliance that will help their clients accelerate
product development dramatically and simultaneously enhance the quality and reliability of their designs
through integrated digital prototyping. The industries that will benefit include automotive, power, heavy
machinery, consumer products and electronics. Customers will derive increased productivity in the design
and production processes by 70-90 percent. By pooling resources to develop software products built upon
the expertise of each company, TCS and ANSYS Inc intend to create a new market and reap the associated
benefits.
Reduce Financial Risk and Share Costs of Research and Development
Some companies may find that the financial risk that is involved in pursuing a new product or production
method is too great for a single company to undertake. In such cases, two or more companies come
together and agree to spread the risk among all of them. One example of this is found in strategic alliance
between the Rs.235-crore Elder Pharma, which has 25 international partners for strategic alliances, has
entered into a tie-up with Reliance Life Sciences. The company is focusing on dermatology and the tie-up
with Reliance is to obtain aloe vera extracts for cosmetics. Elder has launched a dedicated skincare division
with products under El-Dermis brand and plans to launch a number of over the counter products in the
skincare segment.
Achieve or Ensure Competitive Advantage
Alliances are particularly alluring to small businesses because they provide the tools businesses need to be
competitive. For many small companies the only way they can stay competitive and even survive in today’s
technologically advanced, ever-changing business world is to form an alliance with another company. Small
companies can realize the mutual benefits they can derive from strategic alliances in areas such as
marketing, distribution, production, research and development, and outsourcing. By forming alliances with
other companies, small businesses are able to accomplish bigger projects more quickly and profitably, than
if they tried to do it on their own. According to Booz, Allen and Hamilton the world has entered a new age -
an age of collaboration - and that only through allying can companies obtain the capabilities and resources
necessary to win in the changing global marketplace. Self-reliance is an option few companies will be able to
afford (Booz, Allen and Hamilton, 1997).
Costs and Risks of Strategic Alliances
Any firm opting for strategic alliance incurs certain costs as well as gains benefits, compared to a firm that
goes on its own. Strategic alliances have their risks, particularly if the parties are not financial equals. These
risks include the loss of operational control and confidentiality of proprietary information and technology.
Some alliances can involve a clash of corporate cultures or the perceived diminution of independence. In
addition, the parties may deprive themselves of future business opportunities with competitors of their
strategic partner.
The parties must carefully consider a number of factors in the decision of whether to enter into a strategic
alliance, and how best to govern the relationship once the alliance is formed. In addition to the parties’
business objectives, the parties should consider a variety of accounting, tax, antitrust and intellectual
property issues when structuring a strategic alliance. A properly structured strategic alliance can bring many
new opportunities and enhance the parties’ growth potential. In addition, it can provide an alternative
source of capital during difficult economic times. The various costs/risks of entering into alliances include:
Cultural and Language Barriers
Cultural clash is probably one of the biggest problems that corporations in alliances face today. These
cultural problems consist of language, egos, chauvinism, and different attitudes to business can all make the
going rough. The first thing that can cause problems is the language barrier that they might face. It is
important for the companies that are working together to be able to communicate and understand each
other well or they are doomed before they even start. The importance of communication becomes even
more paramount when operating across the participants to a strategic alliance. Language barriers at times
can be a source for delays and frustrations. However, English is becoming a common international language.
Communication problems may also arise because job definitions are much more specific in Western
companies than in Asian companies.
Cultural differences often create problems in making strategic alliances work - especially between Asian and
Western companies. For example, Japanese companies put employee interests ahead of the shareholders’
interests. Western companies, on the other hand, are managed to benefit their shareholders. Such a
difference can cause serious conflict over investment and dividend policies. The decision process in Asian
companies often takes longer as compared to those in their Western counterparts. Patience rather than
pushing for a decision becomes a helpful strategy. Not only do the cultural differences exist among
international firms seeking alliances, but also corporate cultures may be different among firms from the
same country. In the final analysis, flexibility and management learning are the greatest tools in overcoming
this barrier.
Lack of Trust
Risk sharing is the primary bonding tool in a partnership. A sense of commitment must be generated
throughout the partnership. In many alliance cases one company will point the failure finger at the
partnering company. Shifting the blame does not solve the problem, but increases the tension between the
partnering companies and often leads to alliance ruin Building trust is the most important and yet most
difficult aspect of a successful alliance. Only people can trust each other, not the company. Therefore,
alliances need to be formed to enhance trust between individuals. The companies must form the three
forms of trust, which include responsibility, equality, and reliability. Many alliances have failed due to the
lack of trust causing unsolved problems, lack of understanding, and despondent relationships.
Loss of Autonomy
The firm gets committed not only to a goal of its own but that of its alliance partner. This involves cost in
terms of goal displacement. The firm also loses the autonomy and hence its ability to unilaterally control the
outcomes. All the partners in an alliance have control over the performance of the assigned tasks. No
partner, hence, can unilaterally control the outcome of an alliance activity. Similarly, all the partners in an
alliance have to depend on each other. As against these, the firm benefits in terms of gain of influence over
domain and improvement in competitive positioning. This is because the firm’s strengths are supplemented
by the strengths of its alliance partner as well as by the synergy additionally created. This improves the value
chain of the firm. The firm may also use its improved competitive position to penetrate new markets in the
same country. The increase in capacities may also support the firm’s presence in new markets. The firm may
also gain access to the foreign markets by choosing an alliance partner based in or having operations in such
countries.
The firm may not be able to use its own time-tested technology, if the alliance partner does not subscribe to
it. It may have to use the dominant partner’s technology, which could be different, or the combination of its
own technology and its partner’s. This is likely to have its impact on the stability of the firm as it gets
exposed to the uncertainty of using unfamiliar technology. On the other hand, the firm develops its ability to
manage uncertainty under real or perceived protective support of its experienced alliance partner. This
helps the firm solve invisible and complex problems with the help of increased confidence and or support
from the alliance partner. The firm may be able to specialize in its field if its alliance partner contributes to
fill the missing gaps in the value chain of the firm. The firm may also diversify into other unrelated fields with
the support of its alliance partner. Thus, the firm will be in a better position to ward off its competitors, who
are likely to get immobilized at least for the time being as they would have to revise their strategies keeping
in view the changed competitive positioning of the firm. This situation could be used by the firm to push its
advantage further.
Lack of Clear Goals and Objectives
Many strategic alliances are formed for the wrong reasons. This will surely lead to disaster in the future.
Many companies enter into alliances to combat industry competitors. Corporate management feels this type
of action will deter competitors from focusing on their company. On the contrary, this action will raise flags
that problems exist within the joining companies. The alliance may put the companies in the spotlight
causing more competition. Alliances are also formed to correct internal company problems. Once again,
management feels that an increase in numbers signifies a quick fix. In this case, the company is probably
already doomed and is just taking another along for the ride. Many strategic alliances, although entered into
for all the right reasons, do not work. Dissimilar objectives, inability to share risks, and lack of trust lead to
an early alliance demise. Cooperation on all issues is the key to a successful alliance. Many managers enter
into an alliance without properly researching the steps necessary to ensure the basic principles of
cooperation.
Lack of Coordination between Management Teams
Action taken by subordinates that are not congruent with top-level management can prove particularly
disruptive, especially in instances where companies remain competitors in spite of their strategic alliance. If
it were to happen that one company would go off on its own and do its own marketing and sell its own
product while in alliance with another company it would for sure be grounds for the two to break up, and
they would most likely end up in a legal battle which could take years to solve if it were settled at all.
Differences in Management Styles
Failure to understand and adapt to “new style” of management is a barrier to success in an alliance. Changes
are required in management style to run successful alliances. The adaptation of a new style of management
requires a change in corporate culture, which must be initiated and nurtured from the top. Companies need
to devote more resources to understanding the alliance management process, from contract negotiations to
establishing effective communications. They need to develop managers with a new set of competences,
including foreign languages, and other communicating and team-building skills. Other problems that can
occur between companies in trade alliances are different attitudes among the companies; one company
may deliver its good or service behind schedule, or do a bad job producing their goods or service, which may
lead to distrust between the two companies. This could upset the partner and may sometimes lead to a
takeover.
Lack of Commitment
The possibility that partner firms lack ironclad commitment to the alliance could undermine the prospects of
an alliance. Partner firms tend to be interested more in pursuing their self-interest than the common
interest of the alliance. Such opportunistic behavior include shirking, appropriating the partner’s resources,
distorting information, harboring hidden agendas, and delivering unsatisfactory products and services.
Because these activities seriously jeopardize the viability of an alliance, lack of commitment to the alliance is
an important component of the overall risk in strategic alliances. Commitment also gets diluted because the
individuals who negotiated or implemented the initial alliance agreement may have changed due to
promotions, transfers, retirement, or terminations. Continuity of total commitment for the alliance is
needed at all levels in the organization without which the alliance will fail to reach its full potential.
There is a probability that an alliance may fail even when partner firms commit themselves fully to the
alliance. The sources of such a risk includes environmental factors, such as government policy changes, war,
and economic recession; market factors, such as fierce competition and demand fluctuations; and internal
factors, such as a lack of competence in critical areas, or sheer bad luck.
Creating a Potential Competitor
One partner, for example, might be using the alliance to test a market and prepare the launch of a wholly
owned subsidiary. By declining to cooperate with others in the area of its core competency, a company can
reduce the likelihood of creating a competitor that would threaten its main area of business; likewise, a
company can insist on contractual clauses that constrain partners from competing against it in certain
products or geographic regions.
Problems of Coordination and Loss of Agility
Alliance firms, however, are likely to suffer from delays in solutions due to problems of coordination and an
alert competitor may exploit this weakness in-built in any alliance to its great advantage. The competitor
could use a combination of strategies which exploit the weakness of all the alliance partners timing it in such
a way that the weakness of one alliance partner is exploited quickly before another alliance partner comes
to its rescue to defend the alliance. This is how a competitor may induce the synergy to work in reverse in
such strategic alliances. This would improve the competitor’s competitive position manifold. On the other
hand, the firm under strategic alliance may benefit from the rapidity of the response to the changing market
demands when its new alliance partner readily supplies technologies. The delay in the use of new
technology is reduced which benefits the firm in creating a competitive edge over its competitors.
Potential for Conflicts
The understanding reached among the alliance partners is crystallized into an agreement of alliance.
However, no agreement can capture all the details of an understanding. The complexity increases when a
situation arises which is unforeseen or not provided for in the agreement. These may create conflict over
goals, domain, and methods to be followed in the alliance activity among the alliance partners and might
result in setbacks to the alliance. On the other hand, the group synergy may be beneficial to the alliance
partners in such a way that they support each other mutually and amicably resolve whatever differences
may arise. This leads to a harmonious working relationship intra and inter alliance firms, which in turn
further increases the synergic benefits and the cycle goes on. The competitor, deprived of the benefits of
group synergy, would lose his competitiveness and, in turn, cohesiveness and harmony and the cycle goes
on.
Difficulty in Managing Alliances
Strategic alliance is a relatively new concept in management. It is also more difficult to manage, and hence
may lead to failure of strategic alliances formed even by excellent firms. A failure would mean loss of time,
money, material, information, reputation, status, technological superiority, competitive position, and
financial position. The benefits of success are in terms of gain of resources like time, money, information,
and raw material. The firm also gains legitimacy and status and benefits through utilization of unused plant
capacity. Above all, the firm has opportunities to learn, to adapt, develop competencies, or jointly develop
new products as well as share the cost of product development and associated risks.
Other Issues
Experience is the best teacher in alliances but it comes at a very heavy cost. This blunts the inquisitiveness of
any firm to learn through the failure of an experiment. Strategic alliance provides some security to an
inexperienced firm that even if the experiment goes haywire it can look forward to rescue by the other
experienced alliance partner. When the assigned tasks are to be carried out by the firm’s partner in alliance,
the firm still benefits by the firm being a witness to the process of implementation of such tasks. Perhaps,
the most important benefit strategic alliance offers to a firm is the opportunities to learn.
Often, a firm aiming to expand its operations abroad benefits by going in for an alliance as it helps gain
acceptance from the government of the foreign country. This is so because the government of the foreign
country may desire involvement and development of the local firms. On the other hand, the firm may suffer
restrictions from governmental regulations if the government feels that such strategic alliances would be
detrimental to furtherance of the public interest. However, it would still be desirable to have strategic
alliance with a foreign firm because it would be knowledgeable about the complexity of the local conditions
as well as be more sensitive to the changing environmental conditions and so it may raise timely alarm for
the firm to respond appropriately.
Other reasons for under performance and failure of strategic alliances include a breakdown in trust, a
change in strategy, the champions moved on, the value did not materialize, the cultures did not mesh, and
the systems were not integrated. Another main reason strategic alliances fail to meet expectations is the
failure to grasp and articulate their strategic intent, which includes the failure to investigate alternatives to
an alliance. Lack of recognition of the close interplay between the overall strategy of the company and the
role of an alliance in that strategy can also lead to failure of alliance.
Factors Contributing to Successful Strategic Alliances
Senior Management Commitment
The commitment of the senior management of all companies involved in a strategic alliance is a key factor in
the alliance’s ultimate success. For alliances to be truly strategic they must have a significant impact on the
companies’ overall strategic plans; and must therefore be formulated, implemented, managed, and
monitored with the full commitment of senior management. Without senior management’s commitment,
alliances will not receive the resources they need. If senior management is not committed to alliances,
adequate managerial resources, in addition to capital, production, marketing and labour resources, may not
be assigned in order for alliances to accomplish their objectives. Senior management’s commitment to
alliances is important not only to ensure the alliances receive the necessary resources, but also to convince
others throughout the organization of the importance of the alliance. By demonstrating a commitment to
alliance and a strong leadership role, management can minimize this viewpoint. The biggest hurdle senior
management has to overcome in committing itself to strategic alliances is management’s own fear of a loss
of control. But good partnerships, like good marriages are not built on the basis of ownership or control. It
takes effort and commitment and enthusiasm from both sides if either is to realize the benefits.
Similarity of Management Philosophies
Successful partnerships are forged between those companies whose management philosophies, strategies
and ideas are most similar to their own. Indeed, differences in corporate partners’ personalities can often
lead to tragic results. The philosophical differences of unsuccessful alliances are, in part due to cultural
differences, so there is significant potential for cross-border alliances to include such widespread differences
in managerial philosophies as well. Therefore, in order to ensure the best chance of success, companies
should either seek partners who do have similar management philosophies, or draft an alliance agreement
that adequately addresses the differences, and provides for their resolution.
The best strategy to grow via alliances may be to move slowly, and start with simple alliances and the move
towards more complex ones as alliance experience and talent is acquired. Managers of strategic alliances
must create and maintain an environment of trust. This is perhaps easier said than done. It requires the
surrender of at least some managerial control, and it also takes time to build a high degree of trust in a
business partnership.
Frequent Performance Feedback
In order for strategic alliances to succeed, their performance must be continually assessed and evaluated
against the short and long-term goals and objectives for the alliance. The results of these reviews must be
summarized in briefing reports, which should be distributed to management and also keyed into a strategic
alliance tracking data base.
In order for the feedback monitoring system to be successful, it is important that the goals of the alliance be
well defined and measurable. In addition, benchmarks for alliance performance should be set to assist
management in evaluating alliance results. In general, an alliance is successful if both partners achieve their
objectives. Strategic alliances are very tough to measure and evaluate, but can be done with the help of
understanding the form used and understanding the goals of the companies involved.
Clearly Defined, Shared Goals and Objectives
Some alliances are highly integrated with one or more of the parent organizations and share such resources
as manufacturing facilities, management staff, and support functions like payroll, purchasing, and research
and development while, others may be autonomous and independent from their parent organizations.
Whatever the relationship between the partners, it is extremely important that alliances are aligned with
the company strategy. Top management must articulate a clear link between where it expects the industry’s
future profit pools will be, how to capture a larger share of those, and where, if at all, alliances fit in that
plan.
Thorough Planning
Planning, commitment, and agreement are essential to the success of any relationship. The overall strategy
for the alliance must be mutually developed. Key managing individuals and areas of focus for the alliance
must be identified. The first step is to gain a clear understanding of the vision and values of each company.
The next step is to gain agreement on the market conditions in the region of the world that the joint venture
will be operating in. The next step is to clearly state the issues, strengths, and concerns of each organization.
These steps allow the participants to bridge preliminary gaps of understanding at the onset of the process.
During this initial fact finding meetings the partners can learn a great deal about their potential partner.
The next step is to identify areas of common ground. Here, the commonality in the strategic direction
among the partners can be identified. Next the partners need to define the internal and external value of
the alliance. They will also need to agree on the strategic opportunities to mutually pursue. The final step in
this planning process is to create a tactical plan to address the strategic targets. Thorough planning is one of
the key ingredients to the successful formation of strategic alliances.
Clearly Understood Roles
In forming strategic alliances, the partners must have clearly understood roles. It is crucial that the question
of control is resolved before the alliance is formed. A strategic alliance by definition falls short of a merger or
a full partnership. For this reason, control is not dependent on majority ownership. The degree to which
each partner is in control of operations and can offer influential input for decision making must be
determined before the alliance is formed. Some firms view strategic alliances as a second-best option that
they would prefer to do without. This attitude towards an alliance is problematic at best. Because of
uncertainty and discomfort, the feeling is that these alliances must be closely managed and controlled so as
not to get out of hand. This is a counterproductive attitude that often leads to an unsatisfactory outcome for
at least one partner. If the partners in an alliance decide upfront exactly what each partner’s role is in the
newly formed business, then there is no misunderstanding or uncertainty as to how decisions will be made.
Global Vision
In order to succeed in an international strategic alliance, managers of firms must incorporate a global
strategic vision into their enterprise. The most effective alliances are not forged simply as a means to
complete one deal. Smart companies spin a web of relationships that open a series of potential projects, add
value to them, and improve risk management. In order to compete in the growing international market, it
will be increasingly necessary for firms to cooperate on a global level and continually build international
relationships, which will facilitate the process of global competition.
Partner Selection
Partnership selection is perhaps the most important step in creating a successful alliance. A successful
alliance requires the joining of two competent firms, seeking a similar goal and both intent on its success. A
strategic alliance must be structured so that it is the intent of both parties that it will actually succeed -
through the need for speed, adaptation, and facilitated evolution. The foundation of a successful strategic
alliance is laid during the formation process. This process includes partner selection and the initial
agreement between parties. Selecting an appropriate partner and deciding the agenda of the alliance are
the most difficult process in the formation of an alliance. Yet done correctly, they help ensure a higher
quality, longer lasting relationship. Having selected a partner, the alliance should be structured so that the
firm’s risks of giving too much away to the partner are reduced to an acceptable level. The safeguards are
blocking off critical technology, establishing contractual safeguards, agreeing to swap valuable skills and
technologies, and seeking credible commitments.
Communication between Partners: Maintaining Relationships
Communication is an essential attribute for the alliance to be successful. Without effective communication
between partners, the alliance will inevitably dissolve as a result of doubt and mistrust. Ohmae best sums up
the necessity for good communications in building and maintaining a strong strategic alliance relationship.
An alliance is a lot like a marriage. There may be no formal contract. There is no buying and selling of equity.
There are few, if any, rigidly binding provisions. It is a loose evolving kind of relationship. Sure, there are
guidelines and expectations, but no one expects a precise, measured return on the initial commitment. Both
partners bring to an alliance a faith that they will be stronger together than they would be separately. Both
believe that each has unique skills and functional abilities the other likes. And both have to work diligently
over time to make the union successful.
Planning for a Successful Alliance
Alliance building is now fundamental to the way large companies conduct business—from technology and
product development to manufacturing and marketing. The world has never been as interdependent as it is
now, and all trends point to cooperation as a fundamental growing force in business. Businesses are moving
from the classic “closed” system which depends on its internal capabilities and resources to an “open”
system in which reliance on external capabilities and the development of complex relationships with
external entities are becoming commonplace (Steele, 1989).
Strategic Alliance Model
The essence of a strategic alliance is the quest for mutual benefit - the belief that by working together to
address a market need the combined offering will be more potent / valuable / successful than the
contributors could deliver by themselves or through a lesser partnering relationship. It is commonplace for
the boundaries between the operations of strategic alliance partners to become blurred as activities are
integrated into a focused delivery capability. All effective partnering relationships have a heavy reliance on
trust – for a strategic alliance to succeed this trust is absolutely fundamental.
It is important to identify the steps and variables involved in the workings of a typical strategic alliance.
Barriers to the success of the alliance should also be identified. Scanning the environment for opportunities
is the first step in developing strategic alliances. It includes the firm’s analysis of its own strengths,
weaknesses, opportunities and threats (SWOT). Clear understanding of strengths and opportunities allows
the firm to set the short-term and long-term goals and objectives, while the analysis of weaknesses and
threats provides direction to look for alliances. These may include competitors, suppliers, or other firms,
which could provide the needed strengths. These firms constitute the group with alliance potential. The firm
should perform similar analyses (SWOT) for the potential alliance partner. This not only complements the
investigation as to the compatibility of the organization; but, more importantly, enables a firm to assess the
capacity, both financial and physical, to form an integral and harmonious member of the alliance. The
following checklist identifies the key issues to consider when contemplating entering into a strategic
alliance:
1) Choosing the partner carefully – As ever vital to any partnering relationship – absolutely critical if two
companies decide to go deeper into a Strategic Alliance and integrate each other’s business process.
Synergy among partners is the major reason for and the advantage of the alliance. The partnership is
efficient, effective and, as a result, much more competitive compared to each alliance partner performing
the similar tasks individually.
2) Clarity of purpose – Both parties need to understand what they are expecting to get out of the
relationship, how they will measure and recognize success which may not be conventional profit and
revenue measures. Goal compatibility is essential among alliance partners. If they are striving for the same
ends then they are more likely to achieve their objectives. Without such compatibility, the alliance partners
may pull in different directions. All relationships require sharing. The foundation of strategic alliance is
sharing benefits according to the agreed expectations, which may differ. A key component of each alliance
that needs to be agreed up front is the expectations of all the partners in the alliance. They need to be
identified and agreed so that any gaps do not become blockers to progress in the future. By forming a
strategic alliance a firm seeks to change the nature and the scope of what it does. By upsizing it may to be
entering a more intensive and competitive market where the competition will be more intense. The firm
needs to be aware of this likely situation and plan accordingly. This will influence its choice of partnering
organization. In addition, if the partnering organizations share common attitudes then this is an additional
factor likely to lead to successful partnering. If the alliance partners think in a similar way then they are
more likely to agree on how to proceed and disputes are less likely.
3) Select a project – product or market area that could benefit from the increased strength and flexibility
provided by Strategic Alliances. This should normally relate to an existing operation although it could be a
means of breaking new ground. Select suitable partnering organizations as set out in detail in this guide.
Partnering arrangements frequently focus on innovative approaches to products and process reflecting the
strategic nature of the relationship as the parties strives to ensure that they are able to fully meet the
objectives of the partnering agreement. They can then overcome any potential sources of difficulty in
meeting those objectives.
4) Understand each other’s business processes and realizing the full benefits from a strategic alliance
normally require the integration of business processes in order to optimize the operations and eliminate
duplication – another area for some tough decisions. Clear understanding of what value each partner will
bring to the alliance is the foundation on which trust and relationships are built for future success.
5) An alliance plan needs to be formulated, such that it becomes a living document. It needs to embody
both the revenue and the non-revenue (e.g. market activities, relationship building and levels of satisfaction)
aspects of the alliance, with a set of supporting actions identified against members of all the partners
involved. The arrangements can often be less formal than in a more normal contractual situation. This is
deliberate, so that the partnering organizations can have complete flexibility and to avoid the situations of
confrontation and claims arising. Flexibility in establishing and operating any partnering arrangement is of
paramount importance. Again a spirit of mutual understanding and co-operation that allows for the
accommodation of variations in the operation of the agreement will enhance the benefits derived and the
whole outcome of the partnering arrangement.
6) Balancing contributions of partners in the areas of product development, manufacturing, and marketing
are necessary so that no one partner dominates the alliance. Absence of such a balance may result in the
takeover of the weaker partner by the dominant firm or a short-term relationship, usually resulting in
breaking the alliance without achieving its full potential. A strategic alliance requires an equal standing in
the relationship between the respective partners even though the strategic alliance partners may be of
different sizes. This is not a buyer-seller relationship. Understand each other’s strengths – combining each
other’s strengths and building on these is a key aspect of gaining the maximum benefit from a strategic
alliance. This often requires tough decisions to be made regarding roles and responsibilities. Careful
consideration must also be given to the most appropriate formal structure for the strategic alliance to
flourish.
7) Complete trust between the partnering organizations is an essential ingredient. This enables the
resolution of confrontations and disputes, which can arise. The partnering organizations need to be able to
rely implicitly on each other to act in full accord with the aims and objectives of the partnering arrangement.
They need to act in a manner that will support the totality of the agreement, not their individual interests at
the expense of the overall project. Above all they need to be able to discuss issues as they arise in an open
and positive way to prevent minor differences becoming major crises. The risks and rewards of a partnering
arrangement should be shared and allocated in the most appropriate way, in accordance with the key
business drivers of each particular instance.
8) Participation at the top – All partnering relationships requires the commitment from the top to be
successful. An essential ingredient is the commitment and support of senior management of all the alliance
partners. Without that commitment alliances can get into difficulty or fail. High-level support is needed at
the outset to ensure that potential problems that can arise can be adequately dealt with. The commitments
needed to make the alliance successful needs to permeate throughout the participating companies for it to
succeed. Before a firm hopes to operate the alliance successfully it needs to gain full support from within its
own organization at every level. In other words, the management must sell the idea internally. This is
especially the case when contemplating a strategic alliance where the effects on the existing business will be
more marked and unpredictable. This is going to be more important and challenging if it is the first time the
firm has ever undertaken a partnering arrangement. The management must be prepared to seek external as
well as internal support and guidance to build up the case for approval. This must include an assessment of
which markets and products will be suitable for such a new venture and why the firm has selected a
particular partner or partners.
9) Freedom to innovate – Often the motivation to establish a strategic alliance is to stimulate innovative
thinking in the joint activity. Getting the correct balance between necessary regulation and control and
creative freedom is a key consideration.
10) Have an exit strategy – Given that a strategic alliance is a very deep relationship, then exit is likely to be
a complex and potentially costly affair. Nevertheless, it needs considering at the time of entry.
Recognizing these issues, taking expert advice where appropriate, and encouraging the chosen strategic
alliance partner to likewise ought to help secure a firm foundation on which to build the strategic alliance. A
key feature of all successful partnering arrangements is the ability to refine and develop the processes
involved continually so that they can be improved, enhanced and applied in new or enlarged situations.
They are essential so that progress can be monitored, difficulties addressed and the partnering arrangement
is made to work. Again the more usual requirements of national partnering apply. Examples of this are
agreeing the style of the relationship, tangible objectives and continuous improvement as well as an exit
strategy. Also important are such features as agreed key measures, regular joint review and audit, extension
of the program and developing new partners for the future.
Corporate Social Responsibility
Corporate social responsibility (CSR, also called corporate conscience, corporate citizenship or sustainable
responsible business/ Responsible Business) is a form of corporate self-regulation integrated into a business
model. CSR policy functions as a self-regulatory mechanism whereby a business monitors and ensures its
active compliance with the spirit of the law, ethical standards and international norms. In some models, a
firm's implementation of CSR goes beyond compliance and engages in "actions that appear to further some
social good, beyond the interests of the firm and that which is required by law." CSR aims to embrace
responsibility for corporate actions and to encourage a positive impact on the environment
and stakeholders including consumers, employees, investors, communities, and others.
The term "corporate social responsibility" became popular in the 1960s and has remained a term used
indiscriminately by many to cover legal and moral responsibility more narrowly construed.
Proponents argue that corporations increase long term profits by operating with a CSR perspective, while
critics argue that CSR distracts from business' economic role. A 2000 study compared
existing econometric studies of the relationship between social and financial performance, concluding that
the contradictory results of previous studies reporting positive, negative, and neutral financial impact, were
due to flawed empirical analysis and claimed when the study is properly specified, CSR has a neutral impact
on financial outcomes.
Critic questioned the "lofty" and sometimes "unrealistic expectations" in CSR, or, that CSR is
merely window-dressing, or an attempt to pre-empt the role of governments as a watchdog over
powerful multinational corporations.
Political sociologists became interested in CSR in the context of theories of globalization, neoliberalism and
late capitalism. Some sociologists viewed CSR as a form of capitalist legitimacy and in particular point out
that what began as a social movement against uninhibited corporate power was transformed by
corporations into a 'business model' and a 'risk management' device, often with questionable results CSR is
titled to aid an organization's mission as well as a guide to what the company stands for to its
consumers. Business ethics is the part of applied ethics that examines ethical principles and moral or ethical
problems that can arise in a business environment. ISO 26000 is the recognized international standard for
CSR. Public sector organizations (the United Nations for example) adhere to the triple bottom line (TBL). It is
widely accepted that CSR adheres to similar principles, but with no formal act of legislation.
The notion is now extended beyond purely commercial corporations, e.g. to universities.
This is an area of increasing importance in every market and supply chain. Factors addressed here include
cultural differences, differences in perceptions and beliefs and the effect of a fragile ecology. In a domestic
strategic alliance, as opposed to an international situation, it is expected that there would be a shared
culture; where such issues as say child labour are probably not an issue at all, because they do not arise.
However, there could be just as fundamental differences between organizations on what at first might not
seem such important issues. Different organizations have different attitudes and criteria that they apply to
such issues as waste disposal. One may have a very strict and environmentally friendly approach to the
disposal of waste products, especially hazardous ones; while the alliance partner may not. In such a case, in
an alliance, one could become tarnished by the alliance partner’s lesser concern with such issues. Such
differences need to be ascertained, their treatment explored and a common agreed policy developed. This is
a matter that needs to be addressed at the outset and embodied in any alliance plan. There will be other
issues such as differences in the way human resources are treated, which will similarly need addressing.
They will be more or less important as circumstances and attitudes dictate. Even more sensitive can be the
effects of large-scale operations, particularly mineral extraction or even more the oil industry on not only
fragile or vulnerable ecologies but also local populations or economies.
Corporate social responsibility can extend to activities not necessarily seen as being mainstream or core to
your business. This could extend to supporting programs that, while they may not directly or immediately
affect a company’s current business, could raise its profile in an area that could be of future benefit or even
bring goodwill for future projects.
Summary:
 From software to steel, aerospace to apparel, the pace of strategic alliances worldwide is
accelerating.
 A strategic alliance is an agreement between firms to do business together in ways that go beyond
normal company-to-company dealings, but fall short of a merger or a full partnership.
 Strategic alliances can be as simple as two companies sharing their technological and/or marketing
resources. In contrast, they can be highly complex, involving several companies, located in different
countries.
 Strategic alliances are becoming more and more prominent in the global economy. The two major
routes to diversification are mergers and acquisitions and strategic partnering. One plus one makes
three: this equation is the special alchemy of a merger or acquisition.
 Strategic alliances enable business to gain competitive advantage through access to a partner’s
resources, including markets, technologies, capital and people.
 Teaming up with others adds complementary resources and capabilities, enabling participants to
grow and expand more quickly and efficiently. Strategic alliances also benefit companies by reducing
manufacturing costs, and developing and diffusing new technologies rapidly.
 Any firm opting for strategic alliance incurs certain costs and risks compared to a firm going alone.
These risks include the loss of operational control and confidentiality of proprietary information and
technology.
 In addition, the parties may deprive themselves of future business opportunities with competitors of
their strategic partner. Alliances also raise the specter of potential conflicts, loss of autonomy,
difficulties in coordination and management, mismatch of cultures, etc.
1. What do you understand by the term ‘Core Competence’? Explain its importance.' (2016 –
QP404) (5)
Answer: Core competency is a unique skill or technology that creates distinct customer value. For instance,
core competency of Federal express (Fed Ex) is logistics management. The organizational unique
capabilities are mainly personified in the collective knowledge of people as well as the organizational
system that influences the way the employees interact. As an organization grows, develops and adjusts to
the new environment, so do its core competencies also adjust and change. Thus, core competencies are
flexible and developing with time. They do not remain rigid and fixed. The organization can make
maximum utilization of the given resources and relate them to new opportunities thrown by the
environment.
Resources and capabilities are the building blocks upon which an organization create and execute value-
adding strategy so that an organization can earn reasonable returns and achieve strategic competitiveness.
Core Competence Decision

Resources are inputs to a firm in the production process. These can be human, financial, technological,
physical or organizational. The more unique, valuable and firm specialized the resources are, the more
possibly the firm will have core competency. Resources should be used to build on the strengths and remove
the firm’s weaknesses. Capabilities refer to organizational skills at integrating it’s team of resources so that
they can be used more efficiently and effectively.
Organizational capabilities are generally a result of organizational system, processes and control
mechanisms. These are intangible in nature. It might be that a firm has unique and valuable resources, but if
it lacks the capability to utilize those resources productively and effectively, then the firm cannot create core
competency. The organizational strategies may develop new resources and capabilities or it might make
stronger the existing resources and capabilities, hence building the core competencies of the organization.
Core competencies help an organization to distinguish its products from its rivals as well as to reduce its
costs than its competitors and thereby attain a competitive advantage. It helps in creating customer value.
Also, core competencies help in creating and developing new goods and services. Core competencies decide
the future of the organization. These decide the features and structure of global competitive organization.
Core competencies give way to innovations. Using core competencies, new technologies can be developed.
They ensure delivery of quality products and services to the clients.
In their key 1990 paper "The Core Competence of the Corporation," C.K.Prahlad and Gary Hamel argue that
"Core Competences" are some of the most important sources of uniqueness: these are the things that a
company can do uniquely well, and that no-one else can copy quickly enough to affect competition.
Prahlad and Hamel used examples of slow-growing and now-forgotten mega corporations that failed to
recognize and capitalize on their strengths. They compared them with star performers of the 1980s (such as
NEC, Canon and Honda), which had a very clear idea of what they were good at, and which grew very fast.
Because these companies were focused on their core competences, and continually worked to build and
reinforce them, their products were more advanced than those of their competitors, and customers were
prepared to pay more for them. And as they switched effort away from areas where they were weak, and
further focused on areas of strength, their products built up more and more of a market lead.
However, Hamel and Prahlad give three tests to see whether they are true core competences:
1. Relevance – The competence must give your customer something that strongly influences him or her to
choose your product or service. If it does not, then it has no effect on your competitive position and is
not a core competence.
2. Difficulty of imitation – The core competence should be difficult to imitate. This allows you to provide
products that are better than those of your competition. And because you're continually working to
improve these skills, means that you can sustain its competitive position.
3. Breadth of application – It should be something that opens up a good number of potential markets. If it
only opens up a few small, niche markets, then success in these markets will not be enough to sustain
significant growth.
For example, you might consider strong industry knowledge and expertise to be a core competence in
serving your industry. However, if your competitors have equivalent expertise, then this is not a core
competence. All it does is make it more difficult for new competitors to enter the market. More than this,
it's unlikely to help you much in moving into new markets, which will have established experts already.
7.
Business Policy and Strategic Management Turnaround
Turnaround
Learning Objective:
 To understand the concept of retrenchment strategy;

 To understand the need for retrenchment strategy;
 To understand the concept of turnaround strategy; and
 To discuss other variants of retrenchment strategy.
Introduction
Many organizations decline due to falling sales, declining profits and more importantly declining demand.
Demand in an industry declines for a variety of reasons (Harrigan& Porter, 1983). New substitutes emerge
(computers with word processing capabilities replacing manual electronic typewriters) often with higher
quality and lower cost (PVC pipes for GI pipes, Ball pens for fountain pens) or buyers shrink or simply
disappear (jute industries). Changing customer needs, lifestyles and tastes also lead to declining demand
(vanaspati oil, cigarettes, agarbattis, etc.). Also cost of inputs may increase and reduce demand for products
(Petrol cars). In such situations, top managers must find a strategy that will stop the organization’s decline
and put it back on a successful path.
Organizational decay is a slow, long-term deterioration of the firm’s operations caused by its inability to
change and adapt to its external environment. It is a function of environmental adversity (external
opportunities and threats) and internal adversity (organizational negative aspects). HMT Watches Division, a
market leader in mechanical watches, is a case of an organization, which could not adapt itself to the rapid
technological changes. The company was not quick enough to latch on the growing digital watches market
and its premier position in the process. Another example of this decay is evident in the period before LTV, a
US Steel producer, declared bankruptcy. LTV’s financial difficulties included reduced steel orders as a result
of an increase in the level of steel imports (to 20% per year), a decrease in domestic automobile sales (LTV’s
sales of the flat rolled steel products to GM Corporation represented approximately 14% of its 1986 sales),
and high price competition from national and local producers, especially in the bar steel products.
Also, profit had deteriorated as a result of the high costs of raw materials and the low productivity of labour.
These conditions reduced the availability of trade credit and long-term financing.
Environmental adversity may be viewed as an overall measure of the firm’s difficulty in coping with the
environment. The higher the level of adversity encountered by the organization, the more difficult it is to
achieve its goals. This results in organizational decay (decline). Low adversity produces more appropriate
adjustments and motivates the firm to pursue a defensible niche. Severe adversity generally produces mixed
results ranging from adaptation to complete misalignment with the business environment. Many firms faced
with severe adversity make short term or stop gap arrangements at the expense of the long-term
arrangements, which only exacerbate the already worsening situation. Proactive organizations, which
exercise strategic options, before reaching a very high level of adversity, can significantly reduce threats
from the environment.
Impact of Decline/decay on the organizations:

Companies on the decline or facing bankruptcy may experience several negative effects discussed below.
Psychological and Behavioural Reactions to Decline
When employees and management recognize the onset of organizational decay and scarce resources, they
experience low morale (because few needs are met) and may withdraw their confidence in or blame top
management. Other negative responses to decay include: a) conservatism, rejection of new alternatives,
and risk aversion; b) competition and infighting for acquiring scarce resources; and c) employee turnover
(the most competent leaders tend to leave first, causing leadership anaemia).
The Stigma of Closing the Company

Retrenchment and more so liquidating a firm is a discrediting label that causes key constituents (buyers and
suppliers) to react negatively toward the firm, including: a) severing business ties if possible; b) reducing the
quality of engagements (e.g. bad supplies); c) bargaining for more favorable terms than in earlier
relationships; and d) assaulting the credibility of the company and its leaders.
These significant and potentially devastating negative reactions continue through the retrenchment and
restructuring process. Stigma often creates negative perceptions and potentially spoils the image, self-
esteem, and reputation of the organization and its management leading to a) organizational death; b)
damaged managerial careers; and c) an accelerated chance of managerial succession.
Factors Contributing to Rapid Decline or Decay
Organizational Slack
Slack is uncommitted or committed (but underutilized) resources that are at the disposal of the
organization. The existence of uncommitted slack (especially in the form of cash and liquid assets) is
considered a necessary strategic factor for the survival of the declining organization because during decline,
there are not enough sales to generate sufficient cash. On the other hand, slack may be a handicap during
growth period and it may represent a high opportunity cost causing a drag on performance. While
organizations in decline require high discretion and flexibility in using slack, in more stable or growing
markets, high levels of slack (especially in the form of cash) may reduce performance. Hence, critical to the
choice and the timing of retrenchment strategies and the likelihood of survival, is the amount of slack within
the organization. Unfortunately, this situation does not exist in many organizations facing decline or decay.
In particular, while exercising retrenchment strategy as a strategic option, the existence of critical slack, will
give the organization more flexibility in dealing with internal and external adversity.
Leadership
The lack of effective leadership has been identified as one of the most significant causes of business failure.
Leadership vacuum may exist due to managerial incompetence or managerial succession. As mentioned
earlier, this problem is more acute in declining organizations since qualified managers seek alternate
employment before they become associated with any potential stigma. A critical success factor for
companies facing high adversity and unpredictability created by competition is the existence of leaders who
can create an agenda for change and build an effective implementation environment. The leaders should
also be able to alter the organizational philosophy, defining success as lower growth and smaller size and
persuade the various constituencies to support the retrenchment choice.
It may be a good idea to recruit influential leaders prior to implementing a retrenchment strategy because in
the retrenchment process and more specifically in turnaround process, powerful leaders with an access to
elite groups and other networks can; a) provide more flexibility with creditors, stockholders, and the
government, b) influence creditors to support the management’s right to continue in control, and c) provide
additional capital more easily and on better terms. Highly educated, well connected, competent, and
trustworthy leaders have better chances of successful reorganization.
Managerial Control
In successful organizations, managerial depth provides better coordination and control. However,
organizations in decline often choose to cut back their managerial staff especially at the middle levels of
management. Creditors may also force cutbacks in staff or reduction in management compensation. Excess
reduction in managerial depth may eliminate critical functions and decrease chances of survival.
Organizations may have the option, however, to replace personnel involved with coordination and control
functions by applying appropriate information technology. In order to cope with high complexity in the
external and internal environment, firms may find it useful to increase their usage of information and
communication technology.
An organization can stop its decay and increase its survival by adopting an appropriate retrenchment
strategy at the appropriate time. The following propositions provide guidelines for the timing of
retrenchment strategies. The choice of a specific strategy is a function of the level of environmental
adversity and the level of organizational slack.
Condition of Moderate Adversity
Firms with low slack should consider an early retrenchment strategy when faced with moderate adversity
because alternatives are limited. In the context of strategic planning, retrenchment may include the shrink
selectively strategy: discharging some debts while restructuring others, reducing stigma, and shifting the
organizational philosophy to define success as accepting lower growth and size. It is important to trigger the
actions and implement a retrenchment strategy while talented top management is still in the organization
and still feels positive (moderate adversity) about their business and its future.
When slack is moderate, the organization should focus on profitable or promising businesses in which it has
distinctive skills and experience. This strategy variant may take the shape of a combination of an “extracting
cash strategy” and a “shrink selectively strategy”. Firms with high slack can withstand moderate levels of
adversity. High slack enables the organization to maintain its strategic direction through the use of
uncommitted or under-utilized (committed) assets.
Condition of High/Severe Adversity
Small firms are more likely to stop operations apparently due to lack of slack resources, thus increasing the
probability for failure. Large firms have greater physical and financial capacities to hold excess resources and
are expected to have more slack than small firms. Therefore, small firms or firms with low levels of slack,
faced with high/severe adversity, may select to sell off assets outside of its strategic focus (i.e. SSS) or to
accept a leverage buyout (divest). When high slack exists, augmenting the organization’s leadership and
managerial resources would be beneficial. The coordination and control provided by managerial depth could
take the form of a computer based reporting and budgeting system linked with the strategic planning
system.
Retrenchment Strategies
Retrenchment is a short-run renewal strategy designed to overcome organizational weaknesses that are
contributing to deteriorating performance. It is meant to replenish and revitalize the organizational
resources and capabilities so that the organization can regain its competitiveness. Retrenchment may be
thought as a minor surgery to correct a problem. Managers often try a minimal treatment first—cost cutting
or a small layoff—hoping that nothing more painful will be needed to turn the firm around. When
performance measures reveal a more serious situation, more drastic action must be taken to restore
performance.
Retrenchment strategies call for two primary actions: cost cutting and restructuring. One or both of these
tools will be employed more extensively in turnaround situations, because the problems are deeper there
than in retrenchment situations. A cost cutting program should be preceded by careful thought and analysis.
Rarely is it wise to use a simplistic “across-the-board” cost cutting program. Some departments or projects
may need additional funding, while others need modest cuts, and still others need drastic cuts or need to be
eliminated altogether. If cost cutting is a part of the strategy implementation, then the plan of
implementation should clearly specify how it will be applied across the organization and why is it being
proposed.
Retrenchment strategy alternatives include shrinking selectively, extracting cash for investment in other
businesses, and divestment. While these strategies result in generating cash, they differ in terms of their
intentions. Divestment of the whole business is an “end game” strategy and it may be done via selling or
liquidation of business. Under the strategy of extraction of cash for investment in other business, cash is
generated from the troubled business mainly via budget and cost contraction. In both strategies, the
intention of management is to quit the troubled business.
In the shrinking selectively strategy (SSS), cash is generated via downsizing (contraction of size or divesting
some operations. The strategy of shrinking selectively involves retrieving the value of investments in some
parts of the market while reinvesting in others because in some niches’ demand will continue to be grow
while in others the demand shrivels. The objective is to capture the desirable niches. A firm, which chooses
the shrink selectively strategy, should have some internal competitive advantages, which it hopes to
preserve. Thus, it may prefer to retain some part of its former businesses by shrinking rather than divesting,
because of the possible advantages it had built up through the years.
Shrinking selectively as a repositioning strategy (i.e., matching market niche with distinctive competence)
often results in renewed strength. For example, the TATA group continued concentrating on its various
business including steel, automobile manufacturing, etc while selling Tomco, which did not share a
synergistic relationship with its current portfolio of businesses. Similarly, the LTV steel company’s decision
(after filing in 1986) to concentrate on “flat rolled” steel products, while divesting other steel operations,
reflects the intent to maintain a leadership position in production of high-quality, value-added steel for
critical engineering application.
In essence, restructuring involves an organization refocusing on its primary business. During the 1970s,
many firms diversified into businesses they knew little about. Management teams thought this
conglomerate diversification would spread their firms’ risks. If the fortunes of one business declined, the
others in its business portfolio would protect earnings. Quite often, companies struggled to compete well in
the business lines they knew little about. Many of the mergers of the 1980s occurred because these firms
restructured their businesses by trying to sell off these businesses and refocus their efforts in their original
lines.
Variants of Retrenchment Strategy:
The three major variants of retrenchment strategy are turnaround strategy, survival strategy and liquidation
strategy.
Turnaround Strategy
A turnaround situation exists when a firm encounters multiple years of declining financial performance
subsequent to a period of prosperity (Bibeault, 1982; Hambrick & Schecter, 1983; Schendel et al., 1976;
Zammuto & Cameron, 1985). Turnaround situations are caused by combinations of external and internal
factors (Finkin, 1985; Heany, 1985; Schendel et al., 1976) and may be the result of years of gradual
slowdown or months of precipitous financial decline. The strategic causes of performance downturns
include increased competition, raw material shortages, and decreased profit margins, while operating
problems include strikes and labour problems, excess plant capacity and depressed price levels. The
immediacy of the resulting threat to company survival posed by the turnaround situation is known as
situation severity (Altman, 1983; Bibeault, 1982; Hofer, 1980). Low levels of severity are indicated by
declines in sales or income margins, while extremely high severity would be signaled by imminent
bankruptcy. The recognition of a relationship between cause and response is imperative for a turnaround
process and hence, the importance of properly assessing the cause of the turnaround situation so that it
could be the focus of the recovery response is very important.
The Turnaround Process Turnaround
The Turnaround Process begins with a depiction of external and internal factors as causes of a firm’s
performance downturn. If these factors continue to detrimentally impact the firm, its financial health is
threatened. Unchecked financial decline places the firm in a turnaround situation. A turnaround situation
represents absolute and relative-to-industry declining performance of a sufficient magnitude to warrant
explicit turnaround actions. A turnaround is typically accomplished through a two stage process. The initial
stage is focused on the primary objectives of survival and achievement of a positive cash flow. The means to
achieve this objective involves an emergency plan to halt the firm’s financial haemorrhage and a
stabilization plan to streamline and improve core operations. In other words, it involves the classic
retrenchment activities: liquidation, divestment, product elimination, and downsizing the workforce.
Retrenchment strategies are also characterized by the revenue generating, product/market refocusing or
cost cutting and asset reduction activities. While cost cutting, asset reduction and product/market
refocusing are easy to visualize, the idea of revenue-generating is best captured by a strategy that is
characterized by increased capacity utilization, and increased employee productivity.
Retrenchment is an integral component of turnaround strategy. The critical role of retrenchment in

providing a stable base from which to launch a recovery phase of the turnaround process is well established.
Many firms that have achieved a reversal of financial or competitive decline inevitably refer to the presence
of retrenchment as a precursor or prelude to the implementation of a successful recovery strategy (Bibeault,
1982). The question remains, however, as to why retrenchment is so frequently an appropriate first step in
an overall turnaround process. One possible explanation is that economic decline diminishes the firm’s
resource slack. Cost retrenchment helps to preserve the residual resources. Resource flexibility provides
additional slack and is achieved through asset redeployment Resource flexibility must be substituted for
slack that has been largely depleted, or when the heightened requirements of strategic redirection place
additional demands on the firm for resources. These heightened requirements stem from concurrent
demands on the firm to overcome the destructive momentum of the established strategy and to cover the
high startup costs of implementing the new strategic initiatives. Consequently, retrenchment may be
necessary to stabilize the situation by securing or providing slack regardless of the subsequent recovery
strategy that is chosen.
The second phase involves a return-to-growth or recovery stage (Bibeault, 1982; Goodman, 1982) and the
turnaround process shifts away from retrenchment and move towards growth and development and growth
in market share. The means employed for achieving these objectives are acquisitions, new products, new
markets, and increased market penetration. The importance of the second stage in the turnaround situation
is underscored by the fact that primary causes of the turnaround situation have been associated with this
phase of the turnaround process- the recovery response (Hofer, 1980). For firms that declined primarily as a
result of external problems, turnaround has most often been achieved through strategies based on an
revenue driven reconfiguration of business assets. For firms that declined primarily as a result of internal
problems, turnaround has been most frequently achieved through recovery responses that were heavily
weighted toward efficiency maintenance strategies. Recovery is said to have been achieved when economic
measures indicate that the firm has regained its pre-downturn levels of performance.
Between these two stages, a clear strategy is needed for a firm. As the financial decline stops, the firm must
decide whether it will pursue recovery in its retrenchment reduced form through a scaled-back version of its
preexisting strategy, or whether it will shift to a return-to-growth stage. It is at this point that the ultimate
direction of the turnaround strategy becomes clear. Essentially, the firm must choose either to continue to
pursue retrenchment as its dominant strategy or to couple the retrenchment stage with a new recovery
strategy that emphasizes growth. The degree and duration of the retrenchment phase should be based on
the firm’s financial health.
Turnaround Situations: Severity and Speed of Strategic Response
The nature, extent and speed of the appropriate strategic response depends primarily on two dimensions of
the turnaround situation: severity and causality. Severity of the turnaround situation is a measure of the
firm’s financial health; it gauges the magnitude of the threat to company survival. Since the immediate
concern to the firm is the extent to which the decline is a threat to its short-term survival, severity is the
governing factor in estimating the speed with which the retrenchment response will be formulated and
activated. Of course, performance that declines relative to that of competitors, but not absolutely, may
necessitate almost no retrenchment. Rather, a reconsideration of strategy with a probable reconfiguration
of assets would usually be deemed appropriate.
When severity is low, a firm has some financial cushion. Stability may be achieved through cost
retrenchment alone. When the turnaround situation severity is high, a firm must immediately stabilize the
decline or bankruptcy is imminent. Cost reductions must be supplemented with more drastic asset reduction
measures. Assets targeted for divestiture are those determined to be underproductive. In contrast, more
productive resources are protected from cuts or reconfigured as critical elements of the future core business
plan of the company, i.e., the intended recovery response.
In addition, Robbins and Pearce found that the severity of the turnaround situation was the best indicator of
the type and extent of retrenchment that was needed, although an immediate cost cutting response to
financial decline (absolute and relative to the industry) was consistently found to be of value. The
researchers also presented a model of turnaround based on evidence that business firm turnaround
characteristically involved a multi-stage process in which retrenchment could serve as either a grand or
operating strategy. Hofer (1980) conceptualized a link between severity of the downturn and the degree of
cost and asset reductions that a firm should include in its recovery response. He referred to cost and asset
reduction activities as operating turnaround strategies. Operating strategies designed for cost reduction
were recommended for firms in less severe turnaround situations. Drastic cost reductions coupled with
asset reductions were recommended for firms in more severe turnaround situations i.e., more severe
problems require more drastic solutions. Usually, asset reduction is more drastic than cost reduction.
As the importance of external environmental factors assume importance relative to the internal factors,
effective and innovative activities are more appropriate in the recovery phase of the turnaround process. If
the reverse is true, efficiency maintenance activities are more appropriate. In either case, the recovery
phase of the turnaround process is likely to be more successful in accomplishing turnaround when it is
preceded by proactively structured retrenchment which results in the achievement of near-term financial
stabilization. Innovative turnaround strategies involve doing things differently whereas efficiency
turnaround strategies entail doing the same things on a smaller or more efficient scale. Revenue generating
through product reintroduction, increased advertising and selling efforts, and lower prices represent
modifications in existing strategy and can, therefore, be classified as innovative turnaround strategies. In
other words, innovative turnaround strategies involve product or market based activities while efficiency
strategies focus on the production and management systems within the firm.
O’Neill (1986) investigated the relationship of contextual factors to the effectiveness of four primary
turnaround strategies: management (new head executive, new definition of business, new top management
team, morale building among employees), cutback (cost cutting, financial and expense controls, replacing
losing subsidiaries), growth (new product promotion methods, entering new product areas, acquisitions,
add markets), and restructuring (change in organizational structure, new manufacturing methods). His
model predicted a negative relationship between growth strategies and turnaround success where there
were strong competitive pressures. Where firms were in weak market positions, success was found for
cutback and restructuring strategies. For firms competing in mature or declining industries, efficiency or
operating recovery strategies offer the best prospects for successful turnaround. Retrenchment (cost cutting
and asset reducing) are sufficient under certain circumstances to reestablish the long term viability of the
firm.
Survival Strategy
When the company is on the verge of extinction, it can follow several routes for renewing the fortunes of
the company. These are discussed in the following sections.
Divestment
An organization divests when it sells a business unit to another firm that will continue to operate it.
Threatened with bankruptcy between 1979 and 1982, Chrysler sold its U.S. Army tank division to General
Dynamics, its AirTemp air conditioning unit to Fedders, and its European distribution units to
Peugeot/Citroen. The purpose was to focus only on the U.S. auto market- its main market. In our country,
the TATA group has, in some form or the other, been realigning its portfolio since the early 1990s. But in the
past few years it had done this in a more structured manner. The divestment of Tomco and Tata Steel’s
cement plant was a conscious decision. It was Tata Steel’s decision to concentrate on steel and get out of
the cement business. As for Tomco, the company had reached a point where it required immediate
attention, not only in financial terms but in terms of management as well. The group felt that it did not have
the requisite managerial skills in the specific area where Tomco operated and hence decided to hive it off.
Spin-Off
In a spin-off, a firm sets up a business unit as a separate business through a distribution of stock or a cash
deal. This is one way to allow a new management team to try to do better with a business unit that is a poor
or mediocre performer.For instance, Indian Rayon and Industries Ltd (IRIL), an Aditya Birla group enterprise,
has decided to spin-off its insulators business under Jaya Shree Insulator Division, in favour of a new
company - Vikram Insulators Private Ltd (VIPL). The net assets of Rs 92.98 crore of the insulators division
were transferred in favour of VIPL and a 50:50 joint venture with the Japanese insulators giant - NGK
Insulators Ltd - was forged. The joint venture with NGK Insulators Ltd was proposed in order to upgrade the
quality of the existing insulators and to develop new and more technically advanced insulators.
In consideration of transfer of the insulators business, VIPL would allot to IRIL 1.25 crore equity shares of Rs
10 each at par and debentures of (rupee equivalent) $ 25 million. On completion of the demerger, NGK
would subscribe to 1.25 crore equity shares of Rs 10 each of VIPL for cash at a premium. This would result in
equal shareholding for both IRIL and NGK and equal board representation in VIPL.With increased and
complex demands of the power transmission system, the quality and technical requirements of insulators
have become more stringent and rigid. The existing manufacturers of insulators in the country, including
IRIL, did not have the technical capability of manufacturing insulators of such high quality and specification
and hence the need for this new arrangement.
Restructuring the Business Operations
The company tries to survive by restructuring its management team, financial reengineering or overall
business reengineering. Business reengineering involves throwing aside all old business processes and
starting from scratch to design more efficient processes. This may cut costs and assist a turnaround
situation. This is much easier to visualize in a manufacturing process, where each step of assembly is
examined for improvement or elimination. It would be foolish to find more efficient ways to perform
processes that should be abandoned and hence, reengineering is strongly suggested in such cases.
Downsizing is a euphemism for a layoff. As the case of Kirloskar Pneumatic Company suggests, it is a good
way to cut costs quickly. But unless downsizing is tied to a rational strategy, problems can crop up. Cutting
staff without changing the amount and type of work done simply means that the remaining employees must
do more work. This will result in cost reduction, but product quality and customer service may suffer. On the
other hand, if the firm does not down size, its performance deteriorates. Hence any downsizing plan
recommended should fit logically with the strategy proposed.
Liquidation Strategy
Liquidation is the final resort for a declining company. This is the ultimate stage in the process of renewing
company. Sometimes a business unit or a whole company becomes so weak that the owners cannot find an
interested buyer. A simple shutdown will prevent owners from throwing good money after bad once it is
clear that there is no future for the business. In such a situation, liquidation is the best option. A case in
point is the liquidation of loss-making Bharat Starch, a B M Thapar group company, following the sale of its
starch and citric acid divisions to English India Clays and Bilt Chemicals, respectively. This was done as a part
of financial restructuring to relieve the company of its outstanding liabilities. As part of the deal, the two
buyers would actually take over the liabilities of Bharat Starch thereby reducing a major part of the debt
burden of the company. The Thapar family is the largest shareholder in the company with a 45 per cent
stake, followed by UK-based Tate & Lyle, which has a 40 per cent stake. The rest is divided between financial
institutions and the public. For Bilt Chemicals, the takeover of the citric acid plant in Gujarat was a perfect fit
since the company was planning to go in for expansions in the segment.
Bankruptcy is a last resort when the business fails financially. The court will liquidate its assets. The proceeds
will be used to pay off the firm’s outstanding debts. Some companies file for bankruptcy instead of
liquidating. Under this option, the firm reorganizes its operations while being protected from its creditors. If
the firm can emerge from bankruptcy, it pays off its creditors as best as it can.
Summary:
 Many organizations decline due to falling sales, declining profits and more importantly declining
demand. In such situations, top managers must find a strategy that will stop the organization’s
decline and put it back on a successful path.
 Retrenchment strategies normally followed by companies during their decline stage. Retrenchment
is a short-run renewal strategy designed to overcome organizational weaknesses that are
contributing to deteriorating performance.
 It is meant to replenish and revitalize the organizational resources and capabilities so that the
organization can regain its competitiveness.
 Retrenchment strategies call for two primary actions: cost cutting and restructuring. Retrenchment
strategy alternatives include shrinking selectively, extracting cash for investment in other
businesses, and divestment.
 The three major variants of retrenchment strategy are turnaround strategy, survival strategy and
liquidation strategy. A turnaround situation represents absolute and relative-to-industry declining
performance of a sufficient magnitude to warrant explicit turnaround actions.
 A turnaround is typically accomplished through a two stage process. The initial stage is focused on
the primary objectives of survival and achievement of a positive cash flow and the second phase
involves a return-to-growth or recovery stage where the turnaround process shifts away from
retrenchment and moves toward growth and development and growth in market share.
 When the company is on the verge of extinction, it can follow several routes for renewing the
fortunes of the company and survive. An organization divests when it sells a business unit to another
firm that will continue to operate it. This is called a divestment strategy.
 Spin-off is another version of survival strategy. In a spin-off, a firm sets up a business unit as a
separate business through a distribution of stock or a cash deal. This is one way to allow a new
management team to try to do better with a business unit that is a poor or mediocre performer.
 Sometimes a company tries to survive by restructuring its management team, financial
reengineering or overall business reengineering and downsizing its operations. Liquidation is the
final resort for a declining company. This is the ultimate stage in the process of renewing a company.
 Sometimes a business unit or the whole company becomes so weak that the owners cannot find an
interested buyer. A simple shutdown will prevent owners from throwing good money after bad once
it is clear that there is no future for the business. In such a situation, liquidation is the best option.
1. Explain the terms: Divestiture and Spin-off. (2014 – QP206) (5)
Answer: Divestiture: In finance and economics, divestment or divestiture is the reduction of some kind of
asset for financial, ethical, or political objectives or sale of an existing business by a firm. A divestment is the
opposite of an investment.
Selling of, or otherwise disposal of, a firm's assets to achieve a desired objective, such as greater liquidity or
reduced debt burden. In accounting, divestiture transactions are recorded as a one-time, non-recurring gain
or loss.
Divestitures require meticulous strategic planning to translate strategy into execution in order to maximize
shareholders’ return and the overall value of your remaining business portfolio.
Spin off: A spinoff is the creation of an independent company through the sale or distribution of new shares
of an existing business or division of a parent company. A spinoff is a type of divestiture. Businesses wishing
to streamline their operations often sell less productive or unrelated subsidiary businesses as spinoffs. For
example, a company might spin off one of its mature business units that is experiencing little or no growth
so it can focus on a product or service with higher growth prospects. The spun-off companies are expected
to be worth more as independent entities than as parts of a larger business.
BREAKING DOWN 'Spinoff'
Spinoffs are a common occurrence; there are typically about 50 per year in the United States. You may be
familiar with Expedia’s spinoff of TripAdvisor in 2011, United Online’s spinoff of FTD companies in 2013 or
Sears Holding Corporation’s spinoff of Sears Canada in 2012, to name just a few examples.
A corporation creates a spinoff by distributing 100% of its ownership interest in that business unit as a stock
dividend to existing shareholders. It can also offer its existing shareholders a discount to exchange their
shares in the parent for shares of the spinoff. For example, an investor could exchange $100 of the parent’s
stock for $110 of the spinoff’s stock. Spinoffs tend to increase returns for shareholders because the newly
independent companies can better focus on their specific products or services. Both the parent and the
spinoff tend to perform better as a result of the spinoff transaction, with the spinoff being the greater
performer.
The downside of spinoffs is that their share prices can be more volatile and can tend to underperform in
weak markets and outperform in strong markets. They can also experience high selling activity; shareholders
of the parent may not want the shares of the spinoff they received because it may not fit their investment
criteria. Share price may dip in the short term because of this selling activity, even if the spinoff’s long-term
prospects are positive.
Business Policy and Strategic Management Structural Dimensions
Structural Dimensions
Learning Objective:
 To understand the importance of matching the structure & needs of strategy;

 To understand the importance of strategy to the structure of the organization;
 To understand the benefits of strategy; and
 To understand the limitations of different structural designs.
Introduction
Among several other things, successful execution/implementation of strategy depends on the

appropriateness of the internal organization which to a large extent is reflected in the structure. Structure
represents the network of relationships within an organization over a fairly long period of time. The concept
of structure is important because there are alternative forms of structural designs which an organization can
use. A certain organizational form may be more suitable for dealing with certain situation than others. For
instance, a functional centralized form may be more suitable for a specialty manufacturing firm but
unsuitable for a firm operating in a highly complex environment. Once a structure is established (or gets
established), it is not easy to change it, for, it reflects the philosophy, prejudices and ambitions of
management or owners and changing it may be perceived by them as threatening.
Strategic Change
It is important for the organizations to find out the extent to which the change can be implemented. Each
organization has an independent working; therefore, the strategies formulated for these organizations are
also different. Therefore, there can be different levels of strategic change depending on the nature of
strategy. The following table shows different levels of strategic change.
Strategic Change Industry Organization Products Market Appeal

Stable Strategy Same Same Same Same
Routine Strategy Same Same Same New
Limited Strategy Same Same New New
Radical Strategy Same New New New
Organizational Redirection New New New New
Table: Levels of Strategic Change
While implementing a strategy, the whole process involves a number of people, tasks, business units and
products to move from a stable strategy to organizational redirection. This is not an easy job as moving to
organizational redirection means that organization is entering an entirely new industry. This requires lot of
efforts and implementation process is quite complex. Therefore, it becomes important for management to
adapt to the changing times and manage the strategic change.
Matching Organization Structure to Strategy
An important question before the top management in a firm is: how to match the structure to the needs of
the strategy? A company, depending upon its size and objectives, may be pursuing several strategies
simultaneously. There are no hard and fast rules to determine what kind of structure would be useful for
which type of strategy. Each firm has its own history behind it and its managers have their own value
systems and philosophies. The structure, therefore, is the consequences of these and several other
variables. Moreover, each strategy rests on a set of key success factors or critical tasks. It is therefore
desirable to design the organizational structure around the key success factors or critical tasks which are
implied in the firm’s strategy. This requires not only complete clarity on the key success factors (or critical
tasks), but also requires making the units connected with the critical tasks or functions the main
organizational building blocks. Further, the top management has to determine the degree of authority that
has to be delegated to each unit, bearing in mind the benefits and costs of centralization vs.
decentralization. It has to decide how the coordination among different units of the organization would be
brought about.
Strategy—Critical Activities
From the point of view of strategies, there are some activities which are critical to the success of those
strategies while a large number of activities are of routine nature. The routine activities may be either
maintenance or support type of activities e.g., handling pay rolls, accounting, complying with regulations,
managing cash flows, controlling inventories and safe keeping of stores, training of manpower, public
relations, market research etc. However, there are some critical tasks and functions which must be done
exceedingly well for the strategy to be successful. For example, tight cost control is essential for a firm
pursuing the strategy of low-cost leadership. This is particularly true if the margins are low and price cutting
is widely used as a competitive weapon. For a firm which has chalked out ‘differentiation’ as its strategy,
distinctiveness or sophistication in the design of its products is necessary. This needs emphasis on quality
and excellence in workmanship. Thus, the activities that are critical to the strategy and competitive
requirements may differ from firm to firm. Two alternative questions should help to identify strategy—
critical activities: (i) what functions have to be performed exceedingly well for the strategy to succeed? or (ii)
what are the areas where less than satisfactory performance would seriously endanger the success of
strategy?After the critical tasks or functions for a particular strategy have been identified, the next step is to
group the various critical activities, along with routine and support activities associated with the critical
activities, into organizational units or blocks. This would require a close look into the relationships that
prevail within the organization. The flow of material through the production process, types of customers
served, distribution channels used, sequence of operations to be performed, geographic locations are some
of the bases for scrutinizing the relationships.
Degree of Authority (or decentralization)
After the grouping of activities has been done and units have been constituted, the next question to tackle
with is the degree of decision-making authority that has to be delegated in the managers of various units.
Where the firm is engaged in several businesses, two alternative approaches can be followed. One is to
centralize the strategic decision-making authority at the corporate level and delegate only operating
decisions to the unit managers. The other is to substantially decentralize the strategic decisions to the unit
managers, with the corporate staff providing necessary support to them. The corporate office in the latter
case may limit its role to certain kinds of strategic decisions only. What should be the degree of authority
given to the unit managers or how much autonomy should be given to them is essentially a question of
managerial judgement and would depend upon a number of factors. The merits and demerits of
decentralization in each situation must be properly weighed, after taking into consideration the principal
decision the business unit managers make and how the corporate management perceives the importance of
the various units in the overall strategy of the organization. In what way the authority is to be distributed
across various units, some general observations can be made. Firstly, those activities and organizational
units which play a key role in strategy execution should not be made subordinate to routine and non-key
activities. Secondly, revenue or result producing activities should not be made subordinate to support
activities or staff functions. Thirdly, authority for decision making should be delegated to managers who are
closest to the scene of action. Fourthly, the corporate office should hold authority over operating decisions
to the minimum.
Providing for Coordination
Coordination among several units of the organization can be accomplished in several ways. The principal
way is to position the various activities in the vertical hierarchy of authority. Managers higher up in the
hierarchy generally have broader authority over several organizational units and this enables them to have
more clout to coordinate, integrate or arrange for the coordination of the units under their supervision. So
far as business units are concerned, general managers are the central points in coordination because of their
position of authority over the whole unit. Apart from positioning organizational units along vertical scale of
managerial authority, a general manager can also achieve coordination of strategic efforts through informal
meetings, special task forces, standing committees, and six monthly or quarterly strategic planning,
budgeting and review meetings. Further, while formulating the strategic plan itself, a general manager can
solicit the cooperation/association of other general managers in the planning process and this would
provide for inbuilt co-ordination bridges right from the very beginning.
Determinants of Organization Structure
What determines the organizational structure is a controversial question. Several hypotheses have been
advanced. Some of the well-known propositions relate to: size, technology, environment, and complexity.
The research evidence is not conclusive on any of these propositions or determinants of structure which
together constitute what has come to be known as the ‘imperative school of thought’. It was left to John
Child (Organizational Structure, Environment and Performance: The Role of Strategic Choice, Sociology,
1972: Vol. VI) who provided the missing link between the contextual factors (viz. size, technology,
environment) and the structure. The missing link was the manager, his values, aspirations and orientations
as shown in the following figure.
Contextual Factors Management Organization

(The Missing Link)
Environment
Managerial Strategic
Structure
Technology Thinking, Values,
Aspirations and
Orientations
Size
Figure: Determinants of Organization Structure
Strategy & Structure Proposition
Whether strategy precedes structure or structure proceeds strategy is again debatable. There are arguments
for and against the two positions. Research findings are conflicting. As a matter of fact, strategy and
structure are mutually interdependent.
In most of the cases it is found that strategy and structure are interactive. Suppose a company decides to
pursue “differentiation” (based on quality improvement/new product development) through intensive R &D
efforts as its competitive strategy, this may involve the creation of a new or substantial revamping of
existing R & D department. This would mean enlargement of the present organizational structure. If the
quality control manager is made to report to the production manager, a conflict of interests may ensue and
the thrust of the new strategy may be lost. The quality control manager may therefore be made to report to
the chief operating manager. This would also imply change in the organization structure. This was a simple
example where structure follows strategy. However, the opposite is also possible. And this would be the
case when strategy has to take into account the prevailing structure. Let us take the example of a shoe chain
store which believes in aggressive price competition as its strategy for market penetration. If the company
has a centralized organization structure where the prices are to be determined by corporate headquarters,
the managers of the local chain stores have only to implement the new price list received from the
headquarters (i.e., change the price tags). On the other hand if the structure is decentralized with authority
for fixing or altering price vested in the stores’ managers, the strategy for price competition would be quite
different.
Strategy however should not become a slave of the structure i.e., it should not be constrained by the
structure. The implementation of a new strategy must envisage the necessary changes or modifications in
the structure or organizational relationships. Since the landmark research study by Alfred D. Chandler
(Strategy and Structure, MIT Press, Cambridge Mass, 1962) several authors have veered round the view that
organization structure follows the strategy of the enterprise. It has been suggested that the organization
structure should be so designed that it matches to the particular needs of the strategy. Chandler found that
changes in an organization’s strategy bring about new administrative problems which in turn require a new
or refashioned structure if the new strategy is to be successfully implemented. His survey of seventy large
industrial firms, supported by in-depth study of four large corporations (General Motors, Dupont, Standard
Oil, Sears Roebuck) revealed that structure tends to follow the growth strategy of the firm but often not
until inefficiency and internal operating problems provoke a structural adjustment. According to him the
experience of these firms followed a consistent sequential pattern: a company adopts a new strategy —
new administrative problems arise, profitability and performance decline — a shift to more appropriate
organizational structure takes place which leads to improved strategy execution and more profitable levels.
Chandler found this sequence to be often repeated as firms grew and modified their corporate strategies.
A logical conclusion of Chandler’s study is that not all forms of organization structure are equally supportive
of implementing a given strategy. The thesis that structure follows strategy has a strong appeal. How the
work in an organization is structured is just a means to an end and not an end itself. Structure is a
managerial device for facilitating the implementation and execution of the organization’s strategy and,
ultimately, for achieving the intended performance and results. The structural design of an organization
helps people pull together in their performance of diverse tasks. It is a means of tying the organizational
building blocks together in ways that promote strategy accomplishment and improved performance. The
top management, and for that purpose also the general managers, have to provide for the necessary
linkages between strategy and structure for improved performance.
The Stages Model of Structure
The experience of many firms indicates that organization structure evolves through different stages. What
structure an enterprise will have would depend upon its growth stage, apart from size and the key success
factors inherent in its business. For example, the type of organization structure that suits a small specialty
steel tubes manufacturing firm relying upon ‘focus’ strategy in a regional market may not be suitable for a
large, vertically integrated steel producing firm with businesses in diverse geographical areas. To extend our
example further, the structural form suitable for a multi-product, multi-technology, multi-business
enterprise pursuing unrelated diversification is likely to be still different. Recognition of this characteristic
pattern has prompted several attempts to formulate a model linking changes in organizational structure to
stages in an organization’s strategic development.
The basic idea behind the stages concept is that enterprises can be arranged along a continuum running
from simple to very complex organizational forms; and that there is a tendency for an organization to move
along this continuum towards more complex forms as it grows in size, market coverage, product line scope
and as the strategic aspects of its customer—technology—business portfolio become more intricate. The
stages model proposes four distinct stages of strategy-related organization structure.
Stage I: Organizations in this stage are essentially small, single business and managed by one person. The
owner entrepreneur has close daily contact with employees. He personally knows all phases of operations.
Most employees report directly to him and he makes all pertinent strategic and operating decisions. As a
consequence, the organization’s strengths, vulnerabilities and resources are closely linked with the
entrepreneur’s personality, managerial ability, style and financial position. In a way, a Stage I enterprise is an
extension of the interests, abilities and limitations of the personality of its owner. The activities of such a
business typically are concentrated in just one line of business.
Stage II: Compared to a Stage I enterprise, a Stage II enterprise has an increased scale and scope of
operations which necessitate management specialization and transition from individual management to
group management. A State II enterprise is fundamentally a single business enterprise which divides its
strategic responsibility along classical functional lines: personnel, finance, engineering, public relations,
manufacturing, marketing and so on. In an enterprise which is vertically integrated such as an oil company,
the main organizational units are sequentially organised from one stage to another e.g., exploration, drilling,
pipe lines, refining, wholesale distribution, retail sales, etc.
Stage III: A Stage III enterprise, though in a single field or product line has operations which extend to
several geographic areas. Within a broad policy framework, these units have considerable flexibility in
formulating their own strategic plans to meet the specific needs of their geographic areas. Based on the
principle of geographic decentralization, each unit, operating as a semi-autonomous entity, is structured
along financial lines. The main difference between a Stage II and a Stage III enterprise is that while the
functional units of a Stage II enterprise stand or fall together (since they are built around one business at
single location), the operating units of a Stage III enterprise can stand alone in the sense that the operations
in different geographic units are not inextricably linked or dependent upon the units of other areas. The
firms that represent this category may include firms in the cement, brewery, heavy machinery, fertiliser
industries. The chain stores of a footwear company like Bata may also fall in this category. IFFCO, SAIL, NTC,
HMT, are some examples of Stage III enterprises.
Stage IV: Stage IV represents the ultimate in the evolutionary growth of an enterprise. The firms in this
category are typically large multi-product, multi-unit, multi-technology enterprises whose units operate on
decentralized lines. Enterprises in this category reach this stage because their corporate managements
generally lay considerable stress on the strategy of diversification—related or unrelated. As with the Stage III
firms, the semi-autonomous units of Stage IV firms may have substantial flexibility in formulating their
strategies and policies relating to their own lines of business. All the units however report to corporate
headquarters in accordance with the performance parameters decided upon. They conform to the broad
guidelines laid down by the corporate office. The general manager of each unit has overall responsibility for
the total business as his authority extends to all the functional areas. However, some functions and staff
services may be centralized at the corporate level. The prominent example of firms in this category are: ITC,
Shaw Wallace, Grasim Industries, ICI, JK Industries, etc.
Comments on the Stages Model: The stages model provides useful insights into why structural
configuration tends to change in accordance with the change in size, geographic spread, technology and
strategies. As firms progress from small, entrepreneurial enterprises following a basic ‘concentration’
strategy to more complex phases of volume expansion, vertical integration, geographic extension and line of
business diversification, their organization structures evolve from uni-functional to functionally centralized
to multi-divisional decentralized organization forms. While at one end of the spectrum comes single line
businesses which invariably have centralized functional structures, at the other end come highly diversified
enterprises which again invariably have decentralized divisional form. In between come firms which have
limited diversification. Such firms may have hybrid structures partaking the characteristics of functional and
product divisional forms.
Some comments clarifying this point are in order. It is not necessary that a firm must begin at Stage I and
reach ultimately to Stage IV. Most of the large enterprises today right away begin with Stage II or even Stage
III. A firm in the evolutionary process may skip one or more of the stages in the journey. For example, it is
not necessary for a firm in Stage II to pass through Stage III to reach Stage IV. Some firms may exhibit
characteristics of two or more stages at the same time i.e., some operations of these firms may be
decentralized geographically (for example, warehouses or transport facilities of a large steel mill like TISCO
or a company like Coal India Limited) and some other operations (for example procurement of raw material,
plant and machinery, manufacturing facilities) may be centralized.
No organizational form is perfect. A kind of subtle experimentation always goes on. Some firms, after a stint
with decentralization may revert to centralized form. For example, the five separate decentralized, fully
integrated units of Dupont of USA— Rayon, Acetate, Nylon, Orlon, and Dacron—were consolidated into a
Textile Fibre Unit with a single multifibre field force (earlier each unit had its own sales force which vied with
each other for business from the same set of customers and thus competing with each other) organized
around four market segments namely: menswear, Women wear, home furnishing, and industrial products.
Whenever management changes its strategy it must review its organization structure. It must answer this
question: is the organizational structure still alright or does it need modification? The answer to this
question could lead the management in recognizing whether there is or not a mismatch between the
strategy and the organization structure.
Forms of Organization: Strategy Related Benefits & Limitations
There are some well-known forms or approaches to organizational structuring: Functional, Product
Divisions, Holding Company, and Matrix. There are also other variants of these basic forms. Since you must
be familiar with these organization forms i.e., what these organization forms are and what are their main
characteristics, we shall confine our discussion here to strategy related benefits and limitations of these
forms of organization.
Functional Structure
A functional structure tends to be effective in a single business unit where key activities revolve around well-
defined skills and areas of specialization. Concentration on performing functional area tasks increases
specialization leading to greater operating efficiency and development of distinctive skills. The functional
specialization promotes full utilization of capacity of resources, including technical skills—manpower,
facilities and equipment. These are strategically important considerations for single business organizations,
dominant product enterprises and vertically integrated firms.
What form the functional specialization will take varies according to customer product-technology
considerations. For instance, a hospital is often compartmentalized according to the needs of its clients, i.e.,
outdoor and indoor divisions which are further departmentalized into paediatrics, orthopaedics, cardiology,
ear, nose and throat, etc. A municipality is also departmentalized according to purposeful functional areas
viz., fire, public safety, health services, maintenance of road, water and sewerage, recreation, education,
etc. A technical instrument manufacturing firm may be organized around research and development,
engineering, production, technical services, quality control, marketing, personnel, finance and accounting.
The problem with the functional structure is that it may not be easy to keep strategic coordination across
different functional units. The functional specialists tend to have their own perspectives on how the task can
be accomplished and this creates difficulties in achieving coordination. Because they talk in different
languages, they may not have adequate understanding of and fail to appreciate each other’s strategic roles
and changes in the circumstances. Besides, the functional specialists often develop their own mind-sets and
are more loyal to their own functional goals rather than the goals of the organization as a whole. This
imposes considerable strain on the general manager in terms of resolving cross functional differences and
clearing the clogged communication lines and enforcing cooperation. The functional form may also stand in
the way of promoting entrepreneurial creativity, adapting quickly to major changes in the customers,
market and technological scene and in pursuing opportunities that go beyond the conventional boundaries
of the industry.
Product Divisions
For a diversified enterprise producing a variety of products belonging to different industry groups, using
different technologies and with plants at different locations, functional structure makes the job of the
manager incredibly complex. In such an enterprise the needs of the strategy virtually dictate that different
businesses be organized into different business (or product) divisions which may then be organized along
functional lines.
Putting all activities belonging to the same business under one roof facilitates implementation of strategies.
With appropriate authority delegated to the general managers of the divisions, accountability for results can
be stressed in such an arrangement. Reward system can be geared to motivate managers for improved
performance by providing incentives. If entrepreneurially oriented and experienced persons are appointed
as general managers of divisions, the performance of the entire organization may improve on account of
better responsiveness and quick decision making.
However, where activities are not or cannot be properly divisionalised or where considerable
interdependence exists between the components of the organization, as it may happen in a firm with
related diversification, this form may result in the lack of cooperation among autonomy conscious managers
and thus hinder coordination.
Strategic Business Units: Often by introducing one more layer between the chief executive officer (CEO) and
the general managers of divisions, Strategic Business Units (SBUs) may be created to give separate but
related areas within the total enterprise some cohesive direction. The SBUs are an attempt to rationalize the
firm’s varied businesses, particularly where the span of management for the chief executive is too large i.e.,
general managers of several divisions, say 40-50, report to him. Under such conditions it is useful to group
strategically related businesses (divisions) and place them under a Vice-President (a new layer created). This
may improve strategic thinking, planning and coordination of diverse business interests. The strategic
relatedness may include a closely related strategic mission, a common need to compete globally, and
common key success factors. The SBU concept is quite popular in the United States. The General Electric,
Union Carbide, General Foods and some well-known examples of the firms which have capitalized on this
concept in that country.
However, the location of tasks between SBUs head (i.e., vice president) and general manager of various
units comprising the SBU is a delicate matter which needs careful balancing between needs of the general
managers for necessary latitude and a need of the heads of the strategic units for strategic coordination.
Holding Company
Holding company is one which has one or more subsidiary companies. According to Section 4 of the
Companies Act, 1956, a company shall be deemed to be a subsidiary company if the other company is the
controlling company i.e., it (i) holds more than half in nominal values of its equity share capital (or exercises
or controls more than half of its total voting power); or (ii) controls the composition of its Board of Directors;
or if the subsidiary company itself is a holding company of another subsidiary company, then the latter will
also become the subsidiary of the holding company of which the former is a subsidiary company.
In India, holding company form has been adopted as one of the structural forms for organizing public sector
enterprises. The well-known examples are: Fertilizer Corporation of India, State Bank of India, General
Insurance Corporation. Some other public sector enterprises which have subsidiaries are: Steel Authority of
India Limited, Coal India Limited, and National Textile Corporation. The extent of control, or involvement
may vary from very little to quite substantial. Often, however, the holding company form is adopted
because the management of the parent company wants to give maximum freedom to the managements of
the subsidiary companies.
The holding company may have shareholdings in a variety of connected or unconnected business
operations. In such a situation, the holding company is virtually a conglomerate, and in another sense it may
really be an investment company. In reality, therefore, it operates a portfolio of autonomous business units
or investments. The subsidiary companies have their separate, legal entities and have their own names,
thus retaining their own identities. The holding company may limit its role to decisions involving buying and
selling of such companies. A simple organization chart of a holding company is given in the following figure.
The business interests of the parent company may range from 100 per cent (wholly owned subsidiary) to 51
per cent.
The parent-subsidiary relationship may emerge as a result of original planning of the promoter or it may
come about due to subsequent developments e.g., growth of the enterprise (new activities/business
organized as separate legal entities rather than as organic divisions). This kind of relationship may also
emerge on account of acquisitions or takeovers. While holding companies in the Indian public sector
typically consist of subsidiaries representing various geographic units, the subsidiaries in the case of holding
companies in the private sector typically consist of companies with diverse interest, such as construction,
shipping, hotels, mining and engineering, etc. ITC is one such example of the holding company in the private
sector.
Parent (Holding Company)
Head (Corporate Office)
Corporate Staffs &

Specialists
Company A Company B Company C Company D Company E
(Wholly Owned) (74% Owned) (51% Owned) (51% Owned) (Wholly Owned)
If a holding company consists of clusters of subsidiaries, representing diverse interests, these clusters may
be organized into different divisions at the corporate headquarters. For instance, the various hotels of a
company may all be affiliated to the hotel division at the headquarters. This enables the corporate
management to formulate company-wide business strategy, for example, for all the hotels and coordinate
their activities, if necessary. The essential point in a holding company is the extent of autonomy the various
subsidiaries have in relation to strategic decisions and this may be influenced by whether or not there are
divisions in the parent company.
The holding company form offers several advantages. It enables the spread of risk across many business
ventures and facilitates the divestment of individual companies if circumstances so demand. The
subsidiaries can benefit from their belonging to the membership of the group. The losses of one may be
offset against the profits of another. Protection is thus afforded to loss-making units in bad times. The
subsidiaries can have the benefit of cheaper finance for investment from the parent company for expansion
or technology up gradation. They are not burdened with high central overheads since the head office usually
has a lean staff.
The holding company form may not be without some pitfalls, especially when subsidiaries are created as a
result of takeover craze. The empire building may lead to lack of internal strategic cohesion. Since the aim in
the holding company design is to keep the centre as slim as possible, the necessary skills at the centre to
provide help to subsidiaries may not be available. This form may also lead to some duplication of efforts in
the enterprise if taken as a whole. There may be very little synergy between different business interests.
Matrix Form
The key feature of the matrix form is that product (or business) divisional form is overlaid on the functional
structure to form a matrix or grid, resulting dual authority for most of the members of the organization. The
combining of the two structural forms usually results in a compromise between the functional specialization
and line-of-business specialization. The members in such an organization have to learn to live a “new way of
life”. They have to adjust to a different kind of organizational climate.
For organizations which work in a dynamic or fast changing environment or where product life cycle is
relatively short or where the organization has to be constantly on the look-out for new products, matrix
form is the answer. The business managers and resource managers in a matrix structure have important
strategic responsibilities. The team approach implicit in a matrix promotes internal checks and balances the
differing viewpoints and perspectives. Several well known companies in the United States, such as General
Electric, Texas Instruments, Boeing, Dow Corning, Citibank use matrix structures.
Since matrix form is likely to generate some amount of conflict, friction and misunderstanding, it must be
carefully designed. It is a complex structure to manage. Apart from the expectation that everybody must
communicate with everybody else in the grid, decisions may be delayed.
A Brief Discussion on Forms
From the above discussion on various forms it may be observed that there is no such thing as an ideal
organization design. There are no universally applicable rules for matching strategy and structure. It is quite
possible that two firms with similar strategies may work with two different structures. Of course, a structure
that suits one strategy may be totally unfit for another. Further, a structure which has worked well in the
past may not work well in the future. Changes in customer-product-technology relationships may make the
structure of a firm strategically obsolete. An organization structure is thus dynamic. Changes are not only
inevitable but typical.
Experience shows that pragmatic considerations, such as the constraints imposed by the personalities
involved and the corporate culture influence the design of the structure. The design of the structure
however should begin with a strategy-structure framework. The latter should get precedence over the
organization’s internal situation, including the personalities involved. Once the structure has been built
keeping in mind this framework; it may be modified to adapt it to the peculiar situation of the organization.
As already stated, there is nothing like the “best” form in organization design. Each form that we have
discussed in this section has its own strategy related strengths and weaknesses. The adoption of one form
does not preclude the use of one or more of the other forms. Many organizations are large and diverse
enough to accommodate more than one form for their different lines of activities. The best organizational
form is the one that best fits the overall situation.
Some generalizations may however be made. Firstly, where the firm is engaged in a single product line or it
uses continuous process or assembly type of technology, the structure tends to be functionally oriented
because standards of performance and tightly sequenced integration are crucial. Secondly, where an
organization operates in a tightly regulated environment (e.g., government agencies), it often has a more
rigid, authoritarian and bureaucratic organization structure because government rules and regulations have
to be observed. Such rules and procedures leave little latitude for individual discretion. Thirdly, where a
firm’s products are mostly custom made and there is a wide variety in the day-to-day work routine or where
the process of production is high technology based, the structure tends to be decentralized and the
organizational members have greater freedom of decision and action. Fourthly, the greater the diversity
within an organization’s business, the greater is the likelihood that the most effective organization form will
be decentralized and multi-divisional. Finally, the more uncertain and diverse the organization’s product-
market environment, the more likely it is that the firm will utilise a loose “organic” design (e.g., matrix) with
considerable managerial latitude given to subordinates. It is not difficult to understand the logic that lies
behind this. The structural flexibility is more conducive for the organizational units to adapt to their peculiar
environments.
Structuring Multinational (Transnational) Organizations
It is a common knowledge that companies typically begin their international operations through exporting.
One way to fit the personnel and resources concerned with exports is to attach the new export unit to one
of the existing major parts of the organization serving domestic markets. In companies organized along
functional lines, exporting activities or international sales are frequently attached to the sales division.
In firms having a divisionalized product structure (i.e., whose major divisions correspond to different
products or product groups), the export department is often appended to the product division whose export
it handles. Thus, one or all of the major product divisions may have their own export departments. As export
activity expands, company organized in this fashion will think in terms of amalgamating the various export
departments into a single unit serving entire company. Whether the structure of the company undergoes
change or not, a lot would depend whether exports are handled directly by the producer company or by a
trading company as it happened in the initial stages in Japan. However, if the producer in course of time
finds that a ready market for its products exists abroad, it may accelerate the attainment of still larger sales.
It may therefore decide to do away with the trading company and handle exports directly. The producer
then makes arrangements for finance, marketing intelligence and distribution. There is a tendency for such
successful exporters to establish their own sales subsidiaries abroad. The Hitachi company in Japan relied
heavily on the trading companies to carry its products abroad during early stages of its international
development. As its volume of business abroad expanded, it gradually relied less on trading companies and
more on its own management of foreign operations, including joint ventures and wholly owned subsidiaries.
Once a firm has established its own operating units abroad, the original issues change from those in the
exporting stage to the relationship between overall corporate structure and quasi-independent foreign
based subsidiaries which have their own management and productive resources.
Mother-Daughter Type Structure
The relationship between the corporate office and the subsidiaries may be informal as it happened in the
early stage of development with most of the multi-national companies of Europe. The chief executive deals
with them on individual basis. The various operating units (subsidiaries) may be staffed largely by relatives
of the founder. Thus the whole company is a family affair. The highly personalized relationship between the
Chief Executive Officer (CEO) of the parent company and the managing directors of the foreign subsidiaries
has come to be known as mother-daughter type of organization. This is shown in the following figure. This
type of organization allows considerable discretion to the chiefs of the national operating units. Control
from the centre is mainly exercised through personal visits by the chief executive officer to the various units.
The focus of control is often on financial performance.
Figure: Mother-Daughter Structure

The limits of the mother-daughter structure usually surface when multinational companies begin to expand
geographically. The CEO’s personal knowledge of diverse countries of say Asia, Africa and the Middle-East
can only be superficial. This is why; perhaps European multinationals such as Philips, Ciba Geigy, and Nestle
led the move away from the mother daughter organization towards more global structures.
International Division
Since most of the multinationals in United States were already organized on product divisional lines, they
added an international division to the existing structure when they were faced with the expansion of
operations abroad. The international division has its own staff and an executive in-charge. The various
foreign subsidiaries become its operating units as shown in the figure below. This form of structure provides
a central focus within the firm with the strategy directed at the firm’s international opportunities. The
international operations have no longer to play a second fiddle to the domestic operations. Unlike mother-
daughter structure, international division lends itself more readily to the establishment of formal reporting
procedures and a less personal form of control. Grouping together of the firm’s international operations not
only gives them more weightage within the organizational hierarchy but it also facilitates the training and
development of a core of international managers. Moreover, the considerable autonomy that the heads of
the various national subsidiaries typically enjoy within their national spheres clearly fixes responsibility and
accountability for results while leaving them free to respond to local conditions.
Figure: International Division
Global Structures
Global structures may be either global product structures or global area structures.
Let us first talk about global product structure.
Global Product Structure: Unlike the international division form where the overall control, coordination and
direction is concentrated with one executive and with one division, global product structures assign primary
responsibility to international product managers with a world-wide mandate for specified product groups as
shown in the figure below.
President
Corporate Staffs: Functional

Specialists & International
Area Experts
International VP International VP International VP

Product Group A Product Group B Product Group C
Asia
Africa
Latin
America
Africa
National
Subsidiary 1
National
Subsidiary 2
Etc.
Figure: Global Product Structure
Each manager in charge of an international product group is assisted by a staff equipped to scan the
international environment on a global scale. He has both the necessary information and authority to
mobilise firm’s international resources behind global strategies.
Compared to the international division, the global product structure shifts some of the important authority
away from managers managing national subsidiaries and places it in the hands of executives with world-
wide product responsibility. The aim is to achieve better international coordination within specific product
groups. A more global view of competition and the firm’s strategic opportunities is possible. It facilitates
cross-border coordination of product activities which may include manufacturing, marketing and technology
transfer. Technology transfer is of particular importance for firms which have sizeable investment in R & D.
They must defuse the new technology globally within a relatively short period. With its emphasis on cross-
border rationalization of marketing and productive activities the global product structure has the potential
for improving cost efficiency.
While global product structure offers several benefits, certain amount of duplication of activities may
become inevitable. However, the fact that several of the more experienced MNCs have continued to use the
structure indicates that the problems are few and manageable, especially if a corps of senior managers with
international outlook and experience are developed.
Global Area Structure: Under global area structure, the firm’s operations are segmented geographically into
several regions of the world. Each region has responsibility for an area (or region) and has area (or regional)
headquarters. Below the area headquarters, the activities may be organized either on product basis or on
functional basis. The structures will then be known as global area product structures, global area functional
structures, and global area national structures respectively. An organizational chart of global area national
structure is presented in the following figure.
President
Corporate Staffs: Functional

Specialists & International
Area Experts
Vice President Vice President Vice President Vice President

Europe Latin America Asia
Gulf Countries
Figure: Global Area Structure
Structure for Development Programs
Though governments world-wide are characterized by hierarchical structures which depend largely on the
use of rules and authority, they however do recognize the importance of creating new organizational
structures and reforming the existing ones. That they are generally slow in adopting change is another thing.
The corporate form of organization for public sector manufacturing or commercial undertakings in India, for
example, reflects the belief that this form of organization is more appropriate than the departmental form.
Commissions and task forces are often set up by governments to recommend structural reorganization to fit
the changed task requirements. Ministries and departments are regrouped and sometimes some
departments are abolished, especially when a new government takes over. When strategies change,
structures need to be realigned.
Structural Form
Governments usually have functional structures. The tasks or services are broken up according to the
functions. Since development programs are normally initiated by Ministries, there is a tendency for the
sponsor to prescribe a structural form (often the functional form) for the program. However, an across-the-
board approach may not be desirable for programs of complex nature. The appropriateness of a structure
can be judged only in relation to a program’s strategy and environment. The designer should start with the
tasks and goals identified in the strategy and search for the best structural form.
When a program deals with a single service or is relatively small or the technology it uses is simple, or
production processes are standardized and processing of information is relatively easy, the functional
(hierarchical) structure would suffice. To illustrate, for a dairy development program where four basic
functions can be identified, providing service to farmers (extension, inputs), milk collection, quality control
and transport, the functional form can be adopted. The integration of these and some other support or
common functions (e.g., milk processing, marketing, finance, etc.) takes place at the level of the chief
executive.
However, when a program grows larger geographically, or adopts a multiple service strategy (e.g., an
agricultural program diversified into health and education), a simple functional structure may no longer
work. Many development programs, spread over a wide geographical area, require local adaptation of
services. Matrix structures are increasingly used when programs diversify their services or expand. In the
agricultural program that we cited earlier, personnel for health and educational services may be drawn from
relevant Ministries of the Government on the understanding that the technical back up for the services will
be provided by the Agricultural Ministry.
Though, dual authority exists at the middle level in the matrix organization, it merges into a unified
command at the top. In a large and complex development program, however, joint decisions and resolution
of conflict often require the formal cooperation of several organizations outside the program agency.
Network structures would be more appropriate.
Perspectives on Strategy and Structure
Two perspectives are provided here: one by Michael E. Porter and the other by Thomas J. Peters and Robert
H. Waterman Jr.
We shall first take up Porter’s view.
Porter’s Perspective
Porter has enunciated three generic strategies: Overall Cost Leadership, Differentiation and Focus.
According to him the successful implementation of the three generic strategies requires not only different
resources and skills but also imply different organizational arrangements, control procedures and inventive
systems.
Overall cost leadership (common in 1970s in the USA) is achieved through a set of functional policies
culminating into what is popularly known as the Experience Curve Effect. This strategy requires construction
of efficient scale facilities, vigorous pursuits of cost reduction from experience, tight cost and overhead
control and cost minimization in areas like R&D, sales force, advertising and so on. A great deal of
managerial attention to cost control is necessary to achieve the aims.
The differentiation strategy implies offering a product or service by the firm which is perceived in the
industry as being unique. Differentiation can be approached in many ways (one or more at the same time);
product design features, brand image, technology, customer services, dealer network and other dimensions.
The focus strategy means concentrating on a particular buyer group, segment of product lines, or
geographic market.
As with differentiation, focus may take many forms. Whereas the ‘low cost’ and ‘differentiation’ strategies
aim at achieving their objectives industry-wise, the focus strategy is built around serving a particular target
very well. All functional policies are geared in that direction. This strategy rests on the premise that the firm
is able to serve its narrow strategic target more effectively and efficiently than those competitors who are
engaged in broader activities.
We now turn our attention to the organizational requirements for each strategy. Some common
implications of the generic strategies in terms of skills and resources and organizational requirements are
presented in the following Table which is self-explanatory.
Generic Strategy Commonly Required Skills & Common Organizational

Resources Requirements
Overall Cost Leadership Sustained capital investment and Tight Cost Control
access to capital Frequent, detailed control reports
Process engineering skills Structured organization &
Intense supervision of labour responsibilities
Products designed for ease in Incentives based on meeting strict
manufacture quantitative targets
Low-cost distribution system
Differentiation Strong marketing abilities Strong coordination among
Product engineering functions in R & D, product
Creative flair development & marketing.
Strong capability in basic research Subjective measurement &
Corporate reputation for quality incentives ahead of quantitative
or technological leadership measures
Long tradition in the industry or Amenities to attract highly skilled
unique combination of skills labour, scientists or creative
drawn from other businesses people
Strong cooperation of channels
Focus Combination of the above policies Combination of the above policies
directed at the particular strategic directed at the particular strategic
target target
Figure: Organizational Requirements for Different Generic Strategies
Industry Maturity and Organizational Arrangements: According to Porter, not only different organizational
arrangements, leadership and motivation systems are needed for different generic strategies, different
organizational structures and systems are also needed as the industry transitions to maturity. Some suitable
adjustments must take place in the area of control and motivation system as well. As the industry matures,
more attention to costs, customer service and true marketing (as opposed to selling) may be required. More
attention to refining old products rather than introducing new ones may be necessary. The less “creativity”
and more attention to detail and pragmatism is often what is needed in the mature business. These shifts in
competitive focus obviously requires changes in the organizational structures and systems to support them.
Systems designed to highlight and control different areas of business are necessary. The various elements of
the structural and system requirements of mature business are tabulated in the following table.
1. Tight Budget
2. Strict Control
3. Performance based incentive systems
4. Control of financial assets such as inventory & accounts receivable
5. More coordination across functions and among manufacturing facilities
6. Major changes in plant manager’s job.
Table: Organizational System Requirements of Mature Business
In short, it may be stated that there has to be more emphasis on formal arrangement than on the informal
ones as hitherto. The competitive shifts (e.g., aggressive marketing, price competition) and new
organizational requirements may be presented to by people within the organization who till the other day
found pride in pioneering high quality products. Sacrificing quality for costs and close monitoring of costs
may be resisted. Furthermore, new reporting requirements, new controls, new organizational relationships
and other changes may sometimes be seen as a loss in personal autonomy and as a threat. A company
therefore must be prepared to reeducate and re-motivate employees at all levels as it enters the maturity
stage.
Peters and Waterman’s Perspective
Large companies tend to be complex. Unfortunately, many of such companies, according to Peters and
Waterman, respond to complexity by designing complex systems and structures rather than simple ones. A
favourite candidate for the wrong kind of complex response is the matrix organization structure. For a
multiproduct, multi-location and multi-market company, with several functional departments, a four
dimensional matrix may be a normal choice. However, such a matrix is a “logical mess”. The matrix is quite
confusing: “people aren’t sure to whom they should report for what. The most critical problem, it seems, is
that in the name of “balance”, everything is somehow hooked to everything else. The organization gets
paralysed because the structure not only does not make priorities clear, it automatically dilutes priorities. In
fact, it says to people down the line: “everything is important; pay equal attention to everything”.
None of the excellently managed companies, according to the authors, had matrix structures, except for the
project management companies like Boeing. Even early users of the matrix technique such as Boeing and
NASA emphasised one key dimension of the organization structure to which they accorded clear-cut
primacy, and this could be either product, or geography or function. How have the excellent companies
avoided matrix forms? They have done so by sticking to simple forms. “Most of the excellent companies
have a fairly stable, unchanging form—perhaps the product divisions— that provides the essential
touchstone which everybody understands, and from which the complexities of day-to-day life can be
approached.”
Excellent companies are quite flexible in responding to fast changing conditions in the environment. They
make better use of small divisions or other small units. “They can reorganize more flexibly, frequently, and
fluidly. And they can make better use of temporary forms such as task forces and product centres” and
other ad hoc devices. Most of the reorganization takes place around the edges. The fundamental form rarely
changes that much.
Product divisions are the building blocks in the structure of the excellent companies. A characteristic of
structures in such companies is the shifting of people and even products or product lines among divisions on
a regular basis and without acrimony.
The simple form is not limited to companies—specialized in creating niches for themselves. Other
companies such as HP, Emerson, Digital, Dana and 3M have also simple structures. Regardless of industry or
apparent scale needs, virtually all the companies pushed authority far down the line and tried to preserve or
maximize practical autonomy for a large number of people. Simplicity in basic structural arrangement
actually facilitated organizational flexibility. Clean staff at the corporate level is a characteristic feature of
excellent companies. And whatever staff these companies have tends to be out in the field solving problems
rather than being stay put in the home office. Some increasing examples are given below:
1. Emerson Electric has 54,000 employees, with fewer than 100 in the corporate headquarters.
2. Dana employs 35,000 employees and has cut its corporate staff from about 500 in 1970 to around 100 by
1982.
3. Schlimberger, a $ 6 million diversified oil service company, runs its world-wide empire with a corporate
staff of 90.
That “less is more” also holds true for some of the top performing smaller companies. “ROLM, for instance,
manages a $ 200 million business with about 15 people in corporate headquarters. “Virtually every function
in the excellent companies is radically decentralized down to the divisional level at least.” Though strategic
planning is regarded as a corporate function, yet, some companies such as 3-M, HP, J & J have no planners
at the corporate level. Fluor runs its $ 6 million operations with three corporate planners. In some excellent
companies the research staffers come in from line operations and then go back after sometime. “At IBM,
management adheres strictly to the rule of three-year staff rotation. Few staff jobs are manned by career
staffers”. The others are manned by line officers. “If you know you are going to become a user within thirty-
six months, you are not likely to invent an overbearing bureaucracy during your brief sojourn on the other
side of the fence.”
Summary:
 Successful implementation of strategy, among several other factors, depends upon the
appropriateness of the organization structure. The latter must meet the needs of the strategy.
 The various forms of organizational structuring may not be equally supportive of a particular
strategy at hand. In designing an appropriate structure, tasks and functions which are critical to the
achievement of strategy must be first identified.
 The organization designer should then think of other supporting and routine activities which are
connected with the critical tasks and place all these in one unit. In this way various building blocks
would be formed.
 Though strategy and structure are interactive and interrelated, it has been often observed that
structure follows strategy.
 Since structure is a tool to realise the aims of strategy, it helps people pull together in the
performance of their diverse tasks to accomplish those aims. The experience of many firms indicates
that organization structure evolves through different stages.
 The Stages Model provides useful insights into why structure tends to change in accordance with
changes in size, geographic spread, technologies, and strategies of an enterprise.
1. Discuss the pre-requisites for successful implementation of a Project. (2013 – QP206) (10)
Answer: The pre-requisites for successful project implementation are as follows:
a. Adequate formulation
b. Sound Project organization
c. Proper implementation planning
d. Advance action
e. Timely availability of funds
f. Judicious equipment tendering and procurement
g. Better contract management
h. Effective monitoring
Adequate Formulation: A project maybe improperly formulated due to the following reasons:
I. Poor assessment of input requirements

II. Superficial field investigation
III. Using faulty procedures for computing costs and benefits
IV. Omission of project linkages
V. Poor decisions due to lack of experience and expertise
VI. Over estimation of Benefits and underestimating costs
Sound Organization: Few characteristics of a sound organization are:
I. It is led by a competent leader

II. Authority and Responsibility are equitably distributed
III. Adequate attention is paid to designing jobs and work procedures
IV. All work methods and systems are clearly defined
V. A culture of Rewards and Punishment on the basis of performance is established
Proper implementing planning: Proper planning is necessary for all projects, therefore before the
implementation of any project, a project manager must:
I. Develop a comprehensive plan for various activities related to the project

II. Estimate the resource requirement and time plan for each activity
III. Define inter linkages between different activities of the project
IV. Specify cost standards
Advance action: On the following activities:
I. Acquisition of land
II. Securing essential clearances
III. Identifying technology collaborators / consultants
IV. Arranging for infrastructure facilities

V. Preliminary design and engineering
VI. Calling of tenders
Timely availability of funds: In order to be successfully completed, a project must have adequate funds
available to meet its requirements as per the implementation plan. Therefore, applications for loans, tie-ups
with suppliers and contractors must be done in advance. Proper allocation of funds must be done with the
help of experts.
Judicious Equipment Tendering and Procurement: An optimum balance must be maintained between
foreign suppliers and indigenous suppliers, keeping in mind time and cost factors. Procurement must be
done in such a way that outflow of foreign exchange is minimum, however the business must not also be
highly dependent on indigenous suppliers. Importing foreign technology must be considered only when it
compliments development of indigenous technology and capabilities or helps in speedy development or due
to non-availability in local market.
Better contract management: Proper management of contracts is critical to successful project

implementation. Therefore,
I. Competence and capability of the contractors must be ensured before entering into a contract.
II. All parties to contract must be treated as partners in common pursuit.
III. Discipline must be established between all intermediaries
IV. Help must be extended to intermediaries when they have a genuine problem
V. Project authorities must retain the power to transfer a contract to third parties when delays are
anticipated.
Effective Monitoring: An adequate system of feedback and monitoring must be established in order to keep
tabs on the progress of projects. Critical aspects must be focused on, physical and financial milestones must
be set, and working standards must be established. This helps in:
I. Anticipating deviation from implementation plan

II. Analyzing emerging problem
III. Taking corrective action
Business Policy and Strategic Management Control
Control
Learning Objective:
 To understand the concept of strategic control process;

 To understand the importance of strategic control in evaluation;
 To understand the different methods used in control process; and
 To understand the analysis & follow-up action for control.
Introduction
With the completion of the strategy implementation, the organization looks forward to achieving the
desired goals and objectives. It is necessary, however, to introduce the process of strategy evaluation and
control in the early stages of implementation to see whether the strategy is successful or not and to carry
out mid-course corrections wherever necessary. There are several reasons why a strategy may not lead to
desired results. The external environment may not actually follow a trend as was expected at the time of
planning the strategy. The internal changes within the organization such as the organizational systems
consisting of structure, policies and procedures may not reflect harmony with the strategy. After a while, the
top management of even middle level managers may find it difficult to exercise a substantial degree of
control over operating systems. The unexpected moves of the competitors might create major gaps in the
strategy. Thus the list of such factors will require a continuous evaluation and control of strategy.
Strategic Control Process
The evaluation of the strategy of an organization can be done qualitatively as well as quantitatively. The
quantitative evaluation is based on data and is possible through post facto analysis to detect whether the
content of strategy is working or has worked. However, qualitative evaluation can also be done by
addressing the question: Will it work? The qualitative evaluation can thus be done before activating plans of
change.
The qualitative evaluation and control of strategy is a real time process. The performance of strategy is
monitored and corrective actions are taken. The basic aim of any organization is to achieve its goals. But to
achieve the goals, the organization faces lots of hurdles. To overcome these hurdles, it is necessary for any
organization to have a sound strategic control process. The word meaning of 'control' itself means 'to
regulate' or 'to check'. This means that the top management needs to keep check on how well the strategy
is being implemented to achieve the objectives of the organization. For example, if the business is not giving
results as expected, it may be necessary to increase promotional efforts, or revise the product policy, or as a
last resort, the firm may pull out of a particular business.
The strategic control process is closely related to strategic planning process. Figure below represents the
relationship between strategic planning and strategic control process. The process consists of three phases,
which are as follows: 1) Evaluation criteria; 2) Performance evaluation; and 3) Feedback.
The first phase i.e., the evaluation criteria consists of selecting key success factors, developing measures and
setting standards for the same and collecting information about actual performance.
Objectives
Strategic
Evaluation Criteria
Planning
Feedback Performance Evaluation
Strategic
Control Methods & Systems
Control
Organizational
Activities
Figure: Relationship between Strategic Planning and Strategic Control Process
Quantitative Criteria for Evaluation: This is important for measuring the organizational performance
whereby the actual results are compared with the expected results. Usually the organizations use financial
ratios as quantitative criteria for evaluating strategies. These are used due to the following reasons:
1) To compare the performance of the organization over different time periods;

2) To compare the performance of the organization with its competitors in the industry;
3) To compare the organizations' performance to industry averages.
Some of the major financial ratios which can be used as criteria for evaluation of strategy are:
1) Return on investment
2) Return on equity
3) Profit Margin
4) Market Share
5) Debt to equity
6) Earnings per Share
7) Sales Growth
8) Asset Growth
These ratios are used by different organizations to measure the performance of the organization. Here, one
thing is to be noted that the qualitative criteria are related more to the short-term objectives than the long-
term ones. This is the reason why qualitative criteria are very important in evaluating strategies. Therefore,
to evaluate strategies certain qualitative questions should also be taken into consideration. These questions
can be:
A) Whether the strategy is internally consistent or not?

B) Whether it is appropriate considering the available resources or not?
C) How is the firm balancing its investments between high-risk and low-risk prospects?
This shows that answers to all these qualitative questions is important to evaluate and control the strategy.
Operating Control
Operational control systems are designed to ensure that day-to-day actions are consistent with established
plans and objectives. It focuses on events in a recent period. Operational control systems are derived from
the requirements of the management control system.
Corrective action is taken where performance does not meet standards. This action may involve training,
motivation, leadership, discipline, or termination.
Differences Between Strategic and Operational Control

The differences between strategic and operational control are highlighted by reference to a general
definition of management control: "Management control is the set of measurement, analysis, and action
decisions required for the timely management of the continuing operation of a process".
Measurement:
 Strategic control requires data from more sources. The typical operational control problem uses
data from very few sources.
 Strategic control requires more data from external sources. Strategic decisions are normally taken
with regard to the external environment as opposed to internal operating factors.
 Strategic control are oriented to the future. This is in contrast to operational control decisions in
which control data give rise to immediate decisions that have immediate impacts.
 Strategic control is more concerned with measuring the accuracy of the decision premise.
Operating decisions tend to be concerned with the quantitative value of certain outcomes.
 Strategic control standards are based on external factors. Measurement standards for operating
problems can be established fairly by past performance on similar products or by similar operations
currently being performed.
 Strategic control relies on variable reporting interval. The typical operating measurement is
concerned with operations over some period of time: pieces per week, profit per quarter, and the
like.
Analysis:
 Strategic control models are less precise. This is in contrast to operational control models, which
are generally very precise in the narrow domain they apply.
 Strategic control models are less formal. The models that govern the considerations in a strategic
control problem are much more intuitive, therefore, less formal.
 The principal variables in a strategic control model are structural. In strategic control, the whole
structure of the problem, as represented by the model, is likely to vary, not just the values of the
parameters.
 The key need in analysis for strategic control is model flexibility. This is in contrast to operating
control, for which efficient quantitative computation is usually most desirable.
 The key activity in management control analysis is alternative generation. This is different from the
operational control problem, in which in many cases all control alternatives have been specified in
advance. The key analysis step in operations is to discover exactly what happened.
 The key skill required for management control analysis is creativity. In operational control, by
contrast, the formal review of outcomes to discover causes means that they skill required is the
ability to do technical, even statistical, analysis of the data received.
Action:
 The relationship between action and outcome is weaker in strategic control. This is not surprising,
as the most desirable area for control in strategic problems -the environment -is the least subject to
direct action.
 The key action variables in strategic control are organizational. In the operational control problem,
technical factors such as labor levels, production levels, choice of materials, and the like are the
predominant control levels.
 Alternative actions in strategic control are less easy to choose in advance. In strategic control
problem, it is possible to choose all possible action responses to received data in advance. In an
operational control problem, the few responses possible can usually all be worked out before any
operating data received.
 The worst failing in strategic control is omitting a worthwhile action. In operating control, the most
typical sins are those of omissions (e.g., complaints about too many people employed, too many
defects, and too much inventory). In the strategic control problem, sins of omission are much more
serious (e.g., not moving into a business opportunity when it presents itself, not undertaking a
particular social program, not applying resources to meet that challenges in the best fashion).
 The time for strategic control is longer. The period in which control has an impact is longer for
strategic problems that for operating problems.
 The timing of strategic control is events oriented. By contrast, operating decisions tend to be made
on a periodic basis, and they are usually measured accordingly.
 Strategic control has little repetition. Not even the structure is the same as past problems of a like
kind, much less the technical details. Operating problems, by way of contrast, tend to repeat their
structure.
Implications for Controlling Formal Plans
 Contingency plans are less possible in strategic control. The whole idea of contingency plans is
much more difficult in the strategic arena. It is more difficult to generate all possible actions ahead
of time in a strategic problem, because the alternatives are too numerous and too complex.
 Triggering contingency planning is more important in strategic control. Because of this difficulty in
making contingency plans, triggering an examination of alternatives when things do not go
according to plan becomes much more important.
 Preprogrammed variance analysis is less possible in strategic control. For an operational control
model might be possible that the computer performs all possible variance analyses (in the
accounting sense). For strategic control it is both difficult technically and impossible practically.
 A variance inquiry system is more necessary in strategic control. It seems important to have an
inquiry system linked to the formal planning model with which combinations of deviations from
plans can be explored by the human operator.
 A variance inquiry language is more necessary in strategic control. Some sort of language in which
the human can do variance inquiries is highly desirable in the area of strategic control.
 An augmented formal planning system in more necessary in strategic control. A formal planning
system should be augmented with the variance inquiry language described. This would permit the
same system that was used to generate the plan to be used in controlling that plan, leading to both
ease of additional analysis as well, as to consistency with the plan being controlling.
Basic types of Strategic Control are:
1. Premise Control – A strategy may be based on certain premises related to the industry and other
environment factors like government policies and regulations, socio-demographic factors, economic
conditions, etc.
2. Implementation Control – Implementation control is designed to assess whether the overall strategy
should be changed in the light of unfolding events and results associated with incremental steps and
actions that implement the overall strategy.
3. Strategic Surveillance – It is designed to monitor a broad range of events inside and outside the
company that are likely to threaten the course of the firm’s strategy.
4. Special Alert Control - A special alert control is the need to thoroughly, and often rapidly, reconsider
the firm’s basis strategy based on a sudden, unexpected event.
Methods of Control
There are many methods/techniques used in strategic control systems. Every organization has its own way
of using a particular technique according to the requirement of the organization. Most of the methods
related to the strategic management are regarding the financial control systems.
The figure below shows one of the effective systems of financial control, which is universally accepted & is
used by many organizations throughout the world. This system of financial control is known as DuPont’s
system of financial control.
The other methods which are used most frequently are: Budgets, Audits, time-related control techniques
like: PERT and CPM, Management by Objectives (MBO). We will discuss these methods in brief to develop an
understanding of the Strategic Control Process.
Budgets: These are one of the most widely used control methods. Budget preparation is one of them. In
simple terms budget means 'a plan of income and expenditure'. Budget usually deals with allocation of
resources to different organizational units.
Table below shows an example of a budget report. Budget gives an idea about the future expenditures and
income and at this juncture only the analysis of the performance of the company is done and corrective
action call be taken up for flaws, if any. Since budget is actually a forecast, its revision would be required
from time to time depending upon the requirement of the company. It is one of the key elements in
implementing the strategy successfully.
Parameters June 5 months (Year-to-Date)

Budget Actual Difference % Budget Actual Difference %
Total Cost 40000 50000 10000 +25% 200000 205000 5000 +2.5%
Total Units 10,00,000 12,00,000 2,00,000 +20% 1,000,0000 1,000,0000 NIL 0%
Produced
Table: Budget Report
Audits: This is another method of control. As per American Accounting Association (AAA), auditing is defined
as "a systematic process of objectively obtaining and evaluating evidence regarding assertions about
economic actions and events to ascertain the degree of correspondence between those assertions and
established criteria and communicating the results to interested users” (Byars, 1987).
Audit functions come under three basic groups, viz.

1. Independent auditors
2. Government auditors
3. Internal auditors
Independent auditors are professionals who provide their services to the organization.
Government auditors: This precludes the agencies who perform government audits for organizations.
Internal auditors are employees within the organization and perform their function from within.
There is one more group known as Management Audit, which examines and evaluates the overall
performance of a11 organization's management team. Audit teams assess the efficiency of various units in
the organization and the control system of the organization. The information provided by them becomes
crucial for the management.
Nowadays most of the organizations go in for management audits.
Time-related Control Methods
This includes useful graphical and analytical methods aid these methods serve as a tool in the strategic
control process. The most popular methods include Critical Path Method (CPM) and Program Evaluation and
Review Technique (PERT). These are graphical network depicting the different segments of work that must
be completed within a given span of time to complete a project or task. These provide information for both
project planning and control and is helpful for the management in allocating its limited resources.
Management by Objectives (MBO)
This is one of the methods, which is used both in strategic planning and control. In this the objectives are
established for the organization as a whole for functional areas, departments and finally individuals of the
organization. It has three minimum requirements which are as follows:
1 ) Objectives for individuals.
2) Individuals are evaluated and receive feedback on their performance.
3) Individuals are evaluated and rewarded on the basis of their performance.
This helps in keeping a check on working of employees in the organization and helps achieve the goals of the
organization. Apart from these control methods, other methods like: Management Information Systems
(MIS) and Decision Support Systems (DSS) also can be included under the control methods.
Performance Standards
Having identified the measures relevant for assessing the success of the strategy, the next important issue is
to set the standards against which actual performance is to be measured. The standards of performance
could be any of the following three types.
a) Historical Standards
In this type of standards, comparison of present performance is made with the past performance. Though
simplest, this type does not take into account the changes in environmental conditions between the two
periods. Moreover, the prior-period performance itself may not have been acceptable. It also could be
misleading in the formative years when the numerator (previous years’ figures) is small.
b) Industry Standards
In this type of standards, the comparison of a firm's performance is made against similar other firms in the
industry. The difficulty here is that all the firms may not be exactly the same for purposes of comparison.
c) Present. Standards
The goals/targets are decided by the firm's management to be achieved in a particular period. Present
standards convey the aspiration levels and take into account environmental conditions, if properly derived.
These are more realistic and also consider the organizations' capacity to achieve them. These, however,
require tremendous analysis. Absence of such analysis may lead to shocking results. However, for a
company developing a conscious strategy, present standards provide the best alternative.
Analysis and Follow-up Action for Control
Once the actual operations start, information about the actual performance has to be collected periodically
and compared with the standards set. If the objectives or major components of strategy include such factors
as market leadership, information about market share will also have to be collected. Information may also
be collected regarding performance of the other key factors. If the performance on key success factors is
unsatisfactory, the long-term success of the strategy may be endangered. This may be despite the current
success which may be due to favorable current environment for example, boom in the industry, scarcity etc.
If the performance is unsatisfactory, two courses of action are possible. The responsibility centre manager
may be asked to improve performance or if it is not possible, target or standards of performance may be
revised.
The evaluation and control reports may be of two types namely; the motivational and the economic reports.
The motivational reports relate to the performance of the people in the responsibility centres. Economic
reports are concerned with the economic performance of the responsibility centres. The basic difference in
the two is that while the latter gives actual economic performance covering all factors, the former reports
the performance of a responsibility centre. For instance, while an economic report will include all costs, the
motivational report will include only those items of cost over which it has control.
For example, the division may not have any control over purchase price of materials, but it may have control
over material consumption. Similarly, the responsibility centre has control over market share while it may
not have control over industry volume. It is advisable to keep the two reports separate. For instance, if the
economic performance is going down despite best efforts of the responsibility centre, there may be a need
to make a shift in the strategy. Similarly, strategic performance based on economic reports may be
satisfactory but still there may be need for modification of the strategy if the good performance is due to
unexpected favorable developments.
From the control point of view, the reports must be timely, otherwise corrective action may not be possible.
The frequency of reports is determined by the lead time required for corrective action and is constrained by
the lead time for processing the transactional data and its transmittal to retrieve data in the form of reports.
If on the other hand, the evaluations are made too early, kneejerk reactions are likely which may hurt the
plan.
A strategy need not be changed or abandoned just because evaluation has revealed the causes of poor
performance over a short period. It should be tested for a sufficiently long period of time because certain
assumptions might have gone wrong and there was no contingency plan to take care of such situations. If
even after reasonable period of time the performance is not coming up to expectations, it may be due to
serious deficiencies in the business strategy. However, before changing the strategy, it would be advisable
to check its implementation on the test of adequacy. It is quite possible that some of the Ss of the 7-S model
may be grossly out of line with the strategy. And, if corrected, the strategy may still be quite useful.
However, there might have been serious errors in assessing the external and internal environments even
though the evaluation of implementation reveals no major mismatches.
Problems of Control Systems
'There are a large number of problems associated with control systems for strategy evaluation. An efficient
system may collect a lot of irrelevant data whereas a sophisticated system might ignore crucial information.
Some of the typical problems encountered in designing and managing control system are:
1) There may not be a consensus on the criteria for measuring the effectiveness and efficiency of the
strategy.
2) The reporting data may be invalid.
3) The performance norms may be based on outputs on which the relevant business may not have a control.
4) Often performances standards may be set with inherent contradictions. For example, an increase in
market share may be expected in conjunction with an absolute decrease in marketing expenditure.
5) Employees in may consider the system to be unfair and therefore may not accept it.
6) Overemphasis on measuring short-term performance may make managers forget about the strategy
which inherently has long connotations.
7) It is very difficult to set "good', "average" and "poor" levels of performance in situations where the
outputs are not very tangible.
Summary:
 An effective system of evaluation and control is important for the success of corporate strategy. It is
also necessary for taking decisions on whether strategy should continued or modified.
 The success of a strategy should be considered both in terms of effectiveness and efficiency. While it
is easy to measure efficiency, it is relatively more difficult to measure effectiveness.
 The problem in evaluation and control is that of developing appropriate measures. The key variables
of the organization may guide the duration of measures for evaluation and control.
 Structure also plays an important role in evaluation and control of strategy. Defective structures
may lead to inadequate evaluation and control. The economic performance of an organization unit
must be distinguished from the performance of people of the unit from the viewpoint of follow-up
action.
 Factors which are not under the control of a responsibility centre must be excluded from the reports
in evaluating the performance of the responsibility centre people. For evaluation of astrategy or
concrete action, all factors of cost and environment must be included.
 On the basis of evaluation the corrective action may be taken if the performance is not up to the
planned levels. If it is found that the performance of the responsibility centre is not improving or is
unlikely to improve, the targets may be revised.
 If there are successive failures, the strategy may have to be abandoned. Before abandoning the
strategy, however, an examination should be made as to whether implementation has been
adequate.
1. Mention the essential features of an effective evaluation and control system. (2014 – QP206)
(5)
Answer: Strategic evaluation and control could be defined as the process of determining the effectiveness
of a given strategy in achieving the organizational objectives and taking corrective action wherever
required.
9 Characteristics of an Effective Control Systems
Controls at every level focus on inputs, processes and outputs. It is very important to have effective controls
at each of these three stages.
Effective control systems tend to have certain common characteristics. The importance of these
characteristics varies with the situation, but in general effective control systems have following
characteristics.
1. Accuracy:
Effective controls generate accurate data and information. Accurate information is essential for effective
managerial decisions. Inaccurate controls would divert management efforts and energies on problems that
do not exist or have a low priority and would fail to alert managers to serious problems that do require
attention.
2. Timeliness:
There are many problems that require immediate attention. If information about such problems does not
reach management in a timely manner, then such information may become useless and damage may occur.
Accordingly, controls must ensure that information reaches the decision makers when they need it so that a
meaningful response can follow.
3. Flexibility:
The business and economic environment is highly dynamic in nature. Technological changes occur very fast.
A rigid control system would not be suitable for a changing environment. These changes highlight the need
for flexibility in planning as well as in control.
Strategic planning must allow for adjustments for unanticipated threats and opportunities. Similarly,
managers must make modifications in controlling methods, techniques and systems as they become
necessary. An effective control system is one that can be updated quickly as the need arises.
4. Acceptability:
Controls should be such that all people who are affected by it are able to understand them fully and accept
them. A control system that is difficult to understand can cause unnecessary mistakes and frustration and
may be resented by workers.
Accordingly, employees must agree that such controls are necessary and appropriate and will not have any
negative effects on their efforts to achieve their personal as well as organizational goals.
5. Integration:
When the controls are consistent with corporate values and culture, they work in harmony with
organizational policies and hence are easier to enforce. These controls become an integrated part of the
organizational environment and thus become effective.

6. Economic feasibility:
The cost of a control system must be balanced against its benefits. The system must be economically
feasible and reasonable to operate. For example, a high security system to safeguard nuclear secrets may be
justified but the same system to safeguard office supplies in a store would not be economically justified.
Accordingly, the benefits received must outweigh the cost of implementing a control system.
7. Strategic placement:
Effective controls should be placed and emphasized at such critical and strategic control points where
failures cannot be tolerated and where time and money costs of failures are greatest.
The objective is to apply controls to the essential aspect of a business where a deviation from the expected
standards will do the greatest harm. These control areas include production, sales, finance and customer
service.
8. Corrective action:
An effective control system not only checks for and identifies deviation but also is programmed to suggest
solutions to correct such a deviation. For example, a computer keeping a record of inventories can be
programmed to establish “if-then” guidelines. For example, if inventory of a particular item drops below five
percent of maximum inventory at hand, then the computer will signal for replenishment for such items.
9. Emphasis on exception:
A good system of control should work on the exception principle, so that only important deviations are
brought to the attention of management, in other words, management does not have to bother with
activities that are running smoothly. This will ensure that managerial attention is directed towards error and
not towards conformity. This would eliminate unnecessary and uneconomic supervision, marginally
beneficial reporting and a waste of managerial time.

2. What are the Strategic Financial Ratios? Describe the Leverage Ratios. (2016 – QP404) (1+4)
Answer: Use of Financial Ratios

Financial Ratios are used to measure financial performance against standards. Analysts compare financial
ratios to industry averages (benchmarking), industry standards or rules of thumbs and against internal
trends (trends analysis). The most useful comparison when performing financial ratio analysis is trend
analysis. Financial ratios are derived from the three financial statements; Balance Sheet, Income
Statement and Statement of Cash Flows. Financial ratios are used in Flash Reports to measure and improve
the financial performance of a company on a weekly basis.
There are five (5) major categories included in the financial ratios list are:
– Liquidity Ratios
– Activity Ratios
– Debt Ratios
– Profitability Ratios
– Market Ratios
Liquidity Ratios
Liquidity ratios measure whether there will be enough cash to pay vendors and creditors of the company.
Current Ratio
Acid Test Ratio (Quick Ratio)
Activity Ratios
Activity ratios measure how long it will take the company to turn assets into cash.
Daily Sales Outstanding (DSO)

Accounts Receivable Turnover
Daily Payable Outstanding
Accounts Payable Turnover
Inventory Days Outstanding
Inventory Turnover
Debt Ratios
Debt ratios measure the ability of the company to pay its’ long term debt.
Debt Ratio
Debt to Equity Ratio (D/E Ratio)
Times Interest Earned Ratio
Fixed Charge Coverage Ratio
Debt Service Coverage Ratio (DSCR)
Profitability Ratios
The profitability ratios measure the profitability and efficiency in how the company deploys assets to
generate a profit.
Gross Profit Margin

Operating Profit Margin Ratio
Net Profit Margin
Return on Equity Ratio (ROE Ratio)
Return on Investment Ratio (ROI Ratio)
Market Ratios
The market ratios measure the comparative value of the company in the marketplace.
Price Earnings Ratio (P/E Ratio)

Earnings per Share (EPS)
Price to Book Value Ratio (PBV Ratio)
Price to Sales Ratio
Price Earnings Growth Ratio (PEG Ratio)
Dividend Yield
Leverage Ratios:
While some businesses pride themselves on being debt-free, most companies have had to borrow at one
point or another to buy equipment, build new offices or cut payroll checks. For the investor, the challenge is
determining whether the organization’s debt level is sustainable.
Is having debt, in and of itself, harmful? Well, yes and no. In some cases, borrowing may actually be a
positive sign. Consider a company that wants to build a new plant because of increased demand for its
products. It may have to take out a loan or sell bonds to pay for the construction and equipment costs, but
it’s expecting future sales to more than make up for any associated borrowing costs. And because interest
expenses are tax-deductible, debt can be a cheaper way to increase assets than equity.
The problem is when the use of debt, also known as leveraging, becomes excessive. With interest payments
taking a large chunk out of top-line sales, a company will have less cash to fund marketing, research and
development and other important investments.
Large debt loads can make businesses particularly vulnerable during an economic downturn. If the
corporation struggles to make regular interest payments, investors are likely to lose confidence and bid
down the share price. In more extreme cases, bankruptcy becomes a very real possibility.
For these reasons, seasoned investors take a good look at liabilities before purchasing corporate stock or
bonds. As a way to quickly size up businesses in this regard, traders have developed a number of ratios that
help separate healthy borrowers from those swimming in debt.
Debt and Debt-to-Equity Ratios

Two of the most popular calculations, the debt ratio and debt-to-equity ratio, rely on information readily
available on the company’s balance sheet. To determine the debt ratio, simply divide the firm’s total
liabilities by its total assets:
Debt ratio = Total Liabilities / Total Assets
A figure of 0.5 or less is ideal. In other words, no more than half of the company’s assets should be financed
by debt. In reality, many investors tolerate significantly higher ratios. Capital-intensive industries like heavy
manufacturing depend more on debt than service-based firms, for example, and debt ratios in excess of 0.7
are common.
As its name implies, the debt-to-equity ratio instead compares the company’s debt to its stockholder equity.
It’s calculated as follows:
Debt-to-equity ratio = Total Liabilities / Stockholders’ Equity
If you consider the basic accounting equation (Assets – Liabilities = Equity), you may realize that these two
equations are really looking at the same thing. In other words, a debt ratio of 0.5 will necessarily mean a
debt-to-equity ratio of 1. In both cases, a lower number indicates a company less dependent on borrowing
for its operations.
While both these ratios can be useful tools, they’re not without shortcomings. For example, both
calculations include short-term liabilities in the numerator. Most investors, however, are more interested
in long-term debt. For this reason, some traders will substitute “total liabilities” with “long-term liabilities”
when crunching the numbers.
In addition, some liabilities may not even appear on the balance sheet, and thus don’t enter into the
ratio. Operating leases, commonly used by retailers, are one example. Generally Accepted Accounting
Principles, or GAAP, doesn’t require companies to report these on the balance sheet, but they do show up in
the footnotes. Investors who want a more accurate look at debt will want to comb through financial
statements for this valuable information.
Interest Coverage Ratio

Perhaps the biggest limitation of the debt and debt-to-equity ratios is that they look at the total amount of
borrowing, not the company’s ability to actually service its debt. Some organizations may carry what looks
like a significant amount of debt, but they generate enough cash to easily handle interest payments.
Furthermore, not all corporations borrow at the same rate. A company that has never defaulted on its
obligations may be able to borrow at a 3 percent interest rate, while its competitor pays a 6 percent rate.
To account for these factors, investors often use the interest coverage ratio. Rather than looking at the sum
total of debt, the calculation factors in the actual cost of interest payments in relation to operating
income (considered one of the best indicators of long-term profit potential). It’s determined with this
straightforward formula:
Interest Coverage Ratio = Operating Income / Interest Expense
In this case, higher numbers are seen as favorable. In general, a ratio of 3 and above represents a strong
ability to pay off debt, although here, too, the threshold varies from one industry to another.
Analyzing Investments Using Debt Ratios

To understand why investors often use multiple ways to analyze debt, let’s look at a hypothetical company,
Tracy’s Tapestries. The company has assets of $1 million, liabilities of $700,000 and stockholder equity
totaling $300,000. The resulting debt-to-equity ratio of 2.3 might scare off some would-be investors.
Total Liabilities ($700,000) / Stockholders’ Equity ($300,000) = 2.3
A look at the business’ interest coverage, though, gives a decidedly different impression. With annual
operating income of $300,000 and yearly interest payments of $80,000, the firm is able to pay creditors on
time and have cash left over for other outlays.
Operating Income ($300,000) / Interest Expense ($80,000) = 3.75
Because reliance on debt varies by industry, analysts usually compare debt ratios to those of direct
competitors. Comparing the capital structure of a mining equipment company to that of a software
developer, for instance, can result in a distorted view of their financial health.
Ratios can also be used to track trends within a particular company. If, for example, interest expenses
consistently grow at a faster pace than operating income, it could be a sign of trouble ahead.
The Bottom Line

While carrying a modest amount of debt is quite common, highly leveraged businesses face serious risks.
Large debt payments eat away at revenue and, in severe cases, put the company in jeopardy of default.
Active investors use a number of different leverage ratios to get a broad sense of how sustainable a firm’s
borrowing practices are. In isolation, each of these basic calculations provide a somewhat limited view of
the company’s financial strength. But when used together, a more complete picture emerges – one that
helps weed out healthy corporations from those that are dangerously in debt.
3. What is special alert control? (2013 – QP206) (4)

Answer: A special alert control is the need to thoroughly, and often rapidly, reconsider the firm's basis
strategy based on a sudden, unexpected event.
The analysts of recent corporate history are full of such potentially high impact surprises (i.e., natural
disasters, chemical spills, plane crashes, product defects, hostile takeovers etc.).
While Pearce and Robinson suggest that special alert control be performed only during strategy
implementation, Preble recommends that because special alert controls are really a subset of strategic
surveillance that they be conducted throughout the entire strategic management process.
The characteristics of each control component are including the component's purpose, mechanism used to
implement it, the procedure to be followed, degree of focusing, information sources, and
organizational/personnel to be utilized.
4. Mention some cases where diversified portfolio appeared unsuccessful in Indian scenario. (2013 –
QP206) (6)
Answer: Almost every company struggles with a diversification at some point. When times are
good diversification makes unused cash work hard; when times are bad companies enter new territories to
re-invent themselves. Such efforts could represent new growth areas or they could prove to be costly
distractions. Inevitably, there will be some bad moves, especially with acquisitions that divert resources
from a core mission.
The big question therefore: Should a company stay focused on the competencies that made it the leader or
help it be counted among the great, or should it diversify to keep up with, or try and overtake, competitors?
Experts say that's one of the trickier questions facing a whole host of companies irrespective of their
industry. Indeed, the toughest test for leaders is to determine when to move forward and when to pull back.
No management textbook or theory can tell you that.
Of course, there are real-life examples to learn from. Here The Strategist looks at two recent examples - of
companies from two very different industries that went through the whole grind of diversification and have
now decided to exit a few businesses and concentrate on others where they can claim to have competitive
advantage. The first one is a leader in the movie exhibition business, namely PVR, while the second is
homegrown PC maker HCL Infosystems.
PVR began its innings in the movie exhibition business by introducing world-class multiplexes in India and
went for a 'related' diversification into the high-risk high-return business of film production. It decided to get
out of the movie making business post the 2012 release of Hindi movie Shanghai because it doesn't see this
as a viable business opportunity for the long term. HCL Infosystems, our second example, said recently that
it will phase out its manufacturing business over the next few years to improve margins and increase
organisational efficiency. The company will instead focus on strengthening the services and distribution
verticals. HCL Infosystems CEO and managing director Harsh Chitale has been quoted in the media
saying HCL "will be in PC distribution and in after sales services but will not manufacture HCL branded
products in the future".
Though both these companies diversified, both understood the need to pause even as one went back to
where it started and the other moved away from it. What's pertinent is that both paused at the right time,
mulled over what to do next and acted without delay to avoid any distress to their businesses or people.
Back to basics
The latest initiatives of PVR and HCL, or for that matter, Google and Microsoft, raise some interesting
questions. What kinds of expansions are synergistic with the core business, and which are unrelated? Can a
company remain nimble enough and defend its current turf? Does it risk a backlash as it moves into new
markets? Answering that question effectively forces companies to assess their true competitive advantages.
A recent study by Booz & Co covering more than 6,000 companies in 65 industries finds that the best
performance improvement and growth opportunity for a company comes when it rises to the top of the
industry that it operates in. According to Evan Hirsh, partner, Booz & Co, also the co-author of The Grass
isn't Greener, leaders often try to expand into hot new growth industries looking for accelerated
performance they think isn't available in their core business. Such efforts often prove futile because
companies fail to leverage existing expertise or assets into new businesses to generate returns. "Companies
perform better and produce better shareholder returns when they strengthen the key capabilities that help
them win in their core industry. Companies that try to grow into new industries are likely to fail," says the
study.
Consider PVR against this backdrop. According to Kamal Gianchandani, group president, PVR, the company
spotted a viable business opportunity in the business of film production around the year 2007. Moving into
film production meant allocating a fair amount of capital to back good cinema. What the company failed to
note was that while the production costs for films had sky-rocketed, returns were tougher to come by.
Since the company was looking at a new revenue stream it went whole hog and made huge investments in
its film making business - like hiring a completely new team with the mandate to nurture the production
arm. The problem, in hindsight, was that it is tough to achieve scale in the business of film production.
"The business of film production can be a margin game but not one of scale," says Gianchandani. Also, the
nature of the business is such that you can't be hands-off. It demands that the leadership team is clued into
the process from start to finish - go through scripts, meet film directors and sit with them on story sessions,
get into the nitty-gritty of production, attend shoots et al. In other words, understand the rules of a
completely new ballgame. "The business was taking up a disproportionate amount of management time. On
the other hand, the exhibition business, our mainstay, threw up new opportunities," says Gianchandani.
"Also, we realised the returns on investment were far higher here," he adds.
Film exhibition, the mainstay of PVR, has consistently contributed about 90 per cent to the total revenues of
the company. At the end of 2007, the success of films like Taare Zameen Par ensured that the business, in its
very first year, would contribute 9 per cent to the total revenues of the company. However, by 2012,
when PVR decided to shut its film production arm, the segment's contribution to the total revenues of the
company had dwindled to 2 per cent.
According to an August report on PVR by Motilal Oswal the closure of production business is 'a step in the
right direction'. The report notes, "Though two of its productions - Taare Zameen Par and Jaane Tu Ya Jaane
Na - did well, its Khelein Hum Jee Jaan Sey was a flop at box office. Given the capital intensity and high risks
involved, the management decided to reduce its focus on the production business. It has taken full control
over PVR Pictures by buying out the 40 per cent stake held by JP Morgan Mauritius Holdings and ICICI
Venture's India Advantage Fund for Rs 600 million. PVR used PVR Pictures' cash balance of Rs 400 million to
part-finance the deal. PVR Pictures has now become a wholly-owned subsidiary and is focusing on the
distribution business."
"Everything is okay if your core business doesn't suffer," says Gianchandani. He adds that the decision to
branch into film production didn't really hurt the company because it continued to invest in its bread and
butter and exploit the new opportunities therein. "Diversification is about revenue. If you see the growth
opportunity is limited out there, save yourself the time and come back to see growth in the core business
area," he says.
Onto greener pastures

Experts say diversifications fail due to a variety of reasons - from leaders overestimating their ability to
manage new businesses, underestimating costs and competition to a new sector losing sheen (in India, for
instance, the telecom sector seems to be trouble thanks to scams and piling of debt in companies).
The reverse, interestingly, is also true. You may want to march into new markets when your original
business faces the threat of shrinkage or even extinction. See how HCL Infosystems did to understand when
to quit a market. It decided to concentrate and grow the business of services and distribution just when it
felt the heat - like most others - in the PC manufacturing business. As things stand, the PC business accounts
for about 8 per cent (around Rs 1,000 crore) of HCL Infosystems' overall revenues and has been under
pressure for some time now as new categories like tablets and phablets are finding more takers.
To be fair HCL is not the only one; in the last few years, most PC makers in the country have incurred losses
due to the fluctuation of the rupee against other currencies, especially the US dollar. In any case, the PC
business in India is low margin and more than 90 per cent of the components are imported. Plus between
Lenovo, Dell and HP the desktop market was fast slipping away from its grasp.
That said, HCL's wasn't an overnight decision. The transition has been in the works for two years now. As a
first step. the company put in place a Central Programme Management Office (CPMO) consisting of a core
team headed by Rothin Bhattacharyya, EVP, Marketing, Strategy and Corporate
Development, HCL Infosystems, to oversee the overall transition process. Then, from each of the shared
functions such as HR, administration, taxation etc, single point of contacts or SPOCs were appointed. They
were responsible for completing the required restructuring plan pertaining to their function. From each of
the business units, SPOCs were nominated to become responsible for coordinating with the CPMO and
functional SPOCs to ensure all the actions for the business unit were carried out comprehensively and in
time. The core team in the CPMO interacted with the business leaders and the business SPOCs and updated
them on the restructuring process. To make the procedure transparent, a detailed FAQ document on the
various facets of the organisation that were being impacted because of the restructuring was shared across
the organisation.
The process of restructuring was initiated with a clear plan to carve out the diverse businesses into distinct
entities, establish operational and financial delineation and ensure the independence of the different
strategic business units. The idea, says Bhattacharyya, is to enable each business to meet its respective
requirements and at the same time create an organisation customised to the needs and goals of that
particular business. "While there would be now greater independence there would also be accountability for
each business… Our large growth focus businesses such as services and distribution will now be able to
receive undivided attention," he adds. In his view, PC manufacturing in India (with an import content of
almost 90 per cent) has been impacted in the last two years due to the volatility in the exchange rate, a
major reason why HCL's focus on manufacturing in the value chain of PCs in India has gone down.
Evidently, the decision to diversify or focus needs profound business logic behind it. As Amandeep Kalsi,
director, Protiviti Consulting, points out, the first and biggest lesson from the experiences of the two Indian
companies is that diversification needs a systematic and focused approach to the business. "PVR was correct
in continuing to see growth potential and opportunity in the movie exhibition business even after it
diversified into a completely different business. HCL, on the other hand, was quick to spot growth in
diversified businesses to such an extent that the core business getting a hit didn't quite matter," explains
Kalsi.
So even as companies grapple with the fundamental focus-versus-diversify dilemma, it is important to

understand portfolio diversification and active risk management are essential parts of financial analysis
which become even more crucial when competition mounts or when categories shrink and there is an
urgent need to scout for new sources of revenue. But the recipe for success is in identifying your strengths
and competences and sticking to them.
Pulling the right lever
Here are a few things to keep in mind before you take the plunge:
* Question yourself
Do you want to diversify because everyone else is doing it? Do you sense a profitable business
in diversification? What do you want to chase through diversification; scale, profitability, viewers
/clients/consumers? Will the diversification be through acquisitions or will it be a start-up? Can
the diversification add profitability?
* Understand how to do it
Once you have the clear understanding of why the diversification is happening, do it right by having a
leadership team that is completely in sync with what it aspires to do. This is important because if
the diversification fails, the leaders (who lead from the front) are well equipped and in sync with the
understanding of why it is crucial to come back to the core competency area. Second, prepare yourself with
a diversification plan so that the entire organization is aware of the growth strategies. Only a good, sound
and a well-intentioned plan can be executed deliberately for diversifying.
* Failing is not a crime

Not all diversification plans are successful despite the best strategies but it doesn't mean you cannot do
damage control. Apart from infusing new leadership team (this should be part of the planning strategy), you
can also look at partial exits by roping in investors or partners who understand the business well. If nothing
works, it's alright.
* Keep the focus

Keep reassessing your core competency business strength even as you expand and diversify for
opportunities (PVR was sharp in noting opportunity in its core business despite being the leader already).
However, HCL was equally prudent in noting the failure in its core business and kept up the momentum in
other related businesses, which are now its core strength areas. Eventually, it is the focus that is important.
 Write a short note on Strategic Control. (2013 – QP 206) (5)
Answer: “Strategic control focuses on the dual questions of whether:

(1) The strategy is being implemented as planned; and
(2) The results produced by the strategy are those intended.
This definition refers to the traditional review and feedback stages which constitutes the last step in the
strategic management process. Normative models of the strategic management process have depicted it as
including their primary stages: strategy formulation, strategy implementation, and strategy evaluation
(control).
Strategy evaluations concerned primarily with traditional controls processes which involves the review and
feedback of performance to determine if plans, strategies, and objectives are being achieved, with the
resulting information being used to solve problems or take corrective actions.
Recent conceptual contributors to the strategic control literature have argued for anticipatory feed forward
controls that recognize a rapidly changing and uncertain external environment.
Schreyogg and Steinmann (1987) have made a preliminary effort, in developing new system to operate on a
continuous basis, checking and critically evaluating assumptions, strategies and results. They refer to
strategic control as “the critical evaluation of plans, activities, and results, thereby providing information
for the future action“.
Schreyogg and Steinmann based on the shortcomings of feedback-control. Two central characteristics if this
feedback control is highly questionable for control purposes in strategic management: (a) feedback control is
post-action control and (b) standards are taken for granted.
Schreyogg and Steinmann proposed an alternative to the classical feedback model of control: a 3-step model
of strategic control which includes premise control, implementation control, and strategic
surveillance. Pearce and Robinson extended this model and added a component “special alert control” to
deal specifically with low probability, high impact threatening events.
Strategic Control
Time (t ) marks the point where strategy formulation starts. Premise control is established at the point in
time of initial premising (t ). From here on promise control accompanies all further selective steps of
premising in planning and implementing the strategy. The strategic surveillance of emerging events parallels
the strategic management process and runs continuously from time (t ) through (t ). When strategy
implementation begins (t ), the third control device, implementation control is put into action and run
through the end of the planning cycle (t ). Special alert controls are conducted over the entire planning
cycle.
1. Premise Control in Strategic Control
Every strategy is based on certain planning premises or predictions. Premise control is designed to check
methodically and constantly whether the premises on which a strategy is grounded on are still valid. If you
discover that an important premise is no longer valid, the strategy may have to be changed. The sooner you
recognize and reject an invalid premise, the better. This is because the strategy can be adjusted to reflect
the reality.
Planning premises/assumptions are established early on in the strategic planning process and act as a basis
for formulating strategies.
“Premise control has been designed to check systematically and continuously whether or not the
premises set during the planning and implementation process are still valid.
It involves the checking of environmental conditions. Premises are primarily concerned with two types of
factors:
 Environmental factors (for example, inflation, technology, interest rates, regulation, and
demographic/social changes).
 Industry factors (for example, competitors, suppliers, substitutes, and barriers to entry).
All premises may not require the same amount of control. Therefore, managers must select those premises
and variables that (a) are likely to change and (b) would have a major impact on the company and its
strategy if they did.
2. Strategic Surveillance in Strategic Control
Strategic surveillance is designed to observe a wide range of events within and outside your organization
that are likely to affect the track of your organization’s strategy. It’s based on the idea that you can uncover
important yet unanticipated information by monitoring multiple information sources. Such sources include
trade magazines, journals such as The Wall Street Journal, trade conferences, conversations and
observations.
Compared to premise control and implementation control, strategic surveillance is designed to be a

relatively unfocused, open, and broad search activity.
“Strategic surveillance is designed to monitor a broad range of events inside and outside the company
that are likely to threaten the course of the firm’s strategy.”
The basic idea behind strategic surveillance is that some form of general monitoring of multiple information
sources should be encouraged, with the specific intent being the opportunity to uncover important yet
unanticipated information.
Strategic surveillance appears to be similar in some way to “environmental scanning.” The rationale,
however, is different. Environmental, scanning usually is seen as part of the chronological planning
cycle devoted to generating information for the new plan.
By way of contrast, strategic surveillance is designed to safeguard the established strategy on a continuous
basis.
3. Implementation Control in Strategic Control
Implementing a strategy takes place as a series of steps, activities, investments and acts that occur over a
lengthy period. As a manager, you’ll mobilize resources, carry out special projects and employ or reassign
staff. Implementation control is the type of strategic control that must be carried out as events unfold.
There are two types of implementation controls: strategic thrusts or projects, and milestone reviews.
Strategic thrusts provide you with information that helps you determine whether the overall strategy is
shaping up as planned. With milestone reviews, you monitor the progress of the strategy at various intervals
or milestones.
Strategic implementation control provides an additional source of feed forward information.
“Implementation control is designed to assess whether the overall strategy should be changed in light of
unfolding events and results associated with incremental steps and actions that implement the overall
strategy.”
Strategic implementation control does not replace operational control. Unlike operations control, strategic
implementation control continuously questions the basic direction of the strategy. The two basic types of
implementation control are:
1. Monitoring strategic thrusts (new or key strategic programs). Two approaches are useful in enacting
implementation controls focused on monitoring strategic thrusts: (1) one way is to agree early in the
planning process on which thrusts are critical factors in the success of the strategy or of that thrust; (2)
the second approach is to use stop/go assessments linked to a series of meaningful thresholds (time,
costs, research and development, success, etc.) associated with particular thrusts
2. Milestone Reviews. Milestones are significant points in the development of a programme, such as
points where large commitments of resources must be made. A milestone review usually involves a full-
scale reassessment of the strategy and the advisability of continuing or refocusing the direction of the
company. In order to control the current strategy, must be provided in strategic plans.
4. Special Alert Control in Strategic Control

A special alert control is the rigorous and rapid reassessment of an organization’s strategy because of the
occurrence of an immediate, unforeseen event. An example of such event is the acquisition of your
competitor by an outsider. Such an event will trigger an immediate and intense reassessment of the firm’s
strategy. Form crisis teams to handle your company’s initial response to the unforeseen events.
“A special alert control is the need to thoroughly, and often rapidly, reconsider the firm’s basis strategy
based on a sudden, unexpected event.”
The analysts of recent corporate history are full of such potentially high impact surprises (i.e., natural
disasters, chemical spills, plane crashes, product defects, hostile takeovers etc.).
While Pearce and Robinson suggest that special alert control be performed only during strategy
implementation, Preble recommends that because special alert controls are really a subset of strategic
surveillance that they be conducted throughout the entire strategic management process.
The characteristics of each control component are detailed in Table 6-4, including the component’s purpose,
mechanism used to implement it, the procedure to be followed, degree of focusing, information sources,
and organizational/personnel to be utilized.
5.
Business Policy and Strategic Management Evaluation of Strategy
Evaluation of Strategy
Learning Objective:
 To understand the process of evaluation;

 To understand the different aspects of business portfolio analyses;
 To understand the importance of qualitative measures used for evaluation;
 To understand the concept of balanced score-card; and
 To discuss the characteristics of an effective evaluation system.
Introduction
Strategy evaluation is the last stage of the strategic management process and comes after strategy
formulation and implementation as shown below.
STRATEGY FORMULATION  STRATEGY IMPLEMENTATION  STRATEGY EVALUATION
An organization can have one of the best formulated and implemented strategies but if the evaluation of
these is not done, they become obsolete over a period of time. Therefore, it becomes important to have an
effective evaluation system so as to help the organization to achieve its objectives. The evaluation process
involves the control mechanism, which helps in taking corrective actions.
Process of Evaluation
The key to a successful strategy is the effective implementation and evaluation system. Any kind of error in
the strategic decisions will harm the organization, which in the long-run may be highly dangerous.
Therefore, it is very necessary for the management to have a continuous evaluation system based on which
the corrective actions may be taken. The following figure shows the process of evaluation.
A B
Objectives Self-Performance Measure
Standards & Performance&Monitor
Environment the Environment
Strategy
C
(1)
(4) Implementation
(3)
(2)
Analyse the Reasons for
Performance
D
Figure: Evaluation of Strategy
The first phase of this process consists of selecting the key success factors, developing measures and setting
standards for the same, and collecting information about actual state (performance on these measures). The
second phase consists of comparison with the standards laid down and initiating action to alter
performance, wherever necessary. The follow up action could relate to people/business or both and could
be tactical or strategic. For instance, if the business has not picked up as expected, it may be necessary to
increase promotional efforts, or revise the product policy, or as a last resort, the firm may pull out of a
particular business.
It is necessary to maintain a distinction between the follow up action towards business/people and
evaluation/control process. If major changes in environment have taken place and if major assumptions
about environment have gone wrong, it may be improper to give credit or discredit to the people for the
deviation in performance from standard set. At the same time good performance of a strategy may not be
due to good performance of the people as there may be windfall gains due to changes in the environment
not imagined at the time of setting the standards of performance or targets.
From the above figure it can be realised that the process of evaluation is quite complex and there are
several pitfalls in proper evaluation and control. The success of an organization is gauged by its effectiveness
and efficiency. Effectiveness is measured by the degree to which the organization has achieved its objectives
while efficiency refers to the manner of resource utilization for achieving the output. The two can thus be
represented as below:
a) Effectiveness = b) Efficiency =
It is easy to evaluate efficiency by comparing output/input of various organizations or organization units

with one another. Inputs, by and large, are always quantifiable. An organization is more efficient than the
other if it uses less resources (inputs) than another, the same output or if for the same input it gives more
output. The latter case requires output to be measured in quantitative terms and hence is more difficult to
assess.
Measurement of effectiveness has both numerator and denominator which are comparatively more difficult
to quantify. Hence assessment of effectiveness is more difficult than the assessment of efficiency of the
organization.
The success of corporate strategy should be evaluated both in terms of efficiency and effectiveness. It is,
however, not common to find an efficient but ineffective organization or vice versa.
In a profit oriented organization, profit becomes a surrogate measure for both efficiency as well as
effectiveness. Profit is the difference between revenue and expense, and thus is a measure of efficiency.
Being the objective itself, profit also becomes a measure of effectiveness. In organizations with multiple
objectives, the situation is different if the surrogate measures like profit are not available/not sufficient for
evaluating the strategy. In such cases the major problem in evaluating the strategy is to develop measures
for evaluating the strategy. The problem is solved by identifying the key variables or key success factors
which are measures of performance of certain key activities of the organization.
Business Portfolio Analyses
Portfolio analysis is an analysis of the corporation as a portfolio of different business with the objective of
managing it for returns on its resources. The business may be in the forms of organizational units, such as
different subsidiaries or divisions of a parent company or Strategic Business Units (SBUs).
Thus, portfolio analysis looks at the corporate investments in different products or industries under the
common corporate jurisdiction. The corporate manager analyses the future implications of their present
resource allocations and continuously evaluates which operations or products to expand or add, and which
ones to be curtailed or disposed off, so that the overall portfolio balance is maintained or improved. The
focus is on the present as well as the future.
The activities of a company and its effectiveness in the market place also depends on what the other
competing companies are doing. Therefore, the portfolio analysis takes into consideration such aspects as
the company’s competitive strengths, resource allocation pattern and the industry characteristics.
Portfolio analysis is primarily concerned with the balancing of the company’s investments in different
products or industries and is useful for highly diversified multi-product companies operating in a limited
market. The different subsidiaries or strategic business units have to be balanced with respect to the three
basic aspects of running the business:
A) Net Cash Flow

B) State of Development
C) Risk
Portfolio analysis is one of the methods to assist managers in evaluating the strategy.
Let us now discuss different types of Business Portfolio Analyses.
The features of Corporate Portfolio Analysis:
 A corporate portfolio analysis takes a close look at a company’s services and products.
 Each segment of a company’s product line is evaluated including sales, market share, cost of
production and potential market strength.
 The analysis categorizes the company’s products and looks at the competition.
 The goal is to identify business opportunities, strategize for the future and direct business resources
towards that growth potential.
 Portfolio analysis can be performed by an outside firm or by company management.
 There are various tools used for a portfolio analysis with some that look at market share and others
that evaluate a company’s product line against the competition.
 While the process typically points the way for spending for future growth, it can also be used to
identify products or services which short-term may become obsolete, suggesting that part of the
portfolio be retired and the funds used for areas with more promising growth potential.
Corporate Portfolio Analysis is used when an organization’s corporate strategy involves a number of
businesses. Managers can manage this portfolio of businesses using a corporate portfolio matrix, such as the
Boston Consulting Group (BCG) portfolio Matrix, Product (industry) Life Cycle (PLC), General Electric (GE)
Matrix, ADL Matrix, and Directional Policy Matrix (DPM).
Display Matrices
The purpose of analysis is to optimally allocate resources for the best total return, with focus on the
corporate strategies. Many different approaches involving different display matrices have evolved over the
years, with the common objective of successful diversification. Some of the common display matrices are:
A) BCG’s Growth-share Matrix

B) McKinsey Matrix
C) Strategic Planning Institute’s Matrix
D) Arthur D. Little Company’s Matrix
E) Hofer’s Product/Market Evolution Matrix
BCG’s Growth-Share Matrix
The Boston Consulting Group (BCG) is a management consulting firm founded by Harvard Business School
alum Bruce Henderson in 1963. The growth-share matrix is a chart created by group in 1970 to help
corporation analyze their business units or product lines, and decide where to allocate cash. It was popular
for two decades, and is still used as an analytical tool. The Boston Consulting Group (BCG) is a global
management consulting firm and the world’s leading advisor on business strategy.
“BCG matrix (or growth-share matrix) is a corporate planning tool, which is used to portray firm’s brand
portfolio or SBUs on a quadrant along relative market share axis (horizontal axis) and speed of market
growth (vertical axis) axis.”
“Growth-share matrix is a business tool, which uses relative market share and industry growth rate factors
to evaluate the potential of business brand portfolio and suggest further investment strategies.”
It classifies business portfolio into four categories based on industry attractiveness (growth rate of that
industry) and competitive position (relative market share). These two dimensions reveal likely profitability of
the business portfolio in terms of cash needed to support that unit and cash generated by it. The general
purpose of the analysis is to help understand, which brands the firm should invest in and which ones should
be divested.
Market growth rate. High market growth rate means higher earnings and sometimes profits but it also
consumes lots of cash, which is used as investment to stimulate further growth. Therefore, business units
that operate in rapid growth industries are cash users and are worth investing in only when they are
expected to grow or maintain market share in the future.
Relative market share. One of the dimensions used to evaluate business portfolio is relative market share.
Higher the market shares for a corporate, higher is the cash returns. This is because a firm that produces
more, benefits from higher economies of scale and experience curve, which results in higher profits.
Nonetheless, it is worth to note that some firms may experience the same benefits with lower production
outputs and lower market share.
Figure: BCG Matrix
There are four quadrants into which firms’ brands are classified:
Dogs. Dogs hold low market share compared to competitors and operate in a slowly growing market. In
general, they are not worth investing in because they generate low or negative cash returns. But this is not
always the truth. Some dogs may be profitable for long period of time, they may provide synergies for other
brands or SBUs or simple act as a defense to counter competitors moves. Therefore, it is always important
to perform deeper analysis of each brand or SBU to make sure they are not worth investing in or have to be
divested.
Strategic choices: Retrenchment, divestiture, liquidation
Cash cows. Cash cows are the most profitable brands and should be “milked” to provide as much cash as
possible. The cash gained from “cows” should be invested into stars to support their further growth.
According to growth-share matrix, corporates should not invest into cash cows to induce growth but only to
support them so they can maintain their current market share. Again, this is not always the truth. Cash cows
are usually large corporations or SBUs that are capable of innovating new products or processes, which may
become new stars. If there would be no support for cash cows, they would not be capable of such
innovations.
Strategic choices: Product development, diversification, divestiture, retrenchment
Stars. Stars operate in high growth industries and maintain high market share. Stars are both cash
generators and cash users. They are the primary units in which the company should invest its money,
because stars are expected to become cash cows and generate positive cash flows. Yet, not all stars become
cash flows. This is especially true in rapidly changing industries, where new innovative products can soon be
outcompeted by new technological advancements, so a star instead of becoming a cash cow, becomes a
dog.
Strategic choices: Vertical integration, horizontal integration, market penetration, market development,
product development
Question marks (or, Problem Child or, Wild Cat) Question marks are the brands that require much closer
consideration. They hold low market share in fast growing markets consuming large amount of cash and
incurring losses. It has potential to gain market share and become a star, which would later become cash
cow. Question marks do not always succeed and even after large amount of investments they struggle to
gain market share and eventually become dogs. Therefore, they require very close consideration to decide if
they are worth investing in or not.
Strategic choices: Market penetration, market development, product development, divestiture
BCG matrix quadrants are simplified versions of the reality and cannot be applied blindly. They can help as
general investment guidelines but should not change strategic thinking. Business should rely on
management judgment, business unit strengths and weaknesses and external environment factors to make
more reasonable investment decisions.
Advantages and disadvantages of BCG Matrix
Benefits of the matrix:

 Easy to perform;
 Helps to understand the strategic positions of business portfolio;
 It’s a good starting point for further more thorough analysis.
Growth-share analysis has been heavily criticized for its over-simplification and lack of useful application.
Following are the main limitations of the analysis:

 Business can only be classified to four quadrants. It can be confusing to classify an SBU that falls
right in the middle;
 It does not define what ‘market’ is. Businesses can be classified as cash cows, while they are
actually dogs, or vice versa.
 Does not include other external factors that may change the situation completely.
 Market share and industry growth are not the only factors of profitability. Besides, high market
share does not necessarily mean high profits.
It denies that synergies between different units exist. Dogs can be as important as cash cows to businesses
if it helps to achieve competitive advantage for the rest of the company.
How to Perform BCG Matrix Analysis, or, Methodology for Building BCG Matrix
Step 1
Choose the unit. BCG matrix can be used to analyze SBUs, separate brands, products or a firm as a unit
itself. Which unit will be chosen will have an impact on the whole analysis. Therefore, it is essential to define
the unit for which you’ll do the analysis.
Step 2
Define the market. Defining the market is one of the most important things to do in this analysis. This is
because incorrectly defined market may lead to poor classification. For example, if we would do the analysis
for the Daimler’s Mercedes-Benz car brand in the passenger vehicle market it would end up as a dog (it
holds less than 20% relative market share), but it would be a cash cow in the luxury car market. It is
important to clearly define the market to better understand firm’s portfolio position.
Step 3
Calculate relative market share. Relative market share can be calculated in terms of revenues or market
share. It is calculated by dividing your own brand’s market share (revenues) by the market share (or
revenues) of your largest competitor in that industry. For example, if your competitor’s market share in
refrigerator’s industry was 25% and your firm’s brand market share was 10% in the same year, your relative
market share would be only 0.4. Relative market share is given on x-axis. It’s top left corner is set at 1,
midpoint at 0.5 and top right corner at 0 (see the example below for this).
Relative Market Share =
Step 4
Find out market growth rate. The industry growth rate can be found in industry reports, which are usually
available online for free. It can also be calculated by looking at average revenue growth of the leading
industry firms. Market growth rate is measured in percentage terms. The midpoint of the y-axis is usually set
at 10% growth rate, but this can vary. Some industries grow for years but at average rate of 1 or 2% per
year. Therefore, when doing the analysis you should find out what growth rate is seen as significant
(midpoint) to separate cash cows from stars and question marks from dogs.
Step 5
Draw the circles on a matrix. After calculating all the measures, you should be able to map your brands on
the matrix. You should do this by drawing a circle for each brand. The size of the circle should correspond to
the proportion of business revenue generated by that brand.
Let’s draw a BCG Matrix for Corporate A:
Corporate A’s BCG Matrix:
Brands Revenues (in % of Largest Your Brand’s Relative Market

Rs.) Corporate Competitor’s Market Market Growth Rate
Revenues Market Share Share
Share
1 500,000 54% 25% 25% 1 3%
2 350,000 38% 30% 5% 0.17 12%
3 50,000 6% 45% 30% 0.67 13%
4 20,000 2% 10% 1% 0.1 15%
Strategic Implications OF BCG Matrix
Most companies will have different segments scattered across the four quadrants of BCG matrix,
corresponding to Cash Cow, Dog, Question Mark and Star businesses.
The general strategy of a company with diverse portfolio is to maintain its competitive position in the Cash
Cows, but avoid over-investing. The surplus cash generated by Cash Cows should be invested first in Star
businesses, if they are not self-sufficient, to maintain their relative competitive position. Any surplus cash
left with the company may be used for selected Question Mark businesses to gain market share for them.
Those businesses with low market share, and which cannot adequately be funded, may be considered for
divestment. The Dogs are generally considered as the weak segments of the company with limited or now
new investments allocated to them.
The BCG Growth-share matrix links the industry growth characteristic with the company’s competitive
strength (market share), and develops a visual display of the company’s market involvement, thereby
indirectly indicating current resource deployment. (The sales to asset ratio are generally stable over time
across industries). The underlying logic is that investment is required for growth while maintaining or
building market share. But, while doing so, a strong competitive business in an industry with low growth rate
will provide surplus cash for deployment elsewhere in the Corporation. Thus, growth uses cash whereas
market competitive strength is a potential source of cash. In terms of BCG classification, the cash position of
various types of businesses can be visualised as in table below.
Business Type Cash Source Cash Use Net Cash Balance

1. COW More Less Funds available, so milk and deploy
2. STAR More More Build competitive position and grow
3. DOG Less More Divest & redeploy proceeds
4. QUESTION MARKS Less More Funds needed to invest selectively to improve
competitive position
Table: Cash Position of Various Businesses
Limitations of BCG Matrix
The Growth-share BCG Matrix has certain limitations and weak points which must be kept in mind while
using portfolio analysis for developing strategic alternatives.
These are now briefly discussed.
Predicting Profitability from Growth and Market Share
BCG analysis assumes that profits depend on growth and market share. The attractiveness of an industry
may be different from its simple growth rate, and the firm’s competitive position may not be reflected in its
market share. Some other sophisticated approaches have been evolved to overcome such limitations. There
have been specific research studies which illustrate that the well-managed Dog businesses can also become
good cash generators. These organizations relying on high-quality goods, with medium pricing and judicious
expenditure on R & D and marketing, can still provide impressive return on investment of above 20 per cent.
Difficulty in Determining Market Share
There is a heavy dependence on the market share of a business as an indicator of its competitive strength.
The calculation of market share is strongly influenced by the way the business activity and the total market
are defined. For instance, the market for helicopters may encompass all types of helicopters, or only heavy
helicopters or only heavy military helicopters. Furthermore, from geographical point of view the market may
be defined on worldwide, national or even regional bases. In case of complex and interdependent industries,
it may also be quite difficult to determine the market share based on the sales turnover of the final product
only.
No Consideration for Experience Curve Synergy
In the BCG approach, businesses in each of the different quadrants are viewed independently for strategic
purposes. Thus, Dogs are to be liquidated or divested. But, within the framework of the overall corporation,
useful experiences and skills can be acquired by operating low-profit Dog businesses which may help in
lowering the costs of Star or Cash Cow businesses. And this may contribute to higher corporate profits.
Disregard for Human Aspect
The BCG analysis, while considering different businesses does not take into consideration the human aspects
of running an organization. Cash generated within a business unit may come to be symbolically associated
with the power of the concerned manager. As such managing a Cash Cow business may be reluctant to part
with the surplus cash generated by his unit. Similarly, the workers of a Dog business which has been decided
to be divested may react strongly against changes in the ownership. They may deem the divestiture as a
threat to their livelihood or security. Thus, BCG analysis could throw up strategic options which may or may
not be easy to implement.
BCG Modifications
It was in 1981 that the Boston Consulting Group realized the limitations of equating market share with the
competitive strength of the company. They have admitted that the calculation of market share is strongly
influenced by the way business activity and the total market domain is defined. A broadly defined market
will give lower market share, whereas a narrow market definition will result in higher market share resulting
in the company as the leader. It was, therefore, recommended that products should be regrouped according
to the manufacturing process to highlight the economies of scale manufacturing, instead of stressing the
market leadership.
On the other hand, BCG still maintains that for branded goods it is important to be the market leader so that
the advantages of economies of scale and price leadership can be fully utilised. But they also concede that
such advantages may still be achieved even if the company is not the largest producer in the industry. Some
other versions of portfolio analysis have however developed much beyond these minor modifications of
BCG analysis.
GE’s Strategic Business Planning Grid
General Electric (or McKinsey) matrix uses market attractiveness as not merely the growth rate of sales of
the product, but as a compound variable dependent on different factors influencing the future profitability
of the business sector. These different factors are either subjectively judged or objectively computed on the
basis of certain weightages, to arrive at the Industry Attractiveness Index. The Index is thus based on a
thorough environmental assessment influencing the sector profitability.
Factors determining Industry Attractiveness:
Sr. No. Factors Determining Industry Attractiveness Typical Weightage

1. Size of market 10%
2. Rate of growth of sales & cyclic nature of business 15%
3. Nature of competition, including vulnerability to foreign 15%
competition
4. Susceptibility to technological obsolescence & new products 10%
5. Entry conditions and social factors 10%
6. Profitability 40%
100%
Against each of these factors, the concerned business is rated on a scale of 1 to 10, and then the weighted
score is determined from a maximum of 10. This gives the Industry Attractiveness Index for the business
under consideration.
Factors determining Competitive Position of the Company as with Industry attractiveness, the Competitive
Position of the Company is analyzed not only in terms of company’s market share, but also in terms of other
factors often appearing in the Strength and Weakness analysis of the company. Thus, product quality,
technological and managerial excellence, industrial relations etc. are also incorporated besides market share
and plant capacity.
A typical scoring of company’s Competitive Position would be as illustrated below:
Factor Weightage Rating (1 to 10) Score

1. Market Share & Capacity 20% 7 1.4
2. Growth Rate 10% 7 0.7
3. Location & Distribution 10% 5 0.5
4. Management Skill 15% 6 0.9
5. Workforce Harmony 20% 7 1.4
6. Technical Excellence including Product & Process 20% 8 1.6
Engineering
7. Company Image 5% 8 0.4
The Industry Attractiveness Index is then plotted along the vertical axis and divided into low, medium and
high sectors. Correspondingly, the Competitive Position is plotted along the Horizontal axis divided into
Strong, Average and Weak segments. For each business in the portfolio, a circle denoting the size of the
industry is shown in the 3 x3 matrix grid while shaded portion corresponds to the company’s market share
as shown in the figure below:
GE rates each of its businesses every year on such a framework. If Industry’s Attractiveness as well as GE’s
Competitive Position is low, a no-growth red stoplight strategy is adopted. Thus, GE expects to generate
earnings but does not plan for any additional investments in this business. If for a business the Industry
Attractiveness is medium and GE’s Competitive Position is high, a growth green stoplight strategy is evolved
for further investment. But if a business has high Industry Attractiveness Index and low GE’s Competitive
Position, this is branded as yellow stoplight business that may be moved either to growth or no growth
category. Such grids are developed at different managerial levels. The final strategic decisions are made by
GE’s Corporate Policy Committee comprising the Chairman, the Vice-Chairman and Vice-Presidents of
Operational areas, including finance.
Shell’s Directional Policy Matrix
As in the GE’s approach, the Business Prospects and Competitive Capabilities are plotted in Shell’s
Directional Policy Matrix. The three-by-three matrix as shown in the following Figure identifies different
strategies for each grid sector. These are explained in the table followed.
Figure: Three-by-three matrix
Strategy Business Prospects Competitive Recommended Strategies

Capability
1. Leader High Strong High priority with all necessary resources to hold high
market position
2. Try Harder High Medium Allocate more resources to move to leader position
3. Double or High Weak Pick products likely to be future high flyers for
Quit doubling and abandon others
4. Growth Average Avg. Strong May have some strong competition with no one
company as leader. Allocate enough resources to
grow with market.
5. Custodial Average Average May have many competitors, so maximize cash
generation with minimal new resources.
6.Phase Low Average Slowly withdraw to recover most of the investments
Withdrawal
7. Cash Low Strong Spend little cash for further expansion and use this as
Generation a cash source for faster growing.
8. Disinvest Low Weak Assets should be liquidated as soon as possible and
invested elsewhere
Table: Strategies for Different Grade Sector
While using the above analysis, Shell realised that the various zones were of irregular shape, sometimes with
overlapping boundaries.
PIMS Model
A program for the Profit Impact of Market Strategy (PIMS) was started at General Electric, and was later
used by the Strategic Planning Institute. The PIMS program analyses data provided by member companies to
discover ‘general laws which determine the business strategy in different competitive environments
producing different profit results’.
Unlike the earlier approaches using judgment for multidimensional factors, the SPI uses multidimensional
cross-sectional regression studies of the profitability of more than 2,000 businesses. It then develops an
industry characteristic, Business Average Profitability, and compares it with the performance in the
concerned company. This model uses statistical relationship estimated from past experience in place of the
judgmental weightages assigned for the importance of different factors behind Industry Attractiveness and
Competitive Position in previous approaches. This scientific objective approach has been criticised that the
analysis relationship in it is based on heterogeneous population, i.e., different types of business, taken at
different time periods.
Profitability is closely linked with market share. A 10 per cent improvement in profitability is linked with 5
per cent improvement in Return on Investment. This has since been rationalised by a number of arguments,
such as ‘the Experience Curve Effect’ which implies reduction in average cost with increase in accumulated
production. The larger company can use better quality management, and thus can exercise greater market
power.
The Arthur D Little (ADL) Strategic Condition Matrix
Although now slightly dated at first glance, The Arthur D Little (ADL) Strategic Condition Matrix offers a
different perspective on strategy formulation. ADL has two main dimensions – competitive
position and industry maturity.
Competitive position is driven by the sectors or segments in which a Strategic Business Unit (SBU) operates.
The product or service which it markets, and the accesses it has to a range of geographically dispersed
markets that are what makes up an organization’s competitive position i.e. product and place.
Industry maturity is very similar to the Product Life Cycle (PLC) and could almost be renamed an ‘industry life
cycle.’ Of course not only industries could be considered here but also segments.
It is a combination of the two aforementioned dimensions that helps us to use ADL for marketing decision-
making. Now let’s consider options in more detail. Competitive position has five main categories:
1. Dominant – This is a particularly extraordinary position. Often this is associated with some form of
monopoly position or customer lock-in e.g. Microsoft Windows being the dominant global operating system.
2. Strong – Here companies have a lot of freedom since position in an industry is comparatively
powerful e.g. Apple’s iPod products.
3. Favourable – Companies with a Favorable position tend to have competitive strengths in segments of a
fragmented market place. No single global player controls all segments. Here product strengths and
geographical advantages come into play.
4. Tenable – Here companies may face erosion by stronger competitors that have a favourable, strong or
competitive position. It is difficult for them to compete since they do not have a sustainable competitive
advantage.
5. Weak – As the term suggests companies in this undesirable space are in an unenviable position. Of course
there are opportunities to change and improve, and therefore to take an organization to a more favourable,
strong or even dominant position.
From here the strategic position of an organisation can be established. Managers then need to decide upon
the best strategic direction for the business. For example, they might use a Gap Analysis. According to ADL,
there are six generic categories of strategy that could be employed by individual SBU’s:
 Market strategies.
 Product strategies.
 Management and systems strategies.
 Technology strategies.
 Retrenchment strategies.
 Operations strategies.
Hofer Matrix
Characteristics
Hofer matrix is one of the tools used to determine the assessment of the strategic position of the company,
as determined by its internal and external factors.
15 squares matrix was created by CH.W. Hofer. It is a development of the ADL and McKinsey matrices and is
especially useful when analyzing strategically diversified entity.
Rules of design
Matrix is created on the basis of two criteria: the maturity of the sector, divided into 5 phases and the
competitive position of companies in the sector. In this way circles are created, which represent different
areas of activity in the company, and the size of the circle is proportional to size of the sector. Sometimes
segments could be added to the circle, which reflect the market share of company in the sector.
Below is a sample matrix constructed according to the principles set out by Hofer. In its interpretation
attention should be paid to possible strategies for products, their life-cycle phases and the markets in
different sectors.
Competitive Position
Phase of the Development of the Sector Strong Average Average
Embryonic A
Coming on the Market D B
Growth & Shocks F C
Maturity E
Exit H G
Fig: Hofer Matrix

Interpretation of fields
In Hofer matrix, we can characterize groups of products:
 Products A. Dilemmas that have chance of success with appropriate marketing strategies and
financial aid
 Product B - Winners, require appropriate marketing strategies and financial aid, if company has
limited resources for advertising managers must make a choice between products A and B
 Products C are potential losers, the weak position, the sector in the growth phase - managers should
make additional analyzes to rule out the possibility of going through the shock phase
 Products D despite the current difficulties can become market leaders or profitable producers
 Products E and F are profitable, so it is possible to introduce other products in the phase of shock
and generate considerable profits
 Products G and H are the losers are in the exit phase of the market, ahead of the full withdrawal
managers should use strategies for "gathering the harvest".
Ansoff Matrix
The Ansoff Growth matrix is another marketing planning tool that helps a business determine its product
and market growth strategy.
Ansoff’s product/market growth matrix suggests that a business’ attempts to grow depend on whether it
markets new or existing products in new or existing markets. The output from the Ansoff product/market
matrix is a series of suggested growth strategies which set the direction for the business strategy. These are
described below:
Market penetration
Market penetration is the name given to a growth strategy where the business focuses on selling existing
products into existing markets.
Market penetration seeks to achieve four main objectives:

 Maintain or increase the market share of current products – this can be achieved by a combination
of competitive pricing strategies, advertising, sales promotion and perhaps more resources
dedicated to personal selling
 Secure dominance of growth markets
 Restructure a mature market by driving out competitors; this would require a much more aggressive
promotional campaign, supported by a pricing strategy designed to make the market unattractive
for competitors
 Increase usage by existing customers – for example by introducing loyalty schemes
A market penetration marketing strategy is very much about “business as usual”. The business is focusing on
markets and products it knows well. It is likely to have good information on competitors and on customer
needs. It is unlikely, therefore, that this strategy will require much investment in new market research.
Market development
Market development is the name given to a growth strategy where the business seeks to sell its existing
products into new markets.
There are many possible ways of approaching this strategy, including:
 New geographical markets; for example, exporting the product to a new country
 New product dimensions or packaging: for example
 New distribution channels (e.g. moving from selling via retail to selling using e-commerce and mail
order)
 Different pricing policies to attract different customers or create new market segments
Market development is a more risky strategy than market penetration because of the targeting of new
markets.
Product development
Product development is the name given to a growth strategy where a business aims to introduce new
products into existing markets. This strategy may require the development of new competencies and
requires the business to develop modified products which can appeal to existing markets.
A strategy of product development is particularly suitable for a business where the product needs to be
differentiated in order to remain competitive. A successful product development strategy places the
marketing emphasis on:
 Research & development and innovation

 Detailed insights into customer needs (and how they change)
 Being first to market
Diversification
Diversification is the name given to the growth strategy where a business markets new products in new
markets.
This is an inherently more risk strategy because the business is moving into markets in which it has little or
no experience.
For a business to adopt a diversification strategy, therefore, it must have a clear idea about what it expects
to gain from the strategy and an honest assessment of the risks. However, for the right balance between
risk and reward, a marketing strategy of diversification can be highly rewarding.
Qualitative Factors
Measuring in organizational performance is one of the important parts of strategy evaluation process. It
consists of the qualitative as well as quantitative aspects. Here, we will stress upon the qualitative factors as
a criterion for performance measurement.
Basically the qualitative factors constitute human factors. According to Seymour Tilles (David, 1997), six
qualitative questions are useful in evaluating strategies.
They are:
1) Is the strategy internally consistent?

2) Is the strategy consistent with the environment?
3) Is the strategy appropriate in view of available resources?
4) Does the strategy involve an acceptable degree of risk?
5) Does the strategy have an appropriate time framework?
6) Is the strategy workable?
Some additional factors also have an impact on strategy evaluation. They can be :
1) How good is the firm’s balance of investments between high-risk and low-risk projects?
2) How good is the firm’s balance of investments between long-term and short-term projects?
3) To what extent are the firm’s alternative strategies socially responsible? etc.
There can be many more such questions which can have an impact on strategy evaluation.
After assessing all these questions, the final step is to take corrective actions to reposition the firm. This is
necessary to adapt to the changing conditions and be able to face the competition.
Balanced Scorecard Basics
The balanced scorecard is a strategic planning and management system that is used extensively in business
and industry, government, and nonprofit organizations worldwide to align business activities to the vision
and strategy of the organization, improve internal and external communications, and monitor organization
performance against strategic goals. It was originated by Drs. Robert Kaplan (Harvard Business School) and
David Norton as a performance measurement framework that added strategic non-financial performance
measures to traditional financial metrics to give managers and executives a more 'balanced' view of
organizational performance. While the phrase balanced scorecard was coined in the early 1990s, the roots
of the this type of approach are deep, and include the pioneering work of General Electric on performance
measurement reporting in the 1950’s and the work of French process engineers (who created the Tableau
de Bord – literally, a "dashboard" of performance measures) in the early part of the 20th century.
Gartner Group suggests that over 50% of large US firms have adopted the BSC. More than half of major
companies in the US, Europe and Asia are using balanced scorecard approaches, with use growing in those
areas as well as in the Middle East and Africa. A recent global study by Bain & Co listed balanced scorecard
fifth on its top ten most widely used management tools around the world, a list that includes closely-related
strategic planning at number one. Balanced scorecard has also been selected by the editors of Harvard
Business Review as one of the most influential business ideas of the past 75 years.
The balanced scorecard has evolved from its early use as a simple performance measurement framework to
a full strategic planning and management system. The “new” balanced scorecard transforms an
organization’s strategic plan from an attractive but passive document into the "marching orders" for the
organization on a daily basis. It provides a framework that not only provides performance measurements,
but helps planners identify what should be done and measured. It enables executives to truly execute their
strategies.
This new approach to strategic management was first detailed in a series of articles and books by Drs.
Kaplan and Norton. Recognizing some of the weaknesses and vagueness of previous management
approaches, the balanced scorecard approach provides a clear prescription as to what companies should
measure in order to 'balance' the financial perspective. The balanced scorecard is a management system
(not only a measurement system) that enables organizations to clarify their vision and strategy and translate
them into action. It provides feedback around both the internal business processes and external outcomes
in order to continuously improve strategic performance and results. When fully deployed, the balanced
scorecard transforms strategic planning from an academic exercise into the nerve center of an enterprise.
Kaplan and Norton describe the innovation of the balanced scorecard as follows:
"The balanced scorecard retains traditional financial measures. But financial measures tell the story of past
events, an adequate story for industrial age companies for which investments in long-term capabilities and
customer relationships were not critical for success. These financial measures are inadequate, however, for
guiding and evaluating the journey that information age companies must make to create future value
through investment in customers, suppliers, employees, processes, technology, and innovation."
Perspectives
The balanced scorecard suggests that we view the organization from four perspectives, and to develop
metrics, collect data and analyze it relative to each of these perspectives:
The Learning & Growth Perspective
This perspective includes employee training and corporate cultural attitudes related to both individual and
corporate self-improvements. In a knowledge-worker organization, people -- the only repository of
knowledge -- are the main resource. In the current climate of rapid technological change, it is becoming
necessary for knowledge workers to be in a continuous learning mode. Metrics can be put into place to
guide managers in focusing training funds where they can help the most. In any case, learning and growth
constitute the essential foundation for success of any knowledge-worker organization.
Kaplan and Norton emphasize that 'learning' is more than 'training'; it also includes things like mentors and
tutors within the organization, as well as that ease of communication among workers that allows them to
readily get help on a problem when it is needed. It also includes technological tools; what the Baldrige
criteria call "high performance work systems."
The Business Process Perspective
This perspective refers to internal business processes. Metrics based on this perspective allow the managers
to know how well their business is running, and whether its products and services conform to customer
requirements (the mission). These metrics have to be carefully designed by those who know these processes
most intimately; with our unique missions these are not something that can be developed by outside
consultants.
The Customer Perspective
Recent management philosophy has shown an increasing realization of the importance of customer focus
and customer satisfaction in any business. These are leading indicators: if customers are not satisfied, they
will eventually find other suppliers that will meet their needs. Poor performance from this perspective is
thus a leading indicator of future decline, even though the current financial picture may look good.
In developing metrics for satisfaction, customers should be analyzed in terms of kinds of customers and the
kinds of processes for which we are providing a product or service to those customer groups.
The Financial Perspective
Kaplan and Norton do not disregard the traditional need for financial data. Timely and accurate funding data
will always be a priority, and managers will do whatever necessary to provide it. In fact, often there is more
than enough handling and processing of financial data. With the implementation of a corporate database, it
is hoped that more of the processing can be centralized and automated. But the point is that the current
emphasis on financials leads to the "unbalanced" situation with regard to other perspectives. There is
perhaps a need to include additional financial-related data, such as risk assessment and cost-benefit data, in
this category.
Strategy Mapping
Strategy maps are communication tools used to tell a story of how value is created for the organization.
They show a logical, step-by-step connection between strategic objectives (shown as ovals on the map) in
the form of a cause-and-effect chain. Generally speaking, improving performance in the objectives found in
the Learning & Growth perspective (the bottom row) enables the organization to improve its Internal
Process Perspective Objectives (the next row up), which in turn enables the organization to create desirable
results in the Customer and Financial perspectives (the top two rows).
Characteristics of an Effective Evaluation Strategy
There are certain basics which should be followed for making the strategic evaluationeffective. These
characteristics are as follows:
1) The activities of evaluation must be economical.

2) The information should neither be too much nor too little.
3) The control should neither be too much nor too less. It should be balanced.
4) The evaluation activities should relate to the firm’s objectives.
Summary:
 Portfolio analysis is an important task of a corporate strategist.

 It provides a framework for analysing the mutual compatibility of diverse operations of an
organization.
 Balanced score card is one of the methods to measure the performance of the organization. There
are many such methods which help in evaluation system.
1. Name the factors which determine the industry attractiveness and business unit strength
for developing the GE Matrix. Is there any limitation of GE Matrix? (2014 – QP206)
(3+2)
Answer: Industry Attractiveness
Industry attractiveness indicates how hard or easy it will be for a company to compete in the market and
earn profits. The more profitable the industry is the more attractive it becomes. When evaluating the
industry attractiveness, analysts should look how an industry will change in the long run rather than in the
near future, because the investments needed for the product usually require long lasting commitment.
Industry attractiveness consists of many factors that collectively determine the competition level in it.
There’s no definite list of which factors should be included to determine industry attractiveness, but the
following are the most common:
 Long run growth rate

 Industry size
 Industry profitability: entry barriers, exit barriers, supplier power, buyer power, threat of substitutes
and available complements (use Porter’s Five Forces analysis to determine this)
 Industry structure (use Structure-Conduct-Performance framework to determine this)
 Product life cycle changes
 Changes in demand
 Trend of prices
 Macro environment factors (use PEST or PESTEL for this)
 Seasonality
 Availability of labor
 Market segmentation
Competitive strength of a business unit or a product
Along the X axis, the matrix measures how strong, in terms of competition, a particular business unit is
against its rivals. In other words, managers try to determine whether a business unit has a sustainable
competitive advantage (or at least temporary competitive advantage) or not. If the company has a
sustainable competitive advantage, the next question is: “For how long it will be sustained?”
The following factors determine the competitive strength of a business unit:
 Total market share

 Market share growth compared to rivals
 Brand strength (use brand value for this)
 Profitability of the company
 Customer loyalty
 VRIO resources or capabilities (use VRIO framework to determine this)
 Your business unit strength in meeting industry’s critical success factors (use Competitive Profile
Matrix to determine this)
 Strength of a value chain (use Value Chain Analysis and Benchmarking to determine this)
 Level of product differentiation
 Production flexibility
Limitations of GE Matrix:
 Requires a consultant or a highly experienced person to determine industry’s attractiveness and

business unit strength as accurately as possible.
 It is costly to conduct.
 It doesn’t take into account the synergies that could exist between two or more business units.
2. Discuss the Balanced Scorecard approach towards organizational appraisal. (2014 –

QP206) (10)
Answer: Using a Balanced Scorecard Approach to Measure Performance

Traditionally, many Federal agencies have measured their organizational performance by focusing on
internal or process performance, looking at factors such as the number of full-time equivalents (FTE)
allotted, the number of programs controlled by the agency, or the size of the budget for the fiscal year. In
contrast, private sector businesses usually focus on the financial measures of their bottom line: return-on-
investment, market share, and earnings-per-share. Alone, neither of these approaches provides the full
perspective of an organization's performance that a manager needs to manage effectively. But by balancing
internal and process measures with results and financial measures, managers will have a more complete
picture and will know where to make improvements.
Balancing Measures
Robert S. Kaplan and David P. Norton have developed a set of measures that they refer to as "a balanced
scorecard." These measures give top managers a fast but comprehensive view of the organization's
performance and include both process and results measures. Kaplan and Norton compare the balanced
scorecard to the dials and indicators in an airplane cockpit. For the complex task of flying an airplane, pilots
need detailed information about fuel, air speed, altitude, bearing, and other indicators that summarize the
current and predicted environment. Reliance on one instrument can be fatal. Similarly, the complexity of
managing an organization requires that managers be able to view performance in several areas
simultaneously. A balanced scorecard or a balanced set of measures provides that valuable information.
Four Perspectives
Kaplan and Norton recommend that managers gather information from four important perspectives:
 The customer's perspective. Managers must know if their organization is satisfying customer needs.
They must determine the answer to the question, How do customers see us?
 The internal business perspective. Managers need to focus on those critical internal operations that
enable them to satisfy customer needs. They must answer the question, What must we excel at?
 The innovation and learning perspective. An organization's ability to innovate, improve, and learn
ties directly to its value as an organization. Managers must answer the question, Can we continue to
improve and create value for our services?
 The financial perspective. In the private sector, these measures have typically focused on profit and
market share. For the public sector, financial measures could include the results oriented measures
required by the Government Performance and Results Act of 1993 (GPRA). Managers must answer
the question, How do we look to Congress, the President, and other stakeholders?
Tie-In to Employee Performance

The balanced scorecard philosophy need not apply only at the organizational level. A balanced approach to
employee performance appraisal is an effective way of getting a complete look at an employee's work
performance, not just a partial view. Too often, employee performance plans with their elements and
standards measure behaviors, actions, or processes without also measuring the results of employees' work.
By measuring only behaviors or actions in employee performance plans, an organization might find that
most of its employees are appraised as Outstanding when the organization as a whole has failed to meet its
objectives.
By using balanced measures at the organizational level, and by sharing the results with supervisors, teams,
and employees, managers are providing the information needed to align employee performance plans with
organizational goals. By balancing the measures used in employee performance plans, the performance
picture becomes complete.
3. Mention the strategic prescription for ‘Question Mark’ and ‘Star’ position in case of BCG
Growth share matrix. (2014 – QP206) (5)
Answer: To create a BCG matrix, businesses gather market-share and growth-rate data on their business
units or products. One large square is drawn and is divided into four equal quadrants. Along the top of the
box, a market share or cash generation is written, and a growth rate or cash use is written down the left
side. On the top left is high market share, and low market share is on the left. On the left-hand side, high
cash use is at the top and low cash use or growth rate is at the bottom.
Within the diagram, "stars" go in the upper-left quadrant, and "question marks" are put in the upper-right
square. At the bottom, "cash cows" go on the left, and "dogs" are placed on the right. The diagram visually
shows that stars have high market share and a high growth rate, while question marks have low market
share and a high growth rate. On the bottom, cash cows have a low growth rate but a high market share,
and dogs have a low market share and a low growth rate.
The following ideas apply to each quadrant of the matrix:
Stars: The business units or products that have the best market share and generate the most cash are
considered stars. Monopolies and first-to-market products are frequently termed stars. However, because
of their high growth rate, stars also consume large amounts of cash. This generally results in the same
amount of money coming in that is going out. Stars can eventually become cash cows if they sustain their
success until a time when the market growth rate declines. Companies are advised to invest in stars.
Question marks: These parts of a business have high growth prospects but a low market share. They are
consuming a lot of cash but are bringing little in return. In the end, question marks, also known as problem
children, lose money. However, since these business units are growing rapidly, they do have the potential to
turn into stars. Companies are advised to invest in question marks if the product has potential for growth, or
to sell if it does not.
4. Compare between BCG Matrix and GE Matrix. (2013 – QP206) (5)
Answer: BCG matrix is a matrix used by large corporations to decide the ratio in which resources are
allocated among various business segments. Similar to this, GE matrix also helps firms decide their strategy
with respect to different product lines, i.e. the product they should add in the range of products offered by
them and in which opportunity the firm should invest.
Both BCG matrix and GE matrix are two-dimensional models that are used by big business houses, having
several product lines and business units. The latter was developed as an improvement over the former, and
so overcomes many limitations.
Comparison Chart
Basis for Comparison BCG Matrix GE Matrix

Meaning BCG Matrix is a growth share GE Matrix implies multifactor
model, representing growth of portfolio matrix, that assist firm
business and the market share in making strategic choices for
enjoyed by the firm product lines based on their
position in the grid
Number of Cells Four Nine
Factors Market Share and Market Industry Attractiveness and
Growth Business Strengths
Objective To help companies deploy their To prioritize investments among
resources among various various business units
business units
Measures used Single measure is used Multiple measures are used
Classification Classified into two degrees Classified into three degrees
Definition of BCG Matrix
BCG Matrix or otherwise known as Boston Consulting Group growth share matrix is used to represent the
company’s investment portfolio.
Large corporations usually face problems in allocating resources amongst various units and product lines. To
cope with this problem, in 1970, Bruce Henderson designed a matrix for the Group called as BCG matrix. It is
based on two factors which are:
 The growth rate of the product-market.

 Market share held by the company in the respective market, in comparison to its competitors.
BCG Matrix helps the corporation in analyzing the product lines or business units, for prioritizing them and
allocating resources. The model aims at identifying the problem of resource deployment, among different
business segments. In this approach, various businesses of a company are classified on a two-dimensional
grid.
BCG – Growth Share matrix
 The vertical axis shows market growth rate, which is a measure of how attractive the market is?
 The horizontal axis indicates relative market shares, which is an indicator of how strong the company’s
position is?
With the help of this matrix, the company can ascertain four kind of strategic business unit or products as
follows:
 Stars: It represents those products which are growing at a faster rate and requires the huge investment to
maintain their position in the market.
 Cash Cows: The products whose growth is low but holds high market share. They reap a lot of cash for the
company and do not require finance for expansion.
 Question Marks: It indicates those products which possess a low market share in a high-growth market and
so need heavy investment to hold their share in the market, but do not generate cash in the same
proportion.
 Dogs: Dogs represents those products, which neither have a high growth rate nor high market share. Such
products generate enough cash to maintain themselves but will not survive in the long term.
Definition of GE Matrix
GE matrix, alternately known as General Electric Model is a business planning matrix. The model is inspired
by traffic lights which are used to manage traffic at crossings, wherein green light says go, yellow says
caution and Red say stop.
The matrix comprises of nine cells, with two major dimensions, i.e. business strength and industry
attractiveness. Business strength is influenced by market share, brand image, profit margins, customer
loyalty, and technological capability and so on. On the other hand, industry attractiveness is influenced by
drivers such as pricing trends, economies of scale, market size, market growth rate, segmentation,
distribution structure, etc.
GE – Portfolio matrix
When various product lines or business units are drawn on the matrix, strategic choices can be made, on the
basis of their position in the matrix. Product falling into green section reflects the business is in the good
position, but product lying into yellow section needs the managerial decision for making choices and the
product in the red zone, are dangerous as they will lead the company to losses.
Key Differences between BCG and GE Matrices
The points depicted below, elaborate the fundamental differences between BCG and GE matrices:
BCG matrix can be understood as the growth-share model that reflects a growth of business and the market
share possessed by the firm. On the other hand, GE matrix is also termed as multifactor portfolio matrix,
which businesses use in making strategic choices for product lines or business units based on their position
in the grid.
BCG matrix is simpler in comparison to GE matrix, as the former is easy to draw and consist of only four cells,
while the latter consist of nine cells.
The two dimensions on which BCG matrix is based are market growth and market share. Conversely,
industry attractiveness and business strengths are two factors of GE matrix.
BCG matrix is used by the companies to deploy their resources among various business units. On the
contrary, firms use GE matrix to prioritize investment among various business units.
In BCG matrix only a single measure is used, whereas in GE matrix multiple measures are used.
BCG matrix represents two degrees of market growth and market share, i.e. high and low. In contrast, in GE
matrix there are three degrees of business strength, i.e. strong, average and weak, and industry
attractiveness, are high, medium and low.
Conclusion
To sum up, we can say that the two models are similar, but have some differences that cannot be ignored.
While BCG matrix is simpler to plot and easier to understand, GE matrix is a bit difficult to draw and
interpret. However, it is free from certain limitations of BCG matrix.
5. Describe in brief the General Electrics model of portfolio analysis. (2016 – QP404) (5)
OR
6. Mention the process of ascertaining score of industry attractiveness and business unit
strength according to GE Matrix. (2013 – QP206) (5)
Answer: The General Electric Matrix was developed by GE with the assistance of the consulting firm
McKinsey & Company. The model identifies the market position and profitability of different business units
based on their market attractiveness and business unit strength. This is more advanced form of Growth
matrix model compared to BCG Matrix.
The main aims for GE Model:
 Analyze the current portfolio of business units with their position compared to others
 Develop growth strategies for each individual business units by adding new products and businesses
to the portfolio
 Decide the business units to be sold or invested more to exploit future opportunities
Here the two dimensions used are Market Attractiveness and Business Unit Strength. The market
attractiveness refers to the attractiveness of the market or the industry in which the business units operate.
Factors affecting the Market Attractiveness:
 Market Size
 Market growth and Growth potential
 Market profitability
 Competition
 Market predictability
 New opportunities
 Macro environmental and economic factors
Business Unit Strength refers to the competitive position of each of the business units. It specifies the
strength, market share, market position of the Business Units.
Factors affecting the Business Unit Strength:
 Assets and market under the Business Unit
 Relative brand strength as compared to others
 Market share and growth in market share
 Brand Loyalty
 Distribution network and population reach
 R&D, Patents and Innovations

 More investment and access to capital
Based on these two dimensions, one 3x3 matrix is formed to be used as a GE Model. The matrix is shown
below with the respective strategic decisions.
It leads to four strategic decisions based on the outcome of this model:
 Invest
 Protect
 Harvest
 Divest
Investment is made in the market on the basis of the existing market attractiveness in terms of growth.
Also, it is affected by the respective market share of the organization.
Protect condition refers to the situation where a business doesn’t want fresh investment, rather it is willing
to have the security of the given investment, so that, it doesn’t result in losses.
Harvest refers to the situation where the business wants to generate cash out of the given investment (i.e. it
does not want stock accumulation).
Divest refers to the condition where a business organization has finally decided to sale an undertaking or a
part of its undertaking. Divestment is the last option which a business organization can undertake.
7. What are the main characteristics of ‘strategic’ decisions? (2013 – QP 206) (5)
Answer: The main characteristics of Strategic Decisions
a. Strategic decisions have major resource propositions for an organization. These decisions may be
concerned with possessing new resources, organizing others or reallocating others.
b. Strategic decisions deal with harmonizing organizational resource capabilities with the threats and
opportunities.
c. Strategic decisions deal with the range of organizational activities. It is all about what they want the
organization to be like and to be about.
d. Strategic decisions involve a change of major kind since an organization operates in ever-changing
environment.
e. Strategic decisions are complex in nature.
f. Strategic decisions are at the top most level, are uncertain as they deal with the future, and involve
a lot of risk.
g. Strategic decisions are different from administrative and operational decisions. Administrative
decisions are routine decisions which help or rather facilitate strategic decisions or operational
decisions. Operational decisions are technical decisions which help execution of strategic decisions.
To reduce cost is a strategic decision which is achieved through operational decision of reducing the
number of employees and how we carry out these reductions will be administrative decision.

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Business Policy and Strategic Management Concept of Strategy

 Define strategy and understand its meaning;

This definition of strategy lays stress on the following:

This definition lays stress on the following:

Strategy as Action, Inclusive of Objective Setting

This definition provides for three types of actions involved in strategy:

i) Determination of long term goals and objectives.

Strategy as Action Exclusive of Objective Setting

The objectives give directions for implementing a strategy.

Strategy V/s. Policies and Tactics

Strategy v/s Policies

A rule is principle to which an action or a procedure conforms or is intended to conform. It is a standard or a

The three levels are explained as follows:

Corporate Level Strategy

Business Level strategy

Table: Strategic Decisions at Different Levels

Strategy provides various benefits to its users:

 Strategy helps an organization to take decisions on long range forecasts.

Previous Years’ Questions of Vidyasagar University:

1. Write a note on the evolution of strategic management. (2016 – QP 404) (5)

2. Explain the term ‘Strategy’. (2016 – QP 404) (5)

This definition of strategy lays stress on the following:

This definition lays stress on the following:

Understanding the tool

Competitive advantage types

To gain cost advantage a firm has to go through 5 analysis steps:

 Add more product features;

Value Chain Analysis Example

Step 1 - Firm's primary activities

Step 2 - Toal cost and importance

$164 M $410 M $524 M $10 M $384 M $230 M

Step 3 - Cost drivers

 Number  Order size  Scale of  Level of quality  Size of  Number of

Step 4 - Links between activities

Step 5 - Opportunities for reducing costs

 Understanding the process of strategy;

Environmental Analysis Organizational Analysis

Setting Objectives & Goals

Identifying Alternative Strategies

Reformula Choice of Strategy

Reimplemen Implementation of Strategy

Strategy Evaluation & Control

Fig. 2.1: Strategic Process in a Single SBU Firm

Defining Mission, Vision Setting SBU Objectives

Environmental Analysis for Environmental Analysis for

Organizational and SBU Analysis of SBU

Strategic Alternatives Strategic Alternatives

Choice of Strategy Choice of Strategy

Evaluation of Organization Evaluation of SBU Results

Figure 2.2: Strategic Management Processing in a Multiple SBU Firm

Environmental and organizational analysis

A) Monitoring the environment i.e. environmental search and

Identification of strategic alternatives

According to Glueck, there are basically four grand strategic alternatives:

These are together known as stability strategies/ basic strategies.

A) Corporate Portfolio Analysis

Corporate Portfolio Analysis

A) Resources are limited.

A) How the work of the organization will be divided?

There are basically two aspects:

Aligning your people for strategy implementation

Communicate the strategy and get buy-in

Align the organization to implement the strategy