STRATEGIC MANAGEMENT. Objectives:

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1 STRATEGIC MANAGEMENT Subject Code: IA Marks: 50 No. of Lecture Hours / Week:04 Exam Hours: 03 Total Number of Lecture Hours: 56 Exam Marks: 100 Practical Component: 01 Hour / Week Objectives: To explain core concepts in strategic management and provide examples of their relevance and use by actual companies To focus on what every student needs to know about formulating, implementing and executing business strategies in today s market environments To teach the subject using value-adding cases that features interesting products and companies, illustrate the important kinds of strategic challenges managers face, embrace valuable teaching points and spark student s interest. Module 1 (8 Hours) Meaning and Nature of Strategic Management, its importance and relevance. Characteristics of Strategic Management. The Strategic Management Process. Relationship between a Company s Strategy and its Business Model. Module 2 (8 Hours) Strategy Formulation Developing Strategic Vision and Mission for a Company Setting Objectives Strategic Objectives and Financial Objectives Balanced Scorecard. Company Goals and Company Philosophy. The hierarchy of Strategic Intent Merging the Strategic Vision, Objectives and Strategy into a Strategic Plan. Module 3 (7 Hours) Analyzing a Company s External Environment The Strategically relevant components of a Company s External Environment Industry Analysis Industry Analysis Porter s dominant Economic features Competitive Environment Analysis Porter s Five Forces model Industry diving forces Key Success Factors concept and implementation. Module 4 (8 Hours) Analyzing a company s resources and competitive position Analysis of a Company s present strategies SWOT analysis Value Chain Analysis Benchmarking Generic Competitive Strategies Low cost provider Strategy Differentiation Strategy Best cost provider Strategy Focused Strategy Strategic Alliances and Collaborative Partnerships Mergers and Acquisition Strategies Outsourcing Strategies International Business level Strategies. Module 5 (7 Hours) Business Planning in different environments Entrepreneurial Level Business planning Multistage wealth creation model for entrepreneurs Planning for large and diversified companies brief overview of Innovation, integration, Diversification, Turnaround Strategies - GE nine cell planning grid and BCG matrix. Module 6 (10 Hours) Strategy Implementation Operationalizing strategy, Annual Objectives, Developing Functional Strategies, Developing and communicating concise policies. Institutionalizing the strategy. Strategy, Leadership and Culture. Ethical Process and Corporate Social Responsibility. Dept of MBA,SJBIT Page 1

2 Module 7 (8 Hours) Strategic Control, guiding and evaluating strategies. Establishing Strategic Controls. Operational Control Systems. Monitoring performance and evaluating deviations, challenges of Strategy Implementation. Role of Corporate Governance Practical Components: Business Plan: Students should be asked to prepare a Business Plan and present it at the end of the semester. This should include the following: Executive Summary Overview of Business and industry analysis Description of recommended strategy and justification Broad functional objectives and Key Result Areas. Spreadsheet with 5-year P&L, Balance Sheet, Cash Flow projections, with detailed Worksheets for the revenue and expenses forecasts. Analyzing Mission and Vision statements of a few companies and comparing them Applying Michael Porter s model to an industry (Retail, Telecom, Infrastructure, FMCG, Insurance, Banking etc. Pick a successful growing company. Do a web-search of all news related to that company over a oneyear period. Analyze the news items to understand and write down the Company s strategy and execution efficiency. Pick a company that has performed very badly compared to its competitors. Collect Information on why the company failed. What were the issues in strategy and execution that were responsible for the company s failure in the market. Analyze the internal and external factors Map out GE 9-cell matrix and BCG matrix for some companies and compare them Conduct SWOT analysis of your institution and validate it by discussing with faculty Conduct SWOT analysis of companies around your campus by talking to them RECOMMENDED BOOKS: Crafting and Executing Strategy, Arthur A. Thompson Jr., AJ Strickland III, John E Gamble, 18/e, Tata McGraw Hill, Strategic Management, Alex Miller, Irwin McGraw Hill Strategic Management - Analysis, Implementation, Control, Nag A, 1/e, Vikas, Strategic Management - An Integrated Approach, Charles W. L. Hill, Gareth R. Jones, Cengage Learning. Business Policy and Strategic Management, Subba Rao P, HPH. Strategic Management, Kachru U, Excel BOOKS, REFERENCE BOOKS: Strategic Management: Concepts and Cases, David R, 14/e, PHI. Strategic Management: Building and Sustaining Competitive Advantage, Robert A. Pitts & David Lei, 4/e, Cengage Learning. Competitive Advantage, Michael E Porter, Free Press NY Essentials of Strategic Management, Hunger, J. David, 5/e, Pearson. Strategic Management, Saroj Datta, jaico Publishing House, Business Environment for Strategic Management, Ashwathappa, HPH. Contemporary Strategic Management, Grant, 7/e, Wiley India, 2012 Strategic Management-The Indian Context, R. Srinivasan, 4 th edition, PHI Dept of MBA,SJBIT Page 2

3 CONTENTS Module No. Particulars Page No. 1 Introduction to strategic Management The Strategy Formulation Analyzing a Company s External Environment Analyzing a company s resources & Generic Competitive Strategies Business Planning in different environments Strategy Implementation Strategic Control Dept of MBA,SJBIT Page 3

4 Module I Meaning and Nature of Strategic Management, Its importance and relevance, Characteristics of Strategic Management, The Strategic Management Process Relationship between company s Strategy and its Business Model. Strategy What is Strategy? The term strategy is derived from the Greek word strategos which means art of general. Definition According to Johnson and Scholes, strategy is the direction and scope of an organization over the long-term: which achieves advantage for the organization through its configuration of resources within a challenging environment, to meet the needs of markets and to fulfill stakeholder expectations. In other words, strategy is about: How: How to outcompete rivals. How to respond to economic and market conditions and growth opportunities. How to manage functional pieces of the business. Howto improve the firm s financial and market performance. Definition The on-going process of formulating, implementing and controlling broad plans guide the organization in achieving the strategic goods given its internal and external environment. Strategy at different Levels of a Business Strategies exist at several levels in any organization ranging from the overall business (or group of businesses) through to individuals working in it. Corporate Strategy is concerned with the overall purpose and scope of the business to meet stakeholder expectations. This is a crucial level since it is heavily influenced by investors in the business and acts to guide strategic decision-making throughout the business. Corporate strategy is often stated explicitly in a mission statement. For eg. Coco cola, Inc., has followed the growth strategy by acquisition. It has acquired local bottling units to emerge as the market leader Business Unit Strategy is concerned with how a business competes successfully in a particular market. It concern strategic decisions about Dept of MBA,SJBIT Page 4

5 - Choice of products, - Meeting needs of customers, - Gaining advantage over competitors, - Exploiting or creating new opportunities. For eg. Apple Computers uses a differentiation competitive strategy that emphasizes innovative product with creative design. In contrast, ANZ Grindlays merged with Standard Chartered Bank to emerge competitively. Operational Strategy is concerned with how each part of the business is organized to deliver the corporate and business unit level strategic direction. Operational strategy therefore focuses on issues of resources, processes, people etc. Functional Strategy it is the approach taken by a functional area to achieve corporate and business unit objectives and strategies by maximizing resource productivity. It is concerned with developing and nurturing a distinctive competence to provide the firm with a competitive advantage. For eg. P & G spends huge amounts on advertising to create customer demand. Nature of Strategic Management Strategic management is both an Art and science of formulating, implementing, and evaluating, cross-functional decisions that facilitate an organization to accomplish its objectives. The purpose of strategic management is to use and create new and different opportunities for future. The nature of Strategic Management is dissimilar form other facets of management as it demands awareness to the "big picture" and a rational assessment of the future options. It offers a strategic direction endorsed by the team and stakeholders, a clear business strategy and vision for the future, a method for accountability, and a structure for governance at the different levels, a logical framework to handle risk in order to guarantee business continuity, the capability to exploit opportunities and react to external change by taking ongoing strategic decisions. Importance of Strategic Management: Strategic management is important because is helps in setting detailed goals, analysing all our internal and external resources, analysing our external environment, as well as stakeholder views. Good corporate governance needs an efficient strategic management process. As the environment changes, companies may change their vision and objectives, structure, portfolio of business, markets and competitive strategies. The economic liberalization and the Dept of MBA,SJBIT Page 5

6 concomitant (associated) wide opening up of business opportunities and increase in competition have in fact made strategic management a buzz word among the Indian corporate. The task of Strategic Management is to identify the new and different businesses, technologies and markets which the company should try to create long range It always reminds us the present business, should we abandon? Without competitors, there would be no need for strategy, for the sole purpose of strategic planning to enable the company to gain, as efficiently as possible, a sustainable edge over it s competitors (rivals) Changes in one stage of the strategic management process will inevitably affect other stages as well. After a planned strategy is implemented, for example often requires modification as environmental or organizational conditions change, or as top management s ability to interpret these changes improve. Hence, these steps are interrelated; they should be treated as an integrated, ongoing process. Relevance of Strategic Management: Markets are becoming global & products must suit individual needs. There are too much of rules & regulations prevailing which must be followed strictly. Above all, an organization is expected to fulfill social responsibilities which, if ignored, may lead to drastic consequences. Due to fast changing business environment, strategic management has assumed greater relevance today. It has become increasingly difficult to predict the future as: Environment is more complex Technologies are changing at a rapid rate Both domestic & international events get affected due to globalization More reliance on innovation, creativity More social responsibility Increased legislation Characteristics of Strategic Management Long-Term Issues Strategic management deals primarily with long-term issues that may or may not have an immediate effect. For example, investing in the education of the company's work force may yield no immediate effect in terms of higher productivity. Still, in the long run, their education will result in higher productivity, and therefore enhanced profits. Dept of MBA,SJBIT Page 6

7 Competitive Advantage Strategic management helps managers find new sources of sustainable competitive advantage. Executives that apply the principles of strategic management in their work continuously try to deliver products or services cheaper, produce greater customer satisfaction and make employees more satisfied with their jobs. Effect on Operations Good strategic management always has a sizable effect on operational issues. For example, a decision to link pay to performance will result in operational decisions being more effective as employees try harder at their jobs. Operational decisions include decisions that deal with questions such as how to sell to certain customers or whether to open a credit line to them. Operational decisions are made in the lower echelons of the organizational hierarchy. Shareholders Managing the organization strategically fashion requires that the interests of shareholders be put at the heart of all issues. Whether the question at hand is expansion into a new market or negotiating mergers and acquisitions, shareholder value should be at the core at all times. Strategic Management Process: The strategic management is a broader term than strategy and is a process that includes top management s analysis of the environment in which the organization operates prior to formulating a strategy, as well as the plan for implementation and control of the strategy. 1. External Analysis Analyze the opportunities and threats or constraints that exist in the organization s external environment, including industry and macro- environmental forces. (external world) 2. Internal Analysis: Analyze the organization s strengths and weakness in its internal environment. (within the organization) 3. Mission & Direction: Reassess the organization s mission and it s goal in the light of the previous two steps. (review) 4. Strategy Formulation: Formulate strategies that build and sustain competitive advantage by; matching the organization s strengths and weaknesses with the environment s opportunities and threats. 5. Strategy Implementation: Implement the strategies that have been developed. 6. Strategic Control: Engage in strategic control activities when the strategies are not producing the desired outcomes. Dept of MBA,SJBIT Page 7

8 The Strategic Planning Process: Mission & Objectives Environmental Scanning Formulation Implementation Evaluation & Control Strategic Analysis: The process of Strategic Analysis can be assisted by a number of tools, including: PEST Analysis a technique for understanding the environment in which a business operates. Scenario Planning - a technique that builds various possible views of possible futures for a business. Five Forces Analysis a technique for identifying the forces which affect the level of competition in an industry. Market Segmentation a technique which seeks to identify similarities and differences between groups of customers or users. Directional Policy Matrix a technique which summarizes the competitive strength of a business operations in specific markets. Critical Success Factor Analysis - a technique to identify those areas in which a business must outperform the competition in order to succeed. SWOT Analysis a useful summary technique for summarizing the key issues arising from an assessment of a business s internal position and external environmental influences. Strategic Choice: Strategic choice involves understanding the nature of stakeholder expectations identifying strategic options, and then evaluating and selecting strategic options. Dept of MBA,SJBIT Page 8

9 Strategic implementation: Strategic implementation is the process by which strategies and policies are put into action through the development of programs, budgets and procedures. According to Samuel C. Certo and J. Paul Peter, Strategic management is a continuous, interactive, cross-functional process aimed at keeping an organization as whole appropriately matched to its environment. Strategic Management is the systematic application of strategic thinking to the development of the organization. In other words, can be stated as the process by which an organization formulates its objectives & achieves them. Strategic Management is different from long term planning. Long time planning is the attempt to forecast the future & set procedures for present based on past experience. Strategic management focuses on second generation planning. Business is analyzed & several scenarios for the future are put forth. Need for Strategic Management: Initially business operated in environments which had little or no competition. Industry was limited to a few firms. The geographical distribution of most organization was limited & changes in technology were slow. The need for SM was felt in 1960 s due to changing world conditions that lead to diversification & spreading out of activities in other countries. So the need was: Due to change To provide guide lines Research & Development Probability for business performance Systemized decision Improves Communication Allocation of Resources Improves co-ordination Helps Managers to have Holistic Approach Dept of MBA,SJBIT Page 9

10 Relevance of Strategic Management: Markets are becoming global & products must suit individual needs. There are too much of rules & regulations prevailing which must be followed strictly. Above all, an organization is expected to fulfill social responsibilities which, if ignored, may lead to drastic consequences. Due to fast changing business environment, strategic management has assumed greater relevance today. It has become increasingly difficult to predict the future as: Environment is more complex Technologies are changing at a rapid rate Both domestic & international events get affected due to globalization More reliance on innovation, creativity More social responsibility Increased legislation Benefits of Strategic Management: Though the results of SM cannot be measured directly as there are many other factors that influence the performance of an organization, there are certain benefits to the organization. They are: 1. Management process becomes flexible to allow for unanticipated future changes. 2. The organsation is prepared for several future scenarios & is better equipped for face changes. 3. Since objectives ae defined, direction to all activities of the organization is provided. 4. All parts of the organization work in coordination to achieve organization purposes & objectives. 5. Corporate communication, allocation of resources & short range planning also greatly improved. 6. It makes managers proactive & conscious of their environments. It helps them to think of future. 7. Higher motivational levels are achieved. 8. Conflict between personal/departmental goals & organizational goals is reduced. 9. Resistance to change is reduced as employees realize that changes may be due to achieve goals. Dept of MBA,SJBIT Page 10

11 Strategic Management Process: General representation Goal Setting Analysis Strategy Formulation Strategy Implementation Strategy Evaluation Goal Setting: Set by the top management. Analysis: Scanning of the environment, both external & internal Strategy Formulation: Crafting a strategy to achieve the objectives.strategy Formulation includes developing: Vision & Mission(target of the business) Strength & Weakness Opportunities & Threats( environmental scanning) The considerations for the best strategy formulation are: Allocation of resources Business to enter or retain, to divest or liquidate Joint Ventures or mergers, Expansion or entry into Foreign markets Trying to avoid take over Dept of MBA,SJBIT Page 11

12 Strategy Implementation: Implementing the chosen strategy efficiently & effectively. It requires developing Strategy supporting culture, creating an effective organization structure, preparing budgets, developing IS to support the strategy. Strategy Evaluation: Evaluating the performance & initiating corrective adjustments. This is the final stage in the Strategic Management process. It is the means to obtain information about proper implementation of the strategy. All strategies are subject to future modification because external & internal forces are constantly changing. Benefits of Strategic Management Management process becomes flexible to allow for unanticipated future changes. The organization is prepared for several future scenarios & is better equipped for face changes. Since objectives are defined, direction to all activities of the organization is provided. All parts of the organization work in coordination to achieve organization purposes & objectives. Corporate communication, allocation of resources & short range planning also greatly improved. It makes managers proactive & conscious of their environments. It helps them to think of future. Higher motivational levels are achieved. Conflict between personal/departmental goals & organizational goals is reduced. Resistance to change is reduced as employees realize that changes may be due to achieve goals. Financial Benefits Research indicates that organizations using strategic-management concepts are more profitable and successful than those that do not. Businesses using strategic-management concepts show significant improvement in sales, profitability, and productivity compared to firms without systematic planning activities. High-performing firms tend to do systematic planning to prepare for future fluctuations in their external and internal environments. Firms with planning systems more closely resembling strategic management theory generally exhibit superior long-term financial performance relative to their industry. High-performing firms seem to make more informed decisions with good anticipation of both short- and long-term consequences. On the other hand, firms that performs poorly often engage in activities that are shortsighted and do not reflect good forecasting of future conditions. Strategists of low-performing organizations are often preoccupied with solving internal problems and meeting paperwork deadlines. They typically underestimate their competitors' strengths and overestimate their own firm's strengths. They often attribute weak performance to uncontrollable factors such as poor economy, technological change, or foreign competition. Non- financial Benefits Dept of MBA,SJBIT Page 12

13 What are Non financial benefits of Strategic Management? Why firms do no strategic planning? Pitfalls to avoid in strategic planning Business Ethics Global challenges Increased employee productivity Improved understanding of competitors strategies Greater awareness of external threats Understanding of performance reward relationships Better problem-avoidance Lesser resistance to change Strategy versus tactics: The word strategy often confused with tactics, from the Greek Taktike. Taktike translates as organizing the army. In modern usage, strategy and tactics might refer not only to warfare, but to a variety of business practices. Essentially, strategy is the thinking aspect of planning a change, organizing something, or planning a war. Strategy lays out the goals that need to be accomplished and the ideas for achieving those goals. Strategy can be complex multi-layered plans for accomplishing objectives and may give consideration to tactics. Both "strategy" and "tactics" are derived from ancient Greek. To the Greeks, taktihos meant "fit for arranging or maneuvering," and it referred to the art of moving forces in battle, that is the "art and science of how?". Tactics are the meat and bread of the strategy. They are the doing aspect that follows the planning. Tactics refer specifically to action. In the strategy phase of a plan, the thinkers decide how to achieve their goals. In other words they think about how people will act, i.e., tactics. They decide on what tactics will be employed to fulfill the strategy. The tactics themselves are the things that get the job done. Strategies can comprise numerous tactics, with many people involved in attempting to reach an overall goal. While strategy tends to involve the higher ups of an organization, tactics tend to involve all members of the organization. Another term related to strategy and tactics in military operations is logistics. Logistics refers to how an army will be supported so they can employ tactics. Logistics form a part of strategy, for example, when one looks at providing a military force with weapons, food and lodging. Strategy (what?): What to achieve? To attract more new clients and better retain existing Ones Tactics (How?) How to achieve your strategies through who you are, by what you do and with what you have. Dept of MBA,SJBIT Page 13

14 1. Develop your Unique Value Proposition to gain attention 2. Develop your Unique Selling Proposition to stand of the crowd 3. Develop a powerful Audio Logo 4. Start an electronic newsletter 5. Write articles in magazines As Peter Drucker says: "Strategy is doing the right things, tactics is doing things right." Also, when you next hire a new employee, decide whether that employee would do a strategic or a tactical job. The Strategic Planning Process: In today's highly competitive business environment, budget-oriented planning or forecast based planning methods are insufficient for a large corporation to survive and prosper. The firm must engage in strategic planning that clearly defines objectives and assesses both the internal and external situation to formulate strategy, implement the strategy, evaluate the progress, and make adjustments as necessary to stay on track. A simplified view of the strategic planning process is shown by the following diagram: Business Model... Concerns whether revenues and costs flowing from the strategy demonstrate a business can be amply profitable and viable Business Model Design Template: Infrastructure Core capabilities Partner network Offering Value proposition Customers Target customer Distribution channel Customer relationship Finances Cost structure Revenue Business Model-Components The value proposition of what is offered to the market; The target customer segments addressed by the value proposition; Dept of MBA,SJBIT Page 14

15 The communication and distribution channels to reach customers and offer the value proposition; The relationships established with customers; The core capabilities needed to make the business model possible; The configuration of activities to implement the business model; The partners and their motivations of coming together to make a business model happen; The revenue streams generated by the business model constituting the revenue model; The cost structure resulting of the business model. Relationship between a Company s Strategy and its Business Model. Strategy... Deals with a company s competitive initiatives and business approaches Business Model... Concerns whether revenues and costs flowing from the strategy demonstrate a business can be amply profitable and viable Develop a Business Model for any Company Dominos Pizza Infrastructure (larger presence, fast delivery) Offerings (Pizza at Rs. 35/-) Customers (Lower and middle income group, franchisees, good services) Finances (Reduction in Cost through innovative practices, Economies of Scale) Good Strategy + Good Strategy Execution = Good Management Value Creation Competency Customer Focus Competitor Focus Planning and Administration Competency Activity Fit Corporate Fit Alliance Fit People Fit Reward System Fit Communications Fit Global Awareness Competency Dept of MBA,SJBIT Page 15

16 Opportunities / Threats Exist Anywhere Different Business Practices Cultural Awareness Leveraging Technology Competency Faster Innovation Big Companies Act Small Small Companies Act Big Stakeholder Competency Shareholders Customers Employees Communities Senior Managers INDIA S TOP TEN STRATEGISTS Name of the company Position in the industry Infosys Technologies 1 Reliance Industries 2 Wipro 3 Hindustan Lever 4 Maruti Udyog 5 Dr. Reddy s Laboratories 6 HDFC Bank 7 Jet Airways 8 ICICI Bank 9 Ranbaxy Laboratories 10 Dept of MBA,SJBIT Page 16

17 Module II Strategy formulation Developing Strategic vision and Mission for a company Setting Objectives Strategic Objectives and Financial Objectives Balanced score card, Company Goals and Company Philosophy. The hierarchy of Strategic Intent Merging the Strategic Vision Objectives and Strategy into a Strategic Plan. Strategy formulation Strategy formulation is the process by which an organization chooses the most. appropriate courses of action to achieve its defined goals. This process is. essential to an organization's success, because it provides a framework for the. Strategy formulation refers to the process of choosing the most appropriate course of action for the realization of organizational goals and objectives and thereby achieving the organizational vision. DEVELOPING A VISION & MISSION The mission statement communicates the firm's core ideology and visionary goals, generally consisting of the following three components: 1. Core values to which the firm is committed 2. Core purpose of the firm 3. Visionary goals the firm will pursue to fulfill its mission The firm's core values and purpose constitute its core ideology and remain relatively constant. They are independent of industry structure and the product life cycle. The core ideology is not created in a mission statement; rather, the mission statement is simply an expression of what already exists. The specific phrasing of the ideology may change with the times, but the underlying ideology remains constant. Mission Statement: A mission statement is a brief description of a company s fundamental purpose. A mission statement answers the question, Why does an organization exist? A mission statement is a brief written statement of the purpose of a company or organization. Ideally, a mission statement guides the actions of the organization, spells out its overall goal, provides a sense of direction, and guides decision making for all levels of management Dept of MBA,SJBIT Page 17

18 Mission statements contain the following: Purpose and aim of the organization The organization's primary stakeholders: clients, stockholders, etc. Responsibilities of the organization toward these stakeholders Products and services offered Characteristics of Mission Statements: An enduring statement of purpose Distinguishes one firm from another in the same business A declaration of a firm s reason for existence Elements of a mission statement, 1. Clearly articulated. easy to understand the values and purpose. 2. Relevant in terms of its history, culture and shared values. 3. Current not outdated 4. Written in a Positive (Inspiring) Tone capable of inspiring and stimulating Commitment towards fulfilling the mission. 5. Unique not copied from similar units. 6. Enduring Should guide, inspire and challenging. 7. Adapted to the Target Audience stock holders, consumers, employees through shared values and standards of behavior. Mission is the purpose of or a reason for organization existence. Mission is a well convincible statement included fundamental and unique purpose which makes it different from other organization. It identifies scope of it operation in terms of product offered and market served. Mission also means what we are and what we do. Mission Statements are also known as: Creed statement Statement of purpose Statement of philosophy Dept of MBA,SJBIT Page 18

19 Statement of business principles Importance: Mission Statements reveal what an organization wants to be and whom it wants to serve and how? Mission Statements are essential for effectively establishing objectives and formulating strategies. Mission is divided into two categories: Narrow Mission Broad Mission Narrow Mission: Narrow mission also identifies the mission but it restrict in terms of: 1. Product and services offered 2. Technology used 3. Market served 4. Opportunity of growth Broad Mission: Broad mission wider our mission values in terms of product and services, offered, market served, technology used and opportunity of growth. But main flow of this mission that if creates confusion among employee due to its wider sense. Illustration:For example consider two different firms A & B. A deals in Rail Roads and B deals in Transportation i.e. we can say A co. has narrow mission and B co. has a wider mission. Characteristics of good Mission Statements: Mission statements can and do vary in length, content, format, and specificity. Most practitioners and academicians of strategic management consider an effective statement to exhibit nine characteristics or components. Because a mission statement is often the most visible and public part of the strategic management process, it is important that it includes all of these essential components. Effective mission statements should be: Broad in scope Dept of MBA,SJBIT Page 19

20 Generate range of feasible strategic alternatives Not excessively specific Reconcile interests among diverse stakeholders Finely balanced between specificity & generality Arouse positive feelings and emotions Motivate readers to action Generate the impression that firm is successful, has direction, and is worthy of time, support, and investment Reflect judgments re: future growth Provide criteria for selecting strategies Basis for generating & screening strategic options Are dynamic in orientation Components and corresponding questions that a mission statement should answer are given here. Customer: Who are the firm s customers? Products or services: What are the firm s major products or services? Markets: Geographically, where does the firm compete? Technology: Is the firm technologically current? Concern for survival, growth, and profitability: Is the firm committed to growth and financial soundness? Philosophy: What are the basic beliefs, values, aspirations, and ethical priorities of the firm? Self-concept: What is the firm s distinctive competence or major competitive advantage? Concern for public image: Is the firm responsive to social, community, and environmental concerns? Concern for employees: Are employees a valuable asset of the firm? Examples of Mission Statements of some Organizations: Apple Computer ( It is Apple s mission to help transform the way customers work, learn and communicate by providing exceptional personal computing products and innovative customer services. We will pioneer new directions and approaches, finding innovative ways to use computing technology to extend the bounds of human potential. Dept of MBA,SJBIT Page 20

21 Apple will make a difference: our products, services and insights will help people around the world shape the ways business and education will be done in the 21st century. McDonald s :To offer the fast food customer food prepared in the same high-quality manner world-wide, tasty and reasonably priced, delivered in a consistent, low-key decor and friendly atmosphere. Key Market: To offer the fast food customer Contribution: food prepared in the same high-quality manner world-wide, tasty and reasonably priced, Distinction: delivered in a consistent, low-key decor and friendly atmosphere. VISION: Vision is the art of seeing things invisible..... Jonathan Swift The very essence of leadership is that you have vision. You can t blow an uncertain trumpet...theodore Hesburgh VisionDefines the desired or intended future state of a specific organization or enterprise in term s of its fundamental objective and/or strategic direction. The difference between a mission statement and a vision statement is that a mission statement fo cuses on a company s present state while a vision statement focuses on a company s future Importance of Vision and Mission Statements Unanimity of purpose within the organization Basis for allocating resources Establish organizational climate Focal point for direction Translate objectives into work structure Cost, time and performance parameters assessed and controlled Most companies are now getting used to the idea of using mission statements. Dept of MBA,SJBIT Page 21

22 Small, medium and large firms in Pakistan are also realizing the need and adopting mission statements. Components of vision: The three components of the business vision can be portrayed as follows Core Values The core values are a few values (no more than five or so) that are central to the firm. Core values reflect the deeply held values of the organization and are independent of the current industry environment and management fads. One way to determine whether a value is a core value to ask whether it would continue to be supported if circumstances changed and caused it to be seen as a liability. If the answer is that it would be kept, then it is core value. Another way to determine which values are core is to imagine the firm moving into a totally different industry. The values that would be carried with it into the new industry are the core values of the firm. Core values will not change even if the industry in which the company operates changes. If the industry changes such that the core values are not appreciated, then the firm should seek new markets where its core values are viewed as an asset. For example, if innovation is a core value but then 10 years down the road innovation is no longer valued by the current customers, rather than change its values the firm should seek new markets where innovation is advantageous. The following are a few examples of values that some firms have chosen to be in their core: Core Purpose excellent customer service pioneering technology creativity integrity social responsibility The core purpose is the reason that the firm exists. This core purpose is expressed in a carefully formulated mission statement. Like the core values, the core purpose is relatively unchanging and for many firms endures for decades or even centuries. This purpose sets the firm apart from other firms in its industry and sets the direction in which the firm will proceed. The core purpose is an idealistic reason for being. While firms exist to earn a profit, the profit motive should not be highlighted in the mission statement since it provides little direction to the Dept of MBA,SJBIT Page 22

23 firm's employees. What is more important is how the firm will earn its profit since the "how" is what defines the firm. Initial attempts at stating a core purpose often result in too specific of a statement that focuses on a product or service. To isolate the core purpose, it is useful to ask "why" in response to firstpass, product-oriented mission statements. For example, if a market research firm initially states that its purpose is to provide market research data to its customers, asking "why" leads to the fact that the data is to help customers better understand their markets. Continuing to ask "why" may lead to the revelation that the firm's core purpose is to assist its clients in reaching their objectives by helping them to better understand their markets. The core purpose and values of the firm are not selected - they are discovered. The stated ideology should not be a goal or aspiration but rather, it should portray the firm as it really is. Any attempt to state a value that is not already held by the firm's employees is likely to not be taken seriously. Visionary Goals The visionary goals are the lofty objectives that the firm's management decides to pursue. This vision describes some milestone that the firm will reach in the future and may require a decade or more to achieve. In contrast to the core ideology that the firm discovers, visionary goals are selected. These visionary goals are longer term and more challenging than strategic or tactical goals. There may be only a 50% chance of realizing the vision, but the firm must believe that it can do so. Collins and Porras describe these lofty objectives as "Big, Hairy, Audacious Goals." These goals should be challenging enough so that people nearly gasp when they learn of them and realize the effort that will be required to reach them. Most visionary goals fall into one of the following categories: Target - quantitative or qualitative goals such as a sales target or Ford's goal to "democratize the automobile." Common enemy - centered on overtaking a specific firm such as the 1950's goal of Philip- Morris to displace RJR. Role model - to become like another firm in a different industry or market. For example, a cycling accessories firm might strive to become "the Nike of the cycling industry." Internal transformation - especially appropriate for very large corporations. Dept of MBA,SJBIT Page 23

24 For example, GE set the goal of becoming number one or number two in every market it serves. While visionary goals may require significant stretching to achieve, many visionary companies have succeeded in reaching them. Once such a goal is reached, it needs to be replaced; otherwise, it is unlikely that the organization will continue to be successful. For example, Ford succeeded in placing the automobile within the reach of everyday people, but did not replace this goal with a better one and General Motors overtook Ford in the 1930's. Strategic vision: A strategic vision is a road map showing the route a company intends to take in developing and strengthening its business. It paints a picture of a company s destination and provides a rationale for going there. Involves thinking strategically about Future direction of company Changes in company s product-market-customer-technology to improve Current market position Future prospects WHY A SHARED VISION MATTERS A strategic vision widely shared among all employees functions similar to how a magnet aligns iron filings When all employees are committed to firm s long-term direction, optimum choices on business decisions are more likely o Individuals & teams know intent of firm s strategic vision o Daily execution of strategy is improved ITC: To enhance the wealth generation capability of the enterprise, delivering a superior & sustainable stakeholder value. in a globalizing environment Infosys "We will be a globally respected corporation." General Electric We will become number one or number two in every market we serve, and revolutionize this company to have the speed and agility of a small enterprise. Microsoft Corporation Dept of MBA,SJBIT Page 24

25 Empower people through great software any time, any place, and on any device. Communicating the Strategic Vision An exciting, inspirational vision Contains memorable language Clearly maps company s future direction Challenges and motivates workforce Provokes emotion and enthusiasm Winning support for the vision involves Putting where we are going and why in writing Distributing the statement organization-wide Having executives explain the vision to the workforce Strategic Vision vs. Mission A strategic vision concerns a firm s future business path - where we are going Markets to be pursued Future technology-product-customer focus Kind of company management is trying to create The mission statement of most companies focuses on current business activities - who we are and what we do Current product and service offerings Customer needs being served Technological and business capabilities Linking the Vision With Company Values A statement of values is often provided to guide the company s pursuit of its vision Values Beliefs, business principles, and ways of doing things that are incorporated into Company s operations Behavior of workforce Values statements Contain between four and eight values Are ideally tightly connected to and reinforce company s vision, strategy, and operating practices Example: Company Values Dept of MBA,SJBIT Page 25

26 Creating sharehold Building strong Taking care of SETTING OBJECTIVES Entrepren eurial Doing the right thing Excellent customer Giving back to Respect for all Purpose of setting OBJECTIVES is to Convert mission into performance targets Create yardsticks to track performance Establish performance goals requiring stretch Push firm to be inventive, intentional, focused Objectives guards against Complacency Drift Internal confusion Status quo performance Objectives of Madras Fertilizers Ltd. To produce and market fertilizers and bio-fertilizers and market agro-chemicals, efficiently and economically, in an environmentally sound manner; To take up and implement schemes for saving energy; To continuously upgrade the quality of human resources and promote organizational and management development. To continually improve plant and operational safety; To take up R&D schemes. Objectives can be set at two levels: (1) Corporate level These are objectives that concern the business or organisation as a whole Dept of MBA,SJBIT Page 26

27 Examples of corporate objectives might include: We aim for a return on investment of at least 15% We aim to achieve an operating profit of over 10 million on sales of at least 100 million We aim to increase earnings per share by at least 10% every year for the foreseeable future (2) Functional level e.g. specific objectives for marketing activities Examples of functional marketing objectives might include: We aim to build customer database of at least 250,000 households within the next 12 months We aim to achieve a market share of 10% We aim to achieve 75% customer awareness of our brand in our target markets Both corporate and functional objectives need to conform to the commonly used SMART criteria. The SMART criteria: SMART: S M A R T specific, unambiguously measurable ambitious, acceptable, achievable realistic, Relevant, in a certain time Specific - the objective should state exactly what is to be achieved. Measurable - an objective should be capable of measurement so that it is possible to determine whether (or how far) it has been achieved Ambitious - the objective should be achievable given the circumstances in which it is set and the resources available to the business. Relevant - objectives should be relevant to the people responsible for achieving them Time Bound - objectives should be set with a time-frame in mind. These deadlines also need to be realistic. Characteristics of Objectives Represent commitment to achieve specific performance targets Spell-out how much of what kind of performance by when Well-stated objectives are Quantifiable Measurable Contain a deadline for achievement Dept of MBA,SJBIT Page 27

28 TYPES OF OBJECTIVES Strategic Objectives Outcomes that will result in greater competitiveness & stronger long-term market position Financial Objectives Outcomes that relate to improving firm s financial performance Examples: Financial Objectives X % increase in annual revenues X % increase annually in after-tax profits X % increase annually in earnings per share Annual dividend increases of X % Profit margins of X % X % return on capital employed (ROCE) Examples: Strategic Objectives Winning an X % market share Achieving lower overall costs than rivals Overtaking key competitors on product performance or quality or customer service Deriving X % of revenues from sale of new products introduced in past 5 years Achieving technological leadership Unilver s Strategic and Financial Objectives Grow annual revenues by 5-6% annually Increase operating profit margins from 11% to 16% within 5 years Trim company s 1200 food, household, and personal care products down to 400 core brands Focus sales and marketing efforts on those brands with potential to become respected, market-leading global brands Streamline company s supply chain Short-Term vs. Long-Term Objectives Short-term objectives Targets to be achieved soon Milestones or stair steps for reaching long-range performance Long-term objectives Targets to be achieved within 3 to 5 years Dept of MBA,SJBIT Page 28

29 Prompt actions now that will permit reaching targeted long-range performance later Objectives Are Needed at All Levels 1. First, establish organization-wide objectives and performance targets 2. Next, set business and product line objectives 3. Then, establish functional and departmental objectives 4.Individual objectives are established last Importance of Top-Down Objectives Guide objective-setting and strategy-making at lower levels Ensures financial and strategic performance targets for all business units, divisions, and departments are directly connected to achieving company-wide objectives Integration of objectives has two advantages Helps produce cohesion among objectives and strategies of different parts of organization Helps unify internal efforts to move a company along the chosen strategic path Goals vs objectives: Difference between goals and objectives Goals Broad in scope Are general intentions Intangible Abstract in nature Can't be validated Very short statement, few words Directly relates to the Mission Statement Objectives Balanced scorecard-by Robert Kaplan & David Norton Narrow in scope Very precise. Tangible. Concrete in nature Can be validated Longer statement, more descriptive Indirectly relates to the Mission Statement Dept of MBA,SJBIT Page 29

30 I n t r o d u c t i o n t o t h e b a l a n c e d s c o r e c a r d The background Developed by Robert Kaplan and David Norton in 1992 No single measures can give a broad picture of the organisation s health. So instead of a single measure why not one use a composite scorecard involving a number of different measures. Kaplan and Norton devised a framework based on four perspectives financial, customer, internal and learning and growth. The organisation should select critical measures for each of these perspectives. Balanced Scorecard: History: The Balanced Scorecard was developed in the early 1990s by two guys at the Harvard Business School: Robert Kaplan and David Norton. The key problem that Kaplan and Norton identified in the business of the day was that many companies tended to manage their businesses based solely on financial measures. While that may have worked well in the past, the pace of business in today's world requires more comprehensive measures. Though financial measures are necessary, they can only report what has happened in the past where a business has been, but not where it is headed. It's like driving a car by looking in the rearview mirror. Dept of MBA,SJBIT Page 30

31 To provide a management system that was better at dealing with today's business pace and to provide business managers with the information they need to make better decisions, Kaplan and Norton developed the Balanced Scorecard. Balanced scorecard methodology is an analysis technique designed to translate an organization's mission statement and overall business strategy into specific, quantifiable goals and to monitor the organization's performance in terms of achieving these goals. A system of corporate appraisal which looks at financial and non-financial elements from a variety of perspectives. An approach to the provision of information to management to assist strategic policy formation and achievement. It provides the user with a set of information which addresses all relevant areas of performance in an objective and unbiased fashion. A set of measures that gives top managers a fast but comprehensive view of the business. Importance of balanced scorecard The Balanced Scorecard balances the financial perspective with the organisational, customer and innovation perspectives which are crucial for the future of an organisation The balanced scorecard methodology is a comprehensive approach that analyzes an organization's overall performance in four ways, based on the idea that assessing performance through financial returns only provides information about how well the organization did prior to the assessment, so that future performance can be predicted and proper actions taken to create the desired future. Allows managers to look at the business from four important perspectives. Provides a balanced picture of overall performance highlighting activities that need to be improved. Combines both qualitative and quantitative measures. Relates assessment of performance to the choice of strategy. Includes measures of efficiency and effectiveness. Assists business in clarifying their vision and strategies and provides a means to translate these into action. Main benefits of using the balanced scorecard Helps companies focus on what has to be done in order to create a breakthrough performance Acts as an integrating device for a variety of corporate programmes Makes strategy operational by translating it into performance measures and targets Helps break down corporate level measures so that local managers and employees can see what they need to do well if they want to improve organisational effectiveness Provides a comprehensive view that overturns the traditional idea of the organisation as a collection of isolated, independent functions and departments Dept of MBA,SJBIT Page 31

32 B a l a n c e d s c o r e c a r d - f o u r p e r s p e c t i v e s The four perspectives are: Financial perspective - how does the firm look to shareholders? Customer perspective - how do customers see the firm? Internal perspective - how well does it manage its operational processes? Innovation and learning perspective can the firm continue to improve and create value? This perspective also examines how an organisation learns and grows. For each of four perspectives it is necessary to identify indicators to measure the performance of the organisations. From the financial perspective This is concerned with the shareholders view of performance. Shareholders are concerned with many aspects of financial performance: Amongst the measures of success are: Market share Revenue growth Profit ratio Return on investment Economic value added Return on capital employed Operating cost management Operating ratios and loss ratios Corporate goals Survival Profitability Growth Process cost savings Increased return on assets Profit growth Measures Cash flow Net profitability ratio Sales revenue Growth in sales revenue Cost reduction ROCE Share price Return on shareholder funds From the customerperspective Dept of MBA,SJBIT Page 32

33 How do customers perceive the firm? This focuses on the analysis of different types of customers, their degree of satisfaction and the processes used to deliver products and services to customers. Particular areas of focus would include: Customer service New products New markets Customer retention Customer satisfaction What does the organisation need to do to remain that customer s valued supplier? Potential goals for the customer perspective could include: Customer satisfaction New customer acquisition Customer retention Customer loyalty Fast response Responsiveness Efficiency Reliability Image The following metrics could be used to measure success in relation to the customer perspective: Customer satisfaction index Repeat purchases Market share On time deliveries Number of complaints Average time to process orders Returned orders Response time Reliability New customer acquisitions Perceived value for money From the internal perspective This seeks to identify: Dept of MBA,SJBIT Page 33

34 How well the business is performing. Whether the products and services offered meet customer expectations. The critical processes for satisfying both customers and shareholders. Activities in which the firm excels? And in what must it excel in the future? The internal processes that the company must be improved if it is to achieve its objectives. This perspective is concerned with assessing the quality of people and processes. Potential goals for the internal perspective include: Improve core competencies Improvements in technology Streamline processes Manufacturing excellence Quality performance Inventory management Quality Motivated workforce The following metrics could be used to measure success in relation to the internal perspective: Efficiency improvements Reduction in unit costs Reduced waste Improvements in morale Increase in capacity utilisation Increased productivity % defective output Amount of recycled waste Amount of reworking The innovation and learning perspective This perspective is concerned with issues such as: Can we continue to improve and create value? In which areas must the organisation improve? How can the company continue to improve and create value in the future? What should it be doing to make this happen? Potential goals for the innovation and learning perspective include: New product development Continuous improvement Dept of MBA,SJBIT Page 34

35 Technological leadership HR development Product diversification The following metrics could be used to measure success in relation to the innovation and learning perspective: Number of new products % sales from new products Amount of training Number of strategic skills learned. Value of new product in sales R&D as % of sales Number of employee suggestions. Extent of employee empowerment Critical success factors: Success factors on which the company concentrates, to distinguish oneself for competition to build up an advantage in completion Performance indicator Translation of critical success factors to measurable indicators Company goals & philosophy :Objectives, Measures, Targets, Initiatives Each perspective of the Balanced Scorecard includes, objectives, measures of those objectives, target values of those measures, initiatives, defined as follows: Objectives Major objectives to be achieved (Profitable Growth) Measures the observable parameters that will be used to measure progress reaching the objective. (the objective of profitable growth might be measured by growth in net margin) Targets the specific targets values for measures (+2% growth in net margin) Initiatives action programs to be initiated in order to meet the objectives Objectives Measures Targets Initiatives Financial Customer Process Learning Dept of MBA,SJBIT Page 35

36 Advantages: Structure in collection and assimilation of performance information Translation of strategy to operational performance indicators Perspective of learning and growing gives a challenge to improving processes continuously BSC can be used as a planning instrument Gives insight in performance per critical success factor. Disadvantages A laborious and difficult process Use external experts Involve employees with the process Choose a limited amount of performance indicators Pay attention to the availability of information of performance indicators Company Philosophy It is in the form of a Slogan or Statement. It projects the ethical and value based concept(philosophy) a Company contributes to public. This is more related to the Social Responsibility& Public Good. The corporation is a creation of society whose purpose is the production and distribution of needed goods and services, for profit of society and itself. The Company in it s own interest has to promote the public welfare in a positive way. Indeed, the corporate interest broadly defined by management can support involvement in helping to solve virtually any social problem, because people who have good environment, education and opportunity make better employees, customers and neighbors for business than those who are poor, ignorant and oppressed. Pollution control, contributing to public cause in the areas of health, education & poverty. Payment of taxes genuinely, fair wages to employees, quality products/services to consumers, all actions are based on legal and moral foundation etc Hierarchy of Strategic Intent HAMEL AND PRAHALAD coined the term strategic intent strategic" is mainly used with long term "Intent" is basically related to "intentions" that is "a plan to do something" is an intention Strategic Intent -a plan to do something in the long term" strategic intent is the immediate point of view of a long term future that company would like to create. It is the intent of the strategies that company may evolve i.e. it creates spotlight for directing the strategy in a company. When carefully worded, provides a strategic theme filled with emotion for the whole organization.. Dept of MBA,SJBIT Page 36

37 It involves the following: Creating and Communicating a vision Designing a mission statement Defining the business Setting objectives Vision serves the purpose of stating what an organization wishes to achieve in the long run. Mission relates an organization to society. Business explains the business of an organization in terms of customer needs, customer groups and alternative technologies. Objectives state what is to be achieved in a given time period. Strategic intent is about clarity, focus and inspiration Characteristics of Strategic Intent Indicates firm s intent to making quantum gains in competing against key rivals and to establishing itself as a winner in the marketplace, often against long odds Involves establishing a grandiose performance target that is out of proportion to its immediate capabilities and market position but then devoting the company s full resources and energies to achieving the target over time Signals relentless commitment to achieving a particular market position and competitive standing Dept of MBA,SJBIT Page 37

38 A Company s Strategy-Making Hierarchy Strategic Plan: A Company s Strategic Plan Its strategic Its Its strategy Merging the Strategic Vision, Objectives and Strategy into a Strategic Plan: In today's highly competitive business environment, budget-oriented planning or forecast-based planning methods are insufficient for a large corporation to survive and prosper. The firm must engage in strategic planning that clearly defines objectives and assesses both the internal and Dept of MBA,SJBIT Page 38

39 external situation to formulate strategy, implement the strategy, evaluate the progress, and make adjustments as necessary to stay on track. The strategic plan projects a prescriptive model based on predictive environment which is a roadmap for execution. Strategic plan is translated into the operations planning. Any deviation required is to be directed by strategic plan which takes care of the corporate objective and factors commanding the change. The emergent strategy is let us try this strategy and continue it or change it depending in our experience. The prescriptive strategy prescribed, this is our strategy for the next five years, administer it. The emergent approach holds that the long term being uncertain, it is unrealistic to prescribe in advance a strategy with long term perspective. The strategy should evolve responding to emerging developments, and therefore, to some extent, strategy development and implementation occur concurrently. Dept of MBA,SJBIT Page 39

40 Module-III Analyzing a Company s External Environment The Strategically relevant components of a Company s External Environment Industry Analysis Porter s dominant economic features Competitive Environment Analysis Porter s Five Forces model Industry diving forces Key Success Factors concept and implementation. Analyzing a Company s External Environment The performance of a company is affected by external factors like the economy, demographics, social values, and technological changes. The factors in a company s macro-environment which have the largest strategy impact relates to the company s environment, the industry, competition, buyer relations, and supplier relations. To do a company s analysis of its external environment, a company needs to do an industry analysis on dominant economic characteristics, an industry s competitive forces, the driving forces of the industry, the market positions of the industry s rivals, the strategic moves of rivals, key success factors, and the industry s outlook on future profitability. The Industry s Dominant Economic Characteristics Identification of the industry s dominant economic characteristics is important for analyzing a company s industry and preparing a proper competitive analysis of their environment. Understanding the economic characteristics provides an overview of the industry and provides an understanding of the different kinds of strategic moves that the industry members are likely to use. The performance of a company is affected by external factors like the economy, demographics, social values, and technological changes. The factors in a company s macro-environment which have the largest strategy impact relates to the company s environment, the industry, competition, buyer relations, and supplier relations. To do a company s analysis of its external environment, a company needs to do an industry analysis on dominant economic characteristics, an industry s competitive forces, the driving forces of the industry, the market positions of the industry s Dept of MBA,SJBIT Page 40

41 rivals, the strategic moves of rivals, key success factors, and the industry s outlook on future profitability. The Strategically relevant components of a Company s External Environment : The Industry s Dominant Economic Characteristics Identification of the industry s dominant economic characteristics is important for analyzing a company s industry and preparing a proper competitive analysis of their environment. Understanding the economic characteristics provides an overview of the industry and provides an understanding of the different kinds of strategic moves that the industry members are likely to use. Examples of Economic Characteristics: Market size and growth rate Scope of competitive rivalry Number of buyers and rivals A competitive analysis of the geographic scope Degree of product differentiation Technological changes and innovations Economies of scale Capacity utilization Industry profitability Learning and experience curves Degrees of vertical integration Supply and Demand Conditions Product innovation and characteristics Ease of entry/exit in the industry Environmental Scanning The systematic collection and analysis of information about relevant macro environmental trends. It helps in increased general awareness of environmental changes, better strategic Dept of MBA,SJBIT Page 41

42 planning and decision-making, greater effectiveness in governmental matters and proper diversification and resource allocation decisions Environmental scanning also forecast future trends and changes. A number of forecasting techniques are available to strategic managers and they are: Time series analysis an empirical forecasting procedure in which certain historical trends are used to predict such variables as a firm s sales or market share. Delphi technique a forecasting procedure whereby experts are independently and repeatedly questioned about the probability of some event s occurrence until consensus is reached regarding the particular forecasted events. Judgmental forecasting - A procedure whereby employees, consumers, suppliers and /or trade associations serve as sources of qualitative information regarding future trends. Multiple scenarios - a forecasting procedure in which management formulates several plausible hypothetical descriptions of sequence of future events and trends. Role of Environmental Analysis for an Industry 1. The environment changes so fast that new opportunities and threats are created which may result in disequilibrium into organization s existing equilibrium Strategists have to analyze the environment to determine what factors in the environment present opportunities for greater accomplishment of organizational objectives and that factors in the environment present threats to the organization s objective accomplishment so that suitable adjustment in stagiest can be made to derive maximum benefits. 2. Environmental analysis allows strategists time to anticipate opportunities and plan to take optional responses to threes opportunities. Similarly, it helps to develop an early warning system to prevent the threats or to develop strategies which can turn the threats to the organization s advantages. 3. Environmental analysis helps strategists to narrow the range of available alternatives and eliminate options that are clearly inconsistent with forecast opportunities or threats. The analysis helps in eliminating unsuitable alternatives and to process most promising alternatives. Thus it helps strategists to reduce time pressure and to concentrate on those which are important. Five Components of an Organization's External Environment The external environment of an organization are those factors outside the company that affect the company's ability to function. Some external elements can be manipulated by company marketing, while others require the organization to make adjustments. Monitor the basic components of your company's external environment, and keep a close watch at all times. Customers Dept of MBA,SJBIT Page 42

43 Your customers are among the external elements you can attempt to influence, via marketing and strategic release of corporate information. But ultimately, your relationship with your clients is based on finding ways to influence them to purchase your products. Market research is used to determine the effectiveness of your marketing messages, and to decide what changes can be made to future marketing programs to improve sales. Government Government regulations in product development, packaging and shipping play a significant role in the cost of doing business and your ability to expand into new markets. If the government places new regulations on how you must package your product for shipment, that can increase your unit costs and affect your profit margins. International laws create processes that your company must follow to get your product into foreign markets. Economy As with the majority of the elements of your organization's external environment, your company must be efficient at monitoring the economy and learning how to react to it, rather than trying to manipulate it. Economic factors affect how you market products, how much money you can spend on business growth, and the kind of target markets you will pursue. Competition Your competition has a significant effect on how you do business and how you address your target market. You can choose to find markets that the competition is not active in, or you can decide to take on the competition directly in the same target market. The success and failure of your various competitors also determines a portion of your marketing planning, as well. For example, if a long-time competitor in a particular market suddenly decides to drop out due to financial losses, then you will need to adjust your planning to take advantage of the situation. Public Opinion Any kind of company scandal can be damaging to your organization's image. The public perception of your organization can hurt sales it's negative, or it can boost sales with positive company news. Your firm can influence public opinion by using public relations professionals to release strategic information, but it is also important to monitor public opinion to try and defuse potential issues before they begin to spread. Key External Forces External forces can be divided into five broad categories: Economic forces; Social, cultural, demographic, and environmental forces; Political, governmental, and legal forces; Technological forces; and Dept of MBA,SJBIT Page 43

44 Competitive forces. Macro environment the general environment that affects all business firms in an industry, which includes political-legal, economic, social and technological forces. PEST An acronym referring to the analysis of the four macro environmental forces are Political, Economic, Social and Technology. 1. Political-legal include such factors as the outcomes of elections, legislation and judicial court decisions, as well as decisions rendered by various commission and agencies in the Govt. Trade restrictions will always exist to some of the optically sensitive areas like trade sanctions. 2. Economic- significantly influence business operations including growth deadline in Gross Domestic Product and increases or decreases in inflation rate, and exchange rate. 3. Social - such as social values, trends, traditions, religion, culture, societal trends 4. Technology include scientific improvement and innovations and productivity.. Industry analysis An industry analysis is a business function completed by business owners and other individuals to assess the current business environment. A marketassessmenttooldesigned to provide a business with an idea of the complexity of a particular industry. Industry analysis involves reviewing the economic, political and market factors that influence the way the industry develops. Major factors can include the power wielded by suppliers and buyers, the condition of competitors, and the likelihood of new market entrants. Porter s dominant economic features Competitive Environment Analysis Porter s Five Forces model: Industries differ significantly on such factors as market size and growth rate, the number and relative sizes of both buyers and sellers, the geographic scope of competitive rivalry, the degree of product differentiation, the speed of product innovation, demand supply conditions, the extent of vertical integration, and the extent of scale economies and experience/learning curve effects. Porter s Five Forces model Dept of MBA,SJBIT Page 44

45 Industry factors have been found to play a dominant role in the performance of many companies with the exception of those that are its notable leaders of failures. As such, one needs to understand these factors at the outset before delving into the characteristics of a specific firm. Michel Porter, a leading authority on industry analysis, proposed a systematic means of analyzing an industry s potential profitability known as Porter s Five Forces model. According to Porter, an industry s overall profitability depends on five basic competitive forces, the relative weights of which vary by industry. 1. The Intensity of Rivalry among incumbent firms.- Concentration of competitors, High Fixed or Storage Costs, Slow, Lack of Differentiation or Low Switching costs, Capacity Augmented in Large Increments, Diversity of Competitors, High strategic Stakes, High Exit Barriers. Potential factors: Sustainable competitive advantage through innovation Competition between online and offline companies Level of advertising expense Powerful competitive strategy Firm concentration ratio Degree of transparency 2. The Threat of new competitors entering the industry.- Economies of Scale, Brand Identity and Product Differentiation, Capital Requirements, Switching costs, Access to Distribution Channels, Cost disadvantages Independent of Size, Govt. policy The following factors can have an effect on how much of a threat new entrants may pose: The existence of barriers to entry (patents, rights, etc.). The most attractive segment is one in which entry barriers are high and exit barriers are low. Few new firms can enter and non-performing firms can exit easily. Dept of MBA,SJBIT Page 45

46 Government policy Capital requirements Absolute cost Cost disadvantages independent of size Economies of scale Economies of product differences Product differentiation Brand equity Switching costs or sunk costs Expected retaliation Access to distribution Customer loyalty to established brands Industry profitability (the more profitable the industry the more attractive it will be to new competitors) 3. The threat of substitute products or services. Rising of a Substitute Products that satisfy similar consumer needs. Potential factors: Buyer propensity to substitute Relative price performance of substitute Buyer switching costs Perceived level of product differentiation Number of substitute products available in the market Ease of substitution Substandard product Quality depreciation Availability of close substitute 4. The bargaining power of buyers. Buyers raising the weaknesses on the product, costs, credit etc to bring down the rates or threaten to discontinue buying. Or buyers go to their own production for economic reasons. Potential factors: Buyer concentration to firmconcentration ratio Degree of dependency upon existing channels of distribution Bargaining leverage, particularly in industries with high fixed costs Buyer switching costs relative to firm switching costs Buyer information availability Force down prices Availability of existing substitute products Buyer price sensitivity Differential advantage (uniqueness) of industry products Dept of MBA,SJBIT Page 46

47 RFM (customer value) Analysis The total amount of trading 5. The bargaining power of suppliers. - On the guise of rising costs, the suppliers bargain to raise the rates or threaten to stop supplies. Competitor cornering the production of the supplier as a threat. Monopoly of the supplier Potential factors are: Supplier switching costs relative to firm switching costs Degree of differentiation of inputs Impact of inputs on cost or differentiation Presence of substitute inputs Strength of distribution channel Supplier concentration to firm concentration ratio Employee solidarity (e.g. labor unions) Supplier competition: the ability to forward vertically integrate and cut out the buyer. Industry diving forces Key internal forces (such as knowledge and competence of management and workforce) and external forces (such as economy, competitors, technology) that shape the future of an organization. All industries are characterised by trends and new development that gradually or speedily produce changes important enough to require a strategic response from participating firms. Also Industries go thru a life cycle changes- its difference stages and hence the Industry change.but it is far from complete There are more causes..that need to be identified and their impact to be understood. The Concept of Driving Force: Industry conditions change because important forces are driving industry participants competitor, customer, or suppliers) to alter their actions; the driving forces in an industry are the major underlying causes of changing industry and competitive conditions- they have the biggest influence on how the industry landscape will be altered. Some originate in the outer ring of macro-environment and some originate from the inner ring. Dept of MBA,SJBIT Page 47

48 Driving forces Analysis: Identifying what the driving forces are 1. Assessing whether the drivers of change are, on the whole, acting to make the industry more or less attractive 2. Determining what strategy changes are needed to prepare for the impact of the driving forces Identifying an Industry s Driving Forces: 1) Emerging new internet Capabilities and Applications Got into every days biz operation and social fabric of life all across the world. Increasing internet usage & Speed->Growing internet shopping Companies using online technology Collaborate closely with suppliers and streamline their supply chain Revamp internal operations and squeeze our cost saving Manufacturer-> website-> Direct customers. All Biz->Extend Geographical Reach Low cost increases the no. of online rival and hence the compitition of online v/s brick and mortar sellers. Internet gives customer-> Power to research the product offering and shop the market for the best Value. untig Ability of Consumer to download Music from internet has reshaped traditional music retailers s has eroded fax services and first class mail delivery revenues of govt postal services world wide Videoconferencing has eroded the demand of biz travels Online cources offering have the potential of revolutionise higher education Internet will feature faster speed, dazzling applications and over a billion connected gadgets performing an array of functions thus driving firther industry and competitive changes. Internet related impacts vary from industry to industry 2) Increasing Globalisation: Competition begin to shift from regional & national focus to an inernational or global focus Industry members begin seeking out customers in foreign market. Production activities begin to migrate to countries where costs are lowest. Global competition really starts when one or more ambitious Companies precipitate a race for world wide market leadership. Globalization happens:- Blossoming of customer and demand in more and more countries Action of govt to reduce the trade barrier.europe,latin America and Asia Dept of MBA,SJBIT Page 48

49 Significant difference in labour cost ->locate plant e.g China, india, Singapore, Maxico and Brazil ¼ of those in US, Germany and Japan Eg.Industires :- Credit Card, CellPhone, Digital Camera, Golf and Ski Equipment, Motor Vehicles, Steel, Petrolium, Personal Computers, Vedio Games, Public Accounting and Text Publishing. 3) Changes in an Industry Long Term Growth Rate. Shift in industry growth or are driving force for industry change, affecting the balance between industry supply and buyer demand, entry and exit of the firms Increase in buyers demand triggers a race among established firms and new comers to capture the new sales opportunities, in turn will launch offensive strategies to broaden customer base and grow significantly Decrease or slow down in rate at which demand is growing firms fight for their market share If industry sales suddenly turns flat competition itencify, consolidation takes shapes by mergers and acquisitions, Stagnating sales forces both weak and strong firms to sell their biz to those who elect to stick-> forces to close inefficient plants and retrench to small prod base 4) Changes in who buys the Product and how they use it: Shift in buyer demographics-new ways of using product- firms broaden or narrow their product line-diff sales & promotion Downloading Music From Internet-Storing Music Files on HD & PC, Burning CD-forced to reexamin the traditional music stores-also have stimulated the sales of Disc burners and blank discs.pc & Internet- Banks to expand their electronics bill payment services and retailers to move more of their customer services online 5) Product Innovation: Rivals racing to be first to introduce the new product or product enhancement after another. Competition changes->attracting more 1st time buyers ->Rejuvenating ind growth, creating wider or narrow prod differentiation. Strong market position of Successful innovators at the cost of slow innovators Eg. Degital Cameras, Golf Glub, Video games, Toys and Prescription Drugs. 6) Technology Change & Manufacturing Process Innovation Advances in the technology can dramatically alter an industry s landscape. Gives birth to new and better products at lower costs opening up new industry frontier. Dept of MBA,SJBIT Page 49

50 Identifying an Industry s Driving Forces: Technology change contd.. Eg. Internet based phones are stealing large number of customers from using traditional telepone co world wide( high cost technology, hard weird connections via overheads and underground telephone lines Flat screen technology are killing CRT monitors LCD and Plasma screen tech are driving CRT tech further Digital tech driving huge change in camera and film industry MP3 technology is transforming how people listen to music. 7) Marketing Innovation : Successful in introducing new ways to MARKET their products: Spark a burst in buyer interest Widen industry demand Increase product differentiation Lower unit cost Any or all of which can alter the competitive position of rival firmeg.on line marketing of Electronics goods, Music artist mkting their own website V/s contract with recording Studios. 8) Entry or Exit of Major Firms Entry of one or more foreign co. into a geographic market once dominated by domestic firms shakes up the competitive scenario.pushes the competition to new direction, Bring in new rules of competiting Exit:- Reduces the no of mkt leaders, dominance of existing players and rush to capture existing firm s customers. 9) Diffusion of Technical Know how across more companies and more countries. As the knowledge spreads, the competitive advantage of existing firm originally possessing it erodes. It happens thru Scientific Journals, Trade Publications, On site Plant tours, Word of mouth, Employees Migration, and internet sources Tehnology knowledge license / Royaltee fees Cross border technology transfer has made the once domestic industries of automobile, tires, consumer electronics, telecommunication and computers truly global 10) Change in cost and efficiency Widening or shrinking differences in the costs among key competitors tend to dramatically alter the state of competition Low cost fax and e mail put mounting pressure on the inefficient and high cost operation of Postal Dept. Dept of MBA,SJBIT Page 50

51 Shrinking cost of differences in producing multifeatured mobiles is turning the mobile phone market into commodity business and making more buyers to base Price as their Purchase decision 11) Growing buyer preferences for differentiated products instead of a commodity product When buyers taste and preferences start to diverge, sellers can win a loyal following by providing different variants and taste then the competitors. Eg.Beer, Automobile 12) Reduction in uncertainty and Business Risk. An emerging industry is typically characterized by much uncertainty and risk in terms of time and efforts required to cover-up with the investments.emerging industries tend to attract only risk-taking entrepreneurial companies. over time how ever, if the business model of industry pioneers proves profitable and market demand for the product appears durable, more conservative firms are usually enticed to enter the market. Often the later entrants are large & financially strong looking to invest into attractive growth industry. Low biz risk and less industry uncertainty also affect competition in international market. In the early stage the co. enters foreign market with a conservative approach with less risky strategies like exporting, licensing, joint marketing agreement and JV with local companies. As time goes and the co accumulates experience, it starts moving boldly and independently making acquisitions, constructing their own plants, putting their own sales and marketing capabilities to build strong competitive position... 13) Regulatory Influence and government Poliy Changes. Govt regulatory actions can often forces significant changes in industry practices and strategic approaches.deregulation has proved to be a potent pro competitive force in the airline, banking, natural gas, telecommunications, and electric utility industries.govt efforts to reform MEDICARE and HEALT Insurance have become potent driving forces in the health care industry. Key Success Factors - Concept and Implementation: Critical success factor vs. key performance indicator: Critical success factors are elements that are vital for a strategy to be successful. A critical success factor drives the strategy forward, it makes or breaks the success of the strategy (hence critical ). Kenichi Ohmae in his The Mind of the Strategist observes, A good business strategy is oneby which a company can gain significant ground on its competitors at an acceptable cost to itself. Finding a way of doing this is real task of the strategist. He suggests the following four ways ofstrengthening a Company s position relative to that of its competitors. 1. Strategy Based on KFS - Key Factors for Success to identify such critical factors in the areas like sourcing raw materials, production, marketing and concentrate resources on them to gain strategic advantage over the competitors. Dept of MBA,SJBIT Page 51

52 2. Strategy based on Relative Superiority Avoids head on competition and seeks to exploit competitor s weaknesses. Even when the competitors are very strong on the whole, there may be some critical factors or market segments where the company enjoys relative superiority which it can build into a strategic advantage. The relative superiority may be in respect of technology, cost, product quality, suitability of the product to market environment, distribution, after sales service, customer relations, cultural factors etc. 3. Strategy Based On Aggressive Initiatives When competitors are so well established that it may be hard to dislodge. Sometimes the only answer is in unconventional strategy aimed at upsetting the key factors for success on which the competitor has built an advantage. Ask every point as Why? You will get a point. 4. Strategy Based on SDF:; Strategic degrees of freedom (SDF). Superior competitive performance is to exploit the strategic degrees of freedom. This is relevant for consumer goods companies and cost-conscious industrial goods manufacture. Successful deployment of innovations is an alternative.. These innovations may involve the opening up of new markets or the development of new products. In the words of Ohmae, in each of these, the principal concern is to avoid doing the same thing, on the same battle ground, as the competition. The aim is to attain a competitive situation in which your company can (1) gain a relative advantage through measures is competitors will findhard to follow and (2) extend that advantage still further. Industry conditions change because important forces driving industry participants (competitors,customers, suppliers) to alter their actions, the driving forces in an industry are the major underlying causes of changing industry and competitive conditions. Several factors can affect anindustry powerful enough to act as driving forces 1. Changes in the long-term industry growth rate 2. Changes in who buys the product and how they use it. 3. Product innovation. 4. Technological change. 5. Marketing innovations 6. Entry or exit of major firms. 7. Diffusion of technical know-how. 8. Increasing globalization of the industry. 9. Changes in cost and efficiency. 10. Emerging buyer prefers for a differentiated product 11. Regulatory influences and govt policy changes. Dept of MBA,SJBIT Page 52

53 12. Changing societal concerns, attitudes and life-style. 13. Reduction in uncertainty and business risk. Concept of implementation: Dept of MBA,SJBIT Page 53

54 MODULE IV Analyzing a company s resources and competitive position Analysis of a Company s present strategies SWOT analysis Value Chain Analysis Benchmarking- Generic Competitive Strategies Low cost provider Strategy Differentiation Strategy Best cost provider Strategy Focused Strategy Strategic Alliances and Collaborative Partnerships Mergers and Acquisition Strategies Outsourcing Strategies International Business level Strategies. Analyzing Company s Resources & Competitive Position: The object of any industry is to develop the competitive advantage over similar industries in order to sustain growth and profitability. For this, a constant assessment of Strength and Weaknesses in every area of management is to be done on a continuous basis to retain its stability & strengths. The external factors are guiding the internal actions to take advantage of the situation. It is the internal strength h is the real strength of the Management to combat with external changes. Internal Analysis gives the manager the information they need to choose the strategies and business model that will enable their Company to attain a sustained competitive advantage. Internal analysis is a three-step process. (1) The manager must understand the process by whichcompanies create value for customers and profit for themselves, and they need to understand the role of resource, capabilities and distinctive competencies in this process. (2) Secondly, the Managers need to understand how important superior efficiency, innovation, quality and responsiveness to customers are in creating value and generating high profitability. (3) Thirdly, the Managers must be able to analyze the sources of their company s competitive advantage to identify what is driving the profitability of their enterprise and where opportunities for improvement might lie. In other words, they must be able to identify how the strengths of the enterprise boost its profitability and how any weakness leader to lower profitability. Three more critical issues in internal analysis are addressed (1) what factors influence the durability of competitive advantage? (2) Why do successful companies are often lose their competitive advantage? (3) How can companies avoid competitive failure and sustain their competitive advantage over time? Internal Analysis: Internal Analysis is the process by which strategists examine a firm s marketing & distribution, research & development, production, research & development to determine where the firm has it s strength s & weaknesses, determine how to exploit the opportunities & meet the threats the environment is presenting. Dept of MBA,SJBIT Page 54

55 Types of Resources Tangible Resources Relatively easy to identify, and include physical and financial assets used to create value for customers Financial resources Firm s cash accounts Firm s capacity to raise equity Firm s borrowing capacity Physical resources Modern plant and facilities Favorable manufacturing locations State-of-the-art machinery and equipment Technological resources Trade secrets Innovative production processes Patents, copyrights, trademarks Organizational resources Effective strategic planning processes Excellent evaluation and control systems Intangible Resources Difficult for competitors (and the firm itself) to account for or imitate, typically embedded in unique routines and practices that have evolved over time Human Experience and capabilities of employees Trust Managerial skills Firm-specific practices and procedures Innovation and creativity Technical and scientific skills Innovation capacities Reputation Effective strategic planning processes Excellent evaluation and control systems Organizational Capabilities Competencies or skills that a firm employs to transform inputs to outputs, and capacity to combine tangible and intangible resources to attain desired end Outstanding customer service Excellent product development capabilities Innovativeness of products and services Ability to hire, motivate, and retain human capital Significance of Internal Analysis: It helps to know where the firm stands in terms of strengths & weaknesses. It helps to select the opportunities to be tapped in line with its capacity. Dept of MBA,SJBIT Page 55

56 It supports matching of objectives to its capacity. It assists in assessing the capability-gap & takes steps for evaluating the capability in line with growth objective. It assists in selecting the specific lines in which it can grow, using its potential. Analysis of the company s present strategies: 1. How well is the present strategy working? This involves evaluating the strategy from a qualitative standpoint (completeness, internal consistency, rationale, and suitability to the situation) and also from a quantitative standpoint (the strategic and financial results the strategy is producing). The stronger a company's current overall performance, the less likely the need for radical strategy changes. The weaker a company's performance and/or the faster the changes in its external situation (which can be gleaned from industry and competitive analysis), the more its current strategy must be questioned. 2. What are the company s resource strengths /weaknesses and external opportunities and threats?a SWOT analysis provides an overview of a firm's situation and is an essential component of crafting a strategy tightly matched to the company's situation. The two most important parts of SWOT analysis are (1) drawing conclusions about what story the compilation of strengths, weaknesses, opportunities, and threats tells about the company's overall situation, and (2) acting on those conclusions to better match the company's strategy, to its resource strengths and market opportunities, to correct the important weaknesses, and to defend against external threats. A company's resource strengths, competencies, and competitive capabilities are strategically relevant because they are the most logical and appealing building blocks for strategy; resource weaknesses are important because they may represent vulnerabilities that need correction. External opportunities and threats come into play because a good strategy necessarily aims at capturing a company's most attractive opportunities and at defending against threats to its well-being. 3. Are the company s costs and prices competitive?one telling sign of whether a company's situation is strong or precarious is whether its prices and costs are competitive with those of industry rivals. Value chain analysis and benchmarking are essential tools in determining whether the company is performing particular functions and activities costeffectively, learning whether its costs are in line with competitors, and deciding which internal activities and business processes need to be scrutinized for improvement. Value chain analysis teaches that how competently a company manages its value chain activities relative to rivals is a key to building a competitive advantage based on either better competencies and competitive capabilities or lower costs than rivals. 4. How strong is the company relative to rivals? Dept of MBA,SJBIT Page 56

57 The key appraisals here involve how the company matches up against key rivals on industry key success factors and other chief determinants of competitive success and whether and why the company has a competitive advantage or disadvantage. As a rule a company's competitive strategy should be built around its competitive strengths and should aim at shoring up areas where it is competitively vulnerable. When a company has important competitive strengths in areas where one or more rivals are weak, it makes sense to consider offensive moves to exploit rivals' competitive weaknesses. When a company has important competitive weaknesses in areas where one or more rivals are strong, it makes sense to consider defensive moves to curtail its vulnerability. 5. What strategic issues does the company face?this analytical step zeros in on the strategic issues and problems that stand in the way of the company's success. It involves using the results of both industry and competitive analysis and company situation analysis to identify a "worry list" of issues to be resolved for the company to be financially and competitively successful in the years ahead. The worry list always centers on such concerns as "how to...," "what to do about...," and "whether to..." the purpose of the worry list is to identify the specific issues/problems that management needs to address. Actual deciding on a strategy and what specific actions to take is what comes after the list of strategic issues and problems that merit front-burner management attention is developed. SWOT Analysis Value Chain Analysis Benchmarking Ethical Conduct SWOT Analysis SWOT is an abbreviation for Strengths, Weaknesses, Opportunities and Threats SWOT analysis is a systematic identification of factors and the strategy that reflects the best match between them. It is based on the logic that an effective strategy maximizes a business s strengths and opportunities and minimizes its weaknesses and threats. This simple assumption if accurately applied has powerful implications for successfully choosing and designing an effective study. SWOT analysis is an important tool for auditing the overall strategic position of a business and its environment. Objectives of SWOT Analysis To provide a framework to reflect the organizational capability to avail opportunities or to overcome threats presented by the environment. It presents the information about external and internal environment to structured form whereby key external opportunities Dept of MBA,SJBIT Page 57

58 Identifying: Company STRENGTHS & competitive capabilities; Company WEAKNESSES & resource deficiencies; Company market OPPORTUNITIES; THREATS to a company s future profitability.. Importance of SWOT Analysis: Pattern of SWOT Analysis High opportunities and high strengths. Supports an aggressive strategy High opportunities and low strengths. Turnaround oriented strategy High threats and high strengths. Supports Diversification strategy High threats and low strengths. Supports a Defensive strategy. Strengths: Strength is a resource, skill or other advantage relative to the competitors and the needs of the markets firm serves or anticipates serving. Strength is a distinctive competence that gives firm a comparative advantage in the marketplace. E.g. - financial resources - image - market leadership Weaknesses: A weakness is a limitation or deficiency in resources, skills, and capabilities that seriously impedes effective performance. Eg: Facilities, financial resources, management capabilities, marketing skills, and brand image could be sources of weaknesses. o Aids in narrowing the choice of alternatives and selecting a strategy. o Distinct competence and critical weakness are identified in relation to key determinants of success for market segment. Opportunities An opportunity is a major favorable situation in the firm s environment. E.g. - identification of a previously unlooked market segment - changes in competitive or regulatory circumstances - technological changes Threats: A threat is a major unfavorable situation in the firm s environment. It is a key obstacle to the firm s current and/ or desired future position. Dept of MBA,SJBIT Page 58

59 E.g. - entrance of a new competitor - slow market growth - increased bargaining power of key buyers and suppliers Understanding the key opportunities and threats facing a firm helps manager identify realistic options from which to choose an appropriate strategy. Value Chain Analysis To better understand the activities through which a firm develops a competitive advantage and creates shareholder value, it is useful to separate the business system into a series of valuegenerating activities referred to as the value chain. In his 1985 book Competitive Advantage, Michael Porter introduced a generic value chain model that comprises a sequence of activities found to be common to a wide range of firms. Porter identified primary and support activities as shown in the following diagram: Inbound Logistics > Operations > Outbound Logistics > Marketing & Sales > Service > M A R G I N Firm HR Technology Infrastructure Management Development Procurement The goal of these activities is to offer the customer a level of value that exceeds the cost of the activities, thereby resulting in a profit margin. The primary value chain activities are: Inbound Logistics: the receiving and warehousing of raw materials, and their distribution to manufacturing as they are required. Operations: the processes of transforming inputs into finished products and services. Outbound Logistics: the warehousing and distribution of finished goods. Marketing & Sales: the identification of customer needs and the generation of sales. Service: the support of customers after the products and services are sold to them. Dept of MBA,SJBIT Page 59

60 These primary activities are supported by: The infrastructure of the firm: organizational structure, control systems, company culture, etc. Human resource management: employee recruiting, hiring, training, development, and compensation. Technology development: technologies to support value-creating activities. Procurement: purchasing inputs such as materials, supplies, and equipment. The firm's margin or profit then depends on its effectiveness in performing these activities efficiently, so that the amount that the customer is willing to pay for the products exceeds the cost of the activities in the value chain. It is in these activities that a firm has the opportunity to generate superior value. A competitive advantage may be achieved by reconfiguring the value chain to provide lower cost or better differentiation. The value chain model is a useful analysis tool for defining a firm's core competencies and the activities in which it can pursue a competitive advantage as follows: Cost advantage: by better understanding costs and squeezing them out of the valueadding activities. Differentiation: by focusing on those activities associated with core competencies and capabilities in order to perform them better than do competitors. Benchmarking: Benchmarking is the process of identifying "best practice" in relation to both products (including) and the processes by which those products are created and delivered. The search for "best practice" can take place both inside a particular industry, and also in other industries Benchmarking is the tool that allows a company to determine whether the manner in which it performs particular functions and activities represent industry best practices when both cost and effectiveness are taken into account.it is a point of reference against which performance is measured and compared. The objective of benchmarking is to understand and evaluate the current position of a business or organisation in relation to "best practice" and to identify areas and means of performance improvement. The Benchmarking Process Benchmarking involves looking outward (outside a particular business, organisation, industry, region or country) to examine how others achieve their performance levels and to understand the processes they use. In this way benchmarking helps explain the processes behind excellent performance. When the lessons learnt from a benchmarking exercise are applied appropriately, Dept of MBA,SJBIT Page 60

61 they facilitate improved performance in critical functions within an organisation or in key areas of the business environment. Application of benchmarking involves four key steps: (1) Understand in detail existing business processes (2) Analyse the business processes of others (3) Compare own business performance with that of others analysed (4) Implement the steps necessary to close the performance gap Benefits of Benchmarking It ensures best practices will be identified, which in turn assures appropriate improvement. It provides a deeper understanding of the organisation s process. It stimulates the company to try some thing different. Identify new technology Types of Benchmarking There are a number of different types of benchmarking, as summarised below: Strategic Benchmarking: Where businesses need to improve overall performance by examining the long-term strategies and general approaches that have enabled high-performers to succeed. It involves considering high level aspects such as core competencies, developing new products and services and improving capabilities for dealing with changes in the external environment. Changes resulting from this type of benchmarking may be difficult to implement and take a long time to materialize Performance or Competitive Benchmarking: Businesses consider their position in relation to performance characteristics of key products and services. Benchmarking partners are drawn from the same sector. This type of analysis is often undertaken through trade associations or third parties to protect confidentiality. Process Benchmarking: Focuses on improving specific critical processes and operations. Benchmarking partners are sought from best practice organisations that perform similar work or deliver similar services. Process benchmarking invariably involves producing process maps to facilitate comparison and analysis. This type of benchmarking often results in short term benefits. Functional Benchmarking: Businesses look to benchmark with partners drawn from different business sectors or areas of activity to find ways of improving similar functions or work processes. This sort of benchmarking can lead to innovation and dramatic improvements. Internal Benchmarking: involves benchmarking businesses or operations from within the same organisation (e.g. business units in different countries). The main advantages of internal benchmarking are that access to sensitive data and information is easier; standardised data is often readily available; and, usually less time and resources are needed. There may be fewer Dept of MBA,SJBIT Page 61

62 barriers to implementation as practices may be relatively easy to transfer across the same organisation. However, real innovation may be lacking and best in class performance is more likely to be found through external benchmarking. External Benchmarking: involves analysing outside organisations that are known to be best in class. External benchmarking provides opportunities of learning from those who are at the "leading edge". This type of benchmarking can take up significant time and resource to ensure the comparability of data and information, the credibility of the findings and the development of sound recommendations. International Benchmarking: Best practitioners are identified and analysed elsewhere in the world, perhaps because there are too few benchmarking partners within the same country to produce valid results. Globalisation and advances in information technology are increasing opportunities for international projects. However, these can take more time and resources to set up and implement and the results may need careful analysis due to national differences Benchmarking Generic COMPETITIVE STRATEGIES: Business Unit - An organizational entity with its own unique mission, set of competitors and industry. Competitive Advantage - A state whereby; a business unit s successful strategies cannot be easily duplicated by it competitors. Strategic Group A select group of direct competitors who have similar strategic profiles. Generic Strategies Strategies that can be adopted by business unit to guide their organization. based on their similarities. Generic Competitive Strategies Michael Porter developed the most commonly cited generic strategy frame work. According to Porter s a business unit must address two basic competitive concerns. First Managers must determine whether the business unit should focus its efforts on an identifiable subset of the industry in which it operates or seek to serve the entire market as a whole. Second, managers must determine whether the business unit should compete primarily by minimizing its costs relative to those of its competitors (i.e. low cost strategy) or by seeking to offer unique and or unusual products and services (i.e. a differentiation strategy). Efficiency is the key to such business. Ex Nirma, Wal-Mart Low cost provider Strategy, Differentiation Strategy, Best cost provider Strategy & Focused Strategy: Dept of MBA,SJBIT Page 62

63 1. Overall Cost Leadership Strategy - Generates competitive advantage in the form of offering products to customers at lower prices which helps in achieving large market.-no frill products & services. The Co pursuing overall cost leadership must aggressively pursue a position of cost leadership by constructing the most efficient scale faculties and must be good in engineering, manufacturing and physical distribution. The Co has a large market share so that its per unit cost is the lowest. Ex Hero cycles 2. Differentiation Strategy - An act of designing a set of meaningful differences to distinguish the company s offering from competitors offerings in which a large business products and markets to the entire industry products or services that can be readily distinguished from those of it competitors. Thus, the product offered by a Co is perceived by customers as being different from other companies offering the similar product. The product is perceived as distinct, may attract higher price which results into higher profitability. One must be vigil to see whether competitors also go on the same strategy and change the design and models. Ex- Gillette blades, Pizza 3. Best Cost Provider Strategy- An organization focuses on a narrow segment of the market and offers product at lower price than its competitors on the basis of its low cost. with no frills product & services for a market niche with elastic demand. According to Porter, those companies pursuing the same strategy; directed to the same target market constitute a strategic group. The Co which has clear strategy on cost dimension performs better than others. This strategy has the same risk like overall cost leadership strategy has. Ex UB Airways ticket fare Rs.1/- 4. Focused Differentiation Strategy - This strategy generates advantage based on the ability to create more customer value for a narrowly targeted segment and results from a better understanding of customer needs. Ex Hotels Strategic Alliance & Collaborative Partnership A strategic alliance is an agreement between two or more parties to pursue a set of agreed upon objectives needed while remaining independent organizations. This form of cooperation lies between mergers and acquisitions and organic growth. Strategic alliances occurs when two or more organizations join together to pursue mutual benefits. Partners may provide the strategic alliance with resources such as products, distribution channels, manufacturing capability, project funding, capital equipment, knowledge, expertise, or intellectual property. The alliance is a cooperation or collaboration which aims for a synergy where each partner hopes that the benefits from the alliance will be greater than those from individual efforts. The alliance often involves technology transfer (access to knowledge and expertise), economic specialization shared expenses and shared risk. There are many reasons to enter a Strategic Alliance: Dept of MBA,SJBIT Page 63

64 Shared risk: The partnerships allow the involved companies to offset their market exposure. Strategic Alliances probably work best if the companies portfolio complement each other, but do not directly compete. Shared knowledge: Sharing skills (distribution, marketing, management), brands, market knowledge, technical know-how and assets leads to synergistic effects, which result in pool of resources which is more valuable than the separated single resources in the particular company. Opportunities for growth: Using the partner s distribution networks in combination with taking advantage of a good brand image can help a company to grow faster than it would on its own. The organic growth of a company might often not be sufficient enough to satisfy the strategic requirements of a company, that means that a firm often cannot grow and extend itself fast enough without expertise and support from partners Speed to market: Speed to market is an essential success factor In nowadays competitive markets and the right partner can help to distinctly improve this. Complexity: As complexity increases, it is more and more difficult to manage all requirements and challenges a company has to face, so pooling of expertise and knowledge can help to best serve customers. Costs: Partnerships can help to lower costs, especially in non-profit areas like research & development. Access to resources: Partners in a Strategic Alliance can help each other by giving access to resources, (personnel, finances, technology) which enable the partner to produce its products in a higher quality or more cost efficient way. Access to target markets: Sometimes, collaboration with a local partner is the only way to enter a specific market. Especially developing countries want to avoid that their resources are exploited, which makes it hard for foreign companies to enter these markets alone. Economies of Scale: When companies pool their resources and enable each other to access manufacturing capabilities, economies of scale can be achieved. Cooperating with appropriate strategies also allows smaller enterprises to work together and to compete against large competitors. Advantages Access to new technology, intellectual property rights, Create critical mass, common standards, new businesses, Diversification, Improve agility, R&D, material flow, speed to market, Reduce administrative costs, R&D costs, cycle time Dept of MBA,SJBIT Page 64

65 Allowing each partner to concentrate on their competitive advantage. Learning from partners and developing competencies that may be more widely exploited elsewhere. To reduce political risk while entering into a new market Disadvantages Disadvantages of strategic alliances include: Sharing: In a Strategic Alliance the partners must share resources and profits and often skills and know-how. This can be critical if business secrets are included in this knowledge. Agreements can protect these secrets but the partner might not be willing to stick to such an agreement. Creating a Competitor: The partner in a strategic alliance might become a competitor one day, if it profited enough from the alliance and grew enough to end the partnership and then is able to operate on its own in the same market segment. Opportunity Costs: Focusing and committing is necessary to run a Strategic Alliance successfully but might discourage from taking other opportunities, which might be benefitial as well. Uneven Alliances: When the decision powers are distributed very uneven, the weaker partner might be forced to act according to the will of the more powerful partners even if it is actually not willing to do so. Foreign confiscation: If a company is engaged in a foreign country, there is the risk that the government of this country might try to seize this local business so that the domestic company can have all the market on its own. Risk of losing control over proprietary information, especially regarding complex transactions requiring extensive coordination and intensive information sharing. Coordination difficulties due to informal cooperation settings and highly costly dispute resolution Common Mistakes Many Companies struggle to operate their alliances in the way they imagined it and many of these partnerships fail to reach their defined goals. There are some very popular mistakes which can be seen again and again. Some are mentioned here: Low commitment Poor operating/planning integration Strategic weakness Rigidity/ poor adaptability Too strong focus on internal alliance issues instead on customer value Not enough preparation time Hidden agenda leading to distrust Lack of understanding of what is involved Unrealistic expectations Wrong expectation of public perception leading to damage of reputation Dept of MBA,SJBIT Page 65

66 Underestimated complexity Reactive behavior instead of prepared, proactive actions Overdependence Legal problems Classification All partners poor their R & D efforts together by exchanging information and ideas among themselves through networking in order to reduce costs, time and risk. Aims at improving production or services efficiently through exchange of information about the task. To create synergistic effect for marketing products and or services, thereby enhancing sales revenue and reducing marketing costs. Such alliances are quite common in India. -country Alliance - Alliance among foreign country partners or from the same country. In the globalization of world economy, many alliances have been formed at International level. 1. X & Y Alliance - Partners may be of same skills or different skills join together to reap the benefits of economies of scale. Collaborative Partners Any alliance is passable with minimum two partners and any number of partners with the Core Competence (competitive skills), commitment and expertised back ground on these lines. There are essential qualifications that make the Partnership successful. A corporate-level growth strategy in which two or more firms agree to share the costs, risks and benefits associated with pursuing new business opportunities. The strategic alliances are often referred to as partnership. Mergers & Acquisition Strategy: Mergers and acquisitions are both aspects of strategic management, corporate finance and management dealing with the buying, selling, dividing and combining of different companies and similar entities that can help an enterprise grow rapidly in its sector or location of origin, or a new field or new location, without creating a subsidiary, other child entity or using a joint venture. M&A can be defined as a type of restructuring in that they result in some entity reorganization with the aim to provide growth or positive value. Consolidation of an industry or sector occurs Dept of MBA,SJBIT Page 66

67 when widespread M&A activity concentrates the resources of many small companies into a few larger ones, such as occurred with the automotive industry between 1910 and The distinction between a "merger" and an "acquisition" has become increasingly blurred in various respects (particularly in terms of the ultimate economic outcome), although it has not completely disappeared in all situations. From a legal point of view, a merger is a legal consolidation of two companies into one entity, whereas an acquisition occurs when one company takes over another and completely establishes itself as the new owner (in which case the target company still exists as an independent legal entity controlled by the acquirer). Either structure can result in the economic and financial consolidation of the two entities. In practice, a deal that is a merger for legal purposes may be euphemistically called a "merger of equals" if both CEOs agree that joining together is in the best interest of both of their companies, while when the deal is unfriendly (that is, when the management of the target company opposes the deal) it is almost always regarded as an "acquisition". Merger or Amalgamation: is the integration of two or more business. Is also the joining of two separate Cos to form a single Co an external strategy for growth of the organization. A corporate-level growth strategy in which a firm combines with another firm through an exchange of stock. A merger occurs when two or more firms, usually of similar sizes, combine into one through an exchange of stock. Mergers are generally undertaken to share or transfer resources and or improve competitiveness by developing synergy. The name of the merged Co will go after merging. There will be one Company i.e. Merger. Reasons for Merger 1. Quick entry in the business.- There is no gestation time and familiarity of the product orservice to the market and customers. 2. Faster Growth Rate - The volume of business can be raised rapidly with less risk. Youcan overcome a competitors in certain cases. Ready utilities like production, marketing,distribution, research & Development. 3. Diversification Advantages - If the acquiring Co or Merger Co wants to diversify, theycan takeover the same product Co and enter into the business with less time.. 4. Reduction in Competitors and Dependence - You can eliminate Competitors andincrease in your market share. You can enjoy a ready market. 5. Tax advantage - If the merged Co possessing accumulated losses can be set off by themerger Co. 6. Synergistic Advantages - The complementary capabilities can be achieved like2 + 2 = 5 in Marketing, investment, operating (utilization of common facilities,personnel, overheads, inventories etc), Common Management and avoidingduplicating of managerial and other personnel. Dept of MBA,SJBIT Page 67

68 Causes for failure 1. In accuracy (manipulated) of data causing teething problems after merger. The advantages are over emphasized and weaknesses are suppressed. 2. Incompatibility of managerial and other persons causing misalignment of operations. 3. Inadequate planning of merger causing confusion, misunderstanding and delays. Acquisition or Takeover is where one business purchases another. Is the purchase of a controlling interest in another Co. A form of a merger whereby one firm purchases another, often with a combination of cash and stock. Firms with large, successful businesses often acquire smaller competitors with different or complementary product or service lines. Like Cement to Cement, Soap to Soap, Car to Car etc. Acquiring the existing organizations, products, technology, facilities, talent or manpower has the strong advantage of much quicker entry into the target market, while at the same time detouring such barriers to entry as licensing, patents, technological inexperience, lack of raw material suppliers, substantial economies of scale, establishment of distribution channels, etc. The acquisition or Merger goes with a strong report on survey of economics, business prospects, brand equity and financial soundness The acquirer should attempt an evaluation of the following 1. The prospects of technological change in the industry. 2. The size and strength of competitors. 3. The reaction of competitors to an acquisition. 4. The likelihood of government information and legislation. 5. The state of the industry and its long-term prospects. 6. The amount of synergy obtaininable from the merger or acquisition Takeover is done through negotiations or by calling bids by outsiders. The first basic step inacquisition process is the definition of acquisitions objectives. This is necessary because it willdefine precisely the type of organization to be acquired and consequently the type of effortsrequired in the process. The terms are to be complementary to both. The focus is on valuecreation to the acquirer Co. The strength and weaknesses are worked out and solutions are foundwith a planning the program of acquisition schedule. Outsourcing Strategies: What distinguishes an outsourcing arrangement from any other business arrangement is the transfer of ownership of an organization s business activities (processes or functions)-or the responsibility for the business outcomes flowing from these activities-to a service provider. In a Dept of MBA,SJBIT Page 68

69 typical outsourcing arrangement, the people, the facilities, the equipment and the technology (the Factors of Production) are also transferred to the service provider, which then uses the Factors of Production to provide the services back to the organization. The people are often transferred to the service provider, but this is not always the case. An outsourcing arrangement can be either tactical or strategic. An outsourcing is tactical when it is driven by a desire to solve a practical problem. For example, a company may find that its payroll clerk is not able to process payroll changes, cheques, tax returns and make the required accounting entries on time. The company concludes that although the payroll clerk is competent, there is too much work for a single person. The company outsources the payroll process (including the clerk), and ends up with all of the payroll work done on time and at a lower cost. As a result, it achieves a net gain in operational efficiency. Similarly, if an organization outsources its IT infrastructure so it can save five to 10 per cent on the cost of operating that function, the outsourcing is purely tactical. Strategic outsourcing, on the other hand, is not driven by a problem-solving mentality. Instead, it is structured so that it is aligned with the company s long-term strategies. The changes that organizations expect from strategic outsourcing vary and can include anything from (a) achieving a gain in competitive advantage, (b) spending more time on those activities that are truly central to the success of the organization, (c) repositioning the organization in the marketplace, or (d) achieving a dramatic increase in share price Outsourcing has been around for a long time, but it is only in the most recent past that it has become known by that name. A classic example is Coca-Cola. By the late 1890s, Coca-Cola had already established itself as a highly successful soft drink company, but the firm was looking to extend its business across new markets. Although bottling was then considered an emerging source of competitive advantage, Coca-Cola decided that it did not have the capital, the time or the expertise to produce its own bottles. Production methods for bottles at the time were primitive, the result inconsistent, and quality control was a significant concern. Coca-Cola chose to license a group of independent bottlers to whom it sold its syrup while imposing strict quality controls. In the next several decades, Cola-Cola was able to achieve its key strategic business objectives, including vastly expanding its market and protecting its good name. By outsourcing the non-core business function of bottling its products, Coca-Cola was able to focus on its core business objectives (such as maintaining high product quality, protecting its brand and growing market share). By the late 1970s, however, bottled products had developed into a significant competitive feature. While Coca-Cola s competitors were making significant headway in the bottling of soft drinks, the company s independent bottlers were not improving their business. Coca-Cola was losing market-share to its main competitors. In 1979, the company responded by taking steps to Dept of MBA,SJBIT Page 69

70 buy out several of its bottle-making alliance partners so it could develop its own internal capability in what had become a strategic area. First-Mover Advantages & Disadvantages Benefits derived from being the first firm to offer a new or modified product or service.prospectors typically seek First-mover advantages by becoming First to enter the market.first mover advantages can be strong, as demonstrated by; product widely known by theiroriginal brand names. Being first, however, can be a risky proposition, and research has shownthat competitors may be able to catch up quickly and effectively. As a result, prospectors mustdevelop expertise in innovation and evaluate risk scenarios effectively.defenders are almost the opposite of prospectors. They perceive the environment to be stableand certain, seeking stability and control in their operations to achieve maximum efficiency Inhigh-technology industries, companies often compete by surviving to be the first to developrevolutionary new products, that is, to be a First Mover By definition, the first mover withregard to a revolutionary product satisfies unmet consumer needs and demand is high, the firstmover can capture significant revenues and profits. Such revenues and profits signal to potentialrivals that there is money to be made by imitation will rush into the market created by the firstmover, competing away the first mover s monopoly profits and leaving all participants in themarket with a much lower level of returns. Advantages 1. An opportunity to exploit a virgin market network effects and positive feedback loops,locking consumers into its technology. 2. Can establish significant Brand Loyalty which is expensive for later entrants to breakdown. 3. Be able to grab sales volume ahead of rivals and thus reap cost advantages associated withthe realization of scale economies and learning effects. 4. Be able to create switching costs for its customers that subsequently make it difficult forrivals to enter the market. Can change the product features what the rivals are making. Andstill can compete with them. 5. Be able to accumulate valuable knowledge related to customer needs, distributionchannels, product technology process technology etc Disadvantages 1. Significant pioneering costs is to be incurred which the rival need not. Fromprocessing, marketing channels, pricing etc are to be done One time carries a risk. 2. Prone to make mistakes because there are so many uncertainties in a new market. Dept of MBA,SJBIT Page 70

71 3. Risk of building the wrong resource and capabilities because they are focusing on acustomer set that is not going to be characteristic of the mass market. trial & error cost. 4. Risk of investing in an inferior or obsolete technology as there is speed of change on designand function of the product. International Business level strategies Strategic Alliance & Joint Venture. Global Strategy or International Business Strategy is relevant in Globalization of Trade and commerce. Some Cos choose to be involved on an International basis by operating in various countries but limiting their involvement to importing, exporting, licensing or making strategic alliances. Exporting alone can significantly benefit even a small Co. However, international joint ventures a form of strategic alliance involving co-operative arrangements between business across borders - may be desirable even when resources for a direct investment are available. Firms with global objectives may decide to invest directly in facilities abroad. Due to the complexities associated with establishing operations across borders, however, strategic alliances may be particularly attractive to firms seeking to expand their global involvement. Companies often possess market, regulatory and other knowledge about their domestic markets but may need to partner with Cos abroad to gain access to this knowledge as it pertains to international markets. International strategic alliances provide a number of advantages to a firm. They can provide entry into a global market, access to the partner s knowledge about the foreign market, and risk sharing with the partner firm. They can work effectively when partners can learn from each other, when neither partner is large enough to function alone, and when both partners share common strategic goal but are not in direct competition. However a number of problems can arise from International joint ventures, including disputes and lack of trust over proprietary. Knowledge, cultural difference between firms and disputes over ways to share the costs and revenues associated with the partnerships. Most manufacturing Cos begin their global expansion as exporters and only later switch to one of the other does for serving a foreign market. 1. International licensing - An arrangement whereby a foreign licensee purchases the rights to produce a company s products and/or use its technology in the licensee s country for a negotiated fee structure. Eg - Pharmaceuticals, patented goods which has a formula. 2. International franchising -. A form of licensing in which a local franchisee pays a franchiser in another country for the right to use the franchiser s brand names, promotions, materials and producer. Franchising is more used in Service Industries such as fast food. 3. Exporting: Exporting has two distinct advantages: it avoids the costs of establishing manufacturing operations in the host country, which are often substantial and it may be consistent with realizing experience curve cost economies and location economies. 4. Foreign Branching: Is an extension of the Company in its foreign market a separate located strategic business unit directly responsible for fulfilling the operational duties assigned to it by corporate management, including sales, customer service and physical distribution Host counties Dept of MBA,SJBIT Page 71

72 may require that the brands to be domesticated, that is, have some local managers in middle and upper-level positions. 5. Wholly Owned Subsidiary: Is one in which the parent Co owns 100% of subsidiary s shares. To establish a wholly owned subsidiary in a foreign market, a company can either set up a completely new operation in that country or acquire an established host country Co and use it to promote its products in the host market. There are 3 advantages a)competitive advantage is based on its control of a technical (high-tech) competency b)freedom to have full control in all areas of operation and full profits unlike in JV c) It can recognize the local resources and further develop/expand the business lines. The disadvantage is, considerable amount of investment and running high risk. 6. Joint Venture: is a contractual arrangement whereby two or more parties undertake an economic activity; which is subject to joint control. A form of Multi National Strategy Cos goes for Joint Venture with a target nation firm. JV involves Collaboration rather than mere exchange. Establishing a JV with a foreign Co has long been a favored mode of entering a new market. The advantages are, it can benefit from a local partner s knowledge of a host country s competitive conditions, culture, language, political systems and business systems. When the development costs and risks of opening a foreign market are high, a company might gain by sharing these costs and risk with a local partner. Depending upon the political linkage, the JV gets encouragement from Govt. The disadvantage is the Technical Know-how goes in the hand of partner other controls like market, production, quality etc The majority stake holder is likely to dominate and take control of very thing., there arising misunderstanding and in efficiency; JV can be made within the country which is very common. The Cos having the core competence in their respective fields will come together, form a Co and carry on the Economic activity. Dept of MBA,SJBIT Page 72

73 Module 5 (7 Hours) Business Planning in different environments Entrepreneurial Level Business planning Multistage wealth creation model for entrepreneurs Planning for large and diversified companies brief overview of Innovation, integration, Diversification, Turnaround Strategies - GE nine cell planning grid and BCG matrix. Business planning in different environments Business Planning: Business planning, also known as strategic planning or long-range planning, is a management-directed process that is intended to determine a desired future state for a business entity and to define overall strategies for accomplishing the desired state. Through planning, management decides what objectives to pursue during a future period, and what actions to undertake to achieve those objectives. Successful business planning requires concentrated time and effort in a systematic approach that involves: assessing the present situation; anticipating future profitability and market conditions; determining objectives and goals; outlining a course of action; and analyzing the financial implications of these actions. From an array of alternatives, management distills a broad set of interrelated choices to form its long-term strategy. This strategy is implemented through the annual budgeting process, in which detailed, short-term plans are formulated to guide day-to-day activities in order to attain the company's long-term objectives and goals. A business plan is an externally focused document that provides more detailed information on the proposed development of an organisation, and is likely to be shared with potential investors - funding bodies for the voluntary and community sector. 1. A business plan will usually include more detailed information on the financial position of the organisation, financial forecasts, and competitor and market analysis. 2. A business plan is more formal and detailed in its structure and contents. 3. It may be more difficult to present the level of detail required within a business plan in a pictorial format, for example. The use of formal business planning has increased significantly over the past few decades. The increase in the use of formal long-range plans reflects a number of significant factors: Competitors engage in long-range planning. Global economic expansion is a long-range effort. Taxing authorities and investors require more detailed reports about future prospects and annual performance. Investors assess risk/reward according to long-range plans and expectations. Availability of computers and sophisticated mathematical models add to the potential and precision of long-range planning. Expenditures for research and development increased dramatically, resulting in the need for longer planning horizons and huge investments in capital equipment. Steady economic growth has made longer-term planning more realistic. Dept of MBA,SJBIT Page 73

74 TYPES OF PLANS In addition to differentiation by planning horizon, plans are often classified by the business function they provide. All functional plans emanate from the strategic plan and define themselves in the tactical plans. Four common functional plans are: 1. Sales and marketing: for developing new products and services, and for devising marketing plans to sell in the present and in the future. 2. Production: for producing the desired product and services within the plan period. 3. Financial: for meeting the financing needs and providing for capital expenditures. 4. Personnel: for organizing and training human resources. Each functional plan is interrelated and interdependent. For example, the financial plan deals with moneys resulting from production and sales. Well-trained and efficient personnel meet production schedules. Motivated salespersons successfully market products. Two other types of plans are strategic plans and tactical plans. Strategic plans cover a relatively long period and affect every part of the organization by defining its purposes and objectives and the means of attaining them. Tactical plans focus on the functional strategies through the annual budget. The annual budget is a compilation of many smaller budgets of the individual responsibility centers. Therefore, tactical plans deal with the micro-organizational aspects, while strategic plans take a macro-view. Entrepreneurial Level Business planning A business owner has to choose a model of planning, such as strategic planning, that will guide the entire business. Planning is about setting goals that can be timed and measured to determine if a company meets the desired level of performance. Without a strategic plan, a business owner will make more reactive decisions in response to the market. With a strategic plan, all of the firm's employees will know what direction to take. Multi stage wealth creation model for entrepreneurs Entrepreneur Resource capabilities Values/beleifs Characteristics Networks Environment Dynamism Gostility Heterogeneity Strategic Orientation Risk taking Innovation Pro activeness Dept of MBA,SJBIT Page 74

75 Autonomy Planning for large and diversified companies In smaller companies, strategic planning is a less formal, almost continuous process. The president and his handful of managers get together frequently to resolve strategic issues and outline their next steps. They need no elaborate, formalized planning system. Even in relatively large but undiversified corporations, the functional structure permits executives to evaluate strategic alternatives and their action implications on an ad hoc basis. The number of key executives involved in such decisions is usually small, and they are located close enough for frequent, casual get-togethers. Large, diversified corporations, however, offer a different setting for planning. Most of them use the product/market division form of organizational structure to permit decentralized decision making involving many responsibility-center managers. Because many managers must be involved in decisions requiring coordinated action, informal planning is almost impossible.therefore, even executives whose corporate situation permits informal planning may find that our delineation of the process helps them clarify their thinking. To this end, formalizing the steps in the process requires an explanation of the purpose of each step. Three Levels of Strategy Every corporate executive uses the words strategy and planning when he talks about the most important parts of his job. The president, obviously, is concerned about strategy; strategic planning is the essence of his job. A division general manager typically thinks of himself as the president of his own enterprise, responsible for its strategy and for the strategic planning needed to keep it vibrant and growing. Even an executive in charge of a functional activity, such as a division marketing manager, recognizes that his strategic planning is crucial; after all, the company s marketing strategy (or manufacturing strategy, or research strategy) is a key to its success. These quite appropriate uses of strategy and planning have caused considerable confusion about longrange planning. This article attempts to dispel that confusion by differentiating among three types of strategy and delineating the interrelated steps involved in doing three types of strategic planning in large, diversified corporations. (Admittedly, although we think our definitions of strategy and planning are useful, others give different but reasonable meanings to these words.) The process of strategy formulation can be thought of as taking place at the three organizational levels headquarters (corporate strategy), division (business strategy), and department (functional strategy). The planning processes leading to the formulation of these strategies can be labeled in parallel fashion as corporate planning, business planning, and functional planning. Corporate planning and strategy Corporate objectives are established at the top levels. Corporate planning, leading to the formulation of corporate strategy, is the process of (a) deciding on the company s objectives and goals, including the determination of which and how many lines of business to engage in, (b) acquiring the resources needed to attain those objectives, and (c) allocating resources among the different businesses so that the objectives are achieved. Dept of MBA,SJBIT Page 75

76 Business planning and strategy Business planning, leading to the formulation of business strategy, is the process of determining the scope of a division s activities that will satisfy a broad consumer need, of deciding on the division s objectives in its defined area of operations, and of establishing the policies adopted to attain those objectives. Strategy formulation involves selecting division objectives and goals and establishing the charter of the business, after delineating the scope of its operations vis-à-vis markets, geographical areas, and/or technology.thus, while the scope of business planning covers a quite homogeneous set of activities, corporate planning focuses on the portfolio of the divisions businesses. Corporate planning addresses matters relevant to the range of activities and evaluates proposed changes in one business in terms of its effects on the composition of the entire portfolio. Functional planning and strategy In functional planning, the departments develop a set of feasible action programs to implement division strategy, while the division selects in the light of its objectives the subset of programs to be executed and coordinates the action programs of the functional departments. Strategy formulation involves selecting objectives and goals for each functional area (marketing, production, finance, research, and so on) and determining the nature and sequence of actions to be taken by each area to achieve its objectives and goals. Programs are the building blocks of the strategic functional plans. Entrepreneurial Level Business planning grand Strategies; Identification of various alternative strategies is an important aspect of strategic management asit provides the alternatives which can be considered and selected for implementation in order toarrive at certain results The basic objective of identification of strategic alternatives is two fold: First, the managers should be aware about the various courses of action available to them andsecond, even if large number of possible alternative actions are available to them, even if largenumber of possible alternative actions are available, they should be in a position to limitthemselves to various relevant alternatives so that unnecessary exercises are not taken up. TheGrand strategy covers up 1. Stability - In an effective stability strategy, Cos will concentrate their resources wherethe Company presently has or can rapidly develop a meaningful competitive advantage inthe narrowest possible product-market scope consistent with the firm s resources andmarket requirement. 2. Growth - Is one that an enterprise pursues when it increases its level of objectivesupward in significant increment, much higher than an exploration of its past achievementlevel. The most frequent increase indicating a growth strategy; is to raise the marketshare and or sales objectives upward significantly 3. Retrenchment - Is one that an entries pursues when it decides to improve its performancein reaching its objectives by (i) focusing on functional improvement, specially reductionin cost (ii) reducing the number of functions it performs by becoming a captivecompany or (iii) reducing the number of the products and markets it serves up to andincluding liquidation of the business. ( Turnaround, divestment, liquidation) 4. Turnaround: Also known as cutback strategy has the basic philosophy hold the presentbusiness and cut the costs. This situation needed as no organization is immune frominternal hard time-stagnation or declining performance no matter what the state ofeconomy is. It can be for a part of the Co when economical advantage is under stress. Itis a scanning process to cut costs to see that it becomes viable. Dept of MBA,SJBIT Page 76

77 5. Divestment Strategy: The organization after observing for some time finds there is nofuture to the dept or product decides to dispose of. This is done by transferring the sharesto the buyer at a specific negotiated rate. There may be reasons like a company wants togo for a new project wants to dispose of the existing company can also go bydisinvestment route. 6. Liquidation Strategy: When a specific line of activity i.e. production or service is notprofitable and no future and also that there are no buyers through disinvestment process,can dismantle and liquidate the assets and collect money to be used in the profitableareas. Generally, the Cos having accumulated losses or forthcoming period is notpromising, liquidation is one option. 7. Combination: It is a combination of stability, growth, retrenchment strategies in variousforms. The basic reason for adopting this strategy by a multi-business organization isthat a single strategy does not fit all businesses at a particular point of time, because eachbusiness faces different kinds of problems. Like life cycle, recession, severe completionfrom better technology products etc 8. Business Restructuring: Choosing the profitable lines and ignoring the loss making orless profitable units so that more concentration can be given to the prospering lines. Cuttingdown overheads by reducing less utility manpower starting from top. Innovation strategy Is a key factor in the success or many companies, specifically those industries dealing specifically in the fiercely competitive field of technology. Innovation Innovation is needed since both consumer and industrial markets expect periodic changes and improvements in the products offered. Firms seeking to making innovation as their grand strategy seek to reap the initially high profits associated with customer acceptance of a new or greatly improved product. As the products enters the maturity stage these companies start looking for a new innovation. The underlining rationale is to create a new product life cycle and thereby make similar existing products obsolete. This strategy is different from the product development strategy in which the product life cycle of an existing product is extended. e.g. Polaroid which heavily promotes each of its new cameras until competitors are able to match its technological innovation; by this time Polaroid normally is prepared to introduce a dramatically new or improved product. Integration strategy takes place when companies merge or one company buys another.horizontal integration Seeking ownership or increased control over competitors Dept of MBA,SJBIT Page 77

78 Horizontal integration refers to a strategy of seeking ownership of or increased control over a firm's competitors. One of the most significant trends in strategic management today is the increased use of horizontal integration as a growth strategy. Mergers, acquisitions, and takeovers among competitors allow for increased economies of scale and enhanced transfer of resources and competencies. Increased control over competitors means that you have to look for new opportunities either by the purchase of the new firm or hostile take over the other firm. One organization gains control of other which functioning within the same industry. It should be done that every firm wants to increase its area of influence, market share and business. It is a strategy in which a firms long term strategy is based on growth through acquisition of one or more similar firms operating at the same stage of the production-marketing chain. E.g. Acquisition of Arcelor by Mittal Steels Such acquisitions eliminate competitors and provide the acquiring firm with access to new markets. The acquiring firm is able to greatly expand its operations, thereby achieving greater market share, improving economics of scale, and increasing the efficiency of capital use. The risk associated with horizontal integration is the increased commitment to one type of business. Vertical integration It is a process in which a firm's grand strategy is to acquire firms that supply it with inputs (such as raw materials) or are customers for its outputs (such as warehouses for finished products). The acquiring of suppliers is called backward integration. The main reason for backward integration is the desire to increase the dependability of the supply or quality of the raw materials used in the production inputs. This need is particularly great when the number of suppliers are less and the number of competitors is large. In these conditions a vertically integrated firm can better control its costs and, thereby, improve the profit margin. e.g. acquiring of textile producer by a shirt manufacturer The acquiring of customers is called forward integration. e.g. acquiring of clothing store by a shirt manufacturer Benefits of vertical integration strategy: It Allows a firm to gain control over: Distributors (forward integration) Suppliers (backward integration) Competitors (horizontal integration) Forward integration: Gaining ownership or increased control over distributors or retailers Forward integration involves gaining ownership or increased control over distributors or retailer can gain ownership or control over the distributors, suppliers and Competitors using forward integration. Dept of MBA,SJBIT Page 78

79 Guidelines for the use of integration strategies: Six guidelines when forward integration may be an especially effective strategy are: Present distributors are expensive, unreliable, or incapable of meeting firm s needs Availability of quality distributors is limited when firm competes in an industry that is expected to grow markedly Organization has both capital and human resources needed to manage new business of distribution Advantages of stable production are high Present distributors have high profit margins Backward Integration Seeking ownership or increased control of a firm s suppliers Both manufacturers and retailers purchase needed materials from suppliers. Backward integration is a strategy of seeking ownership or increased control of a firm's suppliers. This strategy can be especially appropriate when a firm's current suppliers are unreliable, too costly, or cannot meet the firm's needs. Guidelines for Backward Integration: Six guidelines when backward integration may be an especially effective strategy are: When present suppliers are expensive, unreliable, or incapable of meeting needs Number of suppliers is small and number of competitors large High growth in industry sector Firm has both capital and human resources to manage new business Advantages of stable prices are important Present supplies have high profit margins Diversification Strategies Diversification strategies are becoming less popular as organizations are finding it more difficult to manage diverse business activities. In the 1960s and 1970s, the trend was to diversify so as not to be dependent on any single industry, but the 1980s saw a general reversal of that thinking. Diversification is now on the retreat. Diversification is a form of corporate strategy for a company. It seeks to increase profitability through greater sales volume obtained from new products and new markets. Diversification can occur either at the business unit level or at the corporate level. At the business unit level, it is most likely to expand into a new segment of an industry which the business is already in. At the corporate level, it is generally ] and it is also very interesting entering a promising business outside of the scope of the existing business unit. Dept of MBA,SJBIT Page 79

80 Diversification is part of the four main marketing strategies defined by the Product/Market Ansoff matrix: Ansoff pointed out that a diversification strategy stands apart from the other three strategies. The first three strategies are usually pursued with the same technical, financial, and merchandising resources used for the original product line, whereas diversification usually requires a company to acquire new skills, new techniques and new facilities. Ansoff's matrix provides four different growth strategies: Market Penetration - the firm seeks to achieve growth with existing products in their current market segments, aiming to increase its market share. Market Development - the firm seeks growth by targeting its existing products to new market segments. Product Development - the firms develops new products targeted to its existing market segments. Diversification - the firm grows by diversifying into new businesses by developing new products for new markets. Selecting a Product-Market Growth Strategy The market penetration strategy is the least risky since it leverages many of the firm's existing resources and capabilities. In a growing market, simply maintaining market share will result in growth, and there may exist opportunities to increase market share if competitors reach capacity limits. However, market penetration has limits, and once the market approaches saturation another strategy must be pursued if the firm is to continue to grow. Market development options include the pursuit of additional market segments or geographical regions. The development of new markets for the product may be a good strategy if the firm's core competencies are related more to the specific product than to its experience with a specific market segment. Because the firm is expanding into a new market, a market development strategy typically has more risk than a market penetration strategy. A product development strategy may be appropriate if the firm's strengths are related to its specific customers rather than to the specific product itself. In this situation, it can leverage its strengths by developing a new product targeted to its existing customers. Similar to the case of Dept of MBA,SJBIT Page 80

81 new market development, new product development carries more risk than simply attempting to increase market share. Diversification is the most risky of the four growth strategies since it requires both product and market development and may be outside the core competencies of the firm. In fact, this quadrant of the matrix has been referred to by some as the "suicide cell". However, diversification may be a reasonable choice if the high risk is compensated by the chance of a high rate of return. Other advantages of diversification include the potential to gain a foothold in an attractive industry and the reduction of overall business portfolio risk. The two principal objectives of diversification are 1. improving core process execution, and/or 2. enhancing a business unit's structural position. The fundamental role of diversification is for corporate managers to create value for stockholders in ways stockholders cannot do better for themselves. The additional value is created through synergetic integration of a new business into the existing one thereby increasing its competitive advantage. Diversification typically takes one of three forms: 1. Vertical integration along value chain 2. Horizontal diversification moving into new industry 3. Geographical diversification open up new markets Means of achieving diversification include internal development,acquisitions, strategic alliances, and joint ventures. As each route has its own set of issues, benefits, and limitations, various forms and means of diversification can be mixed and matched to create a range of options. The different types of diversification strategies The strategies of diversification can include internal development of new products or markets, acquisition of a firm, alliance with a complementary company, licensing of new technologies, and distributing or importing a products line manufactured by another firm. Generally, the final strategy involves a combination of these options. This combination is determined in function of available opportunities and consistency with the objectives and the resources of the company. There are three types of diversification: concentric, horizontal and conglomerate: Concentric Diversification Adding new, but related, products or services is widely called concentric diversification. Guidelines for Concentric Diversification Dept of MBA,SJBIT Page 81

82 It involves the acquisition of businesses that are related to the acquiring firm in terms of technology, markets, or products. The selected new business must possess a very high degree of compatibility with the firm's existing business. The ideal concentric diversification occurs when the combined company profits increase the strengths and opportunities and decreases the weaknesses and exposure to risk. Thus, the acquiring firm searches for new businesses whose products, markets, distribution channels, technologies and resource requirements are similar to but not identical with its own, whose acquisition results in synergies but not complete interdependence. e.g. acquiring of Spice Telecom by Idea Five guidelines when concentric diversification may be an effective strategy are provided below: Competes in no- or slow-growth industry Adding new & related products increases sales of current products New & related products offered at competitive prices Current products are in decline stage of the product life cycle Strong management team Conglomerate Diversification Adding new, unrelated products or services Adding new, unrelated products or services is called conglomerate diversification. Some firms pursue conglomerate diversification based in part on an expectation of profits from breaking up acquired firms and selling divisions piecemeal. It is a grand strategy in which a very large firm plans to acquire a business because it represents the most promising investment opportunity available. The principal concern, and often the sole concern, of the acquiring firm is the profit pattern of the venture. They may seek a balance in their portfolio between current businesses with cyclical sales and acquired businesses with countercyclical sales, between high-cash/low-opportunity and low-cash/high-opportunity businesses or between debt-free and high leveraged businesses. e.g. acquisition of Adlabs by Anil Dirubhai Ambani Group Guidelines for Conglomerate Diversification Four guidelines when conglomerate diversification may be an effective strategy are provided below: Declining annual sales and profits Capital and managerial talent to compete successfully in a new industry Financial synergy between the acquired and acquiring firms Exiting markets for present products are saturated Defensive Strategies Dept of MBA,SJBIT Page 82

83 In addition to integrative, intensive, and diversification strategies, organizations also could pursue retrenchment, divestiture, or liquidation. Turnaround Sometimes the profit of a company decline due to various reasons like economic recession, production inefficiencies and innovative breakthrough by competitors. In many cases the management believes that such a firm can survive and eventually recover if a concerted effort is made over a period of a few years to fortify its distinctive competences. This is known as turnaround strategy. Turnaround typically is begun with one or both of the following forms of retrenchment being employed either singly or in combination. 1. Cost reduction It is done by decreasing the workforce through employee attrition, leasing rather than purchasing equipment, extending the life of machinery, eliminating promotional activities, laying off employees, dropping items from a production line and discontinuing low-margin customers. 2. Asset reduction This includes sale of land, buildings and equipment not essential to the basic activity of the firm. Research have showed that turnaround almost always was associated with changes in top management. New managers are believed to introduce new perspectives, raise employee morale and facilitate drastic actions like deep budgetary cuts in established programs. Turnaround situation The model begins with the depiction of external and internal factors as causes of a firm's performance downturn. When these factors continue to detrimentally impact the firm, its financial health is threatened. Unchecked decline places the firm in a turnaround situation. Turnaround situations may be a result of years of gradual slowdown or months of sharp decline. For a declining firm, stabilizing operations and restoring profitability almost always entail strict cost reduction followed by shrinking back to those segments of the business that have been the best prospects of attractive profit margins. Situation severity The urgency of the resulting threat to company survival posed by the turnaround situation is known as situation severity. Severity is the governing factor in estimating the speed with which the retrenchment response will be formulated and activated. When severity is low, stability can be achieved through cost reduction alone. When severity is high cost reduction must be supplemented with more drastic asset reduction measures. Assets targeted for divestiture are those determined to be underproductive. Dept of MBA,SJBIT Page 83

84 More productive resources are protected and will become the core business in the future plan of the company. Turnaround response Turnaround response among successful firms typically include two strategic activities: Retrenchment phase Recovery phase Retrenchment phase It consists of cost-cutting and asset-reducing activities. The primary objective of this process is to stabilize the firm's financial condition. Firms in danger of bankruptcy or failure attempt to halt decline through cost and asset reductions. It is very important to control the retrenchment process in a effective and efficient manner for any turnaround to be successful. After the stability has been attained through retrenchment, the next step of recovery phase begins. Recovery phase The primary causes of the turnaround situation will be associated with the recovery phase. For firms that declined as a result of external problems, turnaround most often has been achieved through creating new entrepreneurial strategies. For firms that declined as a result of internal problem, turnaround has been mostly achieved through efficiency strategies. Recovery is achieved when economic measures indicate that the firm has regained its predownturn levels of performance. Tailoring strategy to fit specific industry and company situations Strategies based on industry situation Strategies for emerging industries Strategies for competing in turbulent, high-velocity markets Strategies for competing in maturing industries Strategies for firms in stagnant or declining industries Strategies for competing in fragmented industries Strategies based on company situation Strategies for sustaining rapid company growth Strategy for industry leaders Strategies for runner-up firms Strategies for weak and crisis-ridden businesses GE nine cell planning grid General Electric with the assistance of McKinsey and Company developed this matrix. This martix includes 9 cells based on long-term industry attractiveness(on Y-axis) and business strength/competitive position (on X-axis). Dept of MBA,SJBIT Page 84

85 The industry attractiveness includes Market size, Market growth rate, Market profitability, Pricing trends, Competitive intensity / rivalry, Overall risk of returns in the industry, Entry barriers, Opportunity to differentiate products and services, Demand variability, Segmentation, Distribution structure, Technology development Business strength and competitive position includes Strength of assets and competencies, Relative brand strength (marketing), Market share, Market share growth, Customer loyalty, Relative cost position (cost structure compared with competitors), Relative profit margins (compared to competitors), Distribution strength and production capacity, Record of technological or other innovation, Quality, Access to financial and other investment resources, Management strength L i m i t a t i o n s It presents a somewhat limited view by not considering interactions among the business units It neglects to address the core competencies leading to value creation Rather than serving as the primary tool for resource allocation, portfolio matrices are better suited to displaying a quick synopsis of the strategic business units. B o s t o n c o n s u l t i n g m a t r i x ( B C G m a t r i x ) - P r o d u c t p o r t f o l i o s t r a t e g y Introduction The business portfolio is the collection of businesses and products that make up the company. The best business portfolio is one that fits the company's strengths and helps exploit the most attractive opportunities. The company must: (1) Analyse its current business portfolio and decide which businesses should receive more or less investment, and (2) Develop growth strategies for adding new products and businesses to the portfolio, whilst at the same time deciding when products and businesses should no longer be retained. Methods of Portfolio Planning The two best-known portfolio planning methods are from the Boston Consulting Group (the subject of this revision note) and by General Electric/Shell. In each method, the first step is to Dept of MBA,SJBIT Page 85

86 identify the various Strategic Business Units ("SBU's") in a company portfolio. An SBU is a unit of the company that has a separate mission and objectives and that can be planned independently from the other businesses. An SBU can be a company division, a product line or even individual brands - it all depends on how the company is organised. The Boston Consulting Group Box ("BCG Box") Using the BCG Box (an example is illustrated above) a company classifies all its SBU's according to two dimensions: On the horizontal axis: relative market share - this serves as a measure of SBU strength in the market On the vertical axis: market growth rate - this provides a measure of market attractiveness By dividing the matrix into four areas, four types of SBU can be distinguished: Stars - Stars are high growth businesses or products competing in markets where they are relatively strong compared with the competition. Often they need heavy investment to sustain their growth. Eventually their growth will slow and, assuming they maintain their relative market share, will become cash cows. Cash Cows - Cash cows are low-growth businesses or products with a relatively high market share. These are mature, successful businesses with relatively little need for investment. They need to be managed for continued profit - so that they continue to generate the strong cash flows that the company needs for its Stars. Question marks - Question marks are businesses or products with low market share but which operate in higher growth markets. This suggests that they have potential, but may require substantial investment in order to grow market share at the expense of more powerful Dept of MBA,SJBIT Page 86