Anda di halaman 1dari 142

The concept of strategic management is an aid to the top management to deal with the problems and

intricacies being posed by an increasingly complex and competitive environment.


-Mr. Ashok Kaka

Strategic Management

Preface
The development, evaluation, and implementation of business strategies are
essential to successful management. The key is a management system that will
help managers
Provide vision to their business.
Monitor and understand a dynamic environment.
Generate visionary and creative strategy options that will be responsive
to changes facing a business.
Develop strategies based on sustainable competitive advantages.
The concept of strategic management is an aid to the top management to deal
with the problems and intricacies being posed by an increasingly complex and
competitive environment. Strategic management may be viewed as a set of
managerial decisions and actions that determine the long term performance of a
company. It includes environmental scanning both external and internal,
strategy formulation, strategy implementation, and evaluation and control.
Therefore, the study of strategic management emphasizes the monitoring and
evaluation of opportunities and threats in light of organizations strengths and
weaknesses.
To be very precise strategic management is concerned with making and
implementing decisions about organizations future direction. It is the
conscious and rational management exercise which involves defining and
achieving organizations objectives and implementing its missions. It can also
be viewed as the pattern of organizations response to its external environment
over time. Strategic manager cannot afford to forget business opportunities that
ultimately decide the future prospects of the organization. Strategic planning is
necessary to see that there is maximum output at minimum cost.
This book is concerned with helping managers identify, select, and implement
strategies. The intent is to provide decision makers with concepts, methods, and
procedures by which they can improve the quality of their decision making.
This book is divided into five parts/modules. The first part structures the book
by introducing concepts, method, and strategies and by providing an overview
of strategic management based on comprehensive model. The second part,
drawing heavily from marketing and economics, covers strategic analysis.
Strategic analysis involves both external analysis (the analysis of the customer,
market, and environment). The third part discusses various models like
portfolio analysis and generic strategies differentiation strategies, strategies
based on low cost, focus, or preemptive move. The fourth part focuses on
global competition, and competition in hostile and declining industries. The

Strategic Management

final part contains a chapter on strategic implementation with focus on Strategic


control, balanced scorecard.
Thus, first chapter provides an overview of the strategic management process
and explains what students will find as they use this book. The remaining 4
chapters cover each part of the strategic management process and techniques
that aid strategic analysis, decision making, implementation, and control.
Finally, in order to have better understanding of the subject, I have included
following three case studies:
ITC Limited: BCG Matrix
ICICI Bank: Balanced Scorecard
Berger Paints Limited: Competitive Advantage
The Audience
This book is suitable for any management or business school course that
focuses on the management of strategies.

Strategic Management

Strategic Management
Module I: Introduction - The Basics of Planning and Strategic
Management
Concept of Planning ,Definition and meaning of strategy, Evolution of
Strategic Management, Corporate Strategy, Patterns of Strategy Development,
Levels of Strategy, Competitive scope and value chain
Module II: Strategic Analysis
Mission, Vision and Business Definition, Environmental Threat and
Opportunity Profile (ETOP), Industry Analysis, Strategic Advantage Profile
(SAP), Competitor analysis, market analysis, environmental analysis and
dealing with uncertainty, scenario analysis and SWOT Analysis.
Module III: Strategic Choice
Traditional Approach - Strategic Alternatives, Various models like BCG, GE
Nine Cell Matrix, Hofers Model, Stricklands Grand Strategy Selection
Matrix, Basis of Choice; Michael Porters Approach Generic competitive
strategies, Cost advantage, differentiation, technology and competitive
advantage, substitution, competitor, complementary products and competitive
advantage, strategic vision vs. strategic opportunism, Coevolving and Patching.
Module IV: Offensive and Defensive Competitive Strategies
Industry Scenarios, Advantages and disadvantages of defensive strategies,
Advantages and disadvantages of offensive strategies
Module V: Strategic Implementation
Strategic control, Balanced Scorecard- concepts and application in strategy
implementation, case studies

Strategic Management

Index
Chapter
no.

Particulars

Page no.

Introduction

Strategic Analysis

42

Strategic Choice

82

Offensive and Defensive


Competitive Strategies

113

Strategic Implementation and case


Studies: ITC (BCG Matrix)

117

ICICI Bank (Balanced Score Card)


Berger Paints (Competitive
Advantage)

Strategic Management

Contents in Brief
Part I: Introduction
1.
2.
3.
4.
5.
6.
7.

Evolution of Strategic Management


Concept of Planning
Levels of Strategy
Corporate Strategy
Patterns of Strategy Development
Competitive Scope
Value chain Analysis

6
17
23
27
30
31
33

Module II: Strategic Analysis


1.
2.
3.
4.
5.
6.
7.
8.
9.

Mission, Vision and Business Definition


Environmental Threat and Opportunity Profile (ETOP)
Strategic Advantage Profile (SAP)
Industry Analysis
Competitor analysis
Market analysis
Environmental analysis and dealing with uncertainty
Scenario analysis
SWOT Analysis

41
52
57
59
64
67
69
71
73

Part III: Strategic Choice


1.
2.
3.
4.
5.
6.
7.
8.
9.

Michael Porters Approach Generic Competitive Strategies, Cost Advantage,


Differentiation
80
Hofers Model, Stricklands Grand Strategy Selection Matrix
83
Various Models like BCG
84
GE Nine Cell Matrix
90
Porters Five Force Model
94
Technology and Competitive Advantage, Substitution
102
Competitor, Complementary Products and Competitive Advantage
103
Strategic vision vs. strategic opportunism
106
Coevolving and patching
107

Part IV: Offensive and Defensive Competitive Strategies


1.
2.

Advantages and Disadvantages of Offensive Strategies


Operationalizing Strategy / Institutionalizing Strategy

112
113

Part V: Strategic Implementation


1.
2.
3.
4.

Strategic Control
Balanced Scorecard Concepts and applications in strategy implementation
Case Studies ITC, ICICI Bank, Berger Paints
Industry Scenarios

117
120
127
135

Strategic Management

Strategic Management
MODULE I
1.1 Evolution of Strategic Management
1.2 Concept of Planning
1.3 Levels of Strategy
1.4 Corporate Strategy
1.5 Patterns of Strategy Development
1.6 Competitive Scope
1.7 Value chain Analysis
Chapter 1 Introduction to Strategic Management
1.0

Introduction

Learning Outcomes
Upon Completion of this chapter, you will be able to answer the following
questions: How do networks impact our daily lives?
1.

The elements of strategic management.

2.

The process of strategic management.

3.

Important aspects of strategic management.

4.

Understand the elements of strategic management process and apply them


successfully in a business venture.

5.

Strategic planning has evolved from and encompasses budgeting longrange planning, and strategic planning.

6.

Outsourcing is becoming a standard business practice in every facet of


business operations. This trend enhances the usefulness of the value chain
approach in strategic analysis

1.1 EVOLUTION OF STRATEGIC MANAGEMENT


Why do some firms succeed while others fail?
A central objective of strategic management is to learn why this
happens.
What is strategy?
An action a company takes to attain superior performance.
What is the strategic management process?

Strategic Management

The process by which managers choose a set of strategies for the


enterprise to pursue its vision.
1. WHAT IS STRATEGY?
The concept of strategy is an aid to top management to deal with problems and
intricacies being posed by an increasingly complex and competitive
environment.

Figure 1.1 Definition of strategy


Strategy According to Henry Mintzberg 1987
A pattern in a stream of decisions and actions
Strategy is a plan, a "how," a means of getting from here to there.
Henry Mintzberg, in his 1994 book, The Rise and Fall of Strategic Planning
,points out that people use "strategy" in several different ways, the most
common being these four:
Strategy is a pattern in actions over time; for example, a company that regularly
markets very expensive products is using a "high end" strategy.
A pattern in a stream of decisions and actions
Strategy is a plan, a "how," a means of getting from here to there
Strategy is position; that is, it reflects decisions to offer particular
products or services in particular markets.
Strategy is perspective, that is, vision and direction.

Strategic Management

Strategy Igor Ansoff (1965)


The common thread among the organizations activities and product-markets
that defines the essential nature of business that the organization was or planned
to be in future
Summarizing, the strategy is:
Concerned with resources necessary for implementing
following a course of action, and

a plan or

Connected to the strategic positioning of a firm making trade-offs


between its different activities, and creating a fit among these activities
A comprehensive plan guiding resource allocation to achieve long-term
organization goal
2. WHAT IS STRATEGIC MANAGEMENT?
Strategic management may be viewed as a set of managerial decisions and
actions that determine the long term performance of a company. It includes
environmental scanning both external and internal, strategy formulation,
strategy implementation, and evaluation and control. Therefore, study of
strategic management emphasizes the monitoring and evaluating of external
opportunities and threats in light of organizations strengths and weaknesses.
To be very precise strategic management is concerned with making and
implementing decisions about organizations future direction. It is conscious
rational management exercise which involves defining and achieving
organizations objectives and implementing its missions. It can also be viewed
as the organizations responses to its external environment over a period of time.
Strategic planner cannot afford to forget business opportunities that ultimately
decide the future prospects of the organization. Strategic planning is necessary
to see that there is maximum output at minimum cost.
The question is not if strategic management makes a difference but rather what
the impact of proper strategic management for the business is. There are as
many definitions of strategy as there are authors writing about it. In the box
below there are three definitions of strategic management developed over years
by key management experts to help understand what it is all about.
Strategic management refers to the managerial process forming strategic
vision, setting objectives, crafting a strategy, implementing and executing the
strategy, and then over time initiating whatever corrective adjustments in the
vision, objectives, strategy and execution is deemed appropriate.
Thompson & Strickland

Strategic Management

Strategic management is defined as a set of decisions and actions that result in


formulation and implementation of plans to achieve the companys objectives.
Strategic management is defined as a set of decisions and actions that result in
formulation and implementation of plans to achieve the companys objectives.
Pearce & Robbins
Strategic management is the analysis, decisions and actions an organization
undertakes in order to create sustain competitive advantage.
Dess & Lumpkin
Figure 1.2 Definition of Strategic Management
From the above one could determine the essentials of strategy. The main aim is
not to give a definition of strategic management in this chapter but only to
elaborate on the construct and its related concepts.
As per definition strategic management has to do with:
Ensuring long term survival of the business in a changing environment
Growing the business as the ultimate business goal
An ongoing and sometimes messy process of analysis, evaluation,
planning, implementation and reviewing. Many of these things happen
simultaneously and interactively
Choices and decision-making
Leading and motivating people to pursue the vision by
o Allocating resources to support strategic goals
o Implementing the decisions and executing the choices
o Changing and adapting to changes which result from the decisions.
Looking at the above definitions, a working definition for this concept
may be as follows:

Strategic Management

Figure 1.3 Working Definition of Strategy


BASIC MODEL OF STRATEGIC MANAGEMENT
Strategic management consists of four basic elements:
Environmental scanning
Strategy formulation
Strategy implementation
Evaluation and control
Environmental scanning: Organization exists within the environment.
ENVIRONMENTAL THREAT-Challenges posed by an unfortunate trend lead to erosion of companys position.
ENVIRONMENTAL OPPORTUNITY -an attractive arena -that company
enjoys a competitive advantage
Strategy Formulation: Concerned with the long-term plans for effective
management of environmental opportunities and threats, in the light of the
organizational strengths and weaknesses. It defines corporate mission, specify
achievable objectives, developing strategies and formulating policies.
Strategy Formulation: It is the process by which strategies and policies are
put to action through the development programs, budgets, and procedures.
Implementation requires changes in the culture, structure and management
10

Strategic Management

Basic Model of
Strategic Management
Four Basic Elements

Ronaldo Parente

Chapter 1
Wheelen & Hunger 10ed

Figure1.4 Working Model of Strategic Management

1. Environmental Scanning

Ronaldo Parente

Chapter 1
Wheelen & Hunger 10ed

Figure 1.5 Environmental Scanning

11

Strategic Management

2. Strategy Formulation
Mission Statement

Setting Objectives & Goals


A statement of purpose (strategic intent)
committing the organization to ambitious
overarching (stretch) objectives.
Provides a sense of direction and
purpose.
Drives strategic decision making and
resource allocations.
Forces the seeking of significant
performance improvements to attain
objectives

Customer Orientation and Business


Definition
Abells Framework for Defining the
business
Consumer-oriented
versus Product-oriented business
definition

Ronaldo Parente

Chapter 1
Wheelen & Hunger 10ed

Figure 1.6 Strategy Formulation (1)

2. Strategy Formulation
Selecting Strategy
Corporate strategy (Stability, Growth,
Retrenchment)
Business strategy (Competitive,
Cooperative)
Functional strategy (Technological
Leadership, Technological Followership)
Defining Policies
Guidelines for decision making that links
formulation to implementation
Ronaldo Parente

Chapter 1
Wheelen & Hunger 10ed

Figure 1.6 Strategy Formulation (2)

12

Strategic Management

3. Strategy Implementation
Programs
Strategy
Implementation

Budgets
Procedures

4. Evaluation & Control


- Continuous process
Ronaldo Parente

Chapter 1
Wheelen & Hunger 10ed

Figure 1.8 Strategy Implementation


Key Elements to the Strategic Management Process
As will be clear at the end of this chapter, it shows that strategic
management has to do with three main areas - namely:
Strategy formulation (planning)
Strategy implementation (doing or execution)
Review of implementation (evaluation or control)
Before one can start formulating a strategy, one has to use strategic thinking in
finding the important events, patterns and trends that will influence the future
of the small business as well as the industry in which the small business
operates. Awareness of ones environment is important. One of the key things
to be good at strategic management is to ensure that all people involved are
strategically oriented. This requires that they should converse about strategic
issues all the time. Strategic conversation must therefore become part of the
culture (the way you do things) of the organization. An important part of
strategic conversation is to challenge choices and decisions all the time. Asking
the right questions is more important than finding the right answers.
Process
Strategic management is a process (steps/events that follow a sequence), which
is elaborated extensively in the chapters that follow. The process is iterative
(steps repeat itself through the feedback loop). The discussion that follows here
is more to set the scene to understand the thinking behind the process.

13

Strategic Management

STRATEGIC MANAGEMENT PROCESS


ENVIRONMENTA
L SCANNING

External
Internal

STRATEGY
FORMULATIO
N

Missions
Objectives
Strategies
policies

STRATEGY
IMPLEMENTATIO
N

Programs
Budgets
Procedures

EVALUATION
CONTROL

Performance

Feedback / Learning

Figure 1.9 Strategic Management Process


Formulation
The outcome of the formulation process is a plan with broad goals and detailed
steps to achieve the vision of the small business. Formulation, however, implies
that a number of things happen before the plan is formulated. This entails
thinking and conversing about the environment, the industry, and key drivers of
success, analysis, evaluation, budgeting and more. The first step in the process
is to establish a vision for the small business, as it leads the rest of the steps in
the process.

STRATEGY FORMULATION
Mission
Reason for
existence

Objectives
What results
to accomplish
when
Strategies
Plan to achieve
the mission &
objective

Policies
Broad
guidelines BACK
for decision
making

Figure 1.10 Strategic Management Process

14

Strategic Management

Implementation
Once the plan is created it needs to be implemented or else it will remain a plan
only. It therefore requires the execution of the steps described in the plan.

STRATEGY IMPLEMENTATION
Programs
Activities needed
to accomplish a
plan
Budgets
Cost of the
Program
Procedures
Sequence of
steps needed
to do the job

Figure 1.11 Strategic Implementation


Monitoring, Evaluation and Control (Review of Implementation)
Control refers to measurement of how well the small business is doing in
executing the plan. It therefore implies that the objectives must be measurable
and some milestones must be set to measure progress. If the execution does
not go according to the plan, then new plans must be made or adaptations to the
original plan must be made.

Figure 1.12 Strategic Management Model


15

Strategic Management

SUMMARY
Doing strategic management correctly:
Leads to better guidance for the business
Leads to making managers more alert to new opportunities and threats It
helps to align all members to pursue the same goals
It helps to make management become more proactive rather than
reactive
it challenges the economic model of the business to ensure sustained
profits It facilitates the decision-making process of allocating resources
Strategic management is an ongoing process of planning (formulation),
executing (doing) and reviewing (control).
There is a lot of analysis to be done as homework before one can
formulate the right strategies.
It should not be done once off but regularly.
There is a lot of analysis to be done as homework before one can
formulate the right strategies.
It should not be done once off but regularly.
CHECK AGAINST LEARNING OUTCOMES
I completely understand the following outcomes and will be able to
apply them in the work environment:
No.

Outcome

1.

The elements of strategic management

2.

The process of strategic management

3.

Important aspects of strategic management

16

Yes

No

Strategic Management

1.2 CONCEPT OF PLANNING

Plans are nothing, planning is everything.

Dwight S. Eisenhower

Strategic Planning
Strategic planning the emergence of which is associated with the 1960s,
1970s, and 1980s is concerned with changing strategic thrusts and
capabilities. The basic assumption is that the past extrapolations are important
are inadequate and discontinuities from past projections and new trends will
require strategic adjustments. An adjustment is strategic thrust or direction
could involve moving into a new product market. The enhancement of research
and development could represent an adjustment in strategic capability.
Strategic planning focuses on market environment facing the firm. Thus,
emphasis is not only on an in-depth understanding of the market environment,
particularly the competitors and customers. The hope is not only to gain insight
into current conditions, but also to be able to anticipate changes that have
strategic implications.
One characteristic that strategic planning shares with budgeting and long range
planning management system is that it is largely based on periodic planning
system, usually an annual system. Typically, an organization will develop a
strategic plan in the spring and summer and then, during fall, will use that plan
as a base for developing the annual operating plans and budgets for the next
year. The periodic planning cycle does provide a time in which managers must
address strategic questions. Without such device, artificial though it may be,
even managers who realize the importance of strategic thinking might find their
time absorbed by day-to-day operations and crises.
The difficulty with the periodic planning process is that the need for strategic
analysis and decision making does not always occur on an annual basis. The
environment and technology may change so rapidly that environmental shocks
may occur so unexpectedly that being tied to planning cycle can be
disadvantageous or even disastrous. If the planning process is allowed to
suppress strategic response outside the planning cycle, performance can suffer,
particularly in dynamic industries.
Management Concepts The Four Functions of Management
Any organization, whether new or old, whether small or big need to run
smoothly and achieve the goals and objectives which it has set forth. For this
they had developed and implemented their own management concepts. There
are basically four management concepts that allow any organization to handle
the tactical, planned and set decisions. The four basic functions of the
management are just to have a controlled plan over the preventive measure.
17

Strategic Management

The four functions of management are:


The base function is to: Plan
The subsequent function is to: Organize
The third function is to: Direct
The final function is to: Control
Planning is unending course of action. There may be sudden strategies where
companies have to face. Sometimes they are uncontrollable. You can say that
they are external factors that constantly affect a company both optimistically
and pessimistically. Depending on the conditions, a company may have to alter
its course of action in accomplishing certain goals. This kind of preparation,
arrangement is known as strategic planning. In strategic planning, management
analyzes inside and outside factors that may affect the company and so
objectives and goals. Here they should have a study of strengths and
weaknesses, opportunities and threats. For management to do this efficiently, it
has to be very practical and ample.
Setting goals & objectives
Example: Meet demand within the limits of available resources at the
least cost
Determining steps to achieve goals
Example: Hire more workers setting start & completion dates Example:
Begin hiring in Jan.; finish, Mar.

Figure 1.2.1 Planning Tasks/Responsibility


18

Strategic Management

PLANNING HORIZON

Planning Horizons
Short-range plans
Job assignments
Ordering
Job scheduling
Dispatching
Responsible:
Operations
managers,
supervisors,
foremen

Today

Responsible:
Operations
managers

Intermediate-range plans
Sales planning
Production planning and
budgeting
Setting employment, inventory,
subcontracting levels
Analyzing operating plans

3 Months

Responsible:
Top executives

Long-range plans
R&D
New product plans
Capital expenses
Facility location, expansion

1 year

5 years

Planning Horizon
PowerPoint presentation to accompany Operations
Management, 6E (Heizer & Render)

13-9

2001 by Prentice Hall, Inc. Upper Saddle River, N.J. 07458

Figure 1.2.2 Planning Horizons


SHORT-RANGE PLANS
Generally cover up to one year
Meet a particular objective in the near future
Answer the question: Are we doing things right?
Should fit well within and contribute to long-range plans
LONG-RANGE PLANS
Generally cover up to one year
Meet a particular objective in the near future
Answer the question: Are we doing things right?
Should fit well within and contribute to long-range plans
This concept was developed by Igor Ansoff, long a leading strategy theorist in
1950s and 1960s. Its focus is on anticipating growth and managing
complexity. The basic assumption is that the past trends will continue in the
future. The planning process typically involves projecting sales, costs,
technology, and so on into the future using data and experience from the past.
The planning task is then to develop human resources and facilities to
accommodate the anticipated growth or contraction. The time frame is not
necessarily as limited as the budgeting system and can anticipate two, five, ten,
or twenty years depending on the context. Included under long-range planning
is gap analysis. A gap occurs if the projected sales and profits do not meet the
organizational goals. Changes in operations, such as increasing the sales force
and/or plant capacity, are then considered to remove gap.
19

Strategic Management

INTERMEDIATE PLANS

Cover the term between short-range and long-range plans.


Usually between three to five years.
Derived from long-range plans; short-range plans derived from
intermediate plans.

TYPES OF PLANS
Strategic planning
Analogous to top-level, long-range planning.
Covers a relatively long period.
Applied at the highest levels of the organization and affecting many parts of
the organization.
Strategic
Operations or tactical planning

Short-range planning.
Done primarily by middle- to lower-level managers.
Concentrates on the formulation of functional plans.

Contingency plans
Address the what-ifs of the managers job.
Gets the manager in the habit of being prepared and knowing what to do if
something does go wrong.
Most needed in rapidly changing environments.
Strategic Planning

The Main
Components of
the Strategic
Planning Process

FIGURE 1.1
Copyright 2001 Houghton Mifflin Company. All rights reserved.

Figure 1.2.3 Components of Planning Process


20

1-4

Strategic Management

Tasks/Responsibility
We try to explain the planning concept with the help of its application in
marketing management.
How would you define a strategic business plan and a strategic marketing plan?
A strategic business plan describes the overall direction an organization will
pursue within its environment and also guides the allocation of resources. It
provides the logic that integrates the perspectives of functional departments and
operating units, and points them all in the same direction.
A strategic marketing plan outlines the actions necessary, which is responsible,
when and where they will be completed, and how they will be coordinated. A
marketing plan is carried out within the context of a firms broader strategic
business plan.
In most large corporations, strategic planning takes place at four levels.
The Corporate Level
The Division Level
The Business Level
The Product Level
Now, can any of you try to guess what would be the steps in the strategic
planning process?
The strategic planning process consists of the seven interrelated steps shown in
Figure and described below.
This process is applicable for small and large firms, consumer and industrial
firms, goods and services-based firms, domestic and international firms, and
profit-oriented and non-profit-oriented organizations.
The Strategic Planning Process
The Strategic Planning, Implementation and Control Process

Figure 1.2.4 Strategic Planning Process

21

Strategic Management

Step1 Defining Organizational Mission


I hope you would understand the vision and mission concepts for organizations.
Defining the organizational mission refers to a long-term commitment to a type
of business and a place in the market. It describes the scope of the firm and its
dominant emphasis and values, based on a firms history, current management
preferences, resources, and distinctive competence, and on
Step 2 Establishing SBUs
Have you ever heard of the term SBU? How would you try and define an SBU?
What is the full form of SBU?
A strategic business unit (SBU) is a self-contained division, product line, or
product department in an organization with a specific market focus and a
manager with complete responsibility for integrating all functions into a
strategy.
Step 3 Setting Marketing Objectives
What do you think are the marketing objectives?
Marketing objectives establish the firms goals for each SBU. Objectives are
described in both quantitative terms (dollar sales, percentage profit growth, and
market share), and qualitative terms (image, level of innovativeness, and
industry leadership role).
Without clearly identified objectives, firms often fail.
Step 4 Performing Situation Analyses
The situation analysis is also known as SWOT Analysis. We shall discuss
SWOT Analysis in the next chapters.
Step 5 Developing Marketing Strategy
A marketing strategy outlines the way in which the marketing mix is used to
attract and satisfy the target market. Thus a marketing strategy would develop
from two components i.e. the marketing mix, and the target market. Marketing
mix, as you would study in detail in this course, consists of mainly the 4 Ps of
marketing. The 4 Ps are Product, Price, Promotion and Place. For services
business, three additional 3 Ps become important. They are People, process and
Physical evidence. Some texts also refer to other Ps like Packaging, and Public
Relations because of their importance.
Step 6 Implementing Tactical Plans
How do you think that strategy is different from tactics?
Strategy is for the long-term whereas tactics is for the short-term. A tactical
plan refers to the short-run actions (tactics) that a firm undertakes in
implementing a given marketing strategy. It has three basic elements:
Specific Tasks
Time Frame
Resource Allocation
22

Strategic Management

Step 7 Monitoring results


As you all will have understood by now, the final step is monitoring of results.
It compares the actual performance of a firm, SBU, or product against the
planned performance for a specified period. Successful companies often
employ the following strategies to assure success:
Continuous monitoring of performance
Regular use of proper strategy adjustments
Maintenance of a customer-oriented focus
Stressing on positive written and oral communication among employees and
channel members.
SUMMARY
Doing strategic planning correctly:
Leads to better guidance/management for the business
Sets parameters for measurement.
Make communication across the company easier.
1.3 THE LEVELS AND FORMULATION OF STRATEGY
Formulation of Strategy
There is a need in modern times for strategies to achieve agreed goals and
objectives, giving a sense of purpose and direction to the organisation, because
of recent technological and social changes and competition from rival
organisations.
In ancient Greek, stratos was the term for the army and so in military terms,
strategy referred to the act of the general so a strategy is some sort of future
plan of action, undertaken by senior management at a high level of abstraction.
A strategy is the mediating force or match between the organisation and the
environment. (Hofer and Schendel)

23

Strategic Management

2. Strategy Formulation
Selecting Strategy
Corporate strategy (Stability, Growth,
Retrenchment)
Business strategy (Competitive,
Cooperative)
Functional strategy (Technological
Leadership, Technological Followership)
Defining Policies
Guidelines for decision making that links
formulation to implementation
Ronaldo Parente

Chapter 1
Wheelen & Hunger 10ed

Figure 1.3.1 Strategy formulation Selecting Strategy


Process of strategy
Strategic management is the organised development of the resources of the
functional areas: financial, manufacturing, marketing, technological, manpower
etc, in the pursuit of its objectives.
It is the use of all the entity's resources; it is a set of policies adopted by senior
management, which guides the scope and direction of the entity. It takes into
account the environment in which the company operates.
Levels of strategy
Most academics classify strategies into three levels:

DIVERSIFIED COMPANY
3 LEVELS OF STRATEGY
Corporate-Level Strategy

Growth of business as a whole

Business-Level Strategy
Division/business unit/product level
Functional-Level Strategy
support corporate & business level strategy

Figure 1.3.2 Levels of Strategy


24

Strategic Management

Strategic Managers for All Levels

FIGURE 1.2
Copyright 2001 Houghton Mifflin Company. All rights reserved.

1-16

Figure 1.3.3 Strategic Managers for all levels


Corporate-Level Strategy
What business or businesses the firm should be in?
It relates to the future formula and structure of the company, and affects the
rationale of the company and the business in which it intends to compete.
Example: Racal Electronics' decision to float off Vodaphone as a separate
company
Business-Level Strategy
How each business attempts to achieve its mission within its chosen area of
activity?

Business-Level Strategies
Cost leadership
Attaining, then using the lowest total cost basis as a

competitive advantage.

Differentiation
Using product features or services to distinguish the

firms offerings from its competitors.

Market niche focus


Concentrating competitively on

a specific market segment.


Copyright 2001 Houghton Mifflin Company. All rights reserved.

1-9

Figure 1.3.4 Business Level Strategies


25

Strategic Management

Here strategy is about which products or services should be developed and


offered to which markets and the extent to which the customer needs are met
whilst achieving the objectives of the organisation. A term that is often used in
relation to business strategy is SBU, or strategic business unit. SBU means a
unit within the overall corporate entity for which there is an external market for
its goods and services, which is distinct from that of another SBU
Example: Ford's Motor Cos car division an SBU - launched its Mondeo
model, aimed at fleet car buyers, who had not favoured the Sierra, its
predecessor.
Functional-Level Strategy
How the different functions of the business support the corporate and business
strategies. They are concerned with how the various functions of the
organisation contribute to the achievement of strategy.
It examines how the different functions of the business (marketing, production,
finance etc) support the corporate and business strategies. Such corporate
planning at the operational level is means oriented and most activities are
concerned only with the ability to undertake directions.
Example: revising delivery schedules and drivers' hours to improve customer
service or recruiting a German-speaking sales person to assist a UK company's
sales drive in Europe.

Functional-Level Strategies
Focus is on improving the effectiveness of
operations within a company.
Manufacturing
Marketing
Materials management
Research and development

Human resources

Copyright 2001 Houghton Mifflin Company. All rights reserved.

1-10

Figure 1.3.5 Functional Level Strategy


However, the boundaries between the three categories are very indistinct and
much depends upon the circumstances prevailing and the kind of organisation.
Overall, corporate planning is concerned with the scope of an organisation's
26

Strategic Management

activities and the matching of these to the organisation's environment, its


resource capabilities and the values and expectations of its various
stakeholders.
1.4 CORPORATE STRATEGY
Highest level and is concerned with the scope of an organizations strategies
and adding value through its relationship with the separate parts of the business
and synergies created between these parts.
Organizations are established to serve some purpose. The purpose may be
manufacturing or rendering service. Before commencement of the organization,
basic objectives must be made clear. Selection of objectives is done through a
decision making process. Decision making consists of setting objectives,
generating and evaluating alternatives, choosing the most suitable alternative
and implement the chosen alternative. This is a continuous phenomenon. Once
the organization is established with some objectives, there is always scope for
modification and addition. As business organization grows, it acquires
capabilities and core competencies. Its strength increases, resource base
widens. Based on the internal and external analysis the organization can
improve continuously using their influence resource and skills to gain
competitive advantage. Corporate strategy is basically concerned with choice of
business, products and markets. This strategy tries to answer the following
questions:
1. What is our business?
2. Should we stay in the same business with a similar level of effort?
(Stability Strategy)
3. Should we come out of the business completely or some part of it?
(Retrenchment Strategy)
4. Should we expand our business by adding new functions, products and
markets? (Expansion Strategy)
5. Should we carry out combination of 2, 3, and 4? (Combination Strategy)
From the above, it is clear that corporate strategy decides the course of action to
be undertaken to take the organization to new heights. The choice of strategies
is vital and this choice would depend on how organization foresees its future
opportunities and threats; and use internal potential and competitiveness to
exploit these opportunities and combat threats. Corporate level strategy
basically is the choice of direction that an organization adopts in order to
achieve its objectives. Various corporate level strategies are discussed as under:
Types of corporate strategies
Growth: expansion into new products and markets
Stability: maintenance of the status quo
Renewal: redirection of the firm into new markets

27

Strategic Management

Figure 1.4.1 Multi Business Corporation - Levels


Growth strategy
Growth strategy seeks to increase the organisations business by expansion into
new products and markets.
Concentration
Vertical integration
Horizontal integration
Diversification
Characteristics of a Concentrated Growth Strategy
Involves focusing resources on the profitable growth of a single product, in a
single market, with a single dominant technology
Rationale - Firm develops and exploits its expertise in a delimited competitive
arena
Determinants of competitive market success
Ability to assess market needs
Knowledge of buyer behavior
Customer price sensitivity
Effectiveness of promotion
Conditions Favoring a Concentrated Growth Strategy
Firms industry is resistant to major technological advancements
Firms targeted markets are not product saturated
Firms markets are sufficiently distinctive to dissuade competitors in adjacent
markets from entering firms segment
Firms inputs are stable in price and quantity and available in amounts and at
times needed
28

Strategic Management

Firms industry is stable


Firms competitive advantages are based on efficient production or distribution
channels
Success of market generalists
Strategies of Horizontal and Vertical Integration
Horizontal integration
Based on growth via acquisition of one or more similar firms operating
at the same stage of the production-marketing chain
Involves eliminating competitors, providing acquiring firm with access
to new markets
Vertical integration
Involves acquiring firms
To supply acquiring firm with inputs - backward integration or
Are customers for firms outputs - forward integration

Vertical and Horizontal Integrations


Textile producer

Textile producer

Shirt manufacturer

Shirt manufacturer

Clothing store

Clothing store

Acquisitions or mergers of suppliers or customer


businesses are vertical integrations
Acquisitions or mergers of competing
businessesProf.Sushil\IITD\Session-VI
are horizontal integrations

25

Figure 1.4.2 Vertical and Horizontal integrations


Diversification Strategies
Concentric diversification
Involves acquisition of businesses related to acquiring firm in terms of
technology, markets, or products
Conglomerate diversification
Involves acquisition of a business because it represents a promising
investment opportunity
Primary motivation is profit pattern of venture
29

Strategic Management

Difference between the approaches


Concentric diversification emphasizes commonality whereas
conglomerate diversification emphasizes profits for each individual unit
1.5 PATTERNS OF STRATEGY DEVELOPMENT
HOW STRATEGY DEVELOPS
Since strategy is about the long-term direction of an organisation, it is typically
thought of in terms of major decisions about the future. However, it would be a
mistake to conceive of organisational strategy as necessarily developing
through one-off major changes. The strategic development of organisations is
better described and understood in terms of continuity. There is a tendency
towards momentum of strategy: once as organisation has adopted a particular
strategy then it tends to develop from and within that strategy, rather than
fundamentally changing direction.
Incremental strategy development
Henry Mintzbergs historical studies of organisations over many decades
showed that global or transformational change did take place but was
infrequent. More typically, organisations
changed incrementally, during which times strategies formed gradually; or
though piecemeal change, during which times some strategies changed and
others remained constant; there were periods of continuity, in which established
strategy remained unchanged; and also periods of flux, in which strategies did
change but in no very clear direction. Mintzbergs work seems to suggest that
this is so: transformational change tends to occur at times of crisis in
organisations, typically when performance has declined significantly.
Intended and realised strategies
Conceiving of organizations strategies in terms of such patterns of change
means it is important to be careful about just what is meant by strategy.
Typically, strategy is written about as though it is developed by managers in an
intended, planned fashion. Strategy is conceived of as being formulated,
perhaps through some planning process, resulting in a clear expression of
strategic direction, the implementation of which is also planned in terms of
resource allocation, structure, and so on. The strategy then comes about, or is
realised in actuality. In this way, strategy is conceived of as a deliberate,
systematic process of development and implementation (route 1 in Figure 1).
This is broadly the framework adopted in this book because it is a convenient
way of thinking through the issues relating to strategy. However, it does not
necessarily explain how strategies are actually realised. It has to be said that
such evidence as exists about the effectiveness of planning systems suggests
that in many organisations that have them, and which attempt to formulate
strategies in such systematic ways, the intended strategies do not become
realised; or only part of what is intended comes about. In effect, much of what
30

Strategic Management

is intended follows route 2 in Figure 1 and becomes unrealised: that is,


statements of strategy which do not come about in practice

Figure 1.5.1 Strategy Development Routes


1.6 COMPETITIVE SCOPE
INTRODUCTION
Business strategies are the courses of action adopted by an organization for
each of its businesses separately, to serve identified customer groups and
provide value to the customer by satisfaction of their needs. In the process, the
organization uses its competencies to gain, sustain and enhance its strategic or
competitive advantage.
Michael E. Porter is credited with extensive pioneering work in the area of
business strategies, what he calls competitive strategies. His writings are
focused on industry analysis, competitive dynamics and competitive strategies.
The dynamic factors that determine the choice of a competitive strategy,
according to Porter, are two, namely, the industry structure and the positioning
of the firm in the industry.
Industry Structure
According to Michael E. Porter industry structure is determined by the
competitive forces. These forces are five in number: The threat of new entrants;
bargaining power of supplier; bargaining power of buyer; threat of substitutes;
rivalry among the existing competition in the industry.
Positioning of Firm Industry
The second factor that determines the choice of competitive strategy of a firm is
its positioning within the industry. Porter considers positioning as the overall
approach of the firm towards competing. It is designed to gain a sustainable
competitive advantage (SCA) and it is based on two variables:
Competitive Advantage
Cooperative Scope
31

Strategic Management

Competitive Advantage can arise due to two factors: lower cost and
differentiation.
Cooperative Scope can be in terms of two factors: broad and narrow target.
In order to understand competitive positioning, we can visualize situation in
which affirm has to compete in the market with other rival firms. One type of
positioning approach may be of offering mass-produced products, distributed
through mass-marketing, thereby resulting in lower cost per unit. The other
type of positioning approach could be relatively higher-priced products of a
limited variety, but intensely focused on identified customer groups who are
willing to pay the higher price. These are produced through batch production
and marketed through a specialized distribution channels. What the firm does is
to differentiate its products or services on some tangible basis from what its
rivals have to offer so that the customer purchases the product even at a
premium.
What these above approaches show is that there is an overall approach to
competing within an industry, adopted consciously by an organization. These
approaches are termed as the two generic type s of competitive advantage that
an organization could plan for: the lower-cost approach and the differentiation
approach. According to Porter, lower-cost is based on the competence of an
organization to design, produce and market a comparable product, more
efficiently than its competitors. Differentiation is the competence of the firm to
provide unique and superior value to the buyer in terms of product quality,
special features or after-sale service.
Other Characteristics of Competitive Advantage
Substantiality
Is it substantial enough to make a difference?
Sustainability
Can it be neutralized by competitors quickly?
Ability to be leveraged into visible business attributes that will
influence customers
(Source: Strategic Marketing Management, Aakers)
Competitive Scope
Apart from competitive advantage, the other factor competitive Scope which
Porter defines as the breadth of an organizations target within its industry. By
the breadth of an organizations target is meant the range of the products,
distribution channels, types of buyers, the geographic areas served and the array
of related industries in which the firm would also compete. The basic reason
why competitive scope is important is that industries are segmented, have
differing needs and that require different sets of competencies and strategies to
satisfy the needs of the customers.

32

Strategic Management

In order to understand competitive scope, again one could visualise an


organization competing in a market with other rival firms. Here the firm can
choose a range of products to offer, the customers groups to cater to, the
distribution channels to employ and the geographical areas to serve. Depending
on the scale of an organizations operations, we could say that the firm can
either adopt abroad target approach or a narrow target approach. Under broad
targeting, the firm can offer a full range of products/ services to a wide range of
customer groups located in widely-scattered geographical area. Under narrow
targeting, the firm can choose to offer a limited range of products/ services to a
few customer groups.
1.7 CORPORATE VALUE CHAIN ANALYSIS
LEARNING OUTCOMES
Value Chain Analysis
Outsourcing is becoming a standard business practice in every facet of business
operations. This trend enhances the usefulness of the value chain approach in
strategic analysis. We have simplified our treatment of this useful conceptual
framework and added several contemporary examples to enable students to
quickly incorporate the value chain perspective into their strategic thinking
process.
INTRODUCTION
Each corporation has its own internal value chain of activities. See FIGURE
1.7.1 for an example of its corporate value chain. Porter proposes that a
manufacturing firms primary activities usually begins with inbound logistics
(raw materials handling and warehousing), go through an operations process in
which a product is manufactured, and continue on to outbound logistics
(warehousing and distribution), marketing and sales, and finally to serve
(installation, repair, and sale of parts). Several support activities, such as
procurement (purchase), technology development (R&D), human resource
management, and firm infrastructure (accounting, finance, strategic planning),
ensure that the primary value-chain activities operate effectively and
efficiently. Each of companys product lines has its own distinctive value chain.
Because most corporations make several different products or services, an
internal analysis of the firm involves analyzing a series of different value
chains.
Internal Analysis
1.7.1 Introduction and Definition of Porters Value Chain
Internal organisation can affect the cost and even the feasibility of some
strategies. There must be a 'fit' between a strategy and the elements of an
organisation. If the strategy does not fit well, it might be expensive, or even
impossible, to make it work. This related to the Resource-Based view of the
firm supported by Grant 1995.
1.7.2 The value chain can be defined as a framework to differentiate the valueadding activities in an organisation. It comprises primary and support
33

Strategic Management

activities.
1.7.3 Importance of value chain analysis is that it provides a frame-work for
identifying or developing a distinctive competence.
1.7.4 Explanation
Two Basic Strategies:
To be a lower-cost producer than competitors
To differentiate products and services from competitors
Each of the activities can be considered as adding value to an
organisations products.
For example: the activity of operations in a car assembly plant. While the
separate components do have a value in that they can be sold and bought as
individual items, as engines, wheels, etc., but when they are assembled into a
complete vehicle then they have added value to customers far in excess of the
individual parts. The value chain can best be described by use of a diagram as
follows:

Corporate Value Chain

Figure 1.7.1 Corporate Value Chain


An organisations value chain consists of nine interrelated activities that
collectively describe everything it does.
The five primary activities consist of the activities performed in order to
create, market, and deliver products and services to customers and also to
provide post-sales services and support.

34

Strategic Management

1.7.5 The primary activities:

The Value Chain


Primary Activities
Inbound
Logistics: receiving and
Storing materials for
Distribution to
production

Marketing
and Sales:
Include promoting
and selling the firms
products

Operations: Transforms
Inputs into finished
products

Outbound
Logistics:
Storing and
Distributing finished
products

Service: Maintenance and


Repairs of the firms
products

Figure 1.7.2 Value Chain Primary Activities


Inbound logistics: - these deal with the delivery, movement and handling of
raw materials from suppliers;
Operations: - transformational activities which create end products from raw
materials, inputs and
Outbound logistics: - refers to the processes which transfer products to
distribution channels;
Marketing/sales: - includes such activities as advertising, promotion, product
mix, pricing, working with buyers and wholesalers, and sales force issues;
Service: - customer service issues include warranty, repair, installation,
customer support, product adjustment and modification.
Primary activities are directly related to the flow of product to the customer and
include five sub-activities as listed above.
1.7.6 The support activities:
The four support activities in the value chain make it possible for the primary
activities to be performed efficiently and effectively. Support activities are
provided to sustain primary activities. These consist of:
Firm infrastructure: - accounting, finance, planning, general management,
legal support and managing government relations.
Human resource management: - recruitment, selection and training,
developing, appraising and compensating employees.
Technology development: - research & development, product design, process
design, equipment design and servicing procedures.
Procurement: - purchasing fixed assets such as machinery and equipments etc.
35

Strategic Management

The Value Chain


Support Activities

Infrastructure

Technology

Human
Resources

Purchasing

Figure 1.7.3 Value Chain Support Activities

The Value Chain


Support Activities
Infrastructure: Admin and
management

Technology:
Improving products and
Production process

Human
Resources: employee
Recruitment, hiring
And, training

Purchasing: Purchasing
inputs

Figure 1.7.4 Support Activities


The Value System
36

Strategic Management

The value chain concept can be extended by recognizing that


organisations must interact with suppliers, distributors, and customers.
An organisations value chain and the value chains of its suppliers,
distributors, and customers collectively form a value system.

The Value System

Suppliers
Value Chain

Companys
Value Chain

Distribution
Systems
Value Chain

Buyers
Value Chain

Figure 1.7.5 Value System


Firms achieve competitive advantage when they provide more value to their
customers or when they provide the same value to their customers at lower
price.
An information system could have a strategic impact if it helps the firm
provide products or services at lower price.
Michael E. Porter: "The Value Chain and Competitive Advantage,"
Competitive Advantage, Chapter 2. New York: The Free Press (1985). What
Is Strategy? Harvard Business Review (November December 1996) Pages
61-78
1.7.6 Summary
Leveraging technology in the value chain - At the business level the most
common analytical chain is the value chain analysis. The value chain model
highlights specific activities in the business where competitive strategies can
best be applied (Porter), and where information systems are most likely to have
a strategic impact. The value chain model identifies specific, critical leverage
points where a firm can use. The ultimate goal of any business is to provide
value to its customers. A business will be profitable if the value it creates is
greater than the cost of producing its products or services.

37

Strategic Management

Chapter I: Introduction to Strategic Management


Multiple Choice Quiz:
Q1. Which one of them is not dealt in the topic Introduction to
strategic management?
(a) Strategic Decision-Making
(b) Value System
(c) Igor Ansoffs definition of strategy
(d) Strategic Management Process
Q.2 The value chain is subdivided into two main headings.
These are primary activities and:
(a) Peripheral activities
(b) Support activities
(c) Secondary activities
(d) Outsourced activities
Q.3 In the value chain, primary activities are:
(a) Directly involved in the production, marketing and delivery of the product
or service
(b) Those activities those are all undertaken in-house.
(c) Those activities that support the production, marketing and delivery of the
product or service
(d) Directly involved in the production and delivery of the product or service
Q.4 The 'operations' in a passenger airline service would be:
(a) The manufacture of the aircraft
(b) Getting passengers and baggage from A to B by means of flying in an
aircraft
(c) The design of the price structure and yield plan
(d) Selling the tickets to passengers
Q.5 In the case where an organization acquires its supplier,
this is an example of:
(a) Horizontal integration
(b) Forwards vertical integration
(c) Backwards vertical integration
(d) Downstream vertical integration
Q.6 Typically profits are highest in which stage of the industry
life-cycle?
(a) Introduction
38

Strategic Management

(b) Growth
(c) Maturity
(d) Decline
Q.7 Strategy implementation and formulation is a challenging,
on-going process. To be effective, it should involve
(a) The board of directors, CEO, and CFO.
(b) Line and staff managers
(c) The CEO and the board of directors.
(d) All of the above.
Q.8 An independent group of suppliers, such as farmers,
gather to form a cooperative in order to sell their products to
buyers directly, replacing their previous distributor. This is an
example of
(a) Forward integration.
(b) Backward integration.
(c) Threat of substitute products.
(d) Threat of entry.
Q.9 When a firm's corporate office helps subsidiaries make
wise choices in their own acquisitions, divestures, and new
ventures, it is called___________
(a) Restructuring
(b) Leveraging core competencies
(c) Uncreasing market power
(d) Parenting
Q.10 Value chain analysis is an effective tool for ________
(a) External Analysis
(b) Internal Analysis
(c) Near shore Analysis
(d) Outshore Analysis

39

Strategic Management

MODULE II
2.1 Vision, Mission and Business Definition
2.2 Environmental Threat and Opportunity Profile (ETOP)
2.3 Strategic Advantage Profile (SAP)
2.4 Industry Analysis
2.5 Competitor Analysis
2.6 Market Analysis
2.7 Environmental Analysis and Dealing with Uncertainty
2.8 Scenario Analysis
2.9 SWOT Analysis

Chapter 2: STRATEGIC ANALYSIS


2.0

Introduction

Learning Outcomes
Upon Completion of this chapter, you will be able to answer the following
questions: How do business environment in view of uncertainties impact our
daily lives?
1.

How external analysis influences strategy?

2.

What are the key components Competitor analyses?

3.

Competitors should be analyzed along several dimensions, including


their size, growth and profitability, image, objectives, business
strategies, organizational culture, cost structure, and strengths and
weaknesses.

4.

Market analysis should assess attractiveness of a market, as well as its


structure and dynamics.

5.

Market trends will affect both the profitability of strategies and key
success factors.

6.

Role of Vision and Mission in defining purpose of the organization.

40

Strategic Management

2.1.1 VISION
2.1.2 MISSION
2.1.3 BUSINESS DEFINITION
LEARNING OUTCOMES
By the end of this learning unit you will be able to apply your
understanding of the following concepts:
The definitions of a vision, mission
and strategic intent, the roles of
vision and mission for the venture
How each influences the strategies chosen
1.

What Is A Vision?

Vision refers to the picture (in the mind) of the future state of affairs of the
venture. It answers the question of what results should be there in say 5 years
from now.
Vision helps to guide the venture as it gives direction for where to go. It could
include hard issues (like an automated production line) or soft issues (like well
trained artisans) for the company. Vision should be results oriented. Vision is
also sometimes referred to as the end goal of the venture as it gives direction
to where the focus must be.
VISION
Mental picture of a

A strategic vision is a

future state of affairs

companys future business path:


-

Where we are going

Markets to be pursued

Future product, market,


customer, technology focus

Kind of company
management is trying to
create
41

Strategic Management

Figure 2.1.1 Vision


Vision is:
Broad category of long term intentions
All inclusive, and futuristic
Aspirations that the organisation holds for future
NTPC To be one of the worlds largest and best power utilities,
powering Indias growth
Hamal and Prahalad on Vision
A broader strategic intent might drive organisations and people to
seek/deploy additional resources to achieve stated intent, which would
have been otherwise dismissed as beyond the capabilities of the
organisation
Strategic intent top management is specific about the ends but leaves
room for the employees with respect to the means
Good vision statement is a dream that is shared across the entire
organisation
Vision defines the desired or intended future state of an organization or
enterprise in terms of its fundamental objective and/or strategic direction.
Vision is a long term view, sometimes describing how the organization would
like the world in which it operates to be.
For example a charity working with the poor might have a vision statement
which read "A world without poverty"
It is sometimes used to set out a 'picture' of the organization in the future. A
vision statement provides inspiration, the basis for all the organization's
planning. It could answer the question: "Where do we want to go?"
Aspirations, expressed as strategic intent, should lead to tangible results;
otherwise they would be just castles in the air. Those results are the realization
of vision of an organization or individual. It is what ultimately the firm or a
person would like to become. For instance, some of you, say in 10 years may
be even earlier, would like to become general managers of managing a SBU in
a large , diversified multinational corporation. Or some others among you
would like to believe that you can be entrepreneur owning your own company
dealing with IT services, employing cutting-edge technology to serve global
clientele in 10 15 years. A firm thinks like that too. Vision, therefore,
articulates the positions that a firm would like to attain in the distant future.
Seen from this perspective, the vision encapsulates the basic strategic intent.

42

Strategic Management

CORPORATE VISION
Corporate vision is a short, succinct, and inspiring statement of what the
organization intends to become and to achieve at some point in the future, often
stated in competitive terms. Vision refers to the category of intentions that are
broad, all-inclusive and forward-thinking. It is the image that a business must
have of its goals before it sets out to reach them. It describes aspirations for the
future, without specifying the means that will be used to achieve those desired
ends.
Warren Bennis, a noted writer on leadership, says: "To choose a direction, an
executive must have developed a mental image of the possible and desirable
future state of the organization.
This image, which we call a vision, may be as vague as a dream or as precise as
a goal or a mission statement."
Broad category of long term intentions
All inclusive, and futuristic
Aspirations that the organisation holds for future
THE NATURE OF VISION
Vision is dreamt of more than it is articulated. This is the reason why it
is difficult to say what vision an organization has unless it is stated
explicitly. Sometimes, it is not even evident to the entrepreneur who
usually thinks of the vision. By nature it could be hazy and vague, like a
dream that one experienced the previous night and is not able to
perfectly recall in a broad daylight. Yet it is a powerful motivator to
action.
Often, it is from the actions that the vision could be derived. Henry Ford
wished to democratize the automobile when he visualised thatn affordable
vehicle must be available for the masses. Jamshetji Tata dreamt of a self-reliant
India in steel making. Narayana Murthy wants to demonstrate that running a
business is legally and ethically possible in India through entrepreneurship.
The first step to be accomplished following the profile phase is to articulate the
Vision or dream for a company. Questions to be addressed include:
What kind of company do we want to be?
What culture and values do we want to foster?
What share of the market and industry position should we achieve?

43

Strategic Management

A VISION STATEMENT
Vision of ITC: Sustain ITCs position as one of Indias most valuable
corporations through world class performance, creating growing value
for the Indian economy and the Companys stakeholders.
A Vision statement outlines what the organization wants to be, or how it
wants the world in which it operates to be. It concentrates on the future.
It is a source of inspiration. It provides clear decision-making criteria
What a vision should be and shouldnt be
A vision should be:
An organizational charter of core values and principles.
The ultimate source of our priorities
The puller (not pusher) into the future
A determination and publication of what makes us unique
A declaration of independence
A vision shouldnt be:
A high concept statement, motto, or literature or an advertising solution
A strategy or plan and view from the top
A history of our proud past
A soft business issue
Passionless
Source: Adopted from Lucas, J.R., Anatomy of a vision statement
Management Review Feb 1998
2.1.2 Mission

Mission Statement

Setting Objectives & Goals


A statement of purpose (strategic intent)
committing the organization to ambitious
overarching (stretch) objectives.
Provides a sense of direction and
purpose.
Drives strategic decision making and
resource allocations.
Forces the seeking of significant
performance improvements to attain
objectives

Customer Orientation and Business


Definition
Abells Framework for Defining the
business
Consumer-oriented
versus Product-oriented business
definition

Ronaldo Parente

Chapter 1
Wheelen & Hunger 10ed

Figure 2.1.2 Mission


44

Strategic Management

What Is A Mission?
Mission is a part of strategy formulation.
Mission answers the question to why you are pursuing the business. To
make a profit is not good enough reason (as a mission statement) as all
ventures have it as a goal and therefore it does not distinguish your venture
from that of the competition.
Can anyone describe the business mission?
A mission statement is a formal description of the mission of a business.
Organizational mission refers to a long-term commitment to a type of business
and a place in the market.
1. It can be expressed in terms of the customer group(s) served, the goods
and services offered, the functions performed, and/or the technologies
utilized.
2. It is considered implicitly when a company seeks a new customer group
or abandons an existing one, introduces a new product category or
deletes an old one, acquires another company or sells one of its own
businesses, performs more (or fewer) marketing functions, or shifts its
technological focus.
Definition of the organizational mission refers to a long-term commitment to a
type of business and a place in the market. It describes the scope of the firm
and its dominant emphasis and values, based on a firms history, current
management preferences, resources, and distinctive competence, and on
environmental factors.

Figure 2.1.3 Business Mission


DEFINING MISSION
Thomson essential purpose of the organization, concerning particularly why
it is in existence, the nature of business (es) it is in and the customers it seeks to
serve and satisfy. Hunger and Wheelen: is the purpose or reason for
the organizations existence
Mintzberg defines Mission: A mission describes the organizations basic
function in society, in terms
45

Strategic Management

MISSION

Why are we doing

The mission statement of a

What we do?

company focuses on its present


business purpose who we are

Reasons for

and what we do.

existence
(purpose)

Current product and service


offerings

Customer needs being


served

Technological and business


capabilities

Figure 2.1.4 Mission Definition


Thomson essential purpose of the organization, concerning particularly why
it is in existence, the nature of business (es) it is in and the customers it seeks to
serve and satisfy. Hunger and Wheelen: is the purpose or reason for
the organizations existence
Figure 1.1.4 Definition of Mission
Elements of Mission:
A Purpose
A Strategy and Strategic Scope
Policies and Standards of Behavior
Values and Culture
Mission is at the top of goal hierarchy. Mission is the organizations reason for
existence and often reveals corporate philosophy and purpose. Mission
describes organizational values, aspirations and is the basis for development for
46

Strategic Management

subsequent goals and plans. A formal mission statement is a broadly stated


definition of basic business scope and operations that distinguishes the
organization from others. Mission statement often focuses on customers,
market and business.
Mission is shaped by History
Resources determine possibilities
Mission should be based on distinctive competencies
Broad purposes of the organization
General criteria for assessing the long-term organizational effectiveness
Driven by heritage & environment
Mission statements are increasingly being developed at the SBU level
as well Defines scope of corporate activity in terms of culture, vision
and values
An organizations mission is the purpose or reason for the organizations
existence. It tells what the company is providing to society service or a
product. Mission statement clearly specifies the purpose of the organization.
Mission statement describes what the organization is now and what it would
like to become. It tells who we are and what we do as well as what we would
like to become. Therefore, mission of business provides statement to insiders
and outsiders of what the company stands for.
While the essence of a vision is forward looking view of what an organization
wishes to become, mission is what an organization is and why it exists. Several
years ago, Peter F. Drucker raised important philosophical questions related to
business:
What is our business?
What will it be?
What it should be?
These three questions though simply worded, are in reality, the most
fundamental questions that any organization can put it to itself. The answers are
based on an analysis of the underlying need of the society that any organization
strives to fulfill. The satisfaction of that need is, then the business of the
organization.
Mission statement expresses their purpose and can therefore be a brief
statement. It also links with the idea of Vision
What is the basic purpose of your organization?
What is unique about your organization?
What is likely to be different about your business five years down the
line?
What is in your company that will make it stand in a crowd?
47

Strategic Management

Who are, and who should be, your customers?


What are the basic beliefs, values and philosophical priorities of your
organization?
UNDERSTANDING MISSION
Organizations relate their existence to satisfying a particular need of the
society. They do so in terms of their mission. Mission is a statement which
defines the role that an organization plays in the society. It refers to the
particular needs of the society, for instance, its information needs. A book
publisher and a magazine editor are both engaged in satisfying the information
needs of the society, but they do it through different means. A book publisher
may aim at producing excellent reading material while a magazine editor may
strive to present news analysis in a balanced and unbiased manner. Both have
different objectives but an identical mission.
MISSION STATEMENTS
Makes vision more tangible and comprehensible
Why the organisation exists and what differentiates it from others?
Mission statement also explains the anticipated state of external
environment for the firm namely macroeconomic environment,
regulation, market dynamics, competitive forces, and changes in the
customer tastes and preferences.
Some examples of mission statements
Mission and Vision of Samsung Electronics
Vision of SAMSUNG Electronics is Leading the Digital Convergence
Revolution and their mission to carry out this vision is Digital-e
Company. There are two parts of being a Digital- e Company, and the
first is clearly about being Digital producing not just digital products,
but products that inspire digital integration across our entire company.
The second part of being a e is to use e-Processes connecting R&D,
production, and marketing to customers, partners, and the marketdisciplined approach is the way we bring value to every part of our
supply chain, including products data to and customer relationship
through Enterprise Resource Planning (ERP)
Mission of Lands End
Lands End, a leading international direct merchant of traditionally
styled, casual clothing for men, women, and children, as well as soft
luggage and products for the home, offers products through regular
mailings of its primary and specialty catalogs and via the Internet. It is
known for providing products of exceptional quality at prices
representing honest value, enhanced by a commitment to excellence in
customer service.

48

Strategic Management

Mission of Coca-Cola
Coca-Colas mission is to maximize shareholder value over time. It
creates value by a strategy guided by six beliefs:
Consumer demand drives everything it does.
Brand Coca-Cola is the core of its business
It will serve consumers a broad selection of non-alcoholic ready-todrink beverages
It will do excellent job marketing
It will think and act locally
It will lead as a model corporate citizen.
Mission of Holiday break plc
Holiday break is the UKs leading operator of specialist holiday businesses.
Group companies retain a distinctive identity whilst sharing expertise and
exploiting opportunities in areas of common interest. Our aim is to achieve
continuing profitable growth by developing our existing businesses and market
leading brands in the UK and European holiday markets and through
acquisitions within the travel sector.
Mission of Motorola
The purpose of our Motorola is to honourably serve the needs of the
community by providing products and services of superior quality at a fair price
to our customers; to do this so as to earn an adequate profit which is required
for the total enterprise to grow; and by so doing provide the opportunity for our
employees and shareholders to achieve their reasonable personal objectives
Mission of Avis car hire mission was simply we try harder
Mission of ONGC Ltd to be a world-class Oil and Gas company integrated
in energy business with dominant Indian leadership and global presence.
Mission of Nirma Ltd Indian FMCG Company Nirma is customer-focused
company, committed to consistently offer better quality products and services
that maximize value to the customer.
Mission of Maytag Corporation To improve the quality of home life by
designing, building, marketing, and servicing the best appliances in the world.
NOTE:
Over time the mission may change, to take advantage of new opportunities or
to respond to new market conditions. Example: Amazon.com changed its
mission from being the worlds largest online bookstore to become worlds
largest online store. eBay changed its mission from running online auctions for
collectors to running online auctions covering all kinds of goods.
GOOD MISSION HARACTERISTICS
Three major characteristics:
49

Strategic Management

First Focus on limited number of Goals.


The statement: We want to produce the highest quality products, offer the
most service, achieve the widest distribution, and sell at the lowest prices
claims too much.
Second Mission statements stresses the companys major policies and values.
They narrow the range of individual discretion so that the employees act
consistently on important issues.
Third They define the major competitive spheres within which company will
operate. Industry:
The range of industries in which company will operate
DuPont prefers to operate in the industrial market
Dow Chemicals in industrial and consumer market
3M will get into almost any industry where it can make money
Products and Applications:
The range of products and Applications Company will supply.
St. Jude Medical claims to Serve Physicians world-wide with high-quality
products for cardiovascular care
MISSION STATEMENT COMPONENTS
Three components of mission statement:
The needs to be served by the company
The targeted customer group
How the company will provide products/service
Source: From John A. Pearce II and F. R. David, Corporate Mission
Statements: The Bottom Line, Academy of Management Executive, May 1987.
Reprinted with permission
SUMMARY
Organizations develop mission statements to share with managers, employees,
and (in many cases) customers. A clear thoughtful mission statement provides
employees with a shared sense of purpose, direction, and opportunity. The
statement guides geographically dispersed employees to work independently
yet collectively towards realizing the organizational goals.
Mission statements are at their best when they reflect a vision an almost
impossible dream that provides a direction for the company for the next 10 to
20 years.
Sonys former President, Akio Morita wanted everyone to have access to
personal portable sound, so his company created the Walkman and portable
CD player. Fred smith wanted to deliver mail anywhere in the United States
before 10:20 am the next day so he created FedEx built core competencies in
computing, communications and, components to support production of laptop
50

Strategic Management

computers, television receivers, and handheld telephones.


Once you understand the environment you have to:
Create a vision of where you want to go
Understand why you would like to go there (purpose)
Find the key things you must do right to successfully reach your vision
2.1.3 Business Definition
Business Definition
Companies often define their businesses in terms of products:
They are in auto business or the clothing business
But according to Levitt argues that market definitions of business are superior
to product definitions.
A business must be viewed as customer - satisfying process, and not a goodsproducing process.
Products are transient hence we look for something else to define business
On the basis of Basic needs
Basic needs and customer groups endure forever.
Transportation is a need: horse and carriage, the automobile, the railroad, the
airline, and the truck are products that meet that need.
Levitt encouraged companies to redefine their businesses in terms of needs and
not products.
IBM redefined itself as from hardware and software manufacture to a builder
of networks
Peter Drucker &Theodore Levitt were the first to agitate this issue and
emphasized need to clarify issues like
Ultimate purpose and what do we want to become?
What kind and what pace of growth?
Need to understand current business in its broadest connotation
Who is our customer?
Whom do we intend to serve? What human needs?
What brings us to this business?
What is the nature of the business in future?
In what business would we like to be in future?
Defining the Business
Examples highlight the difference between target market definition and
strategic market definition
51

Strategic Management

A target market definition tends to focus on selling product or service


Pepsi could define its target market as anyone who drinks a cola beverage and
competitors could therefore be other cola companies
A strategic market definition could be anyone who might drink
something to quench his or thirst. Suddenly, Pepsis competition would
then include non-cola soft drinks, bottled water, fruit juices, tea, and
coffee. To better compete, Pepsi might decide to sell additional
beverages whose growth rate appears to be promising.
Business can be defined in terms of three dimensions:
Customer groups
Customer needs and,
Technology
Consider a small company that defines its business as designing incandescent
lighting systems for television studios.
Its customer Groups Television studios
Customer need Lighting
Technology - Incandescent lighting
The company would like to expand.
It could make lighting for other customer groups Homes, factories,
and offices:
Or it could supply other services needed by television studios, such as
heating, ventilation, or air-conditioning.
It could design other lighting technologies for television studios, such as
infrared or ultraviolet lighting.

Dimensions of Business Definition


by Derek Abell to Define the Business Along 3 Dimensions

Customer Functions
What need is
being satisfied?

Two Companies in the


Time keeping Business

Customer Groups
Who is being satisfied?
Group

Lady

Function Fashionable

Alternate Technologies
Accessory
How the need
Alt. Tech Quartz
Is krishnamoorthy
satisfied?
Digital
Bala
Management Practice MBA 2007Shreekant Limaye

Industrial
Recording
Time
Mechanical

2009

Figure 2.1.5 Dimensions of Business definition


52

Strategic Management

Summary
Once you understand the environment you have to:
Create a vision of where you want to go
Understand why you would like to go there (purpose)
Find the key things you must do right to successfully reach your vision
CHECK AGAINST LEARNING OUTCOMES
I completely understand the following outcomes and will be able to apply
them in the work environment:
No.

Outcome

1.

The definitions of a vision, mission and strategic intent

2.

The roles of vision and mission for the venture

3.

How each influences the strategies chosen

Yes

No

2.2 ENVIRONMENT ANALYSIS, ENVIRONMENT THREAT AND


OPPORTUNITY PROFILE (ETOP), 2.3 STRATEGIC ADVANTAGE
PROFILE (SAP)
2.2 Business Environment Analysis & ETOP
BACKGROUND
Environmental analysis is a systematic process that starts from identification of
environmental factors, assessing their nature and impact, auditing them to find
their impact to the business, and making various profiles for positioning.
A common process of environmental analysis or scanning is discussed in
the following section.
Environmental Analysis Process
A business manager should be able to analyze the environment to grasp
opportunities or face the threats. Organizations need to build strength and
repair their weakness available in the business environment. Therefore, this
process consists not only a single steps but a process of various steps.
Environmental analysis comprises scanning, monitoring, analyzing, and
forecasting the business situation.
Scanning is to get the relevant information from the information overload. It is
to focus on the most relevant information.
Monitoring is to check the nature of the environmental factors.
Analyzing requires data collection and use of different required tools and
techniques.
Forecasting is to find the future possibilities based on the past results and
present scenario.
53

Strategic Management

Environmental analysis process is not static but a dynamic process. It may


differ depending on the situation. However, a general process with few
common steps can be identified as the process of environmental analysis
these are:
a) Monitoring or identifying environmental factors, b) Scanning and
selecting the relevant factors and grouping them, c) Defining variables for
analysis, d) Using different methods, tools, and techniques for analysis, e)
Analyzing environmental factors and forecasting, f) Designing profiles, and g)
Strategic positioning and writing a report. Brief discussion is made on each of
the step of this environmental analysis process.

HOW DO YOU DO AN EXTERNAL ANALYSIS?


General
Environment
Technological

An
Organizations
External
Environment
Figure 3-4

Substitute
Products

Economic

Specific Environment
Industry-Competitors

Organization

Bargaining
Power of
Suppliers Bargaining
Political-Legal
Power of
Buyers

Current
Rivalry

Potential
Entrants
Demographic

Sociocultural

Prentice Hall, 2002

End Show

3 - 10

Identifying environmental factors


First of all a strategist should identify all the relevant factors that might
affect his or her business. In this process, one should first know what the
internal areas of the business are. This includes all the systems, internal
structure, strategies followed, and culture of the organization. All these
areas can be covered into the five functional areas in classical approach.
Similarly, a business daily interacts with the close environmental components
outside the business such as customer, competitor, and supplier. It might cover
all other stakeholders such as trade union, media, and pressure group.
Furthermore, general such business environment factors as political-legal,
economic, socio- cultural, and technological factors are to be identified.
Scanning and selecting relevant and key factors
Out of all the business environmental factors, a strategist should focus only on
the relevant factors for further analysis. All the factors are not equally important
54

Strategic Management

and affecting to the business. In this context, a strategist has to scan the
environmental trend to select only the most affecting environmental factors from
the information overload. This step paves the way of environment analysis and
forecasting.
Defining Variables for Analysis
Selected environmental factors are to be further specified into the variables. A
concept can be interpreted into different variables. For example, political
situation can be measured using few variables such as instability,
reliability, and long-term effect. Economic environment might cover many
variables such as Per Capita, GDP, and Economic policies that can be further
classified into many other variables. Variables are the basis of measurement in
environmental analysis process. Variables can be compared, grouped,
correlated, and predicted to find the clearer picture of the broader concept. It is,
therefore, necessary to define the variables first in any kind of analysis
including the environmental analysis.
Using Different Methods, Techniques, and Tools
Different types of methods, tools, and techniques are used for analysis. Some
of the major methods of analysis can be Scenario Building, Benchmarking, and
Network methods. Scenario presents overall picture of its total system with
affecting factors. Benchmarking is to find the best standard in an industry and
to compare the ones strengths and weakness with the standard. Network
method is to assess organizational systems and its outside environment to find
the strength and weakness, opportunity and threats of an organization.
Some of the techniques of primary information collection can be Delphi,
Brainstorming, Survey, and Historical enquiry.
Analysis tools can be statistical such general descriptive tools as mean, median,
mode, frequency. Tools can be inferential as ANOVA, correlation, regression,
factor, cluster, and multiple regression analysis. There are many tools of
analyzing functional areas. Finance and accounting use mostly profitability,
leverage, fund flow and other similar accounting and financial tools for
analysis.
Forecasting Environmental Factors
Collecting relevant information from the selected areas and to identify
the variables in such areas are the basics of analysis. Analyzing the past
information to predict the future is the main objective of this step. As discussed
earlier, use of different methods, techniques, and tools comes under the
analysis process. It is, therefore, a comprehensive process that analyzes
collected information using different tools and techniques.
Designing Profiles
After analyzing the environmental factors they are recorded into the profiles.
Such profiles record each component or variables into left side and their
positive, negative, or neutral indicators including their statement in the
right side. Internal areas are recorded in Strategic Advantages Profile (SAP)
55

Strategic Management

and external areas are recorded in Environmental Threat and Opportunity


Profile (ETOP). Strength, Weakness, Opportunity, and Threat (SWOT) profile
can be designed combining both of these two profiles into one.
There are varieties of reporting formats or profiles used for external and
internal business environment analysis. Environmental Threat and Opportunity
Profile (ETOP) is commonly used to report the external environmental situation
whereas Strategic Advantages Profile (SAP) to report the internal
environmental situation.
Both of these profiles can be merged into Strength- Weakness-OpportunityThreat (SWOT) profile.
David used External Factor Evaluation (EFE) Matrix to present weighted score
of external environmental factors.
Similarly, he used Internal Factor
Evaluation (IFE) Matrix to make the reporting of internal environmental audit.
(See: annex-...). Wheelen & Hunger used External Factors Analysis Summary
(EFA S) and Internal Factors Analysis Summary (IFAS).
Environmental threats and opportunities profile (ETOP) is a commonly
used profile related to external business environment. Strategic advantages
profile (SAP) is related to internal business environment. Nowadays, strength
& weakness and opportunities & threats (SWOT) profile has become very
popular. Present writing pursued the approach of reporting external and
internal business environment using the same approach.
2.2 Preparing ETOP
Environmental threat and opportunity profile is referred as ETOP profile. It
identifies the relevant environmental factors. Such factors might be general
environmental factors and task environment factors. Thereafter, it is necessary
to identify their nature. Some factors are positive to the organization whereas
others are negative. Therefore, it is necessary to find out their impact to the
organization. Positive, neutral, and negative sign in ETOP denotes the relevant
impact of environmental factors.
ETOP PROFILE BY A PASSENGER CAR FIRM IN INDIA
1. MACROENVIRONMENT
POLITICAL:
Country remains a democracy; era of coalition government
Fair amount of political stability despite the absence of single party rule
Political consensus on higher target of growth of the economy
Political consensus on economic reforms
SOCIAL ENVIRONMENT:
Burgeoning middle class
Major changes in life style
Increased urbanization
56

Strategic Management

More & more consumption orientation


Double income & nuclear family on rise
Living on credit become trend
Boom in leisure activities
Upwardly mobile social class on the rise
ECONOMIC ENVIRONMENT:
Labour situation attractive -Abundance of skilled workers, passenger car
industry and auto ancillaries well endowed with skilled workforce, wages
on the increase now, but by global standards low
TECHNOLOGICAL ENVIRONMENT:
More liberal approach to technology import
Significant efforts at internal technology development
2. MICRO ENVIRONMENT
CONSUMER / DEMAND
Increasing affluence of urban consumers
Larger consumer base
Increasing purchasing power
Changes in lifestyle support products
Changes in buying behaviour -more choosy -cars e.g. Style, comfort apart
from fuel efficiency
COMPETITION
Total change in competitive scenario
Intense competition
SUPPLIER
India -major producer of steel -raw material -no problem
LEGAL
Perceived sound by world players, hence no Foreign Direct investment
(FDI)
TECHNOLOGY
Major changes
It is in hands of world majors in the industry
Very few players have technology for small cars
THE INDUSTRY
Passenger car industry -Growth Industry (short term & medium term)
57

Strategic Management

Industry structure changing -Delicensing & Opening up of industries for


foreign investment
Gaining an expert orientation
Industry attractiveness -reasonably good in short term & medium term
OPPORTUNITY & THREAT MATRIX

OPPORTUNITY & THREAT MATRIX

IDENTIFYING THE ENVIRONMENTAL FACTORS


Environmental scanning results in mass of information related to different
sectors of the environment. Without the technique to deal with this information,
a strategist would be at a loss to comprehend and analyze the environmental
influences. A feasible approach to identify the environmental factors is to test
each factor with regard to its impact on the business of the organization and
the probability of such an impact.
Exhibit provides a matrix which can help a strategist to identify the high
priority environmental factors (termed as issues by Boulton). This is called
Impact Analysis
Environmental scanning leads to the identification of many issues that affect
the organization. These issues could be judged on the basis of the intensity of
their impact on the business of the organization and the relative probability of
such an impact.
In such a manner, environmental issues (and all the factors) could be distributed
among nine cells of the matrix. The issues which are likely to have a high level
of impact on the organizations are critical issues and need immediate attention
of the strategists. High priority issues are those which have a medium to high
probability of impact, while those currently having a high of impact but a low
probability of occurrence need to be kept under watch. All the other issues
could be considered as being of low priority but still requiring continuous
monitoring as conditions may change later. In this way, strategists could narrow
the range of environment their attention upon. These issues help in structuring
of the environmental appraisal, when divided into opportunities and threats and
allocated to different sectors of the environment.
2.3 PREPARING SAP
Strategic advantage profile is known as SAP. It shows strength and weakness of
an organization. Preparation of SAP is very similar process to the ETOP.
58

Strategic Management

There are generally five functional areas in most of the organizations. These
areas are Production or Operation, Finance or Accounting, Marketing or
Distribution, Human Resource & Corporate Planning, and Research &
Development. These functional areas are listed to identify their relative
strength and weakness in SAP. Very similar to the ETOP, positive, neutral,
and negative signs are denoted and brief description is written in SAP profile.
Each functional area is very broad having many components inside.
All these above described profiles provide a clear picture to understand
the strategic position of an organization.

59

Strategic Management

Strategic Position and Report Writing


After analysis of business environment a strategist knows the actual situation
and can make some future forecasting based on the environmental analysis.
After preparing the profiles strategists prepare formal report that describes the
business environment. The report might present issues and best strengths of
business environment in a systematic process. One can draw future strategies
based on the strategic analysis followed.
In conclusion, a strategist or a manager first identifies the relevant
environmental factors then analyzes using different tools and techniques
to find out the actual situation. This overall process is sometimes known
as SWOT analysis, environmental scanning, environmental analysis, or
monitoring-forecasting. This process is very important for a manager to make
his or her organization success by choosing the best available alternative
strategy.
2.4. INDUSTRY ANALYSIS
Conducting Industry Analysis
Seven Questions for Industry Analysis
1.

What are the industry dominant economic traits?

2.

What competitive forces are at work in the industry and how strong are
they?

3.

What are the forces of change in the industry and what impact will they
have?

4.

Which companies are in the strongest/weakest competitive position?

5.

Who is likely to make what competitive moves next?

6.

What key factors will determine success or failure?

7.

How attractive is the industry in terms of its prospects for above


average profitability?

Q1. What are the industry dominant economic traits?


Market size (Small markets dont attract big fish)
Scope of competitive rivalry
Market/industry growth rate (life cycle)

Fast growth breeds new entry; slowdowns lead to increased


competition.

Number of rivals and their size


Number of buyers and their size
Level of backward and forward integration
Technological change (rate and scope)
60

Strategic Management

Level of differentiation between firms products


Opportunities for economies of scale
Ease of entry and exit
Capital requirements
Q1: Industrys Dominant Economic Traits
Market

Size

Scope

Growth rate

Growth cycle

# & size of competitors

Distribution channels

Structure
Forward Integration
Backward Integration

Product

Differentiation

Potential for economies of scale

Learning effects

Entry / exit costs

Technological change

Q2. What competitive forces are at work in the industry and how strong
are they?
Porters Five Forces.
advantage:

Forces influencing industry and competitive

Competitive Intensity (Rivalry Among Sellers)

Barriers to Entry (Potential for New Entrants)

Bargaining Power of Suppliers

Bargaining Power of Customers

Threat of Substitute Products

Q2. What competitive forces are at work in the industry and how strong
are they?
61

Strategic Management

The rivalry among sellers

Greater the rivalry, lower the avg. profitability

What causes rivalry to be strong or weak?


# of competitors
Size / capability of competitors
Financial status of competitors
Slow growth
Cost of exit barriers
Switching costs for customers
Variability in demand

Q2. What competitive forces are at work in the industry and how strong
are they?
Potential new entrants

Barriers to entry
Economies of scale
Learning curve effects
Customer loyalty / brand preferences
Resource / investment
Access to distribution
Regulation
Patents, proprietary technology

Level of industry profits

Q2. What competitive forces are at work in the industry and how strong
are they?
The relative power of suppliers

Importance of component

Switching costs

Backward integration threats

Substitutes

The relative power of buyers

62

Switching costs

% market share / size

Strategic Management

# of suppliers

Product standardization

Potential for backward integration

Q2. What competitive forces are at work in the industry and how strong
are they?
Substitute products

Place a ceiling on prices and profits of industry

Invite comparison shopping

E.g., eyeglasses vs. contact lenses

E.g., sugar vs. artificial sweeteners

Q3. What are the forces of change in the industry and what impact will
they have?
The most dominant forces the cause the industry to change are called
driving forces
Task 1 - identify the driving forces
Task 2 - assessing their impact on the industry (few are important,
generally)
Common Driving Forces
Changes in long term industry growth rate
Changes in who buy the products and for what reason
Product innovation
Technological change
Marketing innovation
Increasing globalization
Regulatory changes
Changing societal concerns, attitudes and lifestyles
Environmental scanning
Q4. Which companies are in the strongest/weakest competitive position?
Using the strategic group mapping: two dimensional representation
according to the competitive characteristics of the competitors in the
63

Strategic Management

industry
Axes should not be correlated
Size of circles proportional to combined sales
The closer the circles, the stronger the rivalry
See http://i.i.com.com/cnwk.1d/html/b/305,1,Competitive
and http://www.quickmba.com/strategy/pest/ for more information.
Q5. Whos likely to make what competitive moves next?
In order to outmaneuver your competition you have to evaluate the
competitors future moves.
Identify competitors strategies
Evaluate who are the major players-- now
Who will be the major players
Evaluate what the major players are going to do
Q6. What key factors will determine success or failure?
Key success factors (KSF) are crucial elements that lead to success.
What are they now? What will they be?
In beer production KSF can be brewing skills
In retail apparel KSF can be low cost, superior service, superior design
In your industry, KSF=????
Q7. How attractive is the industry in terms of its prospects for above
average profitability?
Growth potential
Driving forces
Entry/exit
Stability of demand
Competitive forces
Risk and uncertainty
Competition and its impact on the industrys future

64

Strategic Management

7 Questions
1. What are the industry dominant economic traits?
2. What competitive forces are at work in the industry and how strong
are they?
3. What are the forces of change in the industry and what impact will
they have?
4. Which companies are in the strongest/weakest competitive position?
5. Who is likely to make what competitive moves next?
6. What key factors will determine success or failure?
7. How attractive is the industry in terms of its prospects for above
average profitability?
2.5 COMPETITOR ANALYSIS
Competitive analysis is the practice of analyzing the competitive environment
in which your business operates (or wishes to operate), including strengths and
weaknesses of the businesses with which you compete, strengths and
weaknesses of your own company, demographics and desires of marketplace
customers, strategies that can improve your position in the marketplace,
impediments that prevent you from entering new markets, and barriers that you
can erect to prevent others from eroding your own place in the market.
While industry analysis and strategic group analysis focus on the industry as a
whole or on subsets of firms within an industry, competitor analysis focuses on
each company with which a firm competes directly. Competitor analysis,
therefore deals with actions and reactions of individual firms within an industry
of strategic group. It becomes especially important in the oligopolistic
industries where there are a few powerful competitors and each needs to keep
track of strategic move of others.
According to Porter, the purpose of conducting competitor analysis:
Determine each competitors probable reaction to the industry and
environmental changes
Anticipate responses of each competitor to the likely strategic moves by
other firms; and
Develop a profile of the nature and success of the possible strategic
changes each competitor might undertake.
Competitive analysis starts with the identification of competitors, current and
potential. Some competitors compete more in tensely than others.
PowerBar makes an energy bar that competes most intensely with other energy
snacks (for example, Balance). However, it also competes with energy drinks
and other snacks such as candy. Although intense competitors should be
65

Strategic Management

examined most closely, all competitors are usually relevant to strategy


development.
Especially when there are many competitors, it is helpful to combine those with
similar characteristics (e.g., size and resources), strengths (e.g., brand name,
distribution), and strategies (e.g., high quality) into strategic groups. The luxury
hotel industry may be divided into hotels that offer business-oriented amenities
and hotels that are ultra plush and prestigious. These two groups might be
further divided into those that are members of chains with central reservation
systems and those that are autonomous. To develop strategy, it is important to
understand the competitors
Performance
Image and personality
Objectives
Current and past strategy
Culture
Cost structure
Strengths and weaknesses
Of special interest are the competitors strengths and weaknesses. Strategy
development often focuses on exploiting competitors weaknesses or
neutralizing or bypassing a competitors strength.
Components of Competitor Analysis
Elements of Competitive Analysis
There are several important elements of competitive analysis, each of which
need to be carefully studied if one hopes to transform competitive analysis
activities into business profitability. Major aspects of competitive analysis
include the following:
Future goals of competitor deals with question such as these: how do
our goals compare to our competitors goals? Where will emphasis be
placed in the future? What is attitude towards risk?
Current strategy of competitor deals with questions such as these: How
are we currently competing? Does this strategy support changes in the
competitive structure?
Key assumptions made by competitor deal with questions such as these:
Do we assume - The future will be volatile? Are we operating under
status quo? What assumptions does our competitor hold about the
industry and about themselves?
Capabilities of competitor deal with questions such as these: What are
our strengths and weaknesses? How do we rate compared to our
competitors?

66

Strategic Management

Based on thorough analysis of these components, a response profile can be


prepared for each competitor that can help predict their likely strategic moves,
which can be on the offensive or defensive type. The response profile can be
based on a firm asking questions such as these:
What will our competitor do in the future?
Where do we hold an advantage over our competitors?
How will this change our relationship with our competitors?
The response collected in the response profile is a vital input for the purpose of
business formulation by an organization.
Some examples: The case of two-wheeler and four-wheeler industry is
illustrative of changing scenario of competitiveness. Waiting lists for scooters
and cars were a common phenomenon prior to the 1990s, but now these
markets have become highly competitive. Another case is of the FMCG
industry, in general, where competitiveness in several sub-sectors such as soaps
and detergents, cosmetics, bakery and confectionery products, etc., has
increased by leaps and bounds. It is in such a scenario that competitor analysis
becomes relevant.
Refer back to Porter five forces analysis of the Indian paint industry and note
that the level of competition has increased. Looking at the moves and
countermoves of the two top companies, it is observed that Asian Pains
dominated the decorative pants segment of the paints industry in India with a
market share of 44 percent. Kansai Nerolac retained its market leadership in the
industrial paints segment with a 45 percent market share. Generally companies
in the Indian paints industry were attempting to create a balance among the two
segments so that they did not face extreme demand fluctuations of either of the
two segments. Kansai Nerolacs change of business strategy of refocusing on
the decorative paints segment in order to take advantage of its brand value can
be seen in this context This move constituted a competitive threat to others,
especially Asian Paints. Among the two Asian Paints was stronger in terms of
cost reduction, marketing and, distribution infrastructure and global reach.
Competitive situation has created a situation where branding, distribution and
product quality have become significant. In their effort to avoid that the paint
becomes commodity, the companies are positioning themselves as FMCG
companies trying to build brands and fulfil the role of painting solutions
consultants.
There is very less information available regarding the means adopted by
companies to keep track of their competitors. But many executives do admit
that they rely on their marketing intelligence system to collect information
regarding the probable moves by their strategic competitors. Some other
analysis undertaken by companies:
ANALYSIS OF COMPETITOR STRENGTHS AND WEAKNESSES
Once a company's universe of competitors has been defined and identified, it
can start on the process of identifying the strengths and weaknesses of those
67

Strategic Management

competitors. Abrams cautioned that many small business owners are tempted to
place undue weight on the quality of the product or service they offer (or plan
to offer, in the case of new businesses). This may be a comforting thought,
admitted Abrams, but it betrays a fundamental misunderstanding of how
business works: "The objective features of your product or service may be a
relatively small part of the competitive picture. In fact, all the components of
customer preference, including price, service, and location, are only half of the
competitive analysis. The other half of the equation is examining the internal
strength of your competitors' companies. In the long run, companies with
significant financial resources, highly motivated or creative personnel, and
other operational assets will prove to be tough, enduring competition."
There are two main questions that cut to the heart of this element of
competitive analysis: What key advantages do the competing businesses
possess in the realms of production management, marketing, service reputation,
and other aspects of business operation? What key vulnerabilities or
weaknesses do the competing firms have in these same areas?
Of course, examination of a competitor's strengths and weaknesses also
requires separating important advantages (intense customer loyalty, for
instance) and disadvantages (reputation as a polluter) from less important
advantages (a larger parking lot, perhaps) and disadvantages (older forklift
machinery). Writing in his book Developing Business Strategies, David Aaker
suggested that business owners should concentrate their analysis efforts in four
major areas:
Studying the reasons behind the successesand failuresof competitive firms
Major issues that motivate customers
Major component costs
Barriers to mobility within the industry
ANALYSIS OF INTERNAL STRENGTHS AND WEAKNESSESS
Another important element of competitive analysis is determining what your
own company's strengths and weaknesses are. What aspects of the company's
operation convey an advantage in the marketplace? Is your sales force
composed of bright, ambitious individuals? Does your company have an
advanced inventory management system in place? Do you have an employee
with a talent for advertising and/or marketing? Once a company has determined
its strengths, it can go about the process of utilizing those strengths to improve
its position in the marketplace. Conversely, an examination of internal
weaknesses (uninspired product presentation, recalcitrant work force, bad
physical location, etc.) should spur initiatives designed to address those
shortcomings.
2.6 Market Analysis
The goal of a market analysis is to determine the attractiveness of a market and
to understand its evolving opportunities and threats as they relate to the
68

Strategic Management

strengths and weaknesses of the firm.


David A. Aaker outlined the following dimensions of a market analysis:
Market size (current and future)
Market growth rate
Market profitability
Industry cost structure
Distribution channels
Market trends
Key success factors
Market Size
The size of the market can be evaluated based on present sales and on potential
sales if the use of the product were expanded. The following are some
information sources for determining market size:
government data
trade associations
financial data from major players
customer surveys
Market Growth Rate
A simple means of forecasting the market growth rate is to extrapolate
historical data into the future. While this method may provide a first-order
estimate, it does not predict important turning points. A better method is to
study growth drivers such as demographic information and sales growth in
complementary products. Such drivers serve as leading indicators that are more
accurate than simply extrapolating historical data.
Important inflection points in the market growth rate sometimes can be
predicted by constructing a product diffusion curve. The shape of the curve can
be estimated by studying the characteristics of the adoption rate of a similar
product in the past.
Ultimately, the maturity and decline stages of the product life cycle will be
reached. Some leading indicators of the decline phase include price pressure
caused by competition, a decrease in brand loyalty, and the emergence of
substitute products, market saturation, and the lack of growth drivers.
Market Profitability
While different firms in a market will have different levels of profitability, the
average profit potential for a market can be used as a guideline for knowing
how difficult it is to make money in the market. Michael Porter devised a useful
framework for evaluating the attractiveness of an industry or market. This
framework, known as Porter's five forces, identifies five factors that influence
the market profitability:
69

Strategic Management

Buyer power
Supplier power
Barriers to entry
Threat of substitute products
Rivalry among firms in the industry
Industry Cost Structure
The cost structure is important for identifying key factors for success. To this
end, Porter's value chain model is useful for determining where value is added
and for isolating the costs.
Distribution Channels
The following aspects of the distribution system are useful in a market
analysis:
Existing distribution channels - can be described by how direct they are to the
customer.
Trends and emerging channels - new channels can offer the opportunity to
develop a competitive advantage.
Access to essential unique resources
Ability to achieve economies of scale
Access to distribution channels
Technological progress
It is important to consider that key success factors may change over time,
especially as the product progresses through its life cycle.
Market Trends
Trends within the market can affect current or future strategies and assessments
of market profitability. For example, an important trend in luxury hotels is
business suites that include host of amenities, such as living room/den with a
library of books and VCR movies, internet access, well-stocked refrigerator,
and elegant furnishings.
2.7

ENVIRONMENTAL
UNCERTAINTY

ANALYSIS

AND

DEALING

WITH

Learning Outcomes:
Impact analysis involves assessing systematically the impact and
immediacy of the trends and events that underlie each strategy
uncertainty.
Scenario analysis, a vehicle to explore different assumptions about the
future, involves the creation of two to three plausible scenarios, the
development of strategy appropriate to each, the assessment of scenario
70

Strategic Management

probabilities, and the evaluation of the resulting strategies across the


scenarios.
Environmental analysis and dealing with uncertainty
Strategic uncertainty, uncertainty that has strategic implications, is a key
construct in external analysis. A typical external analysis will emerge with
dozen uncertainties. To be manageable, they need to be grouped into logical
clusters or themes. It is then useful to to assess the importance of each cluster in
order to set priorities with respect to information gathering and analysis. Impact
analysis, is described which is designed to accomplish that assessment.
Sometimes the strategic uncertainty is represented by future trend or event that
has inherent unpredictability. Information gathering and additional analysis will
not be able to reduce the uncertainty. In that case, scenario analysis can be
employed. Scenario analysis basically accepts that the uncertainty as given and
uses it to drive a description of two or more future scenarios. Strategies are then
developed for each. One outcome could be a decision to create organizational
and flexibility so that as the business context changes the strategy will adapt.
Scenario analysis will be detailed in the next section of this chapter.
IMPACT ANALYSIS ASSESSING THE IMPACT OF STRATEGIC
UNCERTAINTY
An important objective of objective external analysis is to rank the strategic
Sometimes the strategic uncertainties and decide how they are to be managed
over time. Which uncertainties merit intensive investment in information
gathering and in-depth analysis, and which merit only a low-key monitoring
effort?
The problem is that dozens of strategic uncertainties are often generated. These
strategic uncertainties can lead to an endless process of information gathering
and analysis that can absorb resources indefinitely. A publishing company may
be concerned about cable TV, lifestyle patterns, educational trends, geographic
population shifts, and printing technology. Any one of these issues involves a
host of subfields and could easily spur limitless research. For example, cable
TV might involve a variety of pay-TV concepts, suppliers, technologies, and
viewer reactions. Unless distinct priorities are established external analysis can
become descriptive, ill focused, and inefficient.
The extent to which a strategic uncertainty should be monitored and analyzed
depends on its impact and immediacy.
1. The impact of a strategic uncertainty is related to
o The extent to which involves trends or events that will impact
existing or potential SBUs.
o The importance of involved SBUs.
o The number of involved SBUs.
2. The immediacy of a strategic uncertainty is related to
o The probability that the involved trends or events will occur.
71

Strategic Management

o The time frame of the trends or events.


o The reaction time likely to be available compared with the time
required to develop and implement appropriate strategy.
Impact of a Strategic Uncertainty
Each strategic uncertainty involves potential trends or events that could have an
impact on present, proposed, and even potential strategic SBUs. For example, a
strategic uncertainty for a beer firm could be based on the future prospects of
the microbrewery market. If the beer firm has both a proposed microbrewery
entry and an imported beer positioned in the same area, trends in the
microbrewery market could have a high impact on the firm. The trend toward
natural foods may present sparkling water product line for the same firm on the
basis of strategic uncertainty.
The impact of strategic uncertainty will depend on the importance of the
impacted SBU to a firm. Some SBUs are more important than others. The
importance of the established SBUs may be indicated by their associated sales,
profits, or costs. However, such measures might need to be supplemented for
proposed or for growth SBUs for which present sales, profits, or costs may not
reflect the true value to a firm. Finally, because an information-need area may
affect several SBUs, the number of involved SBUs can also be relevant to
strategic uncertainty.
Immediacy of Strategic Uncertainties
Trends or events associated with strategic uncertainties may have a high impact
but such a low probability of occurrence that it is not worthy actively
expending resources to gather or analyze information. Similarly, if occurrence
is far in the future relative to the strategic-decision horizon, then it may not be
of little concern. Thus, the harnessing of tide energy may be so unlikely or may
occur so far in the future that it is of no concern to a utility.
2.8 SCENARIO ANALYSIS
The essence of strategy development is to be creative; to surface new, effective
strategies; and to view existing strategies from different perspectives. Most
strategic planning efforts are constrained by an existing mental model of the
business and its environment. Strategies that emerge tend to be extrapolations
of the past. How can new perspectives be introduced so that new alternatives
are generated and old ones challenged? One answer is scenario analysis, an
underused but powerful methodology. Consider the following examples:
A pharmaceutical company developed and examined scenarios based on
competitive new products. The conclusion that their investment plan
was risky led to one of the largest mergers in U.S. history.
The marketing organization of a bank analyzed scenarios based on the
future of U.S. interest rates and concluded that major geographic areas
needed to be managed differentially in order to meet goals.
An innovative European chemicals processor used alternative product
and process R&D scenario to identify contradictions in the long-range
72

Strategic Management

planning assumptions. As a result, $100million in new investment was


deferred until several competing R&D projects had played out.
A software and services company developed three possible competitor
scenarios with strategies for each. The result was the acceptance of a
strategy that was a major departure from the past.
Scenarios provide a way to deal with complex environments in which many
relevant trend and events interact with and affect one another. When a set of
micro trends and events are aggregated into one, two, or, three total scenarios
of the future environment, the analysis is more manageable.
Scenarios also help deal with uncertainty. Instead of investing in information to
reduce uncertainty, the possibility as, opposed to the certainty, of a scenario
will be accepted.
One key to scenario analysis is to have line managers conduct the analysis. The
process of developing scenarios and using those scenarios to consider new
strategies and test existing ones will change mind-sets, challenge assumptions,
create innovation options, and legitimize new directions.
For a business, scenario analysis is very helpful when it comes to making plans
for launching a new product or cultivating a new market of consumers. By
identifying various factors that could have an impact on the success of the
project, it is possible to begin creating scenarios that can help project what
could happen if certain factors were addressed in specific ways. The exercise
can often lead to anticipating and resolving issues before they ever have the
chance to undermine the project, thus enhancing the chances for success.
Investors can also make use of scenario analysis when considering various
types of investment transactions. For example, considering what would happen
to the value of a given stock if key officers left the company issuing the
options, natural disasters, or even political changes may influence the investors
course of action. If the scenarios indicate that events with a high probability of
occurring will cause the shares to increase in value, while also indicating that
less likely events would have minimal impact on the stock, there is a good
chance that the investor will move forward with the purchase.
The process of scenario analysis can be used for short-term projects as well as
long-term situations. Investors who are seeking a quick return on an investment
can utilize the strategy just as efficiently as someone who is looking for ways to
build a financial portfolio that will generate a modest but consistent return over
the years, thus creating a nest egg for retirement. The key to making the
strategy effective is making sure to consider all variables that can be reasonably
identified and follow each of the resulting scenarios to their likely conclusion.
Once that has taken place, it is possible to make an informed position in terms
of how to proceed.
As with many types of financial strategies, the value of scenario analysis is
only as good as the information that goes into the process. Failing to take into
account certain probable events increases the risk of making poor decisions,
and ultimately losing money or other resources as a result of the course chosen.
73

Strategic Management

At the same time, pursuing scenario analysis with a great deal of verifiable
detail can help make it possible to accurately project future market yields,
increase profits, and make the total returns from the project higher than they
would have been otherwise.
STEPS IN SCENARIO ANALYSIS
Identify Scenarios
It is useful to generate scenarios based on probable outcomes; optimistic,
pessimistic, and most likely.
Develop Scenarios strategies
After scenarios have been identified, the next step is to relate them to strategies
both existing strategies and new options.
Estimate Scenario Probabilities
To evaluate alternative strategies, it is useful to determine the scenario
probabilities.
Perform Regret Analysis
The final step is to compare the expected outcomes of each strategy if the
wrong scenario emerges. The expected value of each scenario can be
determined simply multiply each scenario outcome by the probability and
then add up the result.
2.9 SWOT Strength, Weakness, Opportunity, Threat Analysis
LEARNING OUTCOMES
By the end of this learning unit, you will be able to apply your
The elements of SWOT Analysis
How to apply basic SWOT Analysis
How to derive three Core strategies from the outcome
Business Environment Analysis
Identify & classify firms resources-S&W
Combine firms strength into specific capabilities
capability-may be distinctive competence

Corporate

Strategy that best exploits the firms resources


Identify resource gaps & Invest in upgrading
A SWOT analysis is a simple but powerful tool for sizing up a companys
resource capabilities and deficiencies, its market opportunities and the external
threats to its future well-being. A first-rate SWOT analysis provides the basis
for crafting a strategy that capitalizes on the companys resources, aims
squarely at a capturing the companys best opportunities, and defends against
the threats to its well-being.
It is a tool that is applied to the analysis process and helps to clarify the
74

Strategic Management

complexities of the results of all the different analyses. SWOT analysis


graphically plots the results of the external and internal analyses for a
venture. It requires a lot of research and asking questions but its benefit is
that it assists to improve understanding of where we are. It considers 4
elements namely:
Opportunities found in the external environment, are positive and
benefit the venture if pursued correctly
Threats also found externally but the may have negative effects on
the venture
Strengths are found within the venture and gives the venture a
platform to operate from
Weakness are found within the venture and are those elements
that hamper progress and pursuing opportunities.
When you are planning strategically with any companyonline or offlineit is
useful to complete an analysis that takes into account not only your own
business, but your competitors businesses and the current business environment
as well. A SWOT is one such analysis.
Completing a SWOT analysis helps you identify ways to minimize the effect of
weaknesses in your business while maximizing your strengths. Ideally, you will
match your strengths against market opportunities that result from your
competitors weaknesses or voids.

Figure 2.9.1 Environmental scan - SWOT


PERFORMING SWOT OR SITUATION ANALYSIS
In situation analysis, also known as SWOT analysis, an organization identifies
internal strengths and weaknesses, as well as external opportunities and threats.
It seeks to answer two general questions:
75

Strategic Management

Where is the firm now?


In what direction is it headed?
Situation analysis accomplishes the following:
It recognizes strengths and weaknesses relative to competitors.
It searches the environment for opportunities and threats.
It assesses an organizations ability to capitalize on opportunities
and to minimize threats.
It anticipates competitors responses to company strategies.
Situation analysis can, and should be, conducted at any point in an
organizations life. Several examples of situation analyses are provided.

Figure 2.9.2 SWOT Matrix


Strengths & Weaknesses
The analysis of the internal environment of the firm reveals its strengths and its
weaknesses which helps the firm to analyse how to turn its weaknesses in to
strengths. Firms strengths consist of its resources and capabilities that can be
useful in developing its competitive advantage over its competitors. Some of the
examples of firms strengths are Its access to high grade natural resources,
strong brand name, strong distribution network, brand name, patents, strong
information network, etc.
Firms weaknesses are absence of certain strengths which is the necessity for its
business to fight competition. Some of the examples of it are poor reputation
among customers, lack of access to natural resources, lack of coordination with
the suppliers and distributors, dissatisfied employees, demotivated marketing
staff, etc.
Opportunities & Threats
The analysis of the external environment reveals to the firm the opportunities
available for it in the market and what are the threats it is facing, which helps it
76

Strategic Management

analyse the various strategies what to select. Some of the examples of


opportunities are arrival of new technology, removal of some trade barriers or
government regulations, an unfulfilled customer need, etc.
The changes that take place regularly in the external environment gives rise to
certain threats to the business like shift in consumer tastes, new regulations,
increased trade barriers.
Now the firm has to identify the best fit between its strengths and the
opportunities available and try to overcome its weaknesses and ready to face the
challenges / threats.
Strength Opportunities strategies: pursue those opportunities which best fit
Companies strengths
Weaknesses opportunities strategies: pursue opportunities to overcome
weaknesses
Strengths Threats strategies: identify ways through which firm can use its
strength to reduce the degree of external threats
Weaknesses Threats: Establish a defensive plan to prevent the firms
weaknesses from making it highly susceptible to external threats
Basic SWOT
You can develop a basic SWOT analysis in a brainstorming session with
members of your company, or by yourself if you are a one-person shop. To
begin a basic SWOT analysis, create a four-cell grid or four lists, one for each
SWOT component:
Then, begin filling in the lists.
Strengths - Think about what your company does well. What makes you stand
out from your competitors?
What advantages do you have over other businesses?
Weaknesses - List the areas that are a struggle. What do your customers
complain about? What are the unmet needs of your sales force?
Opportunities - Try to uncover areas where your strengths are not being fully
utilized. Are there emerging trends that fit with your companys strengths? Is
there a product/service area that you could do well in but are not yet competing?
Threats - Look both inside and outside of your company for things that could
damage your business. Internally, do you have financial, development, or other
problems? Externally, are your competitors becoming stronger, are there
emerging trends that amplify one of your weaknesses, or do you see other
threats to your companys success?
Advanced SWOT
A more in-depth SWOT analysis can help you better understand your
companys competitive situation. One way to improve upon the basic SWOT is
to include more detailed competitor information in the analysis.
77

Strategic Management

You can note the internet-related activities such as trade organization


participation, search engine inclusion, and outside links to the sites. This will
better help you spot opportunities for and threats to your company.
You can also take a closer look at the business environment. Often,
opportunities arise as a result of a changing business environment.
Some examples are:
A new trend develops for which demand outstrips the supply of quality options.
For example, early on, the trend toward healthy eating coupled with an
insistence on good-tasting food produced a shortage of acceptable natural food
alternatives. Tetra pack fruit juices like Real and Onus captured on a nutritional
drink opportunity.
A customer segment is becoming more predominant, but their specific needs are
not being fully met by your competitors. The Indian rural markets have been
experiencing this phenomenon in the recent years for many product categories.
A customer, competitor, or supplier goes out of business or merges with another
company. With the demise of many pure-play dot-coms, examples of this
abound. As each went out of business, opportunities arise to gain the defunct
businesscustomers. Customers of bpl.net were ready customers for a company
called Data Access which was operating under the NOW brand.
You can also enhance a SWOT analysis through surveys. You can learn more
about your own as well as competitor sites and businesses. Areas you can
research include 1) customer awareness, interest, trial, and usage levels; 2)
brand, site, and/or company image; 3) importance of different site or product
attributes to your customers; and 4) product and/or site performance.
Whether using a basic or more advanced approach to SWOT analysis, you are
sure to come away with newfound insights. Use these to increase your
companys effectiveness and as input into your business or marketing plan.
The extent to which each part of the above process needs to be carried out
depends on the size and complexity of the business
SUMMARY
The SWOT analysis is purely a tool to help one understand the
current situation of the venture.
The SWOT is as good as the research and information used in it.
It cannot do anything for the venture unless there are some
strategies formulated based on the outcome thereof.
CHECK AGAINST LEARNING OUTCOMES
I completely understand the following outcomes and will be able to
apply them in the work environment:

78

Strategic Management

No.

Outcome

1.

The elements of a SWOT analysis

2.

How to apply a basic SWOT analysis

3.

How to derive the three core strategies from the outcome

Yes

No

Chapter-II : Strategic Analysis


Multiple Choice Quiz
Q1. Which one of them is not component of mission statement
communication?
(a) Visionary goals
(b) Competence
(c) Core purpose
(d) Core value
Q.2 The Vision defines:
(a) Where the organization wants to be in the future .It reflects the optimistic
view of the organizations future
(b) Where the organization is going now, basically describing the purpose, why
the organization exists.
(c) Action plan of the organization
(d) Tactics of the organization
Q.3 SWOT analysis is a tool for:
(a) Tool for auditing the organization and its environment
(b) Tool for forecasting.
(c) Tool for quality measurement of service
(d) Tool for strategic control
Q.4 SAP stands for:
(a) Systems Application, Products
(b) Strategic Advantage Profile
(c) Strategic Audit Process
(d) Strategic Analysis Profile
Q.5 Expanded form of ETOP is:
(a) Environmental threat and opportunity profile
(b) Evaluation of technology, opportunity, process
79

Strategic Management

(c) Economic threat and opportunity profile


(d) Environmental technological opportunity profile
Q.6 Environmental analysis does not involve analysis of
following factor:
(a) Technological
(b) Regulatory
(c) Economic
(d) All of above
Q.7 Competitors should be evaluated along several dimensions
mentioned below.
(a) Size.
(b) Growth
(c) Profitability
(d) All of the above.
Q.8 Market analysis will NOT include the following dimensions
(a) Market growth.
(b) Trends and development.
(c) Cost structure.
(d) Internal analysis.
Q.9 In SWOT analysis opportunity and threats are factors
of___________
(a) Internal analysis
(b) Evaluation analysis
(c) External analysis
(d) Resources analysis
Q.10 In SWOT analysis internal factors are ________
(a) Opportunity and Threats
(b) Strengths and weakness
(c) Strengths and opportunity
(d) Threats and opportunity

80

Strategic Management

MODULE III: STRATEGIC CHOICE


1. Michael Porters Approach Generic Strategies
2. Hofers Model, Stricklands Grand Strategy Selection Matrix
3. BCG Matrix
4. GE Nine Cell Matrix
5. Porters Five Force Model
6. Technology and Competitive Advantage, Substitution, Competitor,
Complementary Products and Competitive Advantage
7. Traditional Approach - Strategic Alternatives
8. Strategic vision vs. strategic opportunism
9. Coevolving and patching
Chapter 3: Strategic Choice
1.0 Introduction
Upon Completion of this chapter, you will be able to answer the following
questions:
1. What is the role of Strategic Choice leading to selection of best strategy?
2. What are the Over all cost leadership, differentiation, focus strategies?
3. What are the various business strategies like GE, Hofer etc.?
4. What are the characteristics of Porters five forces model?
3.1

PORTERS GENERIC BUSINESS STRATEGY

Michael Porter has proposed three generic strategies that provide good starting
point for strategic thinking:
Overall-cost leadership
Differentiation
Focus

Figure 3.1.1 Generic Strategies


81

Strategic Management

Although many types of marketing strategies are available, Michael Porter has
condensed them into three generic types that provide a good starting point for
strategic thinking: overall cost leadership, differentiation, or focus.
Business-Level Strategies: Generic Strategies
Overall cost leadership: Attaining, then using the lowest total cost
basis as a competitive advantage.
Here the business works to achieve the lowest production and distribution
costs so that it can price lower than competitors and win more market share.
Firms pursuing this strategy must be good at engineering, purchasing,
manufacturing, and physical distribution; they need less skill in marketing.
Texas Instruments uses this strategy. The problem is that rivals may emerge
with still lower costs, hurting a firm that has rested its whole future on cost
leadership.

Figure 3.1.2 Best - Cost Provider Strategy


HOW TO ACHIEVE COST LEADERSHIP:
Reduce unit costs (e.g. generic designs).
Use cheaper materials.
No frills products.
Increase productivity.
Achieve economies of scale.
Achieve learning curves.
Differentiation: Using product features or services to distinguish the
firms offerings from its competitors.
Here the business concentrates on achieving superior performance in an
important customer benefit area, such as being the leader in service, quality,
style, or technologybut not leading in all of these things. Intel, for instance,
82

Strategic Management

differentiates itself through leadership in technology, coming out with new


microprocessors at breakneck speed.
Seeking to attain the lowest total overall costs relative to service for which
customers will pay a premium. In e-business - Internet-based knowledge
systems, on-line ordering and customer support.
HOW TO ACHIEVE DIFFERENTIATION:
Create products/services superior to competitors (e.g. design, performance,
reliability).
Offer superior after-sales service.
Create superior supply chain.
Create a strong brand.
Offer superior product/service packaging
Focus: Concentrating competitively on a specific market segment.
Here the business focuses on one or more narrow market segments, getting to
know these segments intimately and pursuing either cost leadership or
differentiation within the target segment. Airwalk shoes, for instance, came to
fame by focusing on the very narrow extreme-sports segment.
Focus strategy uses a cost or differentiation advantage to exploit a particular
market segment rather a larger market. In e-business - Chat rooms and
discussion boards, targeted web sites.
HOW TO ACHIEVE NARROW/BROAD FOCUS:
Identify a suitable distribution channels across markets such as internet, chain
stores, mail order catalogues.
Identify the specific needs, requirements and expectations of those channels.
Identify a suitable market customer group and its niche market (segment).
Identify the specific needs, requirements and expectations of that group.
Establish that the specific market niche (segment) is large enough to sustain the
business.
Analyse competition of the niche market.
Produce products/services that meet the specific customer requirements.
Decide whether to go for a differentiation of cost leadership within this market
niche (segment).
Example:
ONLINE air travel industry provides a good example of these three strategies:
Travelocity is pursuing differentiation strategy by offering most
comprehensive range of services to the traveler.
Lowestfare is pursuing lowest-cost strategy
83

Strategic Management

Lastminute is pursuing niche strategy in focusing on travelers who


have the flexibility to travel on very short notice
3.2 SCHENDEL AND HOFER STRATEGIC MANAGEMENT MODEL
& THE THOMPSON AND STRICKLAND MODEL
3.2.1 Schendel and Hofer Strategic Management Model
Dan Schendel and Charles developed strategic management model,
incorporating both planning and control functions.
Their model consists of several basic steps:
1. Goal Formulation
2. Environmental Analysis
3. Strategy Formulation
4. Strategy evaluation
5. Strategy implementation and,
6. Strategic control
According to Schendel and Hofer, the formulation portion of strategic
management consists of at least three sub-processes.
Environmental analysis
Resource Analysis
Value Analysis
Resource and value analysis are part of strategy formulation
3.2.2 The Thompson And Strickland Model
Thomson and Strickland developed several models of strategic management.
According to Thompson and Strickland strategic management is an ongoing
process: "nothing is final and all prior actions and decisions are subject to
future modification."
This process consists of five major five ever-present tasks:
1. Developing a concept of the business and forming a vision of where the
organization needs to be headed.
2. Converting the mission into specific performance objectives.
3. Crafting a strategy to achieve the targeted performance.
4. Implementing and executing the chosen strategy efficiently and effectively.
5. Evaluating performance, reviewing the situation, and initiating corrective
adjustments in mission, objectives, strategy, or implementation in light of
actual experience, changing conditions, new ideas, and new opportunities.
84

Strategic Management

Thompson and Strickland suggest that the firm's mission and objectives
combine to define "What is our business and what will it be?" and "what to
do now" to achieve organization's goals. How the objectives will be achieved
refers to the strategy of firm. In general, this model highlights the relationships
between the organization's mission, its long- and short-range objectives, and its
strategy.
3.3 Boston Consulting Group (BCG) Matrix
The BCG Matrix, named after the Boston Consulting Group (BCG), is perhaps
the most famous 2x2 matrix. The matrix measures a companys relative market
share on the horizontal axis and its growth rate on the vertical axis.

Figure 3.3.1 BCG


Relative Market share

Market Growth Rate

The Boston Consulting Groups


Growth-Share Matrix
20%18%16%14%12%10%8%6%4%2%0

Stars

Question marks

?2

Dogs

Cash cow

6
10x

7
4x

2x 1.5x

1x

.5x .4x .3x .2x .1x

Relative Market Share


Figure 3.3.2 The Boston consulting Groups Growth-Share Matrix
85

Strategic Management

THE GROWTH SHARE MATRIX- the market growth rate on the vertical axis
indicates the annual growth rate of the market in which the business operates. It
ranges from 0 to 20 percent. A market growth rate above 10 percent is
considered high. Relative market share, which is measured on the horizontal
axis, refers to the SBUs market share relative to that of its largest competitor in
the segment. A relative market share of 0.1 means that the companys sales
volume is only 10 percent of the leaders; a relative share of 10 means that the
companys SBU is the leader and has 10 times the sales of the next-strongest
competitor in the market.
The growth share matrix is divided into four cells, each indicating a different
type of business:
1. Question Mark (Problem Child) Businesses that operate in high-growth
markets but have low relative market shares. A question mark requires a lot of
cash because the company has to spend money on plant, equipment and
personnel to keep up with the fast-growing market, and because it wants to
overtake the market leader. The company has to decide whether to keep
pouring money into the business or not.
2. Stars The market leaders in the high growth market. A star does not
necessarily produce a positive cash flow for the company. The company must
spend substantial funds to keep up with the high market growth and to fight off
competitors attacks.
3. Cash Cows Stars with falling growth rates that still has the largest relative
market share and produce a lot of cash for the company. The company does not
have to finance expansion because the markets growth rate has slowed.
Because the business is the market leader, it enjoys economies of scale and
higher profit margins. The company uses its cash cows to pay bills and support
other businesses. If the cash cow starts losing relative market share, the
company will have to pump money back into it to maintain market leadership.
4. Dogs Businesses that have weak market share in low growth markets. A
dog may not require substantial cash, but it ties up capital that could better be
deployed elsewhere. The company should consider whether it is holding on to
these businesses for good reasons or not.

86

Strategic Management

STRATEGIC BUSINESS UNITS STRATEGIES

Figure 3.3.3 The Boston Matrix - Product Portfolio Decisions


Like Ansoffs matrix, the Boston Matrix is a well-known tool for the marketing
manager. It was developed by the large US consulting group and is an approach
to product portfolio planning. It has two controlling aspect namely relative
market share (meaning relative to your competition) and market growth.
You would look at each individual product in your range (or portfolio) and
place it onto the matrix. You would do this for every product in the range. You
can then plot the products of your rivals to give relative market share.
This is simplistic in many ways and the matrix has some understandable
limitations that will be considered later. Each cell has its own name as follows.
FOR YOU, SIMPLE WAYS TO REMEMBER ABOUT EACH CELL IN THE
MATRIX IS GIVEN BELOW.
Dogs
These are products with a low share of a low growth market. These are the
canine version of real turkeys! They do not generate cash for the company
rather they tend to absorb it. Get rid of these products.
Cash Cows
These are products with a high share of a slow growth market. Cash Cows
generate more than is invested in them. So keep them in your portfolio of
products for the time being.
Problem Children
These are products with a low share of a high growth market. They consume
resources and generate little in return. They absorb most money as you attempt
to increase market share.
87

Strategic Management

Stars
These are products that are in high growth markets with a relatively high share
of that market. Stars tend to generate high amounts of income. Keep and build
your stars.

Figure 3.3.4 The Boston Matrix


What do you think are the features of BCG matrix?
The Boston Consulting Group matrix lets a firm classify each SBU in terms of
market share relative to key competitors and annual industry growth.
With the matrix, it can be determined which SBUs are dominant and
whether their industries are growing, stable, or declining.
The matrixs major assumption is that the higher an SBUs market
share, the lower its per-unit costs and the higher its profitability.
A star is a leading SBU in an expanding industry. The major goal is to
sustain differential advantages in the face of rising competition. It
generates substantial profits but requires large amounts of resources to
finance growth.
A cash cow is a leading SBU in a mature or declining industry. It
generates funds that can be used for other SBUs.
A question mark is an SBU that has had little impact (low market
share) in an expanding industry (high growth). It needs substantial cash
to improve its position.
A dog is an SBU with limited sales (low market share) in a mature or
declining industry (low growth). It has cost disadvantages and few
growth opportunities.
Can you suggest some ways to manage your businesses based on the BCG
matrix?
Look for some kind of balance within your portfolio. Try not to have any Dogs.
Cash Cows, Problem Children and Stars need to be kept in a kind of
88

Strategic Management

equilibrium. The funds generated by your Cash Cows are used to turn problem
children into Stars, which may eventually become Cash Cows. Some of the
Problem Children will become Dogs, and this means that you will need a larger
contribution from the successful products to compensate for the failures.
What according to you may be the problems with the Boston Matrix?
There is an assumption that higher rates of profit are directly related to
high rates of market share. This may not always be the case. When
Boeing launches a new jet, it may gain a high market share quickly but
it still has to cover very high development costs.
It is normally applied to Strategic Business Units (SBUs). These are
areas of the business rather than products. For example, for LG in India,
IT products have a separate focus and hence are an SBU and not just a
basket of products.
There is another assumption that SBUs will cooperate. This is not
always the case.
The main problem is that it oversimplifies a complex set of decision. Be
careful. Use the Matrix as a planning tool and always rely on your gut
feeling.
What do you think are the strategies, which companies can make, based on
BCG matrix?
STRATEGIC BUSINESS UNITS STRATEGIES

Figure 3.3.5 strategic Business Units Strategies


1) Build this strategy is appropriate for question marks whose market
shares must grow if they are to become stars. As they are in a growing
market, an inflow of resources would work wonders for them. But if the
company is doubtful about its growth even in a growing market then it
divesting it would be a better decision. An early decision to divest is
89

Strategic Management

likely to produce fairly good bids if the business is in relatively good


shape now.
2) Hold this strategy is appropriate for stars. As they are the market
leaders with highest relative market share and in a rapidly growing
market, it is important for the firm to hold on to its current position for
long. In this stage the firm would be required to pump in resources in
order to maintain its position as a star. In order to reap the benefits from
this star the firm would be required to continuously support it with
resources.
3) Harvest this strategy is appropriate for cash cows. The objective of
harvest strategy is to increase short term cash flow regardless of long
term effect. In other words it involves milking the businesses. In this
position the firm does not spend money on R&D activities, reduces
advertising expenditure and undertakes other cost cutting measures for
the concerned SBU. Harvesting can be also used for weak cows,
question marks and dogs which show some promise for future potential.
4) Divest the objective is to sell or liquidate the business because
resources can be better used elsewhere. This strategy is appropriate for
dogs and question marks that are acting as a drag on the companys
profits. In this strategy the firm does not plough resources into the
business but just try to sell it off at a good price.

A
c
t
2

Market attractiveness & Competitive


strength is also important.

90

Strategic Management

The BCG Matrix for ITC


Ltd.

Stars
Hotels
Paperboards/
Packaging.
Agri business.
Cows
FMCG-Cigarettes

?
FMCG- Others

Dogs
Maybe ITC
Infotech.

SUMMARY
The BCG matrix method is based on the product life cycle theory that can be
used to determine what priorities should be given in the product portfolio of a
business unit. To ensure long-term value creation, a company should have a
portfolio of products that contains both high-growth products in need of cash
inputs and low-growth products that generate a lot of cash. It has 2 dimensions:
market share and market growth. The basic idea behind it is that the bigger the
market share a product has or the faster the product's market grows the better it
is for the company
3.4 GE PORTFOLIO MATRIX
Industry attractiveness
Companys business strengths/Competitive position
An SBUs appropriate objective cannot be determined solely by its position in
the growth-share matrix. If additional factors are considered, the growth-share
matrix can be seen as a special case of a multifactor portfolio matrix that
General Electric (GE) pioneered. In this model, each business is rated in terms
of two major dimensions market attractiveness and business strength
These two factors make excellent marketing sense for rating a business.
Companies are successful to the extent that they enter attractive markets and
possess the required business strengths to succeed in those markets. If one of
these factors is missing, the business will not produce outstanding results.
Neither a strong company operating in an unattractive market nor a weak
company operating in an attractive market will do ll. Using these two
dimensions, the GE matrix is divided into nine cells, as shown in the Figure
3.3.6
91

Strategic Management

MARKET ATTRACTIVENESS
Low Medium High

Market Attractiveness: CompetitivePosition Portfolio Classification


Strong

BUSINESS STRENGTH
Medium

5.00
5.00

3.67

2.33

Weak

Aerospace
fittings

Hydraulic
pumps
3.67
Clutches

2.33

Flexible
diaphragms

Fuel
pumps
Relief
valve

1.00
Invest/grow

Selectivity/earnings

Harvest/divest

2000 Prentice Hall

Figure 3.3.7 Market Attractiveness Matrix

92

1.00

Joints

Strategic Management

Figure 3.3.8 GE Portfolio Matrix


Industry attractiveness-market growth rate, industry profitability, size,
pricing practices, opportunities/threats scale 1 -5 Very unattractive to very
attractive
Business strengths-Market share, technological position, profitability, size,
strengths & weakness scale 1-5, 1-very weak, 5 -very strong
Product line-a letter, circle -area - (size -scales) pie -market share
Identify performance group -current & projected portfolio without any change
in strategy.
The three cells in the upper-left corner indicate strong SBUs suitable for
investment or growth. The diagonal cells stretching from the lower left to the
upper right indicate SBUs of medium attractiveness; these should be pursued
selectively and managed for earnings. The three cells in the lower-right corner
indicate SBUs low in overall attractiveness, which the company may want to
harvest or divest.
In addition to identifying each SBUs current position on the matrix,
management should also forecast its expected position over the next 3 to 5
years. Making this determination involves analyzing product life cycle,
expected competitor strategies, new technologies, economic events, and so on.
Again, the purpose is to see where SBUs are as well as where they appear to be
headed.
The General Electric Approach
The second model to analyze the SBUs has been given by General Electric and
it is even known as Market attractiveness and Company strength matrix. Both
axes are divided into three segments, yielding nine cells. The nine cells are
grouped into three zones:
93

Strategic Management

The block with the Lateral Zone consists of the three cells in the upper left
corner. If the enterprise falls in this zone the business is in a favorable position
with relatively attractive growth opportunities. This indicates a green light to
invest in this product/service.
The blocks with plain Zone consists of the three diagonal cells from the lower
left to the upper right. A position in the yellow zone is viewed as having
medium attractiveness. Organisation must therefore exercise caution when
making additional investments in this product/service. The suggested strategy is
to seek to maintain share rather than growing or reducing share.
The blocks with a Diagonal Zone consist of the three cells in the lower right
corner. A position in the red zone is not attractive. The suggested strategy is
that management should begin to make plans to exit the industry.
FACTORS UNDERLYING MARKET ATTRACTIVENESS AND BUSINESS
STRENGTH IN GE MULTIFACTOR PORTFOLIO MODEL
1. MARKET ATTRACTIVENESS
Overall market size
Annual market growth rate
Historical profit margin
Competitive intensity
Technological requirements
Inflationary vulnerability
Energy requirements
Environmental impact
Social-political legal
2. BUSINESS STRENGTH
Market share
Share growth
Product quality
Brand reputation
Distribution network
Promotional effectiveness
Productive capacity
94

Strategic Management

Productive efficiency
Unit costs
Material supplies
R & D performance
Managerial personnel
The GE matrix is divided into nine cells. The three cells in the upper-left corner
indicate strong SBUs in which the company should invest or grow. The
diagonal cells stretching from the lower left to the upper right indicate SBUs
that are medium in overall attractiveness. The three cells in the lower-right
corner indicate SBUs that are low in overall attractiveness.
3.5 PORTERS Five Forces - Competitor Analysis
Michael Porter's Five Forces
What is it?
Porters model is model to help understand the competitive environment in
which a company operates.
Michael Porter's five forces is a model used to explore the environment in
which a product or company operates.
Five forces analysis looks at five key areas mainly the threat of entry, the power
of buyers, the power of suppliers, the threat of substitutes, and competitive
rivalry.

Figure 3.5.1 Porters Model

95

Strategic Management

New Entrants
Industry
Suppliers competitors and Buyers
extent of rivalry
Substitutes

Introduction
The model of the Five Competitive Forces was developed by Michael E. Porter
in his book Competitive Strategy: Techniques for Analysing Industries and
Competitors in 1980. Since that time the 'five forces tool' has become an
important method for analysing an organizations industry structure in strategic
processes.
Porters model is based on the insight that a corporate strategy should meet the
opportunities and threats in the organizations external environment. Especially,
competitive strategy should base on an understanding of industry structures and
the way they change.
Porter has identified five competitive forces that shape every industry and every
market. These forces determine the intensity of competition and hence the
profitability and attractiveness of an industry. The objective of corporate
strategy should be to modify these competitive forces in a way that improves
the position of the organization. Porters model supports analysis of the driving
forces in an industry. Based on the information derived from the Five Forces
Analysis, management can decide how to influence or to exploit particular
characteristics of their industry.
The Original Five Factor:
Threat of New Entrants
The easier it is for new companies to enter the industry, the more cut-throat
competition there will be. Factors that can limit the threat of new entrants are
known as barriers to entry. Some examples include:
Existing loyalty to major brands
Incentives for using a particular buyer (such as frequent shopper
programs)
High fixed costs
Scarcity of resources
96

Strategic Management

Government restrictions or legislation


Entry protection (patents, rights, etc.)
Economies of product differences
Brand equity
Switching costs or sunk costs
Capital requirements
Access to distribution
Absolute cost advantages
Learning curve advantages
Expected retaliation by incumbents
Power of Suppliers
This is how much pressure suppliers can place on a business. If one supplier
has a large enough impact to affect a company's margins and volumes, then
they hold substantial power. Here are a few reasons that suppliers might have
power:
There are very few suppliers of a particular product
There are no substitutes
The product is extremely important to the buyer, they cannot do without
it
The supplying industry has a higher profitability than the buying
industry
Supplier switching costs relative to firm switching costs
Degree of differentiation of inputs
Presence of substitute inputs
Supplier concentration to firm concentration ratio
Threat of forward integration by suppliers relative to the threat of
backward integration by firms
Cost of inputs relative to selling price of the product
Power of Buyers/ Customers
This is how much pressure customers can place on a business. If one customer
has a large enough impact to affect a company's margins and volumes, then
they hold substantial power. Here are a few reasons that customers might have
power
97

Strategic Management

Small number of buyers


Purchases of large volumes
Switching to another (competitive) product is simple
The product is not extremely important to the buyer, they can do
without it for a period of time.
Customers are price sensitive
Buyer concentration to firm concentration ratio
Bargaining leverage
Buyer volume
Buyer switching costs relative to firm switching costs
Buyer information availability
Ability to backward integrate
Availability of existing substitute products
Buyer price sensitivity
Price of total purchase
Availability of Substitutes
What is the likelihood that someone will switch to a competitive product or
service? If the cost of switching is low, then this poses to be a serious threat.
Here are a few factors that can affect the threat of substitutes:
Buyer propensity to substitute
Relative price performance of substitutes
Buyer switching costs
Perceived level of product differentiation
Fad and fashion
Technology change and product innovation
The main issue is the similarity of substitutes. For example, if the price of
coffee rises substantially, a coffee drinker is likely to switch over to a beverage
like tea because the products are so similar.
If substitutes are similar, then it can be viewed in the same light as a
new entrant.
Consider technology substitutes (who would have thought that MP3
technology would replace tape & CD's?)
98

Strategic Management

Competitive Rivalry
And last but not least, this describes the intensity of competition between
existing firms in an industry. Highly competitive industries generally earn low
returns because the cost of competition is high. A highly competitive market
might result from:
Many players of about the same size, no dominant firm.
Little differentiation between competitors products and services.
A mature industry with very little growth.
Companies can only grow by stealing customers away from competitors
For many industries, this is the major determinant of the competitiveness of the
industry. Sometimes rivals compete aggressively and sometimes rivals compete
in non-price dimensions such as innovation, marketing, etc.
Number of competitors
Rate of industry growth
Intermittent industry overcapacity
Exit barriers
Diversity of competitors
Informational complexity and asymmetry
Fixed cost allocation per value added
Level of advertising expense
Use of the Information from Five Forces Analysis:
Five Forces Analysis can provide valuable information for three aspects of
corporate planning:
Statistical Analysis:
The Five Forces Analysis allows determining the attractiveness of an
industry.
Dynamical Analysis:
In combination with a PESTLE Analysis, which reveals drivers for
change in an industry, Five Forces Analysis can reveal insights about
the potential future attractiveness of the industry. Expected Political,
Economical, Socio-demographical, Technological, Legal and
Environmental changes can influence the five competitive forces and
thus have impact on industry structures.

99

Strategic Management

Useful tools to determine potential changes of competitive forces are


scenarios.
Analysis of Options:
With the knowledge about intensity and power of competitive forces,
organizations can develop options to influence them in a way that
improves their own competitive position. The result could be a new
strategic direction, e.g. a new positioning, differentiation for
competitive products of strategic partnerships.
Influencing the Power of Five Forces
After the analysis of current and potential future state of the five competitive
forces, managers can search for options to influence these forces in their
organizations interest. Although industry-specific business models will limit
options, the own strategy can change the impact of competitive forces on the
organisation. The objective is to reduce the power of competitive forces.
The following provides some examples. They are of general nature. Hence,
they have to be adjusted to each organizations specific situation. The options
of an organization are determined not only by the external market environment,
but also by its own internal resources, competences and objectives.
Reducing the Bargaining Power of Suppliers
Partnering
Supply chain management
Supply chain training
Increase dependency
Build knowledge of supplier costs and methods
Take over a supplier
Reducing the Treat of New Entrants
Increase minimum efficient scales of operations
Create a marketing / brand image (loyalty as a barrier)
Patents, protection of intellectual property
Alliances with linked products / services
Tie up with suppliers
Tie up with distributors
Retaliation tactics
Reducing the Competitive Rivalry between Existing Players
Avoid price competition
100

Strategic Management

Differentiate your product


Buy out competition
Reduce industry over-capacity
Focus on different segments
Communicate with competitors
Reducing the Bargaining Power of Customers
Partnering
Supply chain management
Increase loyalty
Increase incentives and value added
Move purchase decision away from price
Cut put powerful intermediaries (go directly to customer)
Reducing the Threat of Substitutes
Legal actions
Increase switching costs
Alliances
Customer surveys to learn about their preferences
Enter substitute market and influence from within
Accentuate differences (real or perceived)

101

Strategic Management

Figure 3.5.2 Usefulness of Porter Model

SUMMARY
Use of the Five Forces model
The Five Forces tool is a simple but powerful tool for understanding where
power lies in a given business situation. This is important, as it helps you
understand both the strength of your current competitive position, and the
strength of a position youre looking to move into.
102

Strategic Management

With a clear understanding of where power lies, you can take fair advantage of
a situation of strength, improve a situation of weakness, and avoid taking
wrong steps. This makes it an important part of your business planning toolkit.
3.6 Competitor, Complementary Products and competitive Advantage
Technology and Competitive Advantage, Substitution
These subjects are dealt with in Porters five forces Model. However, we
shall deal with Competitive Advantage in the below Section.
3.6 COMPETITIVE ADVANTAGE
LEARNING OUTCOMES
By the end of this learning unit, you will apply your understanding of the
following concepts in order to apply it to ones own venture.
The positioning of a venture in the market
Competitive advantage
1. What Is Positioning?
Very few people seem to grasp the notion of positioning. Positioning, like
competitive advantage, originates from the key success factors.
Perhaps we should start by looking at an example to introduce the idea of
concept positioning. Take three well-known food franchises in SA that all sell
chicken as their main line namely KFC, Nandos and Chicken Licken. How do
they position their concept offerings? Studying their advertisements, set-ups,
pricing strategies, apparent target groups and what their managers say. We can
learn the following about each ones positioning. The concept of KFC seems to
be positioned as convenience that is also fun while being priced for the
average family or individual with medium income. They even have drive
through facilities for more convenience. The pieces make it ideal for feeding
the family of the busy parent. They focus on take-away but sometimes also
have some very basic sit-down facilities. Their marketing often involves
promotions with toys and user-coupons.
Nandos, on the other hand, focus on giving people a lasting experience for
which they will come back time after time. Their product is higher priced larger
portions prepared more healthy for the higher income groups. The taste of
Portugal and open fire preparation brings an added experience component.
They have better sit-down facilities as part of the experience.
Chicken Licken on the other hand positions their product as a basically good
food that makes up a fair sized meal at a cheap price. They normally have no
sit-down but only take away facilities. Nothing that can increase costs is
tolerated. They focus on the lower income group.
As you will now realise, positioning takes place in the mind of the consumer. It
103

Strategic Management

is how they see your product (their perception). It is what you believe the
customers will value. Think how differently a normal loaf of bread and garlic
bread is positioned. Bread is widely distributed, low priced, never advertised
(basic food) while garlic bread is highly priced, exclusively distributed and
promoted (upper class luxury item). Obviously they are aimed at different
target markets.
As you will now realise, positioning takes place in the mind of the consumer. It
is how they see your product (their perception). It is what you believe the
customers will value. Think how differently a normal loaf of bread and garlic
bread is positioned. Bread is widely distributed, low priced, never advertised
(basic food) while garlic bread is highly priced, exclusively distributed and
promoted (upper class luxury item). Obviously they are aimed at different
target markets.
2. What Is Competitive Advantage?
Competitive advantage is a key concept for business. If you can answer the
question of why people will buy from you and not your competition, and you
can find a significant reason, then you are on the way to competitive advantage.
Competitive advantage refers to a benefit that exists when a company has a
product or service that is seen by its target market as better than those of the
competitors. It is found in the resources or can be a capacity / competency that
allow it to be perceived as having an advantage.
Low price can never be seen a competitive advantage as it is not sustainable
and any competitor can beat your price (even at a loss). To be a competitive
advantage it must be sustainable and hard to imitate. There are several places
to seek for a competitive advantage. Remember is not automatic to have a
competitive advantage. One spends a lot of resources to create and maintain
competitive advantage. Think about some brand images (names) that have
become competitive advantages like Coke, BMW, Vodacom and others.
2. Summary
Competitive advantage is key for long-term survival. If you cannot find a
competitive advantage that differentiates you from the competition, you may
survive for a short time only.
3.7 STRATEGIC ALTERNATIVES
There are three ways to identify strategic alternatives. The first is selecting the
product markets in which the firm will operate and deciding how much
investment should be allocated to each; the second is developing the functional
area strategies; and the third is determining the basis of sustainable competitive
advantage in those product markets.

104

Strategic Management

Selecting Strategic Alternatives


IDENTIFICATION OF STRATEGIC ALTERNATIVES
Product-market investment strategies.
Product-market scope
Growth directions
Investment strategies
Functional Area strategies
Bases of competitive advantage
CRITERIA FOR STRATEGY SELECTION
Consider scenarios suggested by strategic uncertainties and environmental
opportunities and threats.
Pursue sustainable competitive advantage.
Exploit organizational strengths or competitor weaknesses.
Neutralize organizational weaknesses or competitor strengths.
Be consistent with organizational vision/objectives.
Achieve a long -term return on investment.
Be compatible with vision/objectives.
Be feasible.
Need only available resources.
Be compatible with internal organization.
Consider the relationship to other strategies within the firm.
Foster product portfolio balance.
Consider flexibility
Exploit synergy.

105

Strategic Management

Figure 3.7.1 Strategic Alternatives

106

Strategic Management

3.8 STRATEGIC VISION VS STRATEGIC OPPORTUNISM


There are two very different approaches to the development of successful
strategies and sustainable advantages. Each can work, but may require very
different systems, people, and culture. Strategic vision takes a long-term
perspective; the focus is on future in both strategy development and the
supporting analysis.
Strategic opportunism emphasizes strategies that make sense today. The
implicit belief is that the best way to have the right strategy in place tomorrow
is to have it right today.
Strategic Vision
To manage a strategic vision successfully, a firm should have four
characteristics.
Four Characteristics a Firm Needs to Manage a Strategic Vision:
1. A clear future strategy with a core driving idea and specification of
the competitive arena, functional area strategies, and competitive
advantage that will support the business.
2. Buy-in throughout the organization. There should be belief in the
correctness of strategy, an acceptance that the vision is achievable and
worthwhile, and a real commitment to making that the vision would
happen.
107

Strategic Management

3. Assets, competencies, and resources to implement the strategy should


be in place, or a plan to obtain them should be underway.
4. Patience. There should be willingness to stick to strategy in the face of
competitive threats or enticing opportunities that would divert resources
from the vision.
Strategic Vision

Is forward looking with long-term perspective.

Provides a sense of purpose.

Provides the rationale for investment that may require years to payoff.

Requires a top-down centralized structure.

Needs strong, charismatic leader.

Strategic Opportunism

Driven by a focus on the present.

Premise that environment is so dynamic and uncertain that it is not


feasible to aim at a future target.

Strategic flexibility and willingness to respond to opportunities is


necessary. Change is the norm.

Minimizes risk of missing emerging opportunities.

Reduces risk of strategic stubbornness.

Requires decentralized structure.

Needs entrepreneurial personnel.

3.9 Patching and Co-Evolving


Patching and Co-Evolving-Elements of Strategic Process of Re-Structuring of
Business portfolio
ELEMENTS OF STRATEGIC PROCESS OF RESTRUCTURING
BUSINESS PORTFOLIO
Restructuring business portfolio, as one of the key strategic processes which are
in focus of new corporate strategy, means the frequent remapping or patching
structure of enterprise in order to fit changing market opportunities namely,
new technologies which mostly include developing the existing and introducing
novel products and services, and market development create new, fresh
opportunities requiring change in corporate repertoire as a prerequisite for
enhancing business efficiency. As a result, individual parts and even the whole
enterprise are closed, the new ones are established, have a growth or they are
closed again. Those continuous fluxes require from corporate management to
continually remap their businesses according to market opportunities. Patching
108

Strategic Management

is the best way to tackle this crucial task. Restitching business portfolio according to changes in market requirements allows corporate managers to focus
on the best market opportunities. By dynamically adjusted businesses in order
to match changing market opportunities, managers are directed toward highpotential businesses, activities or products, uncovering the profit levers that
drive effective strategy of those businesses, and creating economic value for the
corporate enterprise.
Restructuring can take the form of combining, adding, splitting, exiting, or
transferring the businesses (but, also, business activities, and elements of
product assortment). One of the efficient form is to split the enterprise into
several parts (segments, units), focusing on target markets and occasionally
make new splitting, according to the changes on target markets. An efficient
form could be addition of new units to the existing portfolio, taking welldefined market of products in assortment of enterprise. An efficient way is,
also, to create a flexible mix of related products, on the basis of core products,
knowledge, and experience. Internal transfer of knowledge and products from
one unit to another enables better use of knowledge and capabilities of
enterprise and optimal scale of product. Combining products inside the product
assortment leads to creation of their critical mass and increase cash flow in
order to drive new growth.
DETERMINANTS OF STRATEGIC PROCESS OF COEVOLVING
Creating cross-business synergy in corporate enterprise is at the heart of
corporate strategy and a prime rationale for the existence of the multibusiness
corporation. As the ability of two or more business units to generate greater
value working together than they could working apart, synergy has its sources
in shared resources, knowledge and skills, coordinated strategies, vertical
integration or establishing internal alliances in enterprise The right choice of
source of corporate synergy enables efficient structuring business portfolio and
creating corporate advantage on target markets. An efficient way of achieving
corporate synergy is creating the web of collaborative links and relationships
among the enterprise and business units everything starting from exchanging
information on shared assets to creating the corporate strategy. It is realized
through managing a corporate strategic process called coevolving, based on the
principle of natural laws of shared survival and development of individual
related species.
Coevolving is a subtle strategic process in successful corporate enterprises,
including creation of flexible business portfolio with both collaborative and
competitive units and a superior corporate strategy based on cross-business
synergies in performing business activities. The process of coevolving turns the
corporate enterprise into an ecosystem with corporate strategy in the hands of
business-unit managers.
It emphasizes the importance of multibusiness teams at the corporate level the
group of business-unit managers that oversees synergies among the units. The
teams primary task is to manage the shifting collaborative web among the
109

Strategic Management

units. The multi-businesses team is powerful because it can add significant


value to the corporate enterprise beyond the sum of the units. Coevolving leads
to corporate advantage and greater efficiency of enterprise.
SUMMARY
Patching consists of small scale alterations to businesses to further optimize
them or fulfill their potentials through the meeting of growth opportunities.
Coevolution involves the mixing of collaboration and competition in multibusinesses in order to attain synergies.

Chapter III: Strategic Choice


Multiple Choice Quiz
Q.1 Buyers can exercise high bargaining power over their
suppliers under which one of the following conditions?
a. There are few buyers in the market
b. When there are many good substitutes
c. They have few suppliers to choose from
d. There is a high concentration of suppliers
Q.2 Factors that affect market attractiveness. Tick the odd one
out:
(a) Promotional activities
(b) Market size.
(c) Environmental factors
(d) Market growth.
Q.3 In GE Matrix Market attractiveness is plotted on:
(a) X-axis
(b) Y-axis.
Q.4 BCG Matrix relative position (Market share) is plotted on:
110

Strategic Management

(a) Y-axis.
(b) X-axis
Q.5 In BCG Matrix four quadrants are:
(a) Stars
(b) .
(c) Cash cows
(d) Dogs
Q.6 GE Matrix Market size is represented by:
(a) Square
(b) Rectangle
(c) Circle
(d) Triangle
(d) Decline
Q.7 Porters five force Model comprises of.
(a) Bargaining power of buyers
(b) Competitive rivalry
(c) Bargaining power of suppliers
(d) Threat of entry
(e)..
Q.8 Expand PEST analysis
(a) P.
(b) E.
(c) S..
(d) T..
Q.9 Fourth strategies in Growth share Model is___________
(a) Hold
(b) Build
(c) .
(d) Divest
Q.10 Michael porters generic strategies are: ________,
________, ________
(a).
(b).
(c)..
111

Strategic Management

MODULE IV
4.0 Offensive and Defensive Competitive Strategies
4.1 Advantages and disadvantages of offensive strategies
4.2 Advantages and disadvantages of defensive strategies
4.3 Industry scenarios
LEARNING OUTCOMES
Upon Completion of this chapter, you will be able to apply your understanding
of the following concepts: Strategies in declining/hostile markets.
Offensive and Defensive Strategies
There are therefore two broad strategies to be considered:

Offensive strategies where opportunities are vigorously pursued.

Defensive strategies where the venture identifies the threats and defends
itself against them.

Offensive and Defensive Strategies


Offensive Strategies

Defensive Strategies

Used to build new or


stronger market position
and/or create competitive
advantage

Used to protect competitive


advantage (rarely used to
create advantage)

6-10

Figure 4.1.1 Offensive and Defensive Strategies


Offensive Strategies:
Used to build new or stronger market position and/or create competitive
advantage
Defensive Strategies:
Used to protect competitive advantage (rarely used to create advantage)
4.1 Types of Offensive Strategies
112

Strategic Management

Types of Offensive Strategies


1. Initiatives to match or exceed competitor strengths
2. Initiatives to capitalize on competitor weaknesses
3. Simultaneous initiatives on many fronts

4. End-run offensives
5. Guerrilla offensives
6. Preemptive strikes
6-11

Figure 4.1.2 Types of Offensive Strategies


1. Attacking Competitor Strengths Objectives
Whittle away at a rivals competitive advantage
Gain market share by out-matching strengths of weaker rivals
Challenging strong competitors will only be successful in the long-run if you
can truly out compete a rival at what they do best
2. Attacking Competitor Weaknesses Objectives
Utilize company strengths to exploit a rivals weaknesses
Weaknesses to Attack
Customers that a rival is least equipped to serve
Rivals providing sub-par customer service
Rivals with weaker marketing skills
Geographic regions where rival is weak
Market segments a rival is neglecting
3. Launching Simultaneous Offensives on Many Fronts Objectives
Launch several major initiatives to
Throw rivals off-balance
Splinter their attention

113

Strategic Management

Force
them
to
resources to defend their position

use

substantial

A challenger with superior resources can overpower weaker rivals by outcompeting them across-the-board long enough to become a market leader!
4. End-Run Offensives Objectives
Maneuver around strong competitors
Capture unoccupied or less contested markets
This is useful for firms that have difficulty competing head-to-head against
rivals
5. Guerrilla Offenses Approach
Use principles of surprise and hit-and-run to attack in locations and at times
where conditions are most favorable to initiator
Appeal: Well-suited to small challengers with limited resources and market
visibility
6. Preemptive Strikes Approach
Involves moving first to secure an advantageous position that rivals are
foreclosed or discouraged from duplicating!
Defensive or Retaliatory Strategy Objectives
Firms that are threatened by a potential or actual move into their market may
retaliate. Thus, Microsoft has made several moves (including into the internet
space) in part to protect its software position.
Lessen risk of being attacked
Blunt impact of any attack that occurs
Influence challengers to aim attacks at other rivals
Approaches: Block avenues open to challengers Signal challengers vigorous
retaliation is likely
First-Mover Advantages
When to make a strategic move is often as crucial as what move to
make
First-mover advantages arise when
Pioneering helps build firms image and reputation
Early commitments to new technologies and distribution
channels can produce cost advantage
Loyalty of first time buyers is high
114

Strategic Management

Moving first can be a preemptive strike


First-Mover Disadvantages
Moving early can be a disadvantage (or fail to produce an
advantage) when
Costs
of
pioneering
loyalty of first time buyers is weak
Innovators
products
not living up to buyer expectations
Rapid
technological
followers to leapfrog pioneers

are

sizable
are

change

and
primitive,
allows

SCENARIOS are perceptions about the likely environment a firm could face in
future. Scenario writing is one of the techniques for analyzing environment.
Its use could be extended to evaluation by enabling organizations to focus their
strategies on the forthcoming developments in the environment.
For several of the above techniques for strategic control - except with the
possible exception of responsibility centres not much evidence is available
about their applications. The fact that these techniques are proposed is an
evidence of expanding body of knowledge in strategic management and
business policy available for applications by organizations.
SCENARIO WRITING FOR ENVIRONMENTAL SCANNING
Foresight and futurology require looking into the future by intelligent
discerning of influences in the present environment and projecting them into
the future. We are interested in foresight and future so as to know what to
expect and not to be overtaken by nasty surprises. Knowing what to expect
prepares us better to face the future. This is the simple principle behind
scenario writing - one of the techniques, other being extrapolation Delphi
surveys for developing foresight and peeping into the future.
We present industry scenario in the case study section.

115

Strategic Management

MODULE V
5.0 Strategic Implementation

5.1 Strategic Control


5.2 Balanced Scorecard Concepts and applications in strategy implementation
5.3 Industry Scenarios
5.4 Case Study

5.1 STRATEGIC CONTROL


LEARNING OUTCOMES
In this learning unit, you will be able to understand the following concepts
Purpose of Strategic Controls:
To provide managers with a means to motivate employees towards
organizational performance;
Solicit data on how well the organization is performing

STRATEGIC MANAGEMENT

116

Strategic Management

What is Strategic control?


it is the process by which managers monitor the ongoing activities of an
organization and its members to evaluate whether activities are being
performed efficiently and effectively and to take corrective action to improve
performance if they are not
The importance of Strategic Control
The success of a chosen strategy
The implementation compass
Organizational performance
Ensuring competitive advantage
Strategic Control:
Requires more than re-acting on past performance
Keeps the organization on track
Anticipating events that might occur in future
Allows the organization to respond to new opportunities that may
present itself
The importance of Strategic Control
Control & efficiency:
Efficiency measures how many units of inputs are being used to
produce a single unit of output
Must also measure how many units are produced
The control system should contain these measures
The importance of Strategic Control
Control & quality:
Organizational control is important because it determine the quality of
goods & services
Can make continuous improvements to quality over time and this gives
them a competitive advantage
Customer complaints is the basis for determining the quality of a
product or service
Total Quality Management can be regarded as control system

117

Strategic Management

The importance of Strategic Control


Control & Innovation:
Managers must create an environment in which people feel free to
experiment and take risks
Managers are challenged to build control systems that encourage risk
taking
Measures cost reduction, process improvement and improved quality
measures.
Control and Innovation
Problem: Time wasted due to unavailable parts from central store.
Electrical workshop not close to central store (Witbank Municipality)
Electricians designed a innovative solution through simple measures
(trips to stores per electrician per day
Applied 80/20 principle Established decentralized store
Major savings
Control & Innovation
Problem: Time delays at in house filling station of Jhb Municipality
Solution:
Extend petrol hoses
More attendants
Limit filling to half a tank
Ensure all pumps were kept in functional order at all times
Strategic Control Systems
are the formal target setting, measurement and feedback systems
that allow strategic managers to evaluate whether the company is
achieving on the four building blocks of a competitive advantage..
Types of Control systems
Financial controls
Output controls
Behavior controls
Organization culture

118

Strategic Management

Kinds of measures
Efficiency: Level of production costs, number of hours needed to
produce an item, cost of raw materials
Quality: Number of rejects, number of customer returns, level of
product reliability
Innovation: number of new products introduced, time taken to market;
cost of product development
Responsiveness to customers: number of repeat customers; level of
on-time delivery to customers, level of customer service
5.2 BALANCED SCORECARD
LEARNING OUTCOMES
In this learning unit, you will be able to understand the following concepts
Define the measurement of progress
Understand the Balanced Score card
1. Measurement
There is nothing worse than having a strategy but not knowing whether it is
working or not. Every success factor must therefore be converted into several
objectives to be achieved. The word objective suggests that it is able to measure
whether it has been achieved or not.
How do we know the strategy is a good one?
GOODNESS OF FIT TEST
- How well does the strategy fit the companys situation? Judgment
COMPETITIVE ADVANTAGE TEST
- Does strategy lead to sustainable competitive advantage?
PERFORMANCE TEST
- Does strategy boost company performance? Balanced scorecard
One of the ways to do this measurement (developed by Kaplan) is the balanced
scorecard.

119

Strategic Management

5.2 Balanced Score Card- Kaplan & Norton

Adapted from Robert S. Kaplan and David P. Norton, Using the Balanced
Scorecard as a Strategic Management System, Harvard Business Review
(January-February 1996): 76.
Balanced Scorecard Basics
The balanced scorecard is a strategic planning and management system that is
used extensively in business and industry, government, and nonprofit
organizations worldwide to align business activities to the vision and strategy
of the organization, improve internal and external communications, and
monitor organization performance against strategic goals. It was originated by
Drs. Robert Kaplan (Harvard Business School) and David Norton as a
performance measurement framework that added strategic non-financial
performance measures to traditional financial metrics to give managers and
executives a more 'balanced' view of organizational performance. While the
phrase balanced scorecard was coined in the early 1990s, the roots of the this
type of approach are deep, and include the pioneering work of General Electric
on performance measurement reporting in the 1950s and the work of French
process engineers (who created the Tableau de Bord literally, a "dashboard"
of performance measures) in the early part of the 20th century.
A balanced scorecard for measuring company performance is optimal; it
entails:
-

Setting financial and strategic objectives

Placing balanced emphasis on achieving both types of objectives.

(However, if a companys financial performance is dismal or if its very survival


is in doubt because of poor financial results, then stressing the achievement of
120

Strategic Management

the financial objectives and temporarily de-emphasizing the strategic objectives


may have merit)
Just tracking financial performance overlooks the importance of measuring
whether a company is strengthening its competitiveness and market position.
The balanced scored exist of matrices that one uses to keep score on. The
four broad elements that encompass everything are:
Customer perspective
Internal business perspective
Innovation & learning perspective
Financial perspective
Balanced Scorecard is a model integrating financial and non financial
measures.
Causal link between outcomes and performance drivers of such
outcomes
Translates the vision and strategy of a business unit into objectives and
measures in 4 distinct areas
Financial
Customer
Internal Business process
Learning and growth
Purpose of Balanced Scorecard:
A method of implementing a business strategy by translating it into a set of
performance measures derived from strategic goals that allocate rewards to
executives and managers based on their success at meeting or exceeding the
performance measures.
Reasons for the Need of a Balanced Scorecard
Focus on traditional financial accounting measures such as ROA, ROE, EPS
gives misleading signals to executives with regards to quality and innovation. It
is important to look at the means used to achieve outcomes such as ROA, not
just focus on the outcomes themselves.
1. Executive performance needs to be judged on success at meeting a mix
of both financial and non-financial measures to effectively operate a
business.
2. Some non-financial measures are drivers of financial outcome measures
which give managers more control to take corrective actions quickly.
121

Strategic Management

Example: Controls in jet cockpit for pilot


3. Too many measures, such as hundreds of possible cost accounting index
measures, can confuse and distract an executive from focusing on
important strategic priorities. The balanced scorecard disciplines an
executive to focus on several important measures that drive the strategy.

122

Strategic Management

Example Balanced Score Card

Summary
Key to everything is the fact that you can only see progress if you measure
regularly. The balanced scorecard is a tool for that.
CHECK AGAINST LEARNING OUTCOMES
I completely understand the following outcomes and will be able to
apply them in the work environment:
No.

Outcome

1.

Define the measurement of progress

2.

Understand the Balanced Score card

Yes

No

5.4 INDUSTRY SCENARIOS


123

Strategic Management

Envisioning an Uncertain Future Boston Consulting Group

INDUSTRY SCENARIO:
An industry scenario is forecasted description of a particular industrys

likely future. Such a scenario is developed by analyzing the probable

impact of the future societal forces on key groups in a particular industry.

The process may operate as follows:

1. Examine the possible shifts in the societal variables globally.

2. Identify uncertainties in each of the six forces of the task

environment (for example, potential entrants, competitors, likely

substitutes, buyers, suppliers, and other key stakeholders).

3. Make a range of plausible assumptions about future trends.

4. Combine assumptions about individual trends into internally

consistent scenarios.

5. Analyze the industry situation that will prevail under each

scenario.
124

Strategic Management

6. Determine the source of competitive advantage under each

scenario.
7. Predict competitors behaviour under each scenario.

8. Select the scenarios that are either most likely to occur or most

likely to have strong impact on the future of the company. Use

these scenarios in strategy formulation.


Scenarios for Passenger Car Markets in 2020
New markets, new product segments, and new players are rewriting the rules
of the passenger car industry and threatening to upend the traditional order.
However, there is considerable uncertainty about the con-tinuing pace of
these disruptive developments and their eventual outcomes. Will sluggish
investment in road infra- structure stymie the growth of demand in emerging
markets? What effect will spiraling oil prices have on demand for small, fuelefficient cars and on efforts to develop alternative technologies? Will new
players in emerging markets be able to defend their domestic positions
against competitors that have global presence and economies of scale? How
will the pressure for tighter emission regulations affect growth and alter the
competitive landscape?
To explore possible directions for the world's passenger- car markets and
identify strategies that will separate industry winners from losers, we adopted
a scenario- based approach. Traditional forecasting and planning methods,
which tend to rest on deterministic thinking, generally cannot accommodate
high degrees of uncertainty. Scenario-based approaches, in contrast, can
provide a robust platform to support effective decision making through
tumultuous change. To develop our scenarios for passenger car markets, we
first identified the key forces that are likely to shape the future of the industry,
then assessed their probable strength, impact, and mutual interactions. Finally,
we envisioned three primary pathways along which markets may evolve.
On the basis of this research, we identified six broad categories of forces that
will play a significant role in shaping the passenger car landscape:
urbanization, shifting lifestyles and consumer choices, evolving market
characteristics, globalization, patterns of growth in emerging markets, and
environmental impacts and actions.
125

Strategic Management

Clearly, these six forces are subject to considerable uncertainty in terms of


the pace and direction of their development, as well as their potential impact
on the future of the passenger car industry.

Envisioning the Future


Our analysis suggests that two of the six forcespatterns of growth in
emerging markets, and environmental impacts and actionsrepresent a
particularly potent mix of high possible impact and high uncertainty, and
therefore will play the strongest role in shaping alternative scenarios for
passenger car markets. For each force, we have envisioned a pair of possible
outcomes.
Patterns of Growth in Emerging Markets
In a number of emerging markets, rapid overall economic growth masks
stark internal disparities in growth pat- terns. In India, according to the
Economist Intelligence Unit's 2008 Market Indicators and Forecasts, median
household income grew by about 89 percent from 2002 to 2007but less
than 5 percent of households in 2007 accounted for almost 60 percent of total
household in- come. In China, which has been very successful in reducing the
overall level of poverty, there continues to be wide regional disparity in
development, with the top five coastal provinces accounting for more than 42
per- cent of the country's GDP in 2007. If patterns of growth in emerging
markets remain so disparate among economic strata and regions, most of the
demand and spending power will be concentrated in a few large cities, where
product needs and buying behavior will mir- ror those in developed markets.
In addition, the populations in these cities will continue to swell as migrants
flock there in search of better economic prospects.
Environmental Impacts and Actions
Global warming is already affecting lives. Atmospheric concentration of
carbon dioxide has risen by about 30 percent since the late 1800s. Road
transportation has been estimated to account for almost 15 percent of
greenhouse gas emissions, making it one of the largest polluters.
Governments around the world are experimenting with ways to tackle the
interlinked challenges of greenhouse gas emissions and fossil fuel
dependence. The European Union has systematically tightened emission
standards for all OEMs. Since 2006, Japan has been on a course to- ward
adopting standards that will make it, in 2015, the country with the lowest
average fleet wide greenhouse-gas emissions from new passenger cars, at less
than 125 grams of carbon dioxide per kilometer.
These two forcespatterns of growth in emerging markets, and
environmental impacts and actionsshould significantly affect the pace and
direction of growth in the global passenger-car market over the next dozen
years.
Sales in RDEs, which were 15 million units in 2007, representing
approximately 27 percent of global sales, may increase to 31 million to 40
million units in 2020, representing 40 to 47 percent of global sales. Much of
this growth will consist of sales of smaller cars. The global market for small
126

Strategic Management

cars may amount to 24 million to 38 million units, up from 15 million units in


2007. The size of the various marketsand the breakdown between the
numbers of small and large cars sold in each of themwill depend on which
scenarios are realized in which markets. It is important to note that these
numbers reflect generalized outcomes in which a particular scenario plays out
across different markets. In reality, of course, different scenarios may play
out in different markets, moderating the global sales figures.

Three Scenarios for 2020


The two hypothetical outcomes for each of the two forces discussed above
will intersect to create three plausible scenarios for the year 2020, which we
have named Green Freeway, Temporary Utopia, and Stranded Masses.
Green Freeway
In this scenario, income and wealth are more broadly distributed, making
cars affordable for many more households. Worldwide demand for passenger
cars reaches 86 million units in 2020, with emerging markets accounting for
40 million units. However, increasing concerns about air pollution, oil prices,
and other environmental impacts, together with growing health concerns,
have prompted consumers to show a marked preference for "green" products.
Temporary Utopia
Here, too, the benefits of economic growth are being shared by all sectors of
soci- ety, reflecting the success of strong economic-policy initiatives. In this
scenario, however, environmental movements remain fragmented and elitist.
Because there is little popular support for protection of the environment,
industrial lobbies have been able to dilute legislative initiatives and push back
development of green technologies. As in the Green Freeway scenario, global
demand for passenger cars in 2020 is 86 million units and passenger car sales
in RDEs exceed those in the Tri- ad markets by 5 million units, with sales of
small cars again driving much of the growth. At 33 mil- lion units, however,
the small-car segment represents only 38 percent of the global market.
Stranded Masses
In this scenario, economic activity has remained concentrated and population
migration has continued apace. Rapid economic development has led to
increased congestion and rising pollution in major cities, with haphazard
urban growth proceeding unchecked. As in the Temporary Utopia scenario,
green legislation has found no popular support and remains ineffective.
Lacking alternatives, large population segments endure difficult living and
working conditions. This is the most pessimistic scenario for worldwide
demand for passenger cars, which we estimate at 77 million unitswith
small cars accounting for only 24 million units, or approximately 31 percent
of global sales.

127

Strategic Management

CASE STUDY
1. BCG Matrix for ITC Limited

ITC Background:
Governance structure
Strategic supervision
Strategic management
Executive management
Core values
Nation Orientation; Trusteeship; Excellence;
Customer focus; respect for people; Innovation
Vision & Mission statements
Vision: Sustain ITCs position as one of Indias most valuable
corporations through world class performance, creating growing
value for the Indian economy and the Companys stakeholders.
Mission: To enhance the wealth generating capability of the
enterprise in a globalizing environment, delivering superior and
sustainable stakeholder value.
Business Mix of ITC Ltd.
FMCG
Cigarettes
Foods
Lifestyle Retailing
Greeting, Gifting & Stationery
Safety Matches
Agarbattis
Paperboards & Packaging
Paperboards & Specialty Papers
Packaging
Agri - Business
Agri-Exports
e-Choupal
Leaf Tobacco

128

Strategic Management

Hotels
Group Companies
ITC Infotech; etc.

Business wise Sales data


Business/ Year

Growth Value (Rs in Crore)


%
2005
2004

FMCG-Cigarettes 8.4

10002.54 9230.27

FMCG-Others

85.2

563.39

304.16

Hotels

124.1

577.25

257.53

Agribusiness

4.2

1780.07

1708.77

Paper & pkg.

24.9

1565.31

1253.29

Net revenue

12.99

13349.58 11815.04

CAGR during FY 2005-2008


Category

CAGR

Growth parameters

Cigarettes 10.9 %

Pricing power

Hotels

22.7%

Inward traffic, occupancy

Paper

17.2 %

Agri
business
FMCGOthers

34.3 %

Capacity utilization, value


added products
E-choupal, choupal sagar,

60.2 %

Fast track, decent share.

129

Strategic Management

Market share of ITC Ltd.


Outstanding market leader
Cigarettes, Hotels, Paperboards, Packaging and Agri-Exports.
Gaining market share
Nascent businesses of Packaged Foods & Confectionery, Branded
Apparel and Greeting Cards.
Segment

Dominance

Cigarettes

70% share

Paper &
Packg.

Packaging board No.


1 in Asia

Contribution %
Revenue
PBIT
77.0%

87.7%

7.3%

10.7%

Agri
1of the largest xporters
business
from India

7.0%

3.7%

Hotels

ITC Group ranks No.2

4.3%

5.4%

FMCG
(Others)

20% share of greeting


cards market,
'Aashirvaad' atta is
No.1 in branded
segment

4.4%

-7.5%

A
c
t
2

Market attractiveness & Competitive


strength is also important.
130

Strategic Management

Limitations
Assumes market growth rate. A firm may grow the market.
A Dog may be helping other products.
High market share/Growth is not the only success factor.
Linkage between market share and profitability is questionable.

The BCG Matrix for ITC


Ltd.

Stars
Hotels
Paperboards/
Packaging.
Agri business.
Cows
FMCG-Cigarettes

?
FMCG- Others

Dogs
Maybe ITC
Infotech.

Action- Learning points and conclusions


? - To be handled with care.
Strategic forays into emerging high growth markets.
E-Choupal is a transformational strategy.
Strong brand building capability will be tested.
Corporate strategy of creating multiple drivers of growth anchored on
its core competencies and distribution reach.
Embracing difficult and challenging corporate strategy. (Ex:
Paperboards).
EHS philosophy: Contribution to the triple bottom line- Economic,
Environment and social capital.

131

Strategic Management

2. CASE STUDY ICICI BANK


Balanced Scorecard: An Experience of ICICI Bank
Key challenges
Rapid growth in employee base fresh and lateral recruits
Building knowledge and skill base
Ensuring adequate focus on multiple perspectives
Growth, profitability, service levels, building talent
Ensuring consistent implementation of strategy across the organisation
Aligning organisational, business-level and individual goals
Incentivising achievement of the goals set
We (ICICI) were seeking a strategic framework that would enable
this..
Earlier performance management framework
Primarily focused on financial aspect
Other perspectives covered qualitatively
Input rather than output based: focus on work done rather than goals
achieved
Did not meet the need for additional perspectives
Retail strategy required service focus
Wholesale banking required focus on transaction capabilities and quality of
credit origination
Balanced Scorecard approach for ICICI Bank
Stage One
Re-defined and expanded financial perspective
Growth, market share, profitability and credit costs
Introduced customer perspective: concept of service levels as an area of
performance evaluation
Customer satisfaction scores
Introduced process perspective: focus on building a process orientation in the
organisation
Learning perspective: focus on re-skilling for existing employees and speedto-job for new recruits
Stage Two
Further development and detailing of customer service and process perspectives
132

Strategic Management

Specific measures of performance introduced


Branch service quality scores
Turn around time (TAT) benchmarks
Good order index for client bankers
5S achievement
Focused measures served as enablers for meeting
Stage Three
Learning and development perspective
So far focused primarily on business skills
Commenced activity on building leadership pool
Reducing the number of scorecard templates
Already reduced from 750 to 230 in two years
Planned reduction to about 150
New challenges
Scorecards for operations in new geographies outside India
Lessons from ICICI Bank experience
Performance measures should be output rather than input basedPeople should
be assessed on goals not on transactionsRemoves ambiguity from performance
management. Scorecard need not be balanced for individuals but for business
unit as wholeAll perspectives may not apply to all people. Need for scorecard
templatesEnsures consistencyNumber of templates should be rationalised
based on number of different job descriptions
Banks, like other business organisations, are operating in an increasingly
complex environment
In this competitive paradigm, optimally directing all resources towards
organizational goals in a focused manner is the key to access
Having a strategy is not good enough
The strategy must be
Articulated
Understood
Executed
The balanced scorecard is a tool that helps communicate strategy and goals
across the organisation
The balanced scorecard at ICICI Bank has helped achieve:
Rapid business growth
Strategic consistency despite growing scale and diversity
Systematic and objective performance evaluation
The balanced scorecard can help to build a platform for sustained future
growth and value creation

133

Strategic Management

3. COMPETITIVE ADVANTAGE PROFILE: A Case of Berger Paints


Marketing Factors
Market leader -35% share in organized sector
Closest competitor -less than half of APs market share
More than 20 yrs leader
Widest product range -product shades, pack sizes
40 different decorative paints -150 shades, 8 different sizes in packing, no. of
brands -all segments
Brands - quite powerful, high quality MR & MIS, 90% accuracy in forecasting,
100 fastest moving Stock Keeping Units monitored daily
Countrywide distribution -13000 dealers (comp-<8000) -large network-regional
offices, company depots
Physical distribution far superior to competitors
Strong in inventory control (28 days) of sales (industry avg. 51 days, service
level -high, credit o/s -<25 days (comp 40 days)
Manufacturing & Operational factors
Size advantage in relation to competitors
Finesse in production planning, scheduling, and matching with marketing
requirements
In house production -no outsourcing -high reliability suppliers -superior
quality assurance
Four production location -spread benefits
Human Resources
Higher calibre HR
MBAs and highly qualified technical and production staff
Finance Factors
134

Strategic Management

Leader in profits and operating margins


ROI = 40%; rest of the industry = 22%
Net worth = 20.4 million Rs; Nerolac = 5.8 million Rs and Berger Paints = 4.1
million Rs
Cash rich, high liquidity
Corporate Factors
Awards
High profile corporate image
Enviable track record in breaking away the position of MNCs in the Indian
paint Industry

135

Strategic Management

Chapter IV Offensive and Defensive Competitive Strategies


Chapter V strategy implementation
Multiple Choice Quiz:

Q1. Declining market can create hostile markets, markets usually


associated with
(a) Overcapacity
(b) Low margins
(c) Intense competition
(d) All of above
Q2. What term best describes the use of both financial and nonfinancial measures in assessing whether an entity has achieved its
objectives?
(a) Balanced scorecard
(b) Performance measurement
(c) Benchmarking
(d) Target setting
Q.3 Balanced Scorecards tell you the knowledge, skills and systems
that your employees will need (learning and growth) to innovate and
build the right strategic capabilities and efficiencies (internal
processes) that deliver specific value to the market (customer)
which will eventually lead to higher shareholder value (.).
Q.4 _________ is the process of taking the actions that put the
strategy into effect and ensuring that organizational decisions are
consistent with it.
(a) Strategy Implementation
(b) Strategic control
(c) Strategy Formulation
(d) Strategy Objectives
Q.5 Balanced Scorecards are a means of control through:
(a) Performance targets
(b) Portfolio management

136

Strategic Management

(c) Qualitative measures


(d) Quantitative measures
Q.6 Balanced scorecards Translates the vision and strategy of a
business unit into objectives and measures in 4 distinct areas:
(a) Financial
(b) Customer

(c) Internal Business process


(d) L....... and g............
Q.7 Controls should be involving only minimum amount of
information. Controls should monitor only meaningful activities and
results. Controls should be conducted as and when. Controls should
aim at pinpointing everything observed.
(a) True.
(b) False
Q.8 Four special types of controls are:
(a) Premise control.
(b) Implementation control
(c) Strategic surveillance
(d) Special alert control.
(i) True
(ii) False
Q.9 Control Cycle
(a) Establish standards
(b) Measure actual performance
(c) Evaluate performance against standards
(d) Correct performance, if needed.
(i) True
(ii) False
Q.10 How do strategic controls and operational controls differ?
(a)Strategic control: Are we moving in the right direction?
(b) Operational control: how are we performing?

137

Strategic Management

(i) True
(ii) False

Answers to Quiz:
Chapter I: Introduction to Strategic Management
1(a),2(b),3()a,4(b),5(c),6(c),7(d),8(a),9(d),10(b)
Chapter II: Strategic Analysis
1(c),2()a,3(a),4()b,5(a),6(d),7(d),8(d),9(c),10(b)
Chapter III: Strategic Choice
1d, 2a, 3b 4b, 5question marks,6c, 7threat of substitutes,8 political, economic,
social, technological ,9harvest,10 cost leadership, differentiation, focus

Chapter IV Offensive and Defensive Competitive Strategies


Chapter V strategy implementation
Multiple Choice Quiz:

Answers:1d,,2b,3 Financial, ,4a,5a,6Learning and Growth, ,7b,8(i), ,9(i), 10(i)

138

Strategic Management

REFERENCE BOOKS/ E-BOOKSOURCE /LINKS FOR REFERENCE


Text:
Azhar Kazmi, Business Policy and Strategic Management, Tata McGraw Hill
Kaplan Robert & Norton David P, Strategic Focused Organization, Harvard
Business School Press.
Appannaiah, Reddy, Ramanath, Strategic Management, Himalaya Publishing
House
Thomas L.Wheelen, J.David Hunger,Krish Rangarajan, Strategic Management
& Business Policy,9th Ed., published by Pearson education, Inc.,2006
References:
Pearce John A & Robinson R B, Strategic Management: Strategy Formulation
and Implementation, 3rd Ed, A.I.T.B.S. Publishers & Distributors.
Aaker David, Strategic Market Management, 8th Ed., John Wiley and Sons
Gregory G. Dess & G.T.Lumpkin, Strategic Management - creating
competitive advantage, The McGraw-Hill Companies
Strategic Management Workshop - The Institute of Bankers in South Africa
BCG Matrix for ITC Case Study by Ranjan Varma
Business Strategic Management, Barfield
Dr.M.Thenmozhi, Professor, IIT Chennai, Organizational Capability Analysis
Franzv Heerden, Strategic Control and Enhancing Organizational Performance
Philip Kotler, Marketing Management, Millenium Ed. (e-book source)
Bala krishnamoorthy Shreekant Limaye, Management Theory and Practice,
2007-09
Ashok Kaka, Strategic Marketing Planning Thesis for M.S submitted to BITS,
Pilani
Dr. Sushil, Professor IIT Delhi, Strategy Formulation PORTERs GENERIC
STRATEGIES
Neil Ritson, Strategic Management, 2008 Neil Ritson & Ventus Publishing
ApS
Michael E. Porter, Competitive Strategy, New York: The Free Press,1980
chapter 2.
Regular reading of all latest Business Journals: HBR, Strategist, Business
World, Business India, Business Today.
http://www.oup.com/uk/orc/bin/9780199216468/01student/mcqs/
139

Strategic Management

http://www.mhhe.com/business/management/dess1e/student/quiz_mult/ch0
1.mhtml
Video and Power Point Presentations. Strategy Club Strategic Planning
Software ... Dr. Fred R. David is the author of three mainstream strategic
management
www.strategyclub.com/
Other sources of Information: Documentary or secondary sources
- Magazines, newspaper, journals, books, trade &industry Assn. publication,
Govt. Publication, Annual report of Competitor Company
- Mass media
- Internal sources employees, files, documents and MIS

140