Business strategy

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BUSINESS STRATEGY

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INTRODUCTION Definition of Strategic Management

– Definition of Strategy– Evolution of strategic thinking– Views of some eminent thinkers on Strategy

• Peter Drucker• Henry Mintzberg• Igor Ansoff• Kenechi Ohmae• Sumantra Goshal

– Process of Strategic Management• Corporate Strategy• Business Strategy• Functional Level Strategy

– Approaches to Strategy

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Top Management Perspective Vision Mission Objectives Annual Operating Plan (AOP) Monthly Operating Plan (MOP) Core Ideology & Values Formal Planning Vs Emergent Strategy Understanding Competitive Edge Identification of Strategic Gaps

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Two Approaches to Strategic Thinking

WAYS OF THINKING Application or creativity, intuition or imagination

(lateral thinking)

Application of reason

(vertical thinking)

NATURE OF THE PROBLEM

Divergent with many solutions

Convergent with one solution

AREA OF RELEVANCE

Creating the vision: establishing strategic objectives

Realizing the vision:achieving operational effectiveness

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Analysing Business Environment

Analysis of Business Environment at 3 Levels– Macro External Environment Analysis – External Environment Analysis– Firm level Internal Analysis using

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LONG TERM OBJECTIVES AND GRAND STRATEGIES

Concept of Long Term Objective

{ As opposed to Short Term Profit Maximisation}

Concept of Grand Strategy

{ As opposed to Generic Strategies }

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LONG TERM OBJECTIVES

Profitability Productivity Competitive Position Employee Development Employee Relations Technological Leadership Public Responsibility

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QUALITIES OF LONG TERM OBJECTIVES

Acceptable Flexible Measurable Motivating Suitable Understandable Achievable

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GENERIC STRATEGIES

Overall Cost Leadership Differentiation Focussed Growth

Generic Strategy conveys the core idea about how the firm can best compete in the market place on which a long term or grand strategy

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GRAND STRATEGIES Concentrated Growth Market Development Product Development Innovation Horizontal Integration Vertical Integration Concentric Diversification Conglomerate Diversification Turnaround Divestiture Liquidation Bankruptcy Joint Ventures Strategic Alliances Consortia, Keiretsus and Chaebols

STABILITY

GROWTH

RETRENCHMENT

COMBINATION

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Grand Strategy Selection MatrixOvercome weakness

Maximise Strength

InternalRedirected Sources Within the firm

External(Acquisition or Merger for Resource capability

TurnaroundDivestitureLiquidation

Vertical integrationConglomerate Diversification

Concentrated GrowthMarket DevelopmentProduct DevelopmentInnovation

Horizontal integrationConcentric DiversificationJoint Venture

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Model Grand Strategy ClustersRapid Market Growth

Slow Market Growth

Strong CompetitivePosition

Concentrated GrowthVertical integrationConcentric Diversification

Reformulation of concentrated growthHorizontal integrationDivestitureLiquidation

Concentric Diversification Conglomerate DiversificationJoint Venture

Turn around or RetrenchmentConcentric DiversificationConglomerate DiversificationDivestitureLiquidation

Weak CompetitivePosition

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PORTFOLIO ANALYSIS for Strategy choice

Greatest applicability for corporate level planning Three potential advantages

– Encourages framing of good strategies at business level– Provides a neutral basis for resource allocation– Leads to better implementation of strategy because of

intensified focus and objectivity

BCG GE-McKINSEY-SHELL ARTHUR D LITTLE BCG’s Strategic Environment Matrix

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Advantages of Portfolio Matrix Approaches Conveyed large amounts of info about diverse business

units and corporate plans in a greatly simplified format Illuminated similarities and differences between business

units and helped convey the logic behind corporae strategies for each business with a common vocabulary

Simplified priorities for sharing corporate resources across diverse business units that generated and used those resources

Simple prescription which gave a sense of what to accomplish and a way to allocate resources among businesses

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Limitations of Portfolio Matrix Approach Did not address how value was being created across business

units – the only relationship between them was cash. Because of this, its valued simplicity encouraged a tendency to trivialize strategic thinking among users that did not take proper time for thorough underlying analysis

Truly accurate measurement for matrix classification was not as easy as the matrices portrayed

The underlying assumption about the relationship between market share and profitability varied across different industries and market segments

Limited strategic options came to be seen more as basic strategic missions. Created a false sense of what strategies were when none really existed

This approach neglected capital markets and portrayed the notion that firms needed to be self-sufficient in capital

Failed to compared compare the competitive advantage of business received from being owned by a particular company with the costs of owning it

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Limitations of Portfolio Matrix Approach

! ! ! CAUTION All methods of Portfolio Analysis

involves Subjective Factors

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Competitive Strategy Motivation

to cope successfully with the five competitive forces• thereby, yield a superior ROI for the firm

Approaches– Many different approaches– But, best strategy for a given firm is unique

construction reflecting its particular circumstances

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Competitive Strategy (contd) Three potentially successful Generic

Competitive Strategies to outperform other firms in the industry.– Cost leadership – Differentiation – Focus

These may be pursued in combination, though possibility is rare in practice.

A fourth strategy – No Strategy and Stuck in the middle

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Stuck in the Middle

Market Share

Ret

urn

on I

nves

tmen

t

This graph may not hold good in every industry

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Generic Strategies – Common Risks

Failure to attain or sustain the strategy Erosion of strategic value being eroded

with industry evolution

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Generic Strategies – Risks – Low-Cost Strategy

Technological change nullifies past investments or learning Low-cost learning by industry newcomers or followers, through

imitation or through their ability to invest in state-of-the-art facilities

Inability to see required product or markeing change because of the attention placed on cost

Inflation in costs that narrow the firm’s ability to maintain enough of a price differential to offset competitors’ brand images or other approaches to differentiation

Eg., Ford neglecting model change and the requirement for a second car among the American customers

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Generic Strategy – Risks -- Differentiation

The cost differential between low-cost competitor and the differentiated firm becomes to great to hold brand loyalty. Thus buyer ready to sacrifice some of the features, services or image for cost savings

Fall in buyer’s need for differentiation. This can occur as buyers become more sophisticated

Imitation narrows perceived differentiation, a common occurrence as industries mature

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Generic Strategies – Risks -- Focus

The cost differential between broad-range competitors and the focussed firm widens to eliminate the cost advantages of serving a narrow target or to offset the differentiation achieved by focus

The differences in desired products or services between the strategic target and the market as a whole narrows

Competitors find sub-markets within the strategic target and out-focus the focuser

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Industry Evolution Structural Analysis provides

a frame work for Industry structure analysis

Industry structure itself, however, undergoes change

Such changes which affect the five forces are strategically vital

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Industry Evolution

Introduction Growth Maturity Decline

Time

Indu

stry

Sal

es

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Industry Evolution Duration of stages vary widely from Industry

to Industry Difficult to identify, which stage of evolution

the industry is in and hence it reduces the usefulness of the concept

Industry growth does not always go through the S-shaped pattern at all

Some industries revitalise after a decline Some industries skip some stages altogether

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Industry Evolution (contd..) Industry evolves from Initial Structure to Potential

Structure Evolutionary processes push the industry towards its

Potential Structure { eg., Automobile Industry started as a labour intensive industry and ended up as high volume mass production}

Based on underlying technology, nature of present and potential buyers and various other factors, Industry evolution can take a wide range of paths

Investment decisions of industry players do affect the industry evolution

Role of the Luck and Chance in evolution !!

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Industry Evolution (contd..)Criticisms of Product Life Cycle Duration of stages vary widely from Industry

to Industry Difficult to identify, which stage of evolution

the industry is in and hence it reduces the usefulness of the concept

Industry growth does not always go through the S-shaped pattern at all

Some industries revitalise after a decline Some industries skip some stages altogether

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Industry Evolution (contd..) A few Industry Specific Change Factors Initial Structure Structural Potential Particular firms’ investment Decisions

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Industry Evolution (contd..) A few Generally applicable Change Factors Long-run changes in growth

– Demographics– Trends in needs– Change in relative position of substitutes– Changes in the position of complementary products– Penetration of customer group– Product change

Changes in Buyer segments served Buyer’s learning Reduction of uncertainty Diffusion or proprietary knowledge Accumulation of knowledge

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Industry Evolution (contd..) A few Generally applicable Change Factors Expansion (or Contraction) in scale Changes in input and currency costs Product innovation Marketing innovation Process innovation Structural change in adjacent industries Government policy change Entries and exits

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Industry Evolution (contd..) KEY RELATIONSHIPS IN THE INDUSTRY

EVOLUTIONIndustries do not change in a piecemeal fashion.

Change in each industry tend to trigger off changes in other areas

Will the industry consolidate– Industry Concentration and Mobility Barrier Move Together– No concentration takes place if Mobility Barriers are Low or

Falling– Exit Barriers Deter Consolidation– Long-run Profit Potential Depends on Future Structure

Changes in Industry Boundaries Firms can influence Industry Structure

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Types of Industries

Emerging Industries Mature Industries Declining Industries Fragmented Industries

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Overall Cost Leadership

Experience Curve Concept Efficient Scale facilities Vigorous pursuit of cost reduction from experience Tight cost and overhead control Avoidance of marginal customer accounts Cost minimisation in areas like R&D Service Sales Force Advertising

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Overall Cost Leadership – Defence Against the 5 Forces Rivals – Low costs can still earn returns after

competitors have competed away their profits through rivalry

Powerful Buyers – Exert power only to drive down prices to next most efficient competitor

Powerful Suppliers – Provides more flexibility to cope with input cost increases

New Entrants – Low-cost position entry barriers in terms of scale economies/ cost adv

Substitutes – low cost position usually places the firm in a favourable position vis-à-vis substitutes

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Overall Cost Leadership – Characteristics

High relative market share Products designed for easy manufacture A wide product line of related products Heavy up-front capital investment for state-of-

the-art equipment Aggressive pricing and willingness to absorb

start-up losses to build market share Resultant profit from high market share may

have to be re-invested in new equipment and facilities to maintain an efficient manufacturing facility

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Generic Strategy – Cost Leadership -- RequirementsGeneric Strategy Commonly Required

Skills and ResourcesCommon

Organisational Requirements

Overall Cost Leader ship Sustained capital investment and access to capital

Tight cost control

Process Engineering Skills

Frequent, detailed control reports

Intense supervision of labour

Structured organisation and responsibilities

Products designed for ease in manufacture

Incentives based on meeting stict quantitative targets

Low-cost distribution system

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Generic Strategy -- Differentiation

Differentiate the product or service offering of the firm

Create industry wide perception of uniqueness

Differentiation strategy does not ignore costs, but it is not the primary target

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Differentiation – Defence Against 5 Forces

Rivals – Brand loyalty of customers and resulting insensitivity to price

Powerful Buyers – Lack comparable alternatives mitigates buyer power

Suppliers – Differentiation yields higher margins to deal with supplier power

New Entrants – Customer loyalty and need to overcome uniqueness create entry barriers

Substitutes – Differentiation and Customer loyalty enables better positioning against substitutes

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Generic Strategies – Differentiation -- Requirements

Generic Strategy Commonly Required Skills and Resources

Common Organisational Requirements

DIFFEENTIATION

Strong Maketing abilities Strong co-ordination among function in R&D, product development, and marketing

Product Engineering Subjective measurement and incentives instead of quantitative measures

Creative flair Amenities to attract highly skilled labour, scientists, or creative people

Strong capability in basic research

Corporate reputation for quality or technological leadership

Long tradition in the industry or unique combination of skills drawn from other business

Strong co-operation from channels

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Differentiation -- Characteristics

Perception of exclusivity, sometimes incompatible with high market share

Achieving differentiation extensive research, product design, high quality materials or intensive customer support, etc trade-off with cost

Industry wide perception of exclusiveness. But not industry wide usage

Some industries sustain differentiation. Some do not.

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Generic Strategy -- Focus

Objective serve a particular target very well, either through differentiation or low cost

Focus on a particular – Buyer group/ product line Segment/– Geographic market

Focus can take different forms, as above Also Least vulnerable to substitutes/

Weakest Competitors May earn above average returns in its

industry

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Generic Strategy -- Focus

Uniqueness Perceived by the

customerLow Cost Position

Industry wide

Particular segment only

Strategic Advantage

DifferentiationOverall Cost Leadership

Focus

Stra

tegi

c T

arge

t

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Generic Strategy – Focus -- Requirements

Generic Strategy Commonly Required Skills and Resources

Common Organisational Requirements

Focus Combination of the policies for the other two generic strategies, directed at the particular strategic target

Combination of the policies for the other two generic strategies, directed at the particular strategic target

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BCG Based on use of industry growth and relative

market share as proxies for– the competitive position of a firm’s business unit in

its industry– the resulting net cash flow required to operate the

business unit

Underlying assumption – Experience curve is operating

• firm with largest relative share = lowest cost producer

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BCGStars Question marks

Cash cows Dogs

A select few (netusers of resources)

(net suppliers of resources)

Remainder divested

Mar

ket G

row

th R

ate

Low

LowHigh

High

Relative Market Share ( Cash Generation)

Cas

h us

e

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BCG -- Disadvantages

– Markets defined properly to account for important shared experience and other interdependencies with other markets. This is often a subtle problem and requires a great deal of analysis

– The structure of the industry and within industry are such that relative market share is a good proxy for competitive position and relative costs. This is often not true

– Market growth is a good proxy for required cash investment. Yet profits (and cash flow) depend on a lot of other things.

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GE-McKINSEY-SHELL

High Medium Low

Hig

hM

ediu

mL

ow

Divest

Invest

SelectivelyInvestB

usin

ess

Uni

t Pos

itio

n

Industry Attractiveness

SizeGrowthSharePositionProfitabilityMarginsTech PosStren/WeakImagePollutionPeople

SizeMarket GrowthPricingMarket DiversityCompetitive StructureIndustry ProfitabilityTechnical RoleSocialEnvironmentalLegalHuman

1.Identify Industry attractiveness factors2.Assign weight to each factor3.Obtain weighted composite score4.Classify the score into ratings H/M/L5.Classify business units into different categories

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Arthur D Little – Life Cycle Approach

Favourable

Tenable

Weak

Dominant

Strong

Embryonic Growth Mature Aging

Life Cycle Stage

Com

peti

tive

Pos

itio

nNatural D

evelopment

Selective Development

Prove Viability

Out

Natural Development Strategies are appropriate when the SBU is in a mature industry and is competitive. The SBU deserves strong supportSelective Development refers to strategies that concentrate on industries that are attractive or on SBUs that have competitive competenciesProve Viability is transitional strategy that cannot be sustained. The situation has to be changedOut is a strategy for withdrawal

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Arthur D Little – Life Cycle Approach

Identify each line of business – finding commonalities among products and business lines ( use criteria of common rivals, customers, sustainability, prices, quality/style and divestment of liquidation).

Assess Life Cycle stage of each business Identify the competitive position of the firm Identify the strategy for the SBU based on life cycle

stage and competitive position Assign strategic thrust to natural strategy Select one of the 24 generic strategies ( refer to

table)

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BCG’s Strategic Environment Matrix

FragmentedApparel, house-building, jewelry

retailing, sawmills

SpecialisationPharmaceuticals,

luxury cars, chocolate confectionary

StalemateBasic chemicals,

volume-grade paper, ship owning (VLCCs),

VolumeJet engines,

supermarkets, motorcycles, standard

microprocessorsSou

rces

of

Adv

anta

ge

Size of AdvatageSmall

Sm

all

Big

Big

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Analysing Business Environment -- Macro External Environment Analysis

Political Economic Social Technologies (PEST) framework

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Some Possible Trends in the environment

Political TrendsRelations with Pakistan, China, US, Europe, ASEAN, RussiaEmergence of Coalition PoliticsFuture of trade unions

Economic TrendsEconomic LiberalisationFE ControlsMonetary PoliciesInflationary Trends

Social TrendsEmergence of middle class with purchasing powerNuclear familiesEmergence of ‘anti-globalisation’ movesBoom in leisure industries

Technological TrendsCommunication, InternetPublic Transport and InfrastructureUse of new synthetic materialsEmergence of medicinesAutomation

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Analysing Business Environment—External Environment Analysis

– External Environment Analysis• Industry Analysis• Competitor Analysis• Using Porter’s

– Five Forces Model– Competitor Analysis Framework

• Concept of compelementarity as expressed by Ghemwat

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Analysing Business Environment – Firm Level Internal Analysis Firm level Internal Analysis using

– Historical data– SW analysis Key Success Factor of the

Industry to arrive at a Strategic Advantage Profile (SAP)

– OT analysis Environment Threat & Opportunities Profile ( ETOP)

– Concepts of• Learning Curve and Experience Curve

– Profit Impact of Marketing Strategy – PIMS – a Quantitave approach to portfolio planning

– Vulnerability Analysis

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Political Environment

Political influence the legislations and government rules and rules under which the firm operates –Anti trust laws

– Fair trade decisions– Tax programs– Minimum usage legislation– Pollution policies– Pricing policies– Administrative activities

Patent lawsGovernment subsidiesProduct research grantsSupplier Function

Customer FunctionCompetitor Function

Influences which could be both positive and negative

Other functions influenced by political activity

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Economic Environment

Consumption patterns and wealth of consumers

Prime interest rates Inflation rates Trends in growth of GNP General availability of credits Level of disposable income Propensity to spend at national and

international levels

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Social Envionment

Cultural Demographic Religious Educational Ethnic conditioning

Examples --Books and periodicalsConsumer DurablesFashion GarmentsRestaurantsFast Food JointsEntertainment – TV serials

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Technological Environment

Cost of Technology Rate of change of technology Receptivity to new technology and its

adoptionComputer Hardware Steel IndustryAutomobile Industry

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Political Environment

Chinese environment EEPZs in India Tax holidays in backward areas – eg. Goa till

1996 Growth of IT in AP during late 1990s Investment companies registered in Cayman

Islands, Mauritius Shipping companies registered in Liberia Pharmaceutical companies favoured by

Indian patent laws

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Supplier function – – when private business is dependent on government-

owned resources and stockpiles of agricultural products

• Example – telecom companies in India ( till recently )

Customer function – – government demand for products and services

• Example – defence, PWD, telephones, Railways

Competitor function – – protection of consumers and local industries from

imports.– Govt’s plans to help industries to exploit

opportunities • Example – Aviation industry ( Boeing Vs Air Bus)

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Examples of effect of Economic Environment

Emergence of an automobile industry in India

Investment in emerging economies by FII

Decision by makers of luxury goods to invest in a country

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External Environment Analysis

Porter’s Five Forces Model Concept of Complementarity

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Firm Level Internal Analysis

Analysing Departments and Functions– Production/Operations/Technical

• Strategies for small businesses• Strategies for large business units

– Finance and accounting– Marketing– R & D

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Production/operation/technical

Output produce – > sum of

• Costs of the inputs• Transformation process

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Strategies for small businesses

Essentially low investments in– Plant– Equipment– Long-term advertising

Niche market – competes on the basis of quality and customised preferences

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Strategies for large businesses

Capital – Labour Substituion Economies of Scale – Reduction in

average cost per unit Learning – Accumulation of a useful

body of knowledge as a result of experience

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Finance Accounting Study of Financial situation Understanding the

operation of a company– Working Capital Requirement Operations– Financial Parameters Efficiency and Leveraging

capanility Critical areas of functioning

– Scanning the business investments and allotment of funds– Planning for securing and using funds– Controlling expenditure– Reporting all transactions and resuls to appropriate parties

Use of ratios Financial Analysis strengths and Weaknesses Analysis must be directed towards the needs of a

specific situation. ( It is not a standardised process)

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Use of Ratios Liquidity Ratios

– Current Ratio– Quick Ratio

Leverage Ratios– Debt Ratio– Debt to Equity Ratio– Times interest earned Ratio

Activity Ratios– Inventory Turnover– Average Collection Period– Total Asset Turnover– Fixed Turnover

Profitability Ratios– Profit Margin– Return on Assets– Return on equity

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Marketing Study of the product market Links up the organisation with external

environment– Market Research– Market Analysis– Market Forecasting– Sales Forecasting– Advertising– Direct Selling

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R & D Product R & D

– Innovations in products– High product Differentiation Strategies

Process R & D– Attempts to reduce costs of operations– Seeks constant improvement through more

efficient processes– Low cost strategies

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Vulnerability Analysis Every business is based on some “pillars”

– Needs or use functions– Uses, habits, values– Technology stability– Inputs and resources– Niche or market segment– Existent constraints, sanctions, incentives,

complementary products, alternative products cost stability

Aim of Vulnerability analysis is to identify those pillars and possible actions to be taken in response to possible damage to those pillars

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Steps involved in Vulnerability Analysis Identification of elements on which the

survival of business depends (“pillars”) Identification of events which might destroy

the “pillars” Analysing the probability of occurrence of

those events Analyse the impact of those events Identify the actions to be taken, should the

event occur Either take immediate action or wait for the

probability to increase

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Vulnerability Matrix

Defenceless Endangered

Vulnerable Prepared

Company’s ability to reactLow High

ImpactOfthreat

Low

High

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Porter’s Five Forces Model

Threat of New Entrants Intensity of Rivalry among existing

competitors Bargaining Power of Buyers Bargaining Power of Suppliers Threat of Substitutes

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5 forces model

Rivalry among Industry competitorsSuppliers

Substitutes

New Entrants

Buyers

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Concept of Complementarity

Additional Variables incorporated into the intensity of the Five Forces

Complementors– Other firms from which customers buy

complementary products– Other firms to which suppliers sell

complementary resources

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The value Net

companycompetitors complementors

customers

suppliers

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Game Theory

Competitive Activity– Involving

• Players• Strategies• Outcomes• Payoffs• Equilibria

Two strategists concerned with game theory– Adam M Brandenburger– Barry J Balebuff

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Threat of New Entrants – Six Barriers

Economies of Scale Product Differentiation Capital Requirement Cost disadvantages of independent size Access to distribution channels Government policy

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Economies of Scale Higher the volume of production lower

the average cost But the total cost will be higher Similar entry barriers due to economies

of scale in – Distribution– Utilisation of sales forces– Financing for business

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Product Differentiation

Brand Identification Customer Loyalty

AdvertisingCustomer ServiceProduct DifferencesFirst Mover

involves considerable cost

ExampleSoft drinkOTC drugsCosmetics Investment Banking

Domino case ??Jet airways ??NIIT ??

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Capital Requirement

Capital is required for– Infrastructure expenditure– Customer credit– Inventories– Start up losses– R&D– Advertising– Marketing

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Cost disadvantage of independent size

Learning curve & Experience curve Proprietary technology Access to sources of raw material Assets bought at low prices Govt Subsidies Favourable locations

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Access to distribution channels

Fight for the shelf space– Price breaks– Promotions– Salesmanship

Compounded in case of limited no of channels

Creation of new independent channels

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Govt Policies

Imposition of Controls Mandatory Licence Requirements Limited Access to Raw materials Indirect controls such as Environment,

Labour or Social Laws– Eg

• Chinese market• Trucking, Railways, Liquour industries

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Rivalry among existing firms

One firm tries to increase market sharePrice wars, Advertising battles, New product

launches, Enhanced customer services, Additional Warranties

Causes for intense rivalryToo many competitors Industrial growth slowdownLack of differentiationAbsence of switching costsVariety of reasons ranging from exit barrier to

loyalty of old players

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Bargaining power of Buyers

Buyers are powerful under the following circumstances– Too many suppliers and a Few and Large Buyers– Large Quantity purchasers– Dependency on buyers for a large percentage of

its total orders– Low switching costs enables buyers to play the

suppliers against each other– Feasibility of purchasing from several companies

at a time– Threat of vertical integration

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Bargaining power of Suppliers

Suppliers are powerful under the following circumstances– An important product with few substitutes– No single industry is a major customer for the

supplier– Highly differentiated, not substitutable and high

switching costs– Threat of vertical integration– Unable to reciprocate with threat of vertical

integration

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Threat of substitutes

Closer the substitute higher the threat Substitutes limit the scope of price rice

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GRAND STRATEGIES -- Concentrated Growth

Directs the resources to the profitable growth of a single product, in a single market, with a single dominant technology

Increase present customer’s rate of use– Increasing size of purchase– Increasing the rate of product obsolescence– Advertising other uses– Giving price incentive for increased use

Attracting competitor’s customers– Establishing sharper brand differentiation– Increasing promotional effort– Initiating price cuts

Attracting non-users to buy the product– Inducing trial use through sampling, price incentives, etc– Pricing up or down– Advertising new uses

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Rationale for Superior Performance Concentrated Growth Vs Unrelated Diversification Main Characteristics

– Ability to assess market needs– Knowledge of

• buyer behaviour• Customer price sensitivity• Effectiveness of promotion

Avoid situations that require undeveloped skills A major misconception

– Concentrated growth strategy settle for little or no growth Achieves growth by concentrating on the product-market

segment it knows best Some ways to achieve concentrated growth

– Increased productivity– Better coverage of product-market segment– More efficient use of technology

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Conditions that favour Concentrated Growth Industry resistant to major technological advancements

– Late growth or mature stages of prduct life cycle

– Stable product demand

– High industry barriers ( such as capitalisation) Firm’s target markets are not product saturated. Gaps provide

scope for growth Sufficiently distinctive product market dissuading adjacent

product makers from making an entry Inputs are stable in price and quantity and available in right

quantities at right time Stable market without seasonal or cyclical swings Gaps left by the successful market generalists

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Risks and Rewards of Concentrated Growth Lower risk than other strategies during stable growth Higher risks during changing environment Vulnerable to

– Changes in demand if dependent on a single product– Changes in economic environment if dependent on a single

industry Concentrating on single market makes firms adept at

observing future trends. Failure to do so results in disastrous outcomes.

Vulnerable to high opportunity costs resulting from ignoring other options which could use firm’s resources

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GRAND STRATEGIES -- Market Development

Lowest risk and lowest cost after Concentrated Growth Strategy Firm practices a “form of concentrated growth” by identifying new

uses for same products and new markets Changes in media selection, promotional appeals and

distribution can initiate this approach Opening branches in new cities, states or countries Define new psychographic, demographic or geographic markets

Eg – Du Pont -- Kevlar -- bullet proofing to boat building

– Aspirin to lower the incidence of heart attack

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GRAND STRATEGIES -- Market Development

Opening additional geographic markets– Regional expansion– National expansion– International expansion

Attracting other market segments– Developing product versions to appeal to other market

segments– Entering other channels of distribution– Advertising in other media

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GRAND STRATEGIES -- Product Development

Substantial modification of an existing product Creation of a new but related product Adopted to

– Prolong the life-cycle of an existing product– Take advantage of an existing brand or customer base

Penetration of existing market with the new or modified products related to an existing product

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GRAND STRATEGIES -- Product Development

Developing a new product– Adapt ( to other ideas, developments)– Modify ( change colour, motion, sound, odour, form, shape)– Magnify ( stronger, longer, thicker, extra value)– Minify (smaller, shorter, lighter)– Substitute (other ingredients, process, power)– Rearrange (other patterns, layout, seuence, components)– Reverse ( inside out)– Combine ( blend, alloy, assortment, ensemble, combine

units, purposes, appeals, ideas) Developing quality variations Developing additional models and sizes ( product

proliferation).

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GRAND STRATEGIES -- Innovation

In many industries it is risky not to innovate Customer expectation in both consumer and

industrial markets High initial profits As profitability shifts from innovation to

marketing or production, etc introduce another novel idea

NOTE THE DIFFERENCE BETWEEN THIS STRATEGIC APPROACH AND THE APPROACH OF EXTENDING AN EXISTING PRODUCT’S LIFE CYCLE BY PRODUCT EXTENSION

NOTE THE DIFFERENCE BETWEEN THIS STRATEGIC APPROACH AND THE APPROACH OF EXTENDING AN EXISTING PRODUCT’S LIFE CYCLE BY PRODUCT EXTENSION

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Most growth firms appreciate the need to innovate

Few firms use innovation as their fundamental way of relating to markets

Examples ???

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Risk – few innovative ideas prove ultimately profitable– 58 initial ideas– 12 pass initial screening– 7 withstand evaluation of potntial– 3 survive development attempts– 2 appear to have profit potential after test

marketing– 1 commercially successful

{A study by Booz Allen & Hamilton Management Research Department}

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GRAND STRATEGIES -- Horizontal Integration

Acquisition of one or more “similar” firms operating at the “same stage of the production-marketing chain”

Eliminates competition Provides access to new markets Examples ??

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GRAND STRATEGIES -- Vertical Integration

Acquisition firms that supply own firm’s inputs or are customers for own firm’s output

Backward vertical integration Forward vertical integration Acquisition could be purchase of common

stocks, purchase of assets, or exchanging ownership interests

Examples ??

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GRAND STRATEGIES -- Vertical Integration

Textile producerTextile producer

Shirt manufacturer Shirt manufacturer

Clothing Store Clothing Store

Vertical Integration

Horizontal Integration

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GRAND STRATEGIES -- Comparison of Horizontal & Vertical Integration

Horizontal Integration– Expands the operation– Greater market share– Improved economies of scale– Increased efficiency of capital use– Low to moderate risk since the success of

expansion is dependent on proven abilities

Risks– Increased commitment to one type of business

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GRAND STRATEGIES -- Comparison of Horizontal & Vertical Integration

Vertical Integration– Backward integration increases

• dependability of supply • quality of raw material

{ small no of suppliers and large no of competitors controls cost and increases predictability }

– Forward integration increases • Predictability of demands

– Risk • Resulting from expansion into areas requiring strategic

managers to broaden the base of their competencies and to assume additional responsibilities

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Tapered Integration Partial Vertical Integration ( backward or

forward) Firm’s requirement over and above the fairly

large and efficient in-house production If the firm is not large, disadvantages of a

small scale in-house operation Full Vertical Integration Vs Tapered

Integration – Choice varies from industry to industry and firm to firm

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Tapered Integration -- Examples

Co-Cola and Pepsi own some bottlers and have contracts with outside bottlers

Oil companies owning some tankers and using other shipping companies

Automobile companies making own spare parts and buying some from outside

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Tapered Integration -- Advantages

Expands input and output channels without significant capital outlay

Use internal costs and profits to favourably influence external negotiations

Use outside suppliers as a yardstick to control internal manufacturing

Access to external R & D Degree of taper can be made to suit expected

market fluctuations Full knowledge of cost of operation in the adjacent

industry – effective bargaining power Can discipline the suppliers/customers with the

threat of full integration

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Tapered Integration -- Disadvantages

Sacrifices economies of scale Makes co-ordination and monitoring more

difficult By necessity requires the firm to buy from

or sell to competitors

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Quasi Integration

A Relationship somewhere in between long term contracts and full ownership, between vertically related business

Different forms of Quasi IntegrationMinority equity investments

Loans or loan guarantees Repurchase credits Exclusive dealing agreements Specialised logistical facilities Co-operative R & D

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Quasi Integration -- Advantages

Achieves vertical integration without all the costs Creates greater interests between buyer and seller Facilitates specialised arrangements ( logistical

facilities) Lowering unit costs Reduces the risk of demand and

supply interruption Does not need full capital investment for achieving

integration

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GRAND STRATEGIES -- Concentric Diversification

Diversification involves distinctive departure from a firm’s base of operations

{ typically acquisition or internal generation (spin-off) of a separate business with synergistic possibilities counterbalancing the strengths and weaknesses of the two businesses.}

Concentric Diversification -- acquisition of business that are related to the acquiring firm in terms of

• Technology• Markets• Products

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GRAND STRATEGIES -- Concentric Diversification

Acquires new businesses whose products, markets, distribution channels, technologies and resource requirements are similar but not identical

Increased profits, strengths and opportunities Decreased weaknesses and exposure to

threats Acquisition results in synergies and not

interdependence

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GRAND STRATEGIES -- Conglomerate Diversification

Acquires a business which offers the most promising investment opportunity

Principal concern (and often the sole concern) is the profit pattern of the new venture

Little concern for any kind of market/product/distribution channel synergy with the existing business

Focus on financial synergy – – Counter cyclical sales– High cash/low opportunity and low cash/high

opportunity business– Debt free and highly leveraged business

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Motivations for Acquisition Increase in the firm’s stock value Increase the growth rate of the firm Make investment that represents better use of funds than

plowing them into internal growth Improve stability of earnings and sales by acquiring firms whose

earnings and sales complement the firm’s peaks and valleys Balance or fill out the product line Diversify the product line when life cycle of current product has

peaked Acquire a needed resource quickly (eg., high quality technology

or high quality management) Achieve tax savings ( offset against other firm’s losses) Increase efficiency and profitability, especially if there is synergy

between the acquiring firm and the acquired firm

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GRAND STRATEGIES -- Conglomerate Diversification – seven sins of strategy acquisition

Wrong target Wrong price Wrong structure –

– Legal structure for entities– Geographic jurisdiction– Capitalisation structure

Lost deal ( often due to poor communication) Management difficulties ( lack of attention to

management details) Closing crisis ( unavoidable changed conditions) Operating transition crisis

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GRAND STRATEGIES -- Turnaround

Firm finds itself with declining profits due to– Economic recession– Production inefficiency– Innovative breakthrough by competitors

Survival and eventual recovery through turnaround Two forms of retrenchment employed singly or in

combination– Cost reduction

• Decreasing workforce / Lay off• Leasing instead of purchasing equipment• Extending life of machinery• Eliminate elaborate promotionals• Drop items from production line• Discontinue low margin customers

– Asset reduction• Sale of land, buildings and equipment considered non-essential• Elimination of perks ( co a/c or executive cars )

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GRAND STRATEGIES -- Turnaround

Externalfactors

Internalfactors

Declining sales ormargins

Low

High

Imminent bankruptcy

CostReduction

AssetReduction

EfficiencyMaintenance

EntreprenuerialReconfiguration

Stability

Turnaround situation Turnaround Response Cause Severity Retrenchment phase Recovery phase

(operating)

(strategic)

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GRAND STRATEGIES -- Divestiture

Sale of a firm or a major component of the firm Occasions for divestiture

– When retrenchment fails to achieve the desired turnaround– When a non-integrated business activity achieves an

unusually high market value

Intent is to find a buyer willing to pay premium above the value of a going concern’s fixed assets

Reasons for divestiture– Partial mismatch between acquired and parent firm– Corporate financial needs– Government antitrust action

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GRAND STRATEGIES -- Liquidation

Typically sold in parts (only occasionally as a whole – but for its tangible asset value and not as a going concern)

An admission of failure by strategic managers Least attractive strategy As a long term strategy, it minimises losses Plan to get greatest possible return Planned liquidation can be worthwhile

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GRAND STRATEGIES -- Bankruptcy

In a week, on an aveage more than 300 companies fail in USA. Out of this 75% file for liquidation bankruptcy

Bankruptcy Situation Harshest Solution – Liquidation bankruptcy

– Court appointed trustee converts the properties into cash and distributes the proceeds to creditors on a pro-rata basis ( US chapter 7)

A conditional second chance – Reorganisation bankruptcy– Under court approval ( Chapter 11 US )– In case of realistic possibility of long-term survival– Restructuring of debts– Close unprofitable activities & Reorganise businesss

Emergence from Bankruptcy– Analysis of the causes of bankruptcy and severity of the problem– Recovery strategy– Creditors’ faith in the company and its competencies

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GRAND STRATEGIES -- Bankruptcy in US

In a week, on an aveage more than 300 companies fail in USA.

75% file for Liquidation Bankruptcy 25% file for Reorganisation Bankruptcy

{ Source Strategic Management – John Pearce and Richard Robinson; Eighth Edition 2003 }

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GRAND STRATEGIES -- Joint Ventures

Two or more firms – Each having a some but not all capabilites for success in a particular environment – joint together. Eg., Petroleum industry

Joint ownership Strategic advantages for all participants Extends supplier-consumer relationship Presents new opportunities with shareable risks But often limits discretion, control and profit potential

of partners Demands great managerial attention

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GRAND STRATEGIES -- Strategic Alliances

Partnerships that exist for a defined period during which the partners contribute their skills and expertise to a co-operative project

Partners may learn from each other One may “steal” knowledge/technology from the other Many licensing agreements – eg., patents,trademarks or

technical know-how, etc., are granted to a licensee for a specified period of time

Contract manufacturing Franchisee Licensing Outsourcing is a rudimentary example

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GRAND STRATEGIES -- Consortia, Keiretsus, Chaebols

European Consortia – joint programs involving different companies

Keiretesu – Japanese undertaking involving up to 50 different firms that

are joined around a large trading company or bank– Co-ordinated through interlocking directories and stock

exhanges– Designed to minimise the risk of competition in part through

• Cost sharing• Increased economies of scale

Chaebol– South Korean Consortium or Keiretsu– Typically financed through government banking groups– Largely run by professional managers

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Fragmented Industries – Reasons for Fragmentation Low overall entry barriers Absence of Economies of Scale or Experience Curve High Transportation Costs High Inventory Costs or Erratic Sales Fluctuation No Advantages of Size in Dealing with Buyers or

Suppliers Diseconomies of scale in Some Important Aspect Requirement of heavy Creative Content Need for Close Local Control Importance of Personal service as a key element of

success…..Contd/-

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Fragmented Industries – Reasons for Fragmentation ( Contd) Importance of local image and local contacts Diverse Market Needs High Product Differentiation (particularly if based

image) Exit Barriers Local Regulation Government Prohibition of Concentration Newness

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Fragmented Industries – Common Approaches to Consolidation Create Economies of Scale or Experience Curve Standardise Diverse Market Needs Neutralise or Split Off Aspects Most Responsible for

Fragmentation Make Acquisition for a Critical Mass Recognise Industry Trends Early

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Fragmented Industries – Industries that are STUCK Existing Firms Lack Resources or Skills Existing Firms are Myopic or Complacent Lack of Attention by Outside Firms

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Fragmented Industries – Coping with Fragmentation Tightly managed Decentralisation “Formula” Facilities Increased Value added Specialisation by product type of product segment Specialisation by customer type Specialisation by type of order A Focused Geographic Area Bare Bones/No Frills Backward Integration

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Fragmented Industries – Potential Strategic Traps Seeking Dominance Lack of Strategic Discipline Over centralisation Assumption that Competitors have the same

overhead and objectives Over-reaction to new products

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Fragmented Industries- Formulating Strategies

What is the structure of the industry and the position of the competitors

Why is the industry fragmented Can the fragmentation be overcome? How? Is overcoming fragmentation profitable ?

Where should the firm be positioned to do so?

If the fragmentation is inevitable, what is best alternative for coping with it?

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Emerging Industries – Structural EnvironmentCommon Structural Characteristics Technological Uncertainty Strategic Uncertainty High Initial Costs but Steep Cost Reduction Embryonic companies and spin-offs First Time Buyers Short Time Horizon Subsidy

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Emerging Industries – Structural EnvironmentEarly Mobility Barriers

Proprietary Technology Access to Distribution Channels Access to Raw Materials and Other Inputs ( Skilled Labour) of

appropriate cost and quality Cost advantage due to experience, made more significant by

the technological and competitive uncertainities Risk, which raises the effective opportunity cost of capital and

thereby effective capital barriers

FACTORS WHICH ARE GENERALLY NOT MOBILITY BARRIERS IN AN EMERGING INDUSTRY

Brand identification, Economies of Scale, Capital

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Emerging Industries – Structural EnvironmentProblems Constraining Industry Development Inability to obtain Raw Materials and Components Period of Rapid Escalation of Raw Material Price Absence of Infrastructure Absence of Technology or Product Standardisation Perceived likelihood of Obsolescence Customer’s confusion Erratic Product Quality Image and Credibility with the Financial Community Regulatory Approval High Costs Response of Threatened Entities

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Emerging Industries – Structural EnvironmentEarly and Late Markets

Receptivity of market/market segments– Early market or Late market

Early Market– Performance is preferred over cost advantage

• Cost advantage is viewed with suspicion• Newness, uncertainty and erratic performance add to the

suspicion of cost advantage

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Emerging Industries – Strategic Choices

Strategy must cope with– Uncertainty– Risk

• Due to– Undefined rules– Unsettled or changing structure of the industry– Undefined competition

The same factors offer– Strategic freedom– Leverage from good strategic choices is the

highest in determining performance

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Emerging Industries – Structural Environment Early or Late Markets

Nature of the benefit State of the Art Required to Yield Significant Benefits Cost of Product Failure Introduction or Switching Costs Support Services Cost of Obsolescence Asymmetric Government, Regulatory or Labour

Barriers Resources to Change Perception of Technological Change Personal Risk to the Decision Maker

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Emerging Industries – Structural Environment Nature of the benefit

Performance Advantage– How large is the performance advantage for the particular

buyers? Buyers in different situation differ in this aspect– How obvious is the advantage?– How pressing is the need for the buyer to improve along the

dimension offered by the new product?– Does the performance advantage improve the competitive

position of the buyer?– How strong is competitive pressure to compel changeover?

Eg.,Performance advantage helps defensive / offensive action

– How price and/or cost sensitive is the buyer if the added performance entails higher cost?

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Emerging Industries – Structural EnvironmentNature of the benefit

Cost Advantage– How large is the cost advantage for the particular

buyer? – How obvious is the advantage?– Can a lasting competitive advantage be gained

from lowering costs?– How much competitive pressure compels

changeover?– How cost-oriented is the prospective buyer’s

business strategy?

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Emerging Industries – Strategic Choices

Shaping the Industry Externalities in Industry Development (narrow

self interest vs broad industry interest) Changing Role of Suppliers and Channels Shifting Mobility Barriers

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Emerging Industries – Strategic Choices(Contd)

Timing the Entry– Early Entry– Late Entry

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Emerging Industries – Strategic ChoicesTiming the Entry (Contd)

Situations where Early Entry is Recommended– Image and Reputation of a Pioneer is important– Importance of Learning Curve– High Customer Loyalty– Early Commitment of suppliers, distribution channels, etc

Situations where Early Entry is Risky– If Nature of competition and Market Segmentation is likely to

change as Industry matures– High cost of opening the market, which cannot be made

propreitory– Costly competition with small firms during early part and

competition from established players later– Likely technological changes due to obsolescence

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Emerging Industries – Strategic ChoicesTechniques for forecasting

Begin the scenario with Technology and Product Development

Scenario Based Forecast of Markets Scenario Based Forecast of Competition

Product/Technology

Markets Competition

Scenario A

Scenario B

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Emerging Industries – Strategic ChoicesWhich Emerging Industry to Enter

Attractive Initial Structure Attractive Ultimate Structure An Emerging Industry is attractive if its

ultimate structure ( not its initial structure) is one that is consistent with above-average returns and if the firm can create a defendable position in the industry in the long run

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Industries in Transition to Maturity – Industry Changes During Transition

Slowing Growth for more competition for market share Firms in the industry increasingly are selling to experienced

repeat buyers Competition often shifts toward greater emphasis on cost and

service There is topping-out problem in adding industry capacity and

personnel Manufacturing, marketing, distributing, selling, and research

methods are often undergoing change New products and applications are harder to come by International competition increases Industry profits often fall during the transition period, sometimes

temporarily and sometimes permanently Dealer’s margins fall, but their power increases

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Industries in Transition to Maturity – Strategic Implications

Overall Cost Leadership Vs Differentiation Vs Focus – Maturity makes the choice difficult

Need for Sophisticated Cost Analysis• Rationalising Product Mix; Correct Pricing

Process Innovation and Design for Manufacture Increasing Scope of Purchases Buy Cheap Assets Buyer Selection Different Cost Curves Competing Internationally Should transition be attempted at all

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Industries in Transition to Maturity – Strategic Pitfalls

A company’s self perception and its perception of the industry Caught in the middle The cash trap – investment to build share in a mature market

( revenue or profit ) Giving up market share too easily in favour of short-run profits Resentment and irrational reaction to price competition Resentment and irrational reaction to changes in industry

practices Overemphasis on “creative”, “new” products rater than

improving and aggressively selling existing ones Clinging to higher quality as an excuse for not meeting

aggressive pricing and marketing moves of competitors Overhanging excess capacity

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Industries in Transition to Maturity – Organisational Implications

More attention to costs, customer service and true marketing

Reduced attention to introducing new products Less “creativity” and more pragmatism Normally, organisational changes are imposed by

major shifts in strategy, evolution in the size and diversification of a company

Transition to a Mature industry can be a critical phase when attention has to be paid to change in organisational structure and systems

Tighter Budgeting, Increased Cross-co ordination

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Industries in Transition to Maturity – Organisational Implications (contd)

Scaled down expectation for financial growth More discipline from the organisation Scaled down expectation for advancement More attention to human dimension Recentralisation

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Industries in Transition to Maturity – Transition and the General Manager

Change from rapid growth to slow growth – Need to control cost– Need to compete on price– Cross functional co-ordination

Change in the atmosphere Change in the skills requirement

– More of administrative and organisational skills

Reaction of General Management– Denial and dogged adherence to earlier strategy– Complete withdrawal

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Declining Industries – Structural Determinants of Competition in Decline

Conditions of Demand– Uncertainty – permanent ?? Temporary ??– Rate and pattern of decline – cyclical change and decline – faster

the change, easier to identify– Structure of remaining demand pockets –endgame may be profitable

for survivors !!– Causes of decline – Technological substitution, Demographics, Shifts

in needs Exit Barriers

– Durable and Specialised Assets– Fixed Cost of Exit– Strategic Exit Barriers – Inter relatedness;Access to Financial

Markets; Vertical Integration– Information Barriers– Managerial or Emotional Barriers– Government and Social Barriers– Mechanism for Asset Disposition

Volatility of Rivalry

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Declining Industries – Strategic Alternatives

Leadership Niche Harvest Divest quickly

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Declining Industries – Choosing a Strategy

Is the structure of the industry conducive to a hospitable (potentially profitable) decline phase based on the conditions

What are the exit barriers facing each and every significant competitor? Who will exit ? Who will stay on?

Of the firms that stay, what are their relative strengths for competing in the pockets of demand that will remain in the industry? How seriously must their position be eroded before exit is likely ?

What are the exit barriers facing the firm? What are the firm’s relative strengths vis-à-vis the

pockets of demand that remain?

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Declining Industries – Strategies for Decline

LeadershipOr

Niche

HarvestOr

Divest Quickly

NicheOr

Harvest

Divest Quickly

Relative Strength in Remaining Pockets of demand

High LowU

nfav

oura

ble

Fav

oura

ble

F

or d

ecli

ne

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Declining Industries – Pitfalls

Failure to Recognise Decline A War of Attrition Harvesting without Clear Strength

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Declining Industries – Preparations for Decline

Minimise Investments or other actions that will raise exit barriers from any of the sources discussed

Place strategic emphasis on market segments that will be favourable under decline conditions

Create switching costs in these segments

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Fragmented Industries – Reasons for Fragmentation ( Contd) Importance of local image and local contacts Diverse Market Needs High Product Differentiation (particularly if based

image) Exit Barriers Local Regulation Government Prohibition of Concentration Newness

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Emerging Industries – Strategic ChoicesTiming the Entry (Contd)

Situations where Early Entry is Recommended– Image and Reputation of a Pioneer is important– Importance of Learning Curve– High Customer Loyalty– Early Commitment of suppliers, distribution channels, etc

Situations where Early Entry is Risky– If Nature of competition and Market Segmentation is likely to

change as Industry matures– High cost of opening the market, which cannot be made

propreitory– Costly competition with small firms during early part and

competition from established players later– Likely technological changes due to obsolescence

Business strategy

Business

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