Strategic Management

(1) The concept of Strategy

Introduction – The top management of an organization is
concerned with the selection of a course of action from among
different alternatives to meet the organizational objectives. The
process by which objectives are formulated aand 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 of objectives by using its resources. Strategies most
often devote a general programme of action and an implied
deployed 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 a
strategy, the organization is like a ship without a 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 ha s been derived from Greek, ‘strategos’ which
means generalship. The word as 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 broader
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 missions
However, various experts do not agree about the precise scope of
strategy. Lack of consensus has lead to two broad categories of
definations:strategy as action inclusive of objective setting and
strategy as action exclusive of objective setting.
Strategy as action, inclusive of objective setting –
In 1960’s, 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 :
a) Determination of long term goals and objectives
b) Adoption of courses of action
c) 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 from rivals or performs
similar activities in different ways”
The people who believe this version of the definition call strategy a
unified, compreshensive and integrated plan relating to the
strategic advantages of the firm to the challenges of the
environment
After considering bothe 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 definations, 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 term objectives
• Competitive Advantage
• Vector
• Synergy
Strategy v/s Policies
Strategy has often been used as a synonym of policy. However,
both are different and should not be used interchangeably
 1. Policy is the guideline for decisions and actions on the part of
subordinates.
2. It is a general statement of understanding made for
achievement of objectives.
3. Policies are statements or a commonly accepted
understanding of decision making.
4. They are thought oriented.
5. Power is delegated to the subordinates for implementation of
policies.
6. In general terms, policy is concerned with course of action
chosen for the fulfillment of the set of objectives.
7. It is an overall guide that governs and controls managerial
actions.
8. Policies may be general or specific, organizational or
functional, written or implied.
9. They should be clear and consistent.
10. 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 he would be eligible for promotion.
1. 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.
 2. Strategies are specific actions suggested to achieve the
objective.
3. Strategies are action oriented and everyone in the organization
are empowered to implement them.
4. Strategy cannot be delegated downward because it may require
last minute decisions
5. Strategies and policies both are the means towards the end.
6. In other words, both are directed towards meeting organizational
objectives.
7. 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
Tactics decisions can be delegated to all the levels of an
iii)
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.
Since an attempt is made in strategy to relate the organization
vii)
with its environment, the requirement of information is more than
that required in tactics. Tactics use information available internally
in an organization
viii) The formulaltion 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
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. Eg. Reliance Industries and Ashok Leyland Limited.
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 dicrete 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 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 organization. Such decision are made by top
management of the firm. The examples of such strategies include
acquisition strategies, diversification, structural redesigning, etc.
The board of directors and chief executive officer are the primary
groups involved in this level of strategy making. In small and
family owned businesses, the entrepreneur is both the general
manager and the 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 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 Strategy

This strategy relates to 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
The three levels of strategies have different characterstics as shown
below –
Dimensions Levels
Corporate Business Functional
Impact Significant Major Insignificant
Risk High Medium Low
Involved
Profit High Medium Low
potential
Time Long Medium Low
Horizon
Flexibility High Medium Low
 Adaptability Insignificant Medium Significant

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, etc. The basic factor responsible for
differentiation has not been governmental policies, infrastructure
or labour 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 formulation 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 and 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.

2) Process of Strategy

The process of strategy is cyclical in nature. The elements within it

interact among themselves. The figure presents 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 firms
insert SBU strategy between corporate strategy and functional
strategy. Initially, the process of strategy was discussed in terms of
four phases which are –
1) Identification phase
2) Development phase
3) Implementation phase
4) 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 we divide the process into the following

steps –
1) Strategic Intent
2) Environmental and Organizational Analysis
3) Identification of strategic alternatives
4) Choice of strategy
5) Implementation of strategy
6) Evaluation & Control
1) 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’,
‘objectives’, ‘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 lies in the organization’s
mission, business definition, objectives and goals. These terms
become the base for strategic decisions and actions.
Strategic process in a single SBU firm
Defining vision,
mission and business

Organizat
ional Analysis
Environmental
Analysis
Setting
objectives and
goals

Identifying
alternative
strategies

Choice of strategy

Implementation of
strategy

Strategy
evaluation and
control
 Feedback

Vision and Mission – The vision of an organization is the

expectation of the owner of the organization and putting this vision
into action is mission. Mission has a societal orientation and is a
statement which reveals what an organization intends to do for the
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.

Objectives and Goals – 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. 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.
2) 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:
• Monitoring the environment i.e environmental search
•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 emphasis on what could happen and not necessarily what
will happen. The factors which comprises firms environment are of
two types :
• Factors which influence environment directly including
suppliers, customers and competitors and
• 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
analysed 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 organization 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.

3) 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.
According to Glueck, there are basically four grand strategies
alternatives:
• Stability
• Expansion
• Retrenchment
• 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
functions or alternative technology. It involves partial or total
withdrawal from three things. Example – L & T getting out of
cement business.
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 the above four grand strategies, other commonly used
strategies are –
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 by either creating facility or killing others.
Integration can be either forward or backward 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 –
• Concentric diversification
• Conglormerate diversification
• 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 of 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.
All these alternatives are available to an organization and
according to its objectives, it can decide on the one which is most
suitable .
4) Choice of strategy
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
different. The strategic alternatives has to be matched with the
problem. While making a choice, two types of factors have to be
considered –
• Objective factors
• 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 –
• Corporate portfolio analysis
• Competitor analysis
• 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.
Portfolio analysis is an analytical tool which views a corporation as
a basket or portfolio of products or business units to be managed
for thebest possible returns.
When an organization has a number of products in its portfolio, it
is quite likely that they will be in different stages of development.
Some will be relatively new and some much older. Many
organizations will not wish to risk having all their products at the
same stage of development. It is useful to have some products with
limited growth but producing profits steadily, and some products
with real growth potential but may still be in the introductory
stage. Indeed, the products that are earning steadily may be used to
fund the development of those that will provide the growth and
profits in the future.
So the key strategy is to produce a balanced portfolio of products,
some with low risk but dull growth and some with high risk but
great potential for growth and profits. This is what we call as
portfolio analysis.
The aim of portfolio analysis is
1) to analyze its current business portfolio and decide which
businesses should receive more or less investment
2) to develop growth strategies, for adding new businesses to
the portfolio
3) to decide which business should not longer be retained

Balancing the portfolio –

Balancing the portfolio means that the different products or
businesses in the portfolio have to be balanced with respect to four
basic aspects –
1) Profitability
2) Cash flow
3) Growth
4) Risk

This analysis can be done by any of the following technologies –

1. Experience curve
2. PLC concept
3. BCG matix
4. GE nine cell matrix
5. Space diagram
6. Hofer’s product market evaluation matrix
7. Directional Policy matrix

BCG MATRIX – the bcg matrix was developed by Boston

Consulting group in 1970s. It is also called as the growth share
matrix. This is the most popular and most simplest matrix to
describe the corporation’s portfolio of businesses or products.
The BCG matrix helps to determine priorities in a product
portfolio. Its basic purpose is to invest where there is growth from
which the firm can benefit, and divest those businesses that have
low market share and low growth prospects.
Each of the products or business units is plotted on a two
dimensional matrix consisting of
a) relative market share – is the ratio of the market share of the
concerned product or business unit in the industry divided by the
share of the market leader
b) market growth rate – is the percentage of market growth, by
which sales of a particular product or business unit has increased
Analysis of the BCG matrix – the matrix reflects the contribution
of the products or business units to its cash flow. Based on this
analysis, the products or business units are classified as –
 Stars
 Cash cows
 Question marks
 Dogs

Stars – high growth, high market share

Stars are products that enjoy a relatively high market share in a
strongly growing market. They are potentially profitable and may
grow further to become an important product or category for the
company. The firm should focus on and invest in these products or
business units. The general features of stars are -
• High growth rate means they need heavy
investment
• High market share means they have
economies of scale and generate large amount of cash
• But they need more cash than they generate

The high growth rate will mean that they will need heavy
investment and will therefore be cash users. Overall, the general
strategy is to take cash from the cash cows to fund stars. Cash may
also be invested selectively in some problem children (question
marks) to turn them into stars. The other problem children may be
milked or even sold to provide funds elsewhere.
Over the time, all growth may slow down and the stars may
eventually become cash cows. If they cannot hold market share,
they may even become dogs.

Cash Cows – Low growth, high market share

These are the product areas that have high relative market shares
but exist in low-growth markets. The business is mature and it is
assumed that lower levels of investment will be required. On this
basis, it is therefore likely that they will be able to generate both
cash and profits. Such profits could then be transferred to support
the stars. The general features of cash cows are –
• They generate both cash and profits
• The business is mature and needs lower levels of investment
• Profits are transferred to support stars/question marks
• The danger is that cash cows may become under-supported and
begin to lose their market

Although the market is no longer growing, the cash cows may have
a relatively high market share and bring in healthy profits. No
efforts or investments are necessary to maintain the status quo.
Cash cows may however ultimately become dogs if they lose the
market share.
Question Marks – high growth, low market share

Question marks are also called problem children or wild cats.

These are products with low relative market shares in high growth
markets. The high market growth means that considerable
investment may still be required and the low market share will
mean that such products will have difficulty in generating
substantial cash. These businesses are called question marks
because the organization must decide whether to strengthen them
or to sell them.
The general features of question marks are –
• Their cash needs are high
• But their cash generation is low
• Organization must decide whether to strengthen them or sell
them
Although their market share is relatively small, the market for
question marks is growing rapidly. Investments to create growth
may yield big results in the future, though this is far from certain.
Further investigation into how and where to invest is advised.

Dogs – Low growth, low market share

These are products that have low market shares in low growth
businesses. These products will need low investment but they are
unlikely to be major profit earners. In practice, they may actually
absorb cash required to hold their position. They are often regarded
as unattractive for the long term and recommended for disposal.
The general features of dogs are –
• They are not profit earners
• They absorb cash
• They are unattractive and are often recommended for disposal.

Turnaround can be one of the strategies to pursue because many

dogs have bounced back and become viable and profitable after
asset and cost reduction. The suggested strategy is to drop or divest
the dogs when they are not profitable. If profitable, do not invest,
but make the best out of its current value. This may even mean
selling the division’s operations.

Advantages –
1) it is easy to use
2) it is quantifiable
3) it draws attention to the cash flows
4) it draws attention to the investment needs

Limitations –
1) it is too simplistic
2) link between market share and profitability is not strong
3) growth rate is only one aspect of industry attractiveness
4) it is not always clear how markets should be defined
5) market share is considered as the only aspect of overall
competitive position
6) many products or business units fall right in the middle of the
matrix, and cannot easily be classified.

BCG matrix is thus a snapshot of an organization at a given point

of time and does not reflect businesses growing over time.

GE Nine-cell matrix
This matrix was developed in 1970s by the General Electric
Company with the assistance of the consulting firm, McKinsey &
Co, USA. This is also called GE multifactor portfolio matrix.
The GE matrix has been developed to overcome the obvious
limitations of BCG matrix. This matrix consists of nine cells (3X3)
based on two key variables:
i) business strength
ii) industry attractiveness

The horizontal axis represents business strength and the vertical

axis represent industry attractiveness
The business strength is measured by considering such factors as:
• relative market share
• profit margins
• ability to compete on price and quality
• knowledge of customer and market
• competitive strengths and weaknesses
• technological capacity
• caliber of management
Industry attractiveness is measured considering such factors as :
• market size and growth rate
• industry profit margin
• competitive intensity
• economies of scale
• technology
• social, environmental, legal and human aspects

The industry product-lines or business units are plotted as circles.

The area of each circle is proportionate to industry sales. The pie
within the circles represents the market share of the product line or
business unit.
The nine cells of the GE matrix represent various degrees of
industry attractiveness (high, medium or low) and business
strength (strong, average and weak). After plotting each product
line or business unit on the nine cell matrix, strategic choices are
made depending on their position in the matrix.
Spotlight Strategy
GE matrix is also called “Stoplight” strategy matrix because the
three zones are like green, yellow and red of traffic lights.
1)Green indicates invest/expand – if the product falls in green
zone, the business strength is strong and industry is at least
medium in attractiveness, the strategic decision should be to
expand, to invest and to grow.
2)Yellow indicates select/earn – if the product falls in yellow
zone, the
business strength is low but industry attractiveness is high, it needs
caution and managerial discretion for making the strategic choice
3) Red indicates harvest/divest – if the product falls in the red zone,
the business strength is average or weak and attractiveness is also
low or medium, the appropriate strategy should be divestment.

Comparision GE versus BCG -

Thus products or business units in the green zone are almost
equivalent to stars or cashcows, yellow zone are like question
marks and red zone are similar to dogs in the BCG matrix.

Difference between BCG and GE matrices –

BCG Matrix GE Matrix
1. BCG matrix consists of 1. GE matrix consists of nine
four cells cells
2. The business unit is rated 2. The business unit is rated
against relative market share against business strength and
and industry growth rate industry attractiveness
3. The matrix uses single 3. The matrix used multiple
measure to assess growth measures to assess business
and market share strength and industry
 attractiveness
4. The matrix uses two types 4. The matrix uses three
of classification i.e high and types of classification i.e
low high/medium/low and
strong/average/weak
5. Has many limitations 5. Overcomes many
limitations of BCG and is an
improvement over it

Advantages –
1) It used 9 cells instead of 4 cells of BCG
2) It considers many variables and does not lead to simplistic
conclusions
3) High/medium/low and strong/average/low classification enables
a finer distinction among business portfolio
4) It uses multiple factors to assess industry attractiveness and
business strength, which allow users to select criteria appropriate
to their situation
Limitations –
1) It can get quite complicated and cumbersome with the increase
in businesses
2) Though industry attractiveness and business strength appear to
be objective, they are in reality subjective judgements that may
vary from one person to another
3) It cannot effectively depict the position of new business units in
developing industry
4) It only provides broad strategic prescriptions rather than
specifics of business policy

Competitor Analysis – Analysis is done on what the competitor has

and what he does not have. 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 focus is on all the factors of
the environment
Industry Analysis – Here all the competitors belonging to the
particular industry with which the organization is associated is
looked at. 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 having the

following steps –
1. Focussing on strategic alternatives
2. Evaluating strategic alternatives
3. Considering decision factors – objective and subjective
4. Finally, making the strategic choice
5) Implementation of Strategy
Steps involved –
1. Project implementation
2. Procedural implementation
3. Resource implementation
4. Structural implementation
5. Functional implementation
6. 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 procedures and formalities as
prescribed by the governments both state and central. The steps
vary from industry to industry. There may also be frequent changes
in policies.
Resource allocation involves allocation of resources to both inside
the company and outside the company. It has to make decisions
regarding short term and long term allocation.
The structural implementation involves designing of the
organization structure and interlinking various units and sub units
of the organization.
Functional implementation deals with the development of policies
and plans in different areas of functions which and organization
undertakes.
Behavioural implementation deals with those aspects of strategy
implementation that have impact on behavior of people in the
organization.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.

6) Evaluation and Control –

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
concerned with any of the steps involved in the whole process be it
choice for setting mission or objectives.
When evaluation and control is carried out efficiently, it
contributes in three basic areas –
1. Measurement of organizational process
2. Feedback for future actions and
3. Linking performance and rewards
The board of directors, the chief executive and other managers all
play a very important role in strategy evaluation and on control.
Control can be of three types –
1. Control of inputs that are required in an action, known as feed
forward control
2. Control of different stages of action process, known as
concurrent control
3. Past action control based on feedback from completed action
known as feedback control
Control is exercised by managers in the form of four steps –
1. Setting performance standards
2. Measuring actual performance
3. Analyzing variance
4. 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

3) Strategic Framework –
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, the mission,
business definition and objectives are established. Formulation of
strategies is possible only when strategic intent is clearly set up.
Strategic Intent – The foundation for the strategic management is
laid by the hierarchy of strategic intent. The concept of stratetic
intent makes clear what an organization stands for. Hamed and
Prahalad coined the term strategic intent. Characterstics of
strategic intent –
• It is an obsession with an organization
• This obsession may even be out of proportion to their resources
and capabilities
Involves the following –
• Creating and communicating a vision
• Designing a mission statement
• Defining the business
• Setting objectives
Vision –
Defination by Kotler “description of something (an organization,
corporate culture, a business, a technology, an activity) in the
future”
Defination by Miller and Dess “category of intentions that are
broad, all inclusive and forward thinking”
Advantages of having a vision –
• They foster experimentation
• Vision promotes long term thinking
• Visions foster risk taking
• They can be used for the benefit of people
• They make organizations competitive, original and unique
• Good vision represent integrity
• They are inspiring and motivating to people working in an
organization
Mission –
Defination by Hynger and Wheelen – “purpose or reason for the
organization’s existence”
Defination by David F.Harvey – “A mission provides the basis of
awareness of a sense of purpose, the competitive environment ,
degree to which the firm’s mission fits its capabalities and the
opportunities which the government offers”
Defination by Thompson “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”
Examples of mission statement –
India Today – The complete new magazine
Bajaj Auto – Value for money for years
HCL – To be a world class competitor
HMT – Timekeepers of the nation
Mission vs Purpose –
A few major points of distinction –
1. Mission is the societal reasoning while the purpose is the overall
reason
2.Mission is external reasoning and relates to external
environment. Purpose is internal reasoning and relates to internal
environment
3. Mission is for outsiders while purpose is for its own employees
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.
Meaning –
• Objective are open ended attributes denoting a future state or
outcome and are stated in general terms
• When the objectives are stated in specific terms, they become
goals to be attained
• 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 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
The difference between the two is simply a matter of degree and it
may vary widely
Importance of establishing objectives –
1. Objectives provide yardstick to measure performance of a
department or SBU or organization
2. Objectives serve as a motivating force. All people work to
achieve the objectives
3. Objectives help the organization to pursue its vision and mission
4. Objectives define the relationship of organization with internal
and external environment
5. Objectives provide a basis for decision-making.

Areas for setting objectives –

1. Profit objective – or performance objectives
2. Market objective - increase in market share
3. Productivity objective – cost per unit of production
4.Product objective – product development, product
diversification, branding, etc
5. Social objective – tree plantation, provision for drinking water,
setting up of community center, etc
6.Financial objective – relates to cash flow, debt equity ratio,
working capital, new issues, debt instruments, etc
7. Human resource objective – described in terms of absenteeism,
turnover, number of grievances, strikes and lockouts, etc

Strategic Analysis – Strategic Management comprises of three

broad activities, namely, strategic analysis, strategic formulation
and strategic implementation. All the three are interrelated.
Strategic analysis is the foundation for formulating strategies and
basically comprises of the study of business environment as a
whole.
Strategic Analysis comprises of the following –
1. Environmental analysis
2. Competitive forces
3. Internal analysis

Environmental Analysis –
Strategic analysis is basically concerned with the structuring of the
relationship between a business and its environment. The
environment in which business operates has a great influence on
their success 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.
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.
Pestel framework and the Mckinsey’s 7S framework are most
popularly used for such analysis.

PESTEL Framework –
External forces are classified into 6 broad categories – political,
economic, social, technological, environmental and legal forces.
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
Politcal Factors – Government stability, Political values and beliefs
shaping policies,
Regulations towards trade and global business, Taxation policies,
Priorities in social sector
Economic Factors – GNP trends, Interest rates/savings rate, Money
supply,
Inflation rate, Unemployment, Disposable income, Business
cycles, Trade deficit/surplus
Socio-cultural Factors – Population demographics, Social mobility,
Lifestyle changes,
Attitudes to work and leisure, Education, Health and fitness
awareness,
Multiple income families
Technological factors – Biotechnology, Process innovation, Digital
revolution,
Government spending on research, Government and industry focus
on technological effects, New discoveries/development, Speed of
technology transfer, Rates of obsolescence
Legal – Monopolies legislation, Employment law, Health and
safety,Product safety

Mckinsey’s 7S Framework – The framework suggests that there

is a multiplicity of factors that influence an organization’s ability
to change and its proper mode of change. Because of the
interconnectedness of the variables, it would be difficult to make
significant progress in one area without making progress in the
others as well. There is no starting point or implied hierarchy in the
shape of the diagram, and it is not obvious which of the seven
factors would be the driving force in changing a particular
organization at a certain point of time. The critical variables would
be different across organizations and in the same organizations at
different points of time.

The 7 S –
Superordinate goals – are the fundamental ideas around which a
business is built
Structure – salient features of the units’s organizational chart and
inter connections within the office
Systems – procedures and routine processes, including how
information moves around the unit
Staff – personnel categories within the unit and the use to which
staff are put, skill base, etc
Style – characterization of how key managers behave in order to
achieve the unit’s goals
Shared values strategy – the significant meanings or guiding
concepts that the unit imbues on its members
Skills – distinctive capabilities of key personnel and the unit as a
whole
The 7 S model can be used in two ways –
1. Considering the links between each of the S’s 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 S’s which is relevant. Any S’s that
harmonises with all the other S’s can be thought of as strength and
weaknesses
2. The model highlights how a change made in any one of the S’s
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.
Structur
e

Strate Syste
gy ms

Super ordinate
goals

Skills Style

Staff

The Mckinsey 7-S Framework

The competitive forces – The competitive environment refers to

the situation which organisation’s face within its specific area of
operation, and this is understood at an industry level or with
respect to smaller groups called strategic groups. Generally
understood, the 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.
Porter’s Five Forces Framework –
The five forces framework developed by Michael Porter is the
most widely known tool for analyzing the competitive environment
which helps in explaining how forces in the competitive
environment shape strategies and affect performance.
The competitive forces are as follows –
1. The rivalry among competitors in the industry
2. The potential entrants
3. The substitute products
4. The bargaining power of suppliers
5. The bargaining power of buyers
However, these five forces are not independent of each other.
Pressures from one direction can trigger off changes in another
which is capable of shifting sources of competition.
1) Threat of New Entrants – Entry of a firm in and operating in a
market is seen as a threat to the established firms in that market.
The competitive position of the established firms is affected
because the entrants may add new production capacity or it may
affect their market shares. They may also bring additional
resources with them which may force the existing firms to invest
more than what was not required before. Altogether the situation
becomes difficult for the existing firms if not threatening always
and therefore they resort to raising barriers to entry. These barriers
are intended to discourage new entrants and this may be done by
organizations, be in any one or more ways as follows –
• Economies of scale
• Learning or experience effect
• Cost disadvantage independent of scale
• Brand benefits
• Capital requirements
• Switching costs
• Access to distribution channels
• Anticipated growth
2) Bargaining power of suppliers – Business organizations have a
large dependency on suppliers and the latter influence their profit
potential significantly. Supplier’s decisions on prices, quality of
goods and services and other terms and conditions of delivery and
payments have significant impact on the profit trends of an
industry. However, supplier’s ability to do all these depends on the
bargaining power over buyers.
Supplier bargaining power would normally depend on –
• Importance of the buyer to the supplier group
• Importance of the supplier’s product to the buyers
• Greater concentration among suppliers than buyers
• High switching costs for buyers
• Credible threat of forward integration by suppliers

3) Bargaining power of customers – Customers with stronger

bargaining power relative to their suppliers may force supply
prices down or demand better quality for the same price and may
demand more favourable terms of business. Eg.there will always
be a difference in the bargaining power between an individual
buying different construction material like cement, steel, bricks,
etc and a real estate builder buying them for the number of
properties he may have been building over so many years.
Following factors attach greater power to buyers –
• Undifferentiated or standard suppliers
• Customer’s price sensitivity
• Accurate information about the cost structure of suppliers
• Greater concentration in buyer’s industry than in supplier’s
industry and relatively large volume purchase
• Credible threat of backward integration by buyers

4) Threat of substitutes –
Often firms in an industry face competition from outside industry
products, which may be close substitutes of each other. For
example, with the new technologies in place now the electronic
publishings are the direct substitutes of the texts published in print.
Similarly, newspaper find their closest substitutes in their online
versions, though it may be a smart strategic move to position them
as complementary products.
However, the competitive pressure, which any industry may face,
depends primarily on three factors –
• Whether the substitutes available are attractively priced
• Whether buyers view substitutes available as satisfactory in
terms of their quality and performance
• How easily buyers can switch to substitutes

5) Competitive rivalry –
The level of rivalry is minimum in a perfectly competitive market
where there are large number of buyers and sellers and the product
is uniform with everyone. Same is true for monopoly market where
there is only one player and the type of product is also one. The
following factors determine the level of rivalry –
• The stability of environment
• The life expectancy of competitive advantage
• Characteristics of the strategies pursued by competitors

Strategic groups – they are conceptual clusters in the sense that

they are grouped together for purposes of improving analysis and
understanding competition within their industry. They donot
necessarily belong to any formal group such as an industry, trade,
association or any strategic alliances and they donot necessarily
differ in their average profitability.

Competitive intelligence – It is the information which is relevant

to strategy formulation regarding the environmental context within
which a firm competes. Such intelligence has several uses –
a) Providing description of the competitive environment that
inform strategist and guide strategy formulation
b)Challenge common assumption about the competitive
environment
c) Forecasting future development in the competitive environment
d)Identifying and compensating for exposed competitive
weaknesses
e) Determining when a strategy is no longer viable or sustainable
f)Indicating when and how strategy should be adjusted to
changing competitive environment

Scenario planning –
Scenarios are tools for ordering one’s perception about alternative
future environment in which today’s decision might be framed. In
practice, scenarios resemble a set of stories, written or spoken,
built around carefully constructed plots. These stories can express
multiple perspectives on complex events, scenarios give meaning
to these events. Scenarios are powerful planning tools precisely
because the future is unpredictable. Unlike traditional forecasting
or market research, scenarios present alternative images instead of
extrapolating current trends from the present.
Scenarios also embrace qualitative perspectives and the potential
for sharp discontinuities that econometric models exclude.
Consequently, creating scenarios requires decision-makers to
question their broadest assumptions about the way the world works
so that they can foresee decisions that might be missed or denied.
Without an organization, scenarios provide a common vocabulary
and an effective basis for communicating complex – sometimes
paradoxical – conditions and options. Good scenarios are plausible
and surprising, they have the power to break old stereotypes, and
their creators assume ownership and put them to work. Using
scenarios is rehearsing the future. By recognizing the warning
signals, the threats and opportunities that is unfolding, one can
avoid surprises, adapt and act effectively.
Decisions which have been pre-tested against a range of what may
offer are more likely to stand the test of time, produce robust and
resilient strategies, and create distinct competitive advantage.
Ultimately, the result of scenario planning is not a more accurate
picture of tomorrow but better thinking and an ongoing strategic
conversation about the future.
Implementation of scenario planning –
A company wide involvement in scenario planning leads to bette
results in a firm. A cross-functional team is instituted for the
identification and monitoring of issues. Employees are encouraged
to participate by an incentive based process.
 Steps involved –
1) Identification of issues – understand the effects of external
factors on business – technology driven, political, economic,
competitive positioning
2) Classification of issues – support the issue identified with
reports/propositions, determine the uncertainty and kind of impact
of the issue
3) Analyzing and problem solving

Critical success factors (CSF) – critical success factors are those

which contribute to organization’s success in a competitive
environment and therefore the organization needs to improve on
them since poor results may lead to declining performance.
Organizations depending on the environment they operate in and
their own internal conditions can identify relevant csf’s. It is based
on the following 2 characteristics –
i. Industry characterstic – industry specific csf are factors critical
for the performance of the industy. Eg. For a hospitality industry
excellent and customized service, wide presence and excellent
booking and reservation system is critical, while for an airline
industry fuel efficiency, load factors, etc are critical
ii. Competitive position – csf for a firm may also be determined by
its relative position with respect to its competitors. For example,
for a pathological laboratory center, earlier csf was authentic,
hygienic and scientific testing facilities until few big players added
service features like door to door sample collection or home
delivery of reports. Very soon approachability and ease became the
additional csf’s for the players

The value chain framework –

This is another framework most commonly used to guide analysis
of any firm’s strength and weaknesses. In this framework, any
business is seen as a number of linked activities, each producing
value for the customer. By creating additional value, the firm may
charge more or is able to deliver same value at a lower cost, either
of this leading to a higher profit margin. This ultimately adds to the
organization’s financial performance.

Firm’s infrastructure
Human Resource Management
Technology development
Procurement
Inbound Operations Outbound Marketing Service
Logistics Logistics & Sales

The value chain framework (M.E.Porter 1980)

 There are two types of activities – primary activities and support
activities
Primary activities constitute the following –
a)Inbound logistics are activities concerned with receiving, storing
and distributing the inputs to the product or service. They include
materials handling, stock control, transport, etc
b) Operations transform these various inputs into the final products
or services –machining, packaging, assembly testing, etc
c)Outbound logistics collect, store and distribute the product to
customers.
d) Marketing and sales makes consumers aware of the product or
service so that they are able to purchase it.
e) Services activities helps improving the effectiveness or
efficiency of primary activities
Support activities are as follows –
a) Procurement – process for acquiring the various resource inputs
to the primary activities and this is present in many parts of the
organization
b)Technology development – there are key technologies attached
to different activities which may be directly linked with the
product or with processes or with resource inputs
c)Human Resource Management- area involved in recruiting,
managing, training, developing and rewarding people within the
organization.
Top Management – Role & Functions
Management in all business and human organization activity is
simply the act of getting people together to accomplish desired
goals and objectives. Management comprises planning, organizing,
staffing, leading or directing, and controlling an organization (a
group of one or more people or entities) or effort for the purpose of
accomplishing a goal. Resourcing encompasses the deployment
and manipulation of human resources, financial resources,
technological resources, and natural resources.
Management can also refer to the person or people who perform
the act(s) of management.
Henri Fayol considers management to consist of seven functions:
1. planning
2. organizing
3. leading
4. coordinating
5. controlling
6. staffing
7. motivating
Some people, however, find this definition, while useful, far too
narrow. The phrase "management is what managers do" occurs
widely, suggesting the difficulty of defining management, the
shifting nature of definitions, and the connection of managerial
practices with the existence of a managerial cadre or class.
One habit of thought regards management as equivalent to
"business administration" and thus excludes management in places
outside commerce, as for example in charities and in the public
sector. More realistically, however, every organization must
manage its work, people, processes, technology, etc. in order to
maximize its effectiveness. Nonetheless, many people refer to
university departments which teach management as "business
schools." Some institutions (such as the Harvard Business School)
use that name while others (such as the Yale School of
Management) employ the more inclusive term "management."
Basic functions of management
Management operates through various functions, often classified as
planning, organizing, leading/motivating, and controlling.
• Planning: Deciding what needs to happen in the future (today,
next week, next month, next year, over the next 5 years, etc.) and
generating plans for action.
• Organizing: (Implementation) making optimum use of the

resources required to enable the successful carrying out of plans.

• Staffing: Job Analyzing, recruitment, and hiring individuals for

appropriate jobs.
• Leading: Determining what needs to be done in a situation and

getting people to do it.

• Controlling: Monitoring, checking progress against plans,

which may need modification based on feedback.

• Motivating: the process of stimulating an individual to take

action that will accomplish a desired goal..

Formation of the business policy
• The mission of the business is its most obvious purpose -- which
may be, for example, to make soap.
• The vision of the business reflects its aspirations and specifies

its intended direction or future destination.

• The objectives of the business refers to the ends or activity at

which a certain task is aimed.

• The business's policy is a guide that stipulates rules, regulations

and objectives, and may be used in the managers' decision-making.

It must be flexible and easily interpreted and understood by all
employees.
• The business's strategy refers to the coordinated plan of action

that it is going to take, as well as the resources that it will use, to

realize its vision and long-term objectives. It is a guideline to
managers, stipulating how they ought to allocate and utilize the
factors of production to the business's advantage. Initially, it could
help the managers decide on what type of business they want to
form.
How to implement policies and strategies
• All policies and strategies must be discussed with all managerial
personnel and staff.
• Managers must understand where and how they can implement

their policies and strategies.

• A plan of action must be devised for each department.

• Policies and strategies must be reviewed regularly.

• Contingency plans must be devised in case the environment

changes.
• Assessments of progress ought to be carried out regularly by

top-level managers.
• A good environment and team spirit is required within the

business.
• The missions, objectives, strengths and weaknesses of each

department must be analysed to determine their roles in achieving

the business's mission.
• The forecasting method develops a reliable picture of the

business's future environment.

• A planning unit must be created to ensure that all plans are

consistent and that policies and strategies are aimed at achieving

the same mission and objectives.
• Contingency plans must be developed, just in case.

All policies must be discussed with all managerial personnel and

staff that is required in the execution of any departmental policy.
• Organizational change is strategically achieved through the
implementation of the eight-step plan of action established by John
P. Kotter: Increase urgency, get the vision right, communicate the
buy-in, empower action, create short-term wins, don't let up, and
make change stick.

Where policies and strategies fit into the planning process

• They give mid- and lower-level managers a good idea of the
future plans for each department.
• A framework is created whereby plans and decisions are made.

• Mid- and lower-level management may add their own plans to

the business's strategic ones.

Multi-divisional management hierarchy

The management of a large organization may have three levels:
1. Senior management (or "top management" or "upper
management")
2. Middle management
3. Low-level management, such as supervisors or team-leaders
4. Foreman
5. Rank and File
Top-level management
• Require an extensive knowledge of management roles and skills.
• They have to be very aware of external factors such as markets.

• Their decisions are generally of a long-term nature

• Their decisions are made using analytic, directive, conceptual

and/or behavioral/participative processes

• They are responsible for strategic decisions.

• They have to chalk out the plan and see that plan may be

effective in the future.

• They are executive in nature.
Middle management
• Mid-level managers have a specialized understanding of certain
managerial tasks.
• They are responsible for carrying out the decisions made by top-

level management.
Lower management
• This level of management ensures that the decisions and plans
taken by the other two are carried out.
• Lower-level managers' decisions are generally short-term ones.

Foreman / lead hand

• They are people who have direct supervision over the working
force in office factory, sales field or other workgroup or areas of
activity.
Rank and File
• The responsibilities of the persons belonging to this group are
even more restricted and more specific than those of the foreman.

Benchmarking – Benchmarking compares an organization’s

performance against ‘best in class’ performance wherever that is
found. Managers seek out the best examples of a particular practice
in other companies as part of an effort to improve the
corresponding practice in their own firm.
When the search for best practices is limited to competitors, the
process is called competitive benchmarking. Other times managers
may seek out the best practices regardless of what industry they are
in, called functional benchmarking. Benchmarking provides the
motivation and the means many firms need to seriously rethink
how their organizations perform certain tasks.
A comprehensive internal analysis of an organization’s strengths
and weaknesses must however utilize all three types of comparison
standards. For instance, an organization can study industry norms
to access where it stands in terms of number of complaints
generated regarding defects during guarantee period of the product.
Then it could benchmark the organization that is best at controlling
the defects. Based on the benchmarking results it could implement
major new programmes and track improvements in these
programmes over time using, historical comparisons.
Value Chain – it shows that differentiation occurs out of the
firm’s value chain. 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 of 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.
SWOT Analysis –
SWOT stands for Strenths, Weakness, Opportunties and Threats. A
SWOT analysis summarizes the key issues from the external
environment and the internal capabilities of an organization those
which become critical for strategy development. The aim through
this is to identify the extent to which the strength and weakness are
relevant to and capable to dealing with changes in the business
environment. It also reflects whether there are opportunities to
exploit further the competencies of the organization.
Strength – Positive internal factors – technological skills, leading
brands, distribution channels, customer loyalty, production quality,
management
Weakness – Negative internal factors – absence of important skills,
weak brands, low customer retention, unreliable product or
service, poor management
Opportunties – Positive external factors – changing customer
tastes, liberalization of geographic markets, technological
advances, changes in government policies, lower personal taxes,
change in population age-structure, new distribution channels
Threats – Negative external factors – changing customer tastes,
closing of geographic markets, technological advances, changes in
government policies, tax increase, change in population age
structure, new distribution channels.

BUSINESS LEVEL STRATEGY

Business level strategies are popularly known as generic or
competitive strategies. Michael Porter classified these strategies
into overall cost leadership, differentiation and focus. The first two
strategies are broader in concept as their competitive scope is wide
enough whereas the third strategy i.e the focus strategy has a
narrower competitive scope.

The experience curve – Cost has been correlated with the

accumulated experience by the experience curve. Let us take the
example of production –
The underlying principle behind the experience curve is that as
total quantity of production of a standardized item is increased, its
unit manufacturing cost decreases in a systematic manner. The
concept of the experience curve was presented by BCG in 1966
and since then it has been accepted as an important phenomenon.
Causes of experience curve effect –
• Improved productivity of labour
• Increased specialization
• Innovation in production methods
• Value engineering and fine tuning
• Balancing production line
• Methods and system rationalization
The experience curve relationship provides a good framework for
managerial considerations for predicting industrial scenario with
respect to future costs, profit margins, and corresponding cash
flows for the manager’s own as well as his/her competitor’s
operations.
Competitive strategies like the below mentioned can be developed
based on experience curve –
1. Selling product at most competitive price
2. Maximising profits by selling at the highest price the market can
afford
3. Selling at a higher price initially but crashing the prices later to
keep the competition out.

Best
Cost Leadership Differentiation
cost
Provide
 Cost Focus Focussed
differentiation

Competitive strategies by Michael Porter

1) Low cost provider strategy -
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. One
such competitive strategy is overal l 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 –
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
To sustain the cost leadership throughout, the firm must be clear
about its accomplishment through different elements of the value
chain.
Though low cost can be one of the most important competitive
advantages enjoyed by firms all over the globe it does have its own
drawback. Some are
• Initiation by the competitive firms
• Threat of competitive firms from other countries
• Firm losing cost leadership due to fast technological changes,
which require high capital investment
• Threat by competitors to capture still lower cost segments
• Competition based on other than cost.
2) Differentiation Strategy – 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 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 differentiatial 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.
There are a number of factors which result in differentiation. Some
of them are –
• To compete against the rivals
• To create entry barriers for newcomers by building a unique
product
• To reduce the threats arising from the substitutes
• To develop a differentiation advantage
Different areas of differentiation –
Purchasing – quality of components and material acquired
Design – aesthetic appeal
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 management – permits responsiveness to the needs of
specific customers
Financial management – improves stability of the firm
Marketing – building of product and company reputation through
advertising
Customer service – providing pre-sales information to customers
Sources of differentiation – Its 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.
Some examples of differentiation –
• Ability to serve customers needs anywhere
• Simplified maintenance for the customers
• Single point at which the buyer can purchase
• Superior compatibility among products
• Uniqueness

Factors/Drivers for differentiation –

• 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 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
channels, 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 product to the end
users
• Timing – the firms can achieve uniqueness by encashing 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 peform better and better, continuous
improvement is necessary and this comes through continous
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 play a role in
making a firm unique, like relationship of management with
employees

Differentiation is governed by value activities in a value chain and

these activities in turn are governed by certain driving factors
which make the form unique
Cost of differentiation –
Differentiation generally involves costs. 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:
• Increased expenditure on training
• Increased advertising spend to promote the product
• Cost of hiring highly skilled salesforce
• Use of more expensive material to improve the quality of the
product, etc
Advantages of differentiation –
• Premium price for the firm
• Increase in number of units sold
• Increase in brand loyalty by the customers
• Sustaining competitive advantage
Disadvantage of differentiation –
• Uniqueness of the product not valued by buyers
• Excess amount of differentiation
• Loss due to differentiation

3) Focus Strategy –
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 other market
competitors. This is also known as 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 –

a) Cost focus - Cost focus is where a firm seeks a cost advantage

in the target segment. This is basically a niche-low cost strategy
whereby a cost advantage is achieved in focuser’s target segment.
According to Porter, cost focus exploits differences in behavior in
some segments. In this the focuser concentrates on a narrow buyer
segment and out-competes rivals on the basis of lower cost.

b) Differentiation focus - Differentiation focus is where a firm

seeks differentiation in the target segment. In this, the firm offers
niche buyers something different from rivals. Firm seeks
differentiation in its target segment. Differentiation focus exploits
the specific needs of buyers in specified segments. Eg. MayBach
luxury car which is targeted to segment where customers can
afford to pay a sum as large as Rs.5.4 crores.

Following are the situations where a focus strategy is efficient –

• Market segment large enough to be profitable
• Market segment has good growth potential
• Market segment is not significant to the success of major
competitors
• Focuser has efficient resources
• Focuser is able to defend against challenges
• High costs are difficult to the competitors to meet the
specialized need of the niche
• Focuser is able to choose from different segments
Advantages of focus strategy –
• Focuser can defend against Porters competitive forces
• Focuser can reduce competition from new firms by creating a
niche of its own
• Threat from producers producing substitute products is reduced
• The bargaining power of the powerful customers is reduced
• Focus strategy, if combined with low-cost and differentiation
strategy, would increase market share and profitability
Risks of focus strategy –
• Market segment may not be large enough to generate profits
• Segment’s need may become less distinct from the main market
• Competition may take over the target-segment

Corporate Strategy
Corporate strategy is primarily about the choice of direction for the
corporation as a whole. The basic purpose of a corporate strategy
is to add value to the individual businesses in it. A corporate
strategy involves decisions relating to the choice of businesses,
allocation of resources among, different businesses, transferring
skills and capabilities in such a way as to obtain synergies among
product lines and business units, so that the corporate whole is
greater than the sum of its individual business units.

Types of Corporte Strategies

There are four types of strategic alternatives available at corporate

level. They are

1) Stability strategy –

Stability strategy implies continuing the current activities of the

firm without any significant change in direction. If the
environment is unstable and the firm is doing well, then it may
believe that it is better to make no changes. A firm is said to be
following a stability strategy if it is satisfied with the same
consumer groups and maintaining the same market share, satisfied
with incremental improvements of functional performance and the
management does not want to take any risks that might be
associated with expansion or growth.
Stability strategy is most likely to be pursued by small businesses
or firms in a mature stage of development.
Stability strategies are implemented by ‘steady as it goes’
approaches to decisions. No major functional changes are made in
the product line, markets or functions.
However, stability strategy is not a ‘do nothing’ approach nor does
it mean that goals such as profit growth are abandoned. The
stability strategy can be designed to increase profits through such
approaches as improving efficiency in current operations.

Why do companies pursue a stability strategy?

1) the firm is doing well or perceives itself as successful
2) it is less risky
3) it is easier and more comfortable
4) the environment is relatively unstable
5) too much expansion can lead to inefficiencies

Situations where a stability strategy is more advisable than the

growth strategy:

a) if the external environment is highly dynamic and

unpredictable
b) strategic managers may feel that the cost of growth may be
higher than the potential benefits
c) excessive expansion may result in violation of anti trust
laws

Types of stability strategies –

1) Pause/Process with caution strategy – some organizations
pursue stability strategy for a temporary period of time until the
particular environmental situation changes, especially if they have
been growing too fast in the previous period. Stability strategies
enable a company to consolidate its resources after prolonged rapid
growth. Sometimes, firms that wish to test the ground before
moving ahead with a full-fledged grand strategy employ stability
strategy first.
2) No change strategy – a no change strategy is a decision to do
nothing new i.e continue current operations and policies for the
foreseeable future. If there are no significant opportunities or
threats operating in the environment, or if there are no major new
strengths and weaknesses within the organization or if there are no
new competitors or threat of substitutes, the firm may decide not to
do anything new.
3) Profit strategy – the profit strategy is an attempt to
artificially maintain profits by reducing investments and short-term
expenditures. Rather than announcing the company’s poor position
to shareholders and other investors at large, top management may
be tempted to follow this strategy. Obviously, the profit strategy is
useful to get over a temporary difficulty, but if continued for long,
it will lead to a serious deterioration in the company’s position.
The profit strategy is thus usually the top management’s short term
and often self serving response to the situation.

In general, stability strategies can be very useful in the short run,

but they can be dangerous if followed for too long.

2) Growth/Expansion Strategies –
Growth strategies are the most widely pursued corporate strategies.
Companies that do business in expanding industries must grow to
survive. A company can grow internally by expanding its
operations or it can grow externally through mergers, acquisitions,
joint ventures or strategic alliances.

Reasons for pursuing growth strategies –

1) to obtain economies of scale

2) to attract merit
3) to increase profits
4) to become a market leader
5) to fulfill natural urge
6) to ensure survival

Growth strategies can be divided into three broad categories:

a) Intensive strategies
b) Integration strategies
c) Diversification strategies

a) Intensive strategies – without moving outside the

organization’s current range of products or services, it may be
possible to attract customers by intensive advertising, and by
realigning the product and the market options available to the
organization. These strategies are generally referred to as
intensification strategies.
There are three important intensive strategies –

• Market penetration – seeks to increase market share for

existing products in the existing markets through greater marketing
efforts. This includes activities like increasing the sales force,
increasing promotional effort, giving incentives, etc. Marketing
penetration is generally achieved through the following approaches
–
- increasing sales to the current customers by increasing
the size of purchase, advertising other uses, giving price incentives
for increased use
- attracting the competitor’s customers by increasing
promotional efforts, establishing sharper brand differentiation,
offering price cuts
- attracting non users to buy the product by inducing trail
use through sampling, advertising new users

This strategy is effective when currents markets are not saturated,

usage rate of present customers is low, economies of scale can
bring down the costs and when market shares of major competitors
are declining while total sales are increasing.

Market development – seeks to increase market share by selling

the present products in new markets. This can be achieved through
the following approaches –
- by entering new geographic market through regional
expansions, national expansion and international expansion
- by entering new market segments by developing product
versions to appeal to other segments, entering other channels of
distribution and through advertising in other media.
This strategy is effective when new untapped or unsaturated
market exists, new channels of distribution are available, the firm
has excess production capacity, the firm’s industry is becoming
rapidly global and when the firm has resources for expanded
operations.

• Product development – seeks to increase market share by

developing new or improved products for present markets. Can be
achieved through developing new product features, developing
quality variations and by developing additional models and sizes
(product proliferation)

This strategy is effective when the firm’s products are in maturity

stage, the firm witnesses rapid technological developments in the
industry, the firm is in a high growth industry, competitors bring
out improved quality products from time to time and the firm has
strong R & D capabilities

b) Integration Strategies – integration basically means

combining activities relating to the present activity of a firm. Such
a combination can be done on the basis of the industry value chain.
A company performs a number of activities to transform an input
to output. These activities include right from the procurement of
raw materials to the production of finished goods and their
marketing and distribution to the ultimate customers. These
activities are also called value chain activities. The firm that adopts
integration may move forward or backward the industry value
chain

Expanding the firm’s range of activities backward into the souces

of supply and/or forward into the distribution channel is called
‘vertical integration’. Thus, if a manufacturer invests in facilities to
produce raw materials or component parts that it formerly
purchased from outside suppliers, it remains in the same industry,
but its scope of operations extend to two stages of the industry
value chain. Similarly, if a manufacturer opens a chain of retail
outlets to market its products directly to consumers, it remains in
the same industry, but its scope of operations extend from
manufacturing to retailing. Vertical integration can be full
integration, participating in all stages of the industry value chain or
partial integration, participating in selected stages of the industry
value chain.
A firm can pursue vertical integration by starting its own
operations or by acquiring a company already performing the
activities it wants to brings inhouse. Thus, integration is basically
of two types –
 Vertical integration
 Horizontal integration

Vertical Integration – involves gaining ownership or

increased control over suppliers or distributors. Vertical integration
is of two types –
1) Backward integration – involves gaining ownership of firm’s
suppliers. For example, a manufacture of finished products may
take over the business of a supplier who manufactures raw
materials, component parts and other inputs. It decreases the
dependability of the supply and quality of raw materials used as
production inputs. This strategy is generally adopted when
- present suppliers are unreliable, too costly or cannot meet
firm’s needs
- the firm’s industry is growing rapidly
- Number of suppliers is small, but the number of competitors
is large
- Stable prices are important to stabilize cost of raw materials
- Present suppliers are getting high margins
- The firm has both capital and hr to manage the new business

2) Forward integration – involves gaining ownership or

increased control
Over distributors or retailers. This strategy is generally adopted
when
- the present distributors are expansive, unreliable or
incapable of meeting the firm’s needs
- the availability of quality distributors is limited
- the firm’s industry is growing and will continue to grow
- the advantages of stable production are high
- present distributors or retailers have high profit margins
- the firm has both capital and hr to manage new business

Advantages of vertical integration –

1) a secure supply of raw materials or distribution channels

2) control over raw materials and other inputs required for
production or distribution channels
3) access to new business opportunities and technologies
4) elimination of need to deal with a wide variety of suppliers
and distribution

Disadvantages of vertical integration –

1) increased costs, expenses and capital requirements

2) loss of flexibility in investments
3) problems associated with unbalanced facilities or unfulfilled
demand
4) additional administrative costs associated with managing a
more complex set of activities

Horizontal Integration – is a strategy seeking ownership or

increased control over a firm’s competitors.
Advantages are
- it eliminates or reduces competition
- it yields access to new markets
- it provides economies of scale
- it allows transfer of resources and capabilities

c) Diversification Strategies – is the process of adding new

businesses to existing businesses of the company. In other words,
diversification adds new products or markets in the existing ones.
A diversified company is one that has two or more distinct
businesses. The diversification strategy is concerned with
achieving a greater market from a greater range of products in
order to maximize profits. From the risk point of view, companies
attempt to spread their risk by diversifying into several products or
industries.

Diversification can be achieved through a variety of ways:

1) through mergers and acquisitions
2) through joint ventures and strategic alliances
3) through starting up a new unit

Reasons for diversification –

1) saturation or decline of the current business
2) better opportunities
3) sharing of resources and strengths
4) new avenues for reducing costs
5) obtain technologies and products
6) use of brand name
7) risk minimization

Types of diversification –
a) concentric diversification
b) conglomerate diversification

a) Concentric diversification – adding to new, but related

business is called Concentric diversification. It involves acquisition
of businesses that are related to the acquiring firm in terms of
technology, markets or products. The selected new business has
compatibility with the firm’s current business.
Advantages –
- businesses sharing tangible and intangible resources
- increasing the firm’s stock value
- increases the growth rate of the firm
- better use of funds than ploughing them back into internal
growth
- improves the stability of earning and sales
- balances the product line when the life cycle of the current
products have peaked
- helps to acquire a needed resource quickly
- achieves tax savings
- increases efficiency and profitability through synergy
- reduces risk

b) Conglomerate diversification – adding to new, but unrelated

businesses Is called conglomerate diversification. The new
businesses will have no relationship to the company’s technology,
products or markets.
Advantages –
- business risk is scattered over diverse industries
- financial resources are invested in industries that offer the
best profit prospects
- buying distressed businesses at a low price can enhance
shareholder wealth
- company profitability can be more stable in economic
upswings and downswings
Disadvantages –
- it is difficult to manage different businesses effectively
 - the new businesses may not provide any competitive
advantage if it has no strategic fits

Differences between concentric and conglomerate

diversification

Sl.No Concentric Conglomerate

Diversification Diversification
1 Diversifying into Diversifying into
businesses related to businesses unrelated
the existing business to the existing
business
2 There is No commonality in
commonality in markets, products or
markets, products or technology
technology
3 Main objective is to Main objective is to
increase shareholder increase shareholder
value through value through profit
‘synergy’ by sharing maximization
skills, resources and
capabilities
4 Less risky More risky

Means to achieve diversification –

i. Mergers & Acquisitions
ii. Joint ventures
iii. Strategic alliances
iv. Internal development

i) Mergers & Acquistions – a merger occurs when two or

more organizations of about equal size combine to become one
through an exchange of stock or cash or both.

Mergers can take place in different ways

Acquisition occurs when a large organization purchases
a smaller firm, or vice versa.
Consolidation is when both firms dissolve their identity
to create a new firm. It is also known as amalgamation.
Friendly merger – when both firms desire a merger or
acquisition, it is termed as friendly merger
Takeover – a surprise attempt by one company to acquire
control of another Company against the will of the current
management is called a takeover or hostile takeover. It is usually
done through the purchase of controlling share of voting stock in a
publicly traded company. In the case of takeover, the
acquiring firms retains its identity whereas the target firm loses its
identity after restructuring.
Demerger – or split or division of a company is the
opposite of mergers and acquisition. This happens when a part of
the undertaking is transferred to a newly formed company or to an
existing company. The size of the company after demerger would
reduce.
 Reasons for mergers & acquisitions –
 To gain economies of scale
 To achieve diversification of the portfolio
 To quickly acquire valuable resources
 To reduce risks and borrowing costs
 To achieve growth
 To gain additional capacity
 To obtain taxation or investment incentive
 To gain managerial expertise
 To acquire market supremacy
 To bypass legal hurdles
 To take over sick units

Types of mergers –
a) horizontal merger – companies producing the same product
or doing same business join together.
b) Vertical merger – joining of two or more companies
involved in different stages of production or distribution of the
same product or service.
c) Lateral or allied merger – when the firms producing different
products which are related in some way come together
d) Conglomerate merger – the merger of two or more
companies producing unrelated products.
e) Concentric merger – if the activities of the segments brought
together are so related that there is carryover of specific
management functions or complimentarity in relative strengths
among them
f) Circular merger – when firms belonging to the different
industries and producing altogether different products combine
together under the banner of central agency.

The merger process –

1) Identify industries
2) Select sectors
3) Choose companies
4) Evaluate cost of acquisition and returns
5) Rank the candidates – strategic fit, financial fit, cultural fit
6) Identify good candidates
7) Decide the extent of acquisition/retention
8) Merger implementation
9) Post-merger integration

Demerits of M & A
1) sometimes expensive premiums are paid to acquire a
business
2) a number of difficulties are faced in integrating the activities
and resources of the acquired firm into the operations of the
acquiring firm
3) synergies can be quickly imitated by the competitors
4) cultural clashes create a major challenge, which may doom
the induced benefits

ii) Joint Ventures – joint ventures are assuming an

increasingly prominent role in the strategy of leading firms.
A joint venture occurs when two or more companies join together
to form a separate legal entity, where each of the partners own
equal or near equal stake. These ventures are formed to capitalize
on each other’s distinctive competencies. The most common forms
of a joint venture include those between an international firm with
a domestic firm.

Types of joint ventures –

1) International joint ventures: in this type of joint ventures, the

international partner intends to benefit from the domestic partner’s
local knowledge of industry conditions of a specific industry. This
strategy will help the international firm to hedge its risks of
product development costs specific to that market. Further, some
countries make it mandatory for international firms to only enter
the country through a joint venture with the local partner, rather
than on their own. The primary disadvantage in this type of joint
venture is that the international firm might lose control of its
technology to its joint venture partner. Also, such joint ventures
will not give the firm enough control over its joint venture, so that
it could compete globally against its competitors.
2) Diversification joint venture – a firm may diversify into new
products or markets through a joint venture. In such joint ventures,
the specific benefits arise from transfer of technical, managerial
and financial expertise from one business to another
3) Market entry joint ventures – in this type of joint ventures,
two or more firms in different businesses enter a new business
where they could capitalize on their combined capabilities

iii) Strategic Alliances – In strategic alliances, two or

more firms jointly Cooperate for mutual gain. Each partner brings
knowledge or Resources to the partnership. For example, one
partner provides Manufacturing capabilities while the other
partner provides marketing
Marketing expertise. In the long run, partners can
learn from each other and develp new core
competencies.
Advantages of strategic alliances – improvement of efficiency,
access to knowledge,
Overcoming local government regulations, overcoming
restrictions in competition
Issues involved – assess and value partner knowledge, determine
knowledge accessibility,
Evaluate case of knowledge transfer, establish knowledge
connections between the partners,
Ensure that cultures are in alignment

3) Defensive strategies – These strategies are also

called retrenchment strategies. A company may pursue
retrenchment strategies when it has a weak competitive
position in some or all of the product lines resulting in poor
performance – sales are down and profits are dwindling.
In an attempt to eliminate the weaknesses that are
dragging the company down, management may follow one or
more of the following retrenchment strategies –

a) Turnaround
 b) divestment
c) bankruptcy
d) liquidation

a) Turnaround - a firm is said to be sick when it faces a severe

cash crunch or a consistent downtrend in its operating profits. Such
firms become insolvent unless appropriate internal and external
actions are taken to change the financial picture of the firm. This
process of recovery is called turnaround strategy.

The three phases of turnaround –

1) First phase – is the diagnosis of impending trouble. Many authors
and research studies have indicated distinct early warning signals of
corporate sickness
2) Second phase – involves analyzing the causes of sickness to
restore the firm on its profit track. Thse measures are of both short-
term and long-term nature
3) The third and final phase – involves implementation of change
process and its monitoring

When turnaround becomes necessary –

• Decreasing market share
• Decreasing constant rupee sales
• Decreasing profitability
• Increasing dependence on debt
• Restricted dividend policies
• Failure to reinvest sufficiently in the business
• Diversification at the expense of the core business
• Lack of planning
• Inflexible chief executive
• Management succession problems
• Unquestioning boards of directors
• A management team unwilling to learn from its competitors

Types of turnaround strategies –

a) strategic turnaround
b) operating turnaround – revenue increasing strategies, cost
cutting strategies, asset reduction strategies, combination strategies

Turnaround Process
i) revival of a sick unit requires the formulation and
implementation of a new strategy
ii) localizing problems and sequencing the corrective actions
helps in the revival of the sick unit
iii) the successful implementation of the turnaround strategy
requires appropriate organization structure, a participative type
of decision making environment, effective administrative and
budgetary controls, training, performance evaluation, career
progression and rewards.
iv) The turnaround strategy must focus on profit generation and
profits must be regarded as a legitimate goal
v) The acceptance and commitment of managers and employees
of the organization towards revival measures
vi) Openness in the change process leads to confidence in the top
management and its strategy
vii) Understanding of technical processes and problem solving
attitude in overcoming technical snags is essential for turning
around of sick companies
viii) The vital role of consultants
ix) Active support given to the chief executive
x) Focused leadership

b) Divestiture – selling a division or part of an organization is

called divestiture.
Generally used in the following circumstances –
- when the business cannot be turned around
- when the business needs more resources than the
company can provide
- when a business is responsible for a firm’s overall poor
performance
- when a business is a misfit with the rest of the
organization
- when a large amount of cash is required quickly
- when government’s legal actions threaten the existence of
a business

Types –
1) Spin-off – a new company comes into existence. The
shareholders of the parent company become the shareholders of the
new company spun off. It is a kind of demerger when an existing
parent company distributes on a pro-rata basis the shares of the new
company to the shareholders of the parent company free of cost.
There is no money transaction, subsidiary’s assets are not revalued,
and transaction is treated as stock dividend. Both the companies
exist and carry on their businesses independently after spin-off. Eg.
ITC has spun off hotel business from the company and formed ITC
Hotels Ltd
Involuntary spin-off – when faced with an adverse regulatory
ruling, a firm may be forced to spin-off to comply with the legal
formalities.
Defensive spin-off – defensive spin-off is a takeover defence.
Company may choose to spin-off divisions to make it less attractive
to the bidder
Tax consequences of spin-off : Shares allotted to the shareholders
during spin-off is not taxed as capital gain or as dividend

2) Sell-off – it is a form of restructuring, where a firm sells a

division to another company. When the business unit is sold,
payment is received generally in the form of cash or securities
3) Voluntary corporate liquidation or bust-ups – it is also known
as complete sell-off. The companies normally go for voluntary
liquidation because they create value to the shareholders. Here the
firm sells its assets/divisions to multiple parties which may result in
a higher value being realized than if they had to be sold as a whole.
Through a series of spin-offs or sell-offs a company may go
ultimately for liquidation
4) Equity carveouts – it is a different type of divestiture and
different form of spin-off and sell-off. The parent company may
sell a 100% interest in subsidiary company or it may choose to
remain in the subsidiary’s line of business by selling only a partial
interest (shares) and keeping the remaining percentage of
ownership.
5) Leveraged buyouts (LBO’s) – a leveraged buyout is an
acquisition of a company in which the acquisition is substantially
financed through debt. Much of the debt may be secured by the
assets of the company.

c) Bankruptcy – this is a form of defensive strategy. It allows

organizations to file a petition in the court for legal protection to the
firm, in case the firm is not in a position to pay its debt. The court
decides the claims on the company and settles the corporation’s
obligations.

d) Liquidation – occurs when an entire company is dissolved and

its assets are sold. It is a strategy of the last resort. When there are
no buyers for a business which wants to be sold, the company may
be wound up and its assets may be sold to satisfy debt obligations.
Liquidation becomes inevitable under the following circumstances
–
1) when an organization has pursued both turnaround strategy
and divestiture strategy, but failed
2) when an organization’s only alternative is bankruptcy.
3) When the shareholders of a company can minimize their losses
by selling the assets of a business

Combination strategy – a company can pursue a combination of

two or more corporate strategies simultaneously. But a combination
strategy can be exceptionally risky if carried too far. No
organization can afford to pursue all the strategies that might
benefit the firm. Difficult decisions must be made. Priorities must
be established. Organizations like individuals have limited
resources, so organizations must choose among alternative
strategies