Strategic Management

Unit-3
Strategy Formulation Strategy formulation is often referred to as strategic planning or long range planning. The Strategy formulation process is concerned with developing a corporations mission, objectives, strategy and policy. This process involves scanning external and internal environment factors, analysis of the strategic factors, generation, evaluation and selection of the best alternative strategy. 1.Situation analysis : SWOT analysis Strategy formulation begins with situation analysis. It means the process of finding strategic fit between external opportunities and internal strengths while working around external threats and internal weaknesses. SWOT analysis should not only result in identification of corporations distinctive competencies. SWOT can be used to take a broader formula SA=O/(S-W) view of strategy through the

(means Strategic Alternative equals Opportunity divided by Strengths minus Weakness). This reflect an important strategic issue Should we invest more in our Strengths to make them even stronger? OR should we invest in our weaknesses to at least make them competitive? TOWS Matrix
INTERNAL FACTROS

STRENGTHS (S)

WEAKNESSES (W)

EXTERNAL FACTORS SO STRATEGIES OPPORTUNITIES (O) Generate strategies here that use strengths to take advantage of ST STRATEGIES Opportunities Generate strategies here that use Strengths to avoid Threats WO STRATEGIES Generate strategies here that take advantage of WT STRATEGIES Opportunities by overcoming Generate strategies here that minimize weaknesses and avoid threats

THREATS (T)

2. Business Strategies Business strategy is extremely important because research shows that business unit effect have double impact on overall company performance. Business strategy can be competitive and/or cooperative Competitive = battling against all competitors for advantage. Cooperative = working with one or more companies to gain advantage against other competitors. Cost leadership:- is a lower-cost competitive strategy . Differentiation:- involves the creation of products/ services that is perceived throughout its industry as unique Cost Focus :- is a low-cost competitive strategy that focuses on a particular buyer groups or geographical market. Competitive Tactics:- is a specific operation plan that details how a strategy is to be implemented Timing tactics when to compete Market location tactics where to compete. 3. Cooperative Strategies A company can also use cooperative strategies to gain completive advantage within an industry by working with other firms. Strategic Alliances:- is a long term cooperative arrangement between two or more independent firms for mutual economic gain.

Eg: IBM strategic alliance agreement with Wipro to address customer needs in India. Mutual Service Consortium :- is a partnership of similar companies in similar industries that pool their resources to gain a benefit that is too expensive to develop alone. Joint Venture:- is a corporative business activity, formed by tow or more separate organizations for strategic purpose, that creates an independent business entity. Licensing Arrangements:- is an arrangement in which the licensing firm grants rights to another firm in another country to produce and/or sell a product. Value-Chain Partnership:- is a strong and close alliance in which one company or unit forms a long term arrangement with a key supplier or distributor for mutual advantage. --

CORPORATE LEVEL STRATEGY. Corporate-level strategies ( or simply, Corporate Strategies ) are basically about decision related to: Allocating resources among the different business of a firm Transferring resources from one set of business to others and Managing and development of a portfolio of business In case of the small firm having a single business, it could mean the adoption of course of action that yields better profitability for the firm. In the case of the large, multi-business firm, the corporate strategy would also be about managing the various businesses of maximizing their contribution to the overall corporate objectives and transferring resources from one set of business to others.

Corporate strategy therefore includes decisions regarding the flow of financial and other resources to and from a companys product lines and business units. Corporate Directional Strategies
GROWTH STABILITY RETRENCHMEN T Turnaround Captive Company Sell-out / Divestment Bankruptcy / Liquidation

Concentration Vertical Growth Horizontal Growth

Pause / Proceed with Caution No Change Profit

Diversification Concentric

Growth Strategies / Expansion Strategies Growth Strategies expand the companys activities. The corporate strategy of expansion is followed when an organization aims at high growth by substantially broadening the scope of one or more of its business in terms of customer groups, customer functions and alternative technologies. Eg:-Customer Groups:A chocolate manufacturer expands its customer group to include middle-aged and old persons to its existing customers comprising children and adolescents. Eg:- Customer Functions :- A Stockbrokers firm offers personalized financial services to small investors apart from its functions of dealing shares and debentures Eg:- Alternative Technologies:- A printing firm changes from the traditional letter press printing to desk-top publishing in order to increase its production and efficiency Stability Strategies

Stability strategies make no change to the companys current activities. This strategy adopted by an organization when it attempts at incremental improvement of its performance, aim at stability in each of three dimensions of customer groups, customer functions and alternative technologies Eg:-Customer Groups:- A packed tea company provides special service to its institutional buyers to encourage bulk buying Eg:- Customer Functions :- A copier machine company provides better after-sales services its existing customers to improve its company and product image and increase of sales of accessories and consumables Eg:- Alternative Technologies:- A steel company modernises its plant to improve efficiency and productivity. Retrenchment Strategies Retrenchment strategies reduce the companys level of activities. This strategy is followed when an organization aims at contraction of its activities through substantial reduction or elimination of the scope of one or more of its business in terms of their customer groups, customer functions or alternative technologies either singly or jointly in order to improve its overall performance. Eg:-Customer Groups:- A pharmaceutical firm pulls out from retail selling to concentrate on institutional selling in order to reduce the size of sales force and increase marketing efficiency Eg:- Customer Functions :- A corporate hospital decides to focus only on specialty treatment and realize higher revenue by reducing its commitment to general case. Eg:- Alternative Technologies:- A training institution attempts to serve a larger clientele through distance learning system and discard its face-to-face interaction methodology of training in order to reduce its expenses.

(1) Turnaround Strategy :-

Improving internal efficiency can be doe by adopting turnaround strategy. Adoption of turn around strategy is necessary during the adverse condition of the firm. Like Incurring losses continuously Declining demand for product and/or services Increasing cash outflows and/or declining cash inflows Declining sales and declining market share Declining production and/or productivity Increasing debt and debt service Continuous problems of working capital High rate of employee turnover and employee job dissatisfaction (2) Divestment Strategy Divestment strategy involves the sale or liquidation of a portion of business, or major division, profit centre or SBU (3) Liquidation Strategy:It involves closing down a firm and selling its assets. It is considered as the last resort. Combination Strategies The combination strategy is followed when an organization adopts a mixture of expansion, stability and retrenchment strategies, either at the same time in its different business or at different times in one of its business- with an aim to improving its performance.

INTEGRATION STRATEGIES Integration means combining activities related to the present activities of a firm. Such combination may be done on the basis of the value

chain. Value chain is a set of interlinked activities performed by an organization, right from procurement of raw materials down to the marketing of finished products. Integration is an expansion strategy; it results in a widening of the scope of the business definition of a firm. There are certain conditions under which firm are motivated to adopt integration strategies. A Make or Buy decision is taken when firms wish to negotiate with suppliers or buyers Manufacturing of ones own products are to be evaluated against the cost of procuring the same from suppliers If cost of making are less than the cost of procurement then make the item itself by the company Among the integration strategies we have two types 1. Horizontal Integration 2. Vertical integration.

Horizontal Integration When an organization takes up the same type of products at the same level of production or marketing it is said to follow a strategy of horizontal integration. A horizontal integration strategy results in a bigger size with benefit of stronger position. Horizontal integration can be done through merger and acquisition. Eg:- Delta Airlines acquired Northwest Airlines in 2008 to obtain access to Northwest Asian markets ( it is acquisition) Horizontal integration exists both in terms of marketing and operations. When a company whishes to sell in various geographical market segments, it can have a number of subsidiaries selling the same products widely- making horizontally integrated in terms of marketing.

Eg:-P&G continuously adds additional size and multiple variations to its existing product line to reduce possible niches competitors may enter

There are many benefits of adopting a horizontal integration strategy:1. Economies of scale :- horizontal integration leads to lower cost

structure by spending over the fixed cost operation

2. Economies of scope:-

horizontal integration results in tow or more organization using the same resource base to produce a variety of products in the product range. organization to offer customers a wider range of products that can be bundled together.

3. Increased product differentiation: - horizontal integration allows

4.

Increased market Power :- bigger size of operation a successful business model:- an organization successful at employing a business model gets to replicate it with another organization through horizontal integration. are fewer competitors.

5. Replicating

6. Reduction in industry rivalry:- after horizontal integration there

There are some risks 1. There is little practical evidence to show that the horizontal integration form of mergers actually increase the value of an organization 2. Horizontal integration increases the size. But increase the size may attract the provisions of the monopolies 3. Just like computer software and hardware are two entirely different products, economies of scope do not necessarily arise out of horizontal integration.

Vertical Integration.

When an organization starts making new products that serves its own needs vertical integration takes place. Vertical integration could of two types:1. Backward Integration ( Backward Linkage) 2. Forward Integration
Petroleum Exploration

(Forward Linkage) Backward

integration

Petroleum Production

Backward

integration

Refining

Original

Company

Sales to Wholesaler/ dealer

Forward

integration

Sales to Retailer

Forward

integration

It means:-

Backward Integration

PRESENT POSITION OF THE FIRM

Forward Integration

Backward Integration: - going backward on an industrys value chain Backward integration effective when: present suppliers are especially expensive or unreliable Number of suppliers is small and the number of competitors is large An organization has both capital and HR to manage new business of supplying its own raw materials The advantages of a stable raw material price particularly important Present suppliers have high profit margin Forward integration: - going forward on an industrys value chain Forward integration effective when: present distributors are especially expensive or unreliable availability of quality distributors is limited competes in an industry growing and expected to continue to grow an organization has both capital and HR needed to manage of distributing its own products present distributors or retailers have high profit margin

Vertical Integration Continuum

Full Integration Taper Integration Quasi Integration Long-Term Contract

Generally, when firms integrate vertically ( move backward or forward) resulting in a full integration. Full Integration Strategies:- A firm internally makes 100% of its supplies and completely controls its distribution. When you read about

a fully integrated Oil refining company, it means a company that pass through full range of value chain activities, from raw-materials to marketing. But when a firm does not commit itself fully, it is possible to have partial vertical integration. Taper Integration Strategies: - It is also called concurrent sourcing. A firm internally produces less than half of its own requirement and buys the rest from outside suppliers (backward taper integration). Quasi Integration Strategies :- A firm purchases most of their requirement from other firms. Ancillary industry units and outsourcing through subcontracting are adopted forms of quasi integration. Long-Term Contracts:-are agreements between two firms to provide agreed-upon goods and services to each other for a specified period of time. This cannot really be considered to be vertical integration unless it an exclusive contract. --CONCENTRATION STRATEGIES. OR INTENSIVE STRATEGIES

Concentration is a simple, first-level type of expansion strategy. It involves covering resources in one or more of a firms businesses in terms of their respective customer needs, customer functions or alternative technologies- either singly or jointly. Ansoff Product-Market Matrix
Pro duct Market Present New

Present

MARKET PENETRATIO N

PRODUCT DEVELOPMEN T DIVERSIFICA TION

New

MARKET PENETRATIO N

1. Market penetration : - selling more products to the same market. A firm may attempt at focusing intensely on existing market with its present products using a market penetration type of concentration. Eg:- Budget airlines in India went into aggressive marketing with low pricing Market penetration effective when: Current markets are not saturated with a particular product or service usage rate of present customers could be increased significantly market share of major competitors have been declining While total industry sales have been increasing increased economies of scale provide major competitive advantages 2. Market development : - involves selling the same products to new market, it may try to attracting new users for existing products, resulting in a market development type of concentration. Eg:- The coir industry has faced sever crisis due to the synthetic foam and fibers products. Market development strategies in the coir industry have attempted to present coir product as an environment-friendly product Market development effective when: New channels of distribution are available, inexpensive an organization is very successful at what it does new untapped or unsaturated markets exists an organization has both capital and HR needed to Manage an expanded organization an organization has excess production capacity an organizations basic industry is becoming rapidly global is scope

3. Product Development :- selling new product to the same markets, it may introduce newer products in the existing markets by concentration of product development. Eg:-Glaxo Smith Kline (UK) introduced the new Aquafresh 3 total care tooth paste Product development effective when: An organization has successful products that are in maturity stage of the product life cycle. an industry represented by rapid technological developments major competitors offer better-quality products in comparable prices an organization competes in a high-growth industry an organization has especially strong R& D capabilities 4.Diversification:- can be Related diversification or Unrelated diversification Related diversification:- Adding new but related products or services Eg:-Glaxo Smith Kline (UK) introduced the new ADAPTOR toothbrush

Unrelated diversification:- Adding new unrelated products and services Eg:-A kitchenware company entered into a growing skin and beauty business

-------

DIVERSIFICATION STRATEGIES Diversification involves a substantial change in business definitionsingly or jointly in terms of customer groups, customer functions and

alternative technology. When new products are made for new markets then diversification takes place. Eg: A book publisher is going into publishing magazines A book publisher is going into carpet manufacturing. a. Concentric or Related Diversification An organization takes up activity in such a manner that it is related to the existing business definition of one or more of a firms businesses, either in terms of customer groups, customer functions or alternative technologies. Eg: A book publisher is going into publishing magazines Concentric diversification may be of three types:1. Marketing-related concentric diversification:- A similar type of product is offered with the help of unrelated technology Eg:- a company in the sewing machine business diversifies into kitchenware and household appliances, which are sold through a chain of retail stores to family consumers. 2. Technology-related concentric diversification:- A new product or service is provided with the help of related technology Eg:- a leasing firm offering hire-purchase services to institutional customers 3. Marketing- and technology- related concentric diversification:- A similar type of product or services is provided with the help of a related technology Eg:- a synthetic water tank manufacturer makes other synthetic items such as pre-fabricated doors and windows. Reasons for Concentric or Related Diversification Realizing financial synergies in terms of transaction cost savings and tax savings Realizing marketing synergies by increased market power Realizing operational synergies through economies of scale Realizing personal synergies through utilizing human resources Realizing informational synergies by using common source of information, databases..etc

 Realizing managerial synergies by managing a set of businesses requiring a common set of administrative skills and experience. b) Conglomerate or Unrelated Diversification. When an organization adopts a strategy requires taking up those activities which are unrelated to the existing business definition of any of its business, wither in terms of their customer groups, customer functions and alternative technologies. Offering a new product manufactured through an unfamiliar technology for a new set of customers involves considerable risk. So we need to understand the condition under which such diversification can be undertaken Eg:- The Godrej Group operates in agriculture products, animal feed, branded tea, chemicals..etc Reasons for conglomerate or unrelated diversification Spreading business risks by investing in different industries Maximize returns by investing in portfolio businesses and selling out unprofitable ones Leveraging competencies in corporate restructuring Stabilizing returns by avoiding upswings and downswings Taking advantage of emerging opportunities Migrating from businesses under threat Why are Diversification Strategies adopted? To minimize risk by spreading it over several businesses It may be used to capitalize on its capabilities so as to maximize organizational strengths or minimize weaknesses if growth in existing businesses is blocked due to environmental and regulatory factors- then going for diversification. Risks of Diversification Diversification, especially unrelated , is a complex strategy to formulate and implement

 Diversification strategies demand a wide variety of skills Diversification results in decreasing commitment to a single or few businesses and diverting it into several of them at the same time Diversification often does not result in the promised rewards Diversification increase the administrative cost of managing, integrating and controlling a wide portfolio businesses. --DEFENSIVE STRATEGIES The purpose of a defensive strategy is to protect a preexisting competitive advantage. The goal of a firm using defensive strategies is to maintain a current position and to keep away threats from other businesses. The defensive strategy is not to make progress put to simply maintain the status quo. Approaches There are two approaches to defensive strategies. The first approach is to actively block competitors who attempt an attack on the firm's market share. For example, if a firm faces a new entrant to the market, it could take them on directly by cutting prices in order to drive them out.

The second approach is to simply make it known that any attack on the business will be met with a strong counterattack, for instance by making announcements about product developments. Benefits The major benefit of a defensive strategy is that it is considerably less risky than an offensive strategy and requires fewer resources.

 A defensive strategy can help a firm to dominate its existing market and to maintain its current success. Drawbacks The single largest drawback of a defensive strategy is that it does not allow for development. A company that uses only defensive strategies may be able to hang on to its current position and present competitive advantage, but it is unable to grow beyond that stage. Defensive Tactics According to Porter, defensive tactics aim to lower the probability of attack, divert attacks to less threatening areas or reduce the intensity of attack. a) Rise Structural barriers:1. Offer a full line of product in every profitable market segment to close off any entry points 2. Channel access by signing exclusive agreement with distributors 3. Raise buyer switching costs by offering low-cost training to users 4. Raise the cost gaining trial users by keeping price low 5. Increase scale economies to reduce unit costs 6. Limit outside access to facilities and personnel 7. Tie up suppliers by obtaining exclusive contracts or purchasing key location 8. Avoid suppliers those who are serving competitors 9. Encourage the government to raise barriers b) Increased Expected Retaliation For example, Management may strongly defend any erosion of market share by drastically cutting prices

c) Lower the inducement for attack A third type of defensive tactic is to reduce a challengers expectation of future profits in the industry. For example Southwest Airlines Company can deliberately keep prices low and constantly invest in cost-reducing measures. Strategic analysis-Competitive-Cost Analysis Competitive cost analysis, a method for analyzing the cost structure of two competing companies, represents a strategic application of cost modeling. The principles for developing accurate and comprehensive cost models, we can use four categories of cost drivers -- design, facility, geography, and execution. Conducting Value chain Analysis Refer Value chain of Porter- with the diagram.+ Allocate Costs The next step is to attempt to attach costs to each discrete activity. Value chain analysis requires managers to assign costs and assets to each activity thereby providing a very different way of viewing costs than traditional cost accounting methods. It is important to note that existing financial management and accounting system in many firms are not set up to easily provide activity-based cost breakdowns Cost Advantage and the Value Chain A firm may create a cost advantage either by reducing the cost of individual value chain activities or by reconfiguring the value chain. Once the value chain is defined, a cost analysis can be performed by assigning costs to the value chain activities. The costs obtained from the accounting report may need to be modified in order to allocate them properly to the value creating activities. Porter identified 10 cost drivers related to value chain activities:

Economies of scale Learning Capacity utilization Linkages among activities Interrelationships among business units Degree of vertical integration Timing of market entry Firm's policy of cost or differentiation Geographic location Institutional factors (regulation, union activity, taxes, etc.)

A firm develops a cost advantage by controlling these drivers better than do the competitors. A cost advantage also can be pursued by reconfiguring the value chain. Reconfiguration means structural changes such as new production process, new distribution channels, or a different sales approach. For example, FedEx structurally redefined express freight service by acquiring its own planes and implementing a hub and spoke system.

Portfolio analysis
In portfolio analysis, top management views its products lines and business units from a portfolio of investment Using a portfolio model to make strategic decision involves Identifying a set of strategic alternative to be considered Classifying each alternative for long-term performance potential and Classifying each alternative based on this assessment and allocating sufficient resources based on the classification Two of the most popular portfolio techniques are the The Boston Consulting Group (BCG) Matrix and GE multifactor model. The BCG Matrix High
STARS QUESTION MARK

Business Growth Rate

CASH COW

DOGS

Low Low High Relative Market Share Question Mark :- (Low share, High growth rate):- Sometimes called Problem Children. They generally require consider. Rapid growth makes such business attractive from an industry view point. But their low market share raises a question about whether they can compete successfully against larger and most cost-efficient rivals. The title question mark suggests that the management has to decide whether to continue investing in the SBU or withdraw from the market. Dogs:- (Low Share, Low growth) Dogs are those businesses that have weak share in a low growth market. Typically, they either generate a low profit or a loss. The decision faced by the company is whether to hold on the dog for strategic reasons. BCG suggests that weak dog businesses be harvested, divested or liquidated depending upon the ability of the strategy. Stars:- (High share, High growth) Stars are those products, which have moved to the position of leadership in a high-growth market. The company can depend on these businesses units to increase overall performance of the total portfolio. Stars, generally require large cash investments to expand production facilities and meet working capital requirements. Cash Cows:-(high Share, Low Growth rate) When the rate of growth begins to fall stars become cash cows. The terms cash cow is derived from the fact that it is these products which generate considerable amount of cash for the organization but lower growth rate. The major strategies are for the above stages:-

Build: - The primary objective is to increase the SBUs market share in order to strengthen its position. It is the strategy suited to question mark
1. Hold:- the primary objective is to maintain the current share.

Which is typically sued for cash cow 2. Harvest:- it is suited to cash cow 3. Divest:- the objective here is to get rid of the SBU that is drain on profits. This strategy is often used for question mark and dogs as well. GE(General Electric) multifactor model
Winners Winners B Question Mark C Average BusinessesF Losers I Losers G Losers J

High Industry Attractiveness

Winners

Medium E
Profit Producers H

Low

Strong Weak

Average

Business Strength / Competitive Position In order to avoid the limitation of other model, a number of firms have attempted to use GE Matrix . The nine cell of the GE matrix are grouped on the basis of low to high industry attractiveness and weak to strong business strength. Zone A,B and E - the Strategic signal is - INVEST OR EXPAND Zone- C, F,H & I the Strategic signal is - SELECT OR ERAN

Zone G & J

the Strategic signal is - HARVEST OR DIVEST

Variables that might be considered for Business Strength are: Size of the business Growth Relative share Customer loyalty Distribution Technology Marketing skills Patents

Variable that might be considered for Industry Attractiveness are: Size of the market Growth Competitive intensity Price levels Profitability Technological sophistication Government regulation

Strategic Analysis - Operating and Financial analysis.

1. SWOT:- ( explain the SWOT and its helps for analyzing- ) 2. Experience Curve Analysis :- The concept of experience curve is similar to a learning curve, which explain that efficiency increases as learning is gained by workers through repetitive work. The experie3nce curve is based on the commonly phenomenon that unit cost is declines a firm accumulates experience in terms of the cumulative volume of production. An experience curve results from a variety of factors such as learning effects, economies of scale, product redesign and technological improvement in production

The larger players in the industry would prefer the cost leadership route to gather advantages of the experience curve. The experience curve is considered to be a barrier for new firms contemplating entry in an industry. Eg:- Experience curve phenomenon seemed to have worked in favour of Bajaj Auto. 3.Life Cycle Analysis Like product life cycle- Life Cycles are found in markets, businesses and industries. Life cycle is a conceptual model that suggests that products, markets, businesses and industries evolve through sequential stages of introduction, growth, maturity and decline.

The main advantage of life cycle is that it can be used to diagnose a portfolio- (of products, businesses or industries)- in order to establish the stage at which each of them exists.

For instance- Expansion may be feasible for introductory and growth stage. A combination of strategies like selective, harvesting, retrenchment..etc may be adopted for declining businesses.

4. Industry Analysis and Competition Analysis

Porters Approach to Industry Analysis ( Refer Unit-2 and explain the same here too) 5. STRATPORT Model STRAPORT ( Strategic Portfolio) model is developed to assist managers in allocating resources across strategic opportunities. In the model, the firm is characterized as developing cash resources from internal operations and external financial sources. These cash

resources are opportunities.

allocated

to

businesses

that

represent

strategic

The time horizon considered in the model is divided into two periods1. Planning and 2. Post planning period The resources allocated affect the performance of the business unit during planning, whereas the post planning period is used to evaluate the long term impact of the allocations. 6. Economic Value Added (EVA) Economic value added is a popular concept in finance today. The key is that the cost of equity capital should be used in calculating return on capital. It forces companies to be aware of all resources that are used in serving each product-market. EVA=(Operating profit-Taxes)- (Debt capital rate X D/(D+E) + Equity Capital cost. D= Debt E= Equity

7.Comprehensive Analysis:Refer Unit-2 8. Comparative Analysis:Refer Unit-2