Strategic Management

Strategic Management
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1. Introduction .......................................................................................................................................... 5
1.1 Levels of strategy ................................................................................................................................ 5
2. Process of Strategy ............................................................................................................................... 7
2.1 Strategic intent .................................................................................................................................... 7
2.2 Environmental analysis ....................................................................................................................... 8
2.3 Evaluation of strategic alternatives ..................................................................................................... 8
2.4 Choice ............................................................................................................................................... 10
2.5 Strategy implementation ................................................................................................................... 11
2.6 Strategy evaluation and control......................................................................................................... 12
3. Mission, Vision and Values ............................................................................................................... 12
3.1 Strategic Intent .................................................................................................................................. 12
3.2 Vision ................................................................................................................................................ 13
3.3 Mission.............................................................................................................................................. 13
3.4 Values ............................................................................................................................................... 14
4. Environmental Analysis ..................................................................................................................... 15
4.1 PESTEL Framework ......................................................................................................................... 15
5. Competitive Environment .................................................................................................................. 16
5.1 Porter’s 5 forces model ..................................................................................................................... 16
5.2 Strategic group mapping ................................................................................................................... 18
6. Internal Analysis ................................................................................................................................ 19
6.1 Resource based view of the firm ....................................................................................................... 19
6.2 Critical success factors ...................................................................................................................... 20
6.3 Value chain framework ..................................................................................................................... 20
6.4 Balance scorecard ............................................................................................................................. 22
6.5 Benchmarking ................................................................................................................................... 23
6.6 SWOT analysis ................................................................................................................................. 23
7. Industry Life Cycle............................................................................................................................. 25
8. Porter’s Generic Strategies ................................................................................................................. 26
9. Corporate Strategies ........................................................................................................................... 28
9.1 Stability Strategy ............................................................................................................................... 29
9.2 Growth Strategy ................................................................................................................................ 29
9.3 Retrenchment strategy ...................................................................................................................... 33
9.4 Combination Strategy ....................................................................................................................... 35
10. Diversification ............................................................................................................................... 35
10.1 Related Diversification (Concentric Diversification) ..................................................................... 35
10.2 Unrelated Diversification (Conglomerate Diversification) ............................................................. 36
10.3 Rationale for Diversification........................................................................................................... 36
10.4 Mergers and acquisitions ................................................................................................................ 37
11. Business portfolio analysis ............................................................................................................ 38
11.1 BCG’s growth share matrix ............................................................................................................ 39
11.2 GE’s strategic business planning grid ............................................................................................. 41
11.3 Product life cycle, PLC ................................................................................................................... 43
11.4 Experience curve ............................................................................................................................. 45
12. Strategy and Structure .................................................................................................................... 46
13. Evaluation of strategy .................................................................................................................... 46
13.1 Process of Evaluation ...................................................................................................................... 46
14. Competitive Advantage of Nations ................................................................................................ 47
15. WTO and RTP ............................................................................................................................... 49
15.1 Doha Round (The Doha Agenda) ................................................................................................... 50
15.2 Principles of the trading system ...................................................................................................... 50
15.3 Agreements in WTO ....................................................................................................................... 51


1. Introduction
The top management of an organization is always concerned with selection of a course of action from
among different alternatives to meet the organizational objectives. The process by which objectives are
formulated and achieved is known as strategic management and strategy acts as the means to achieve
the objective.
Strategy is the grand design or an overall 'plan' which an organization chooses in order to move or react
towards thee set objectives by using its resources. Strategies most often devote a general programme of
action and an implied deployment of emphasis and resources to attain comprehensive objectives. An
organization is considered efficient and operationally effective if it is characterized by coordination
between objectives and strategies. There has to be integration of the parts into a complete structure.
Strategy helps the organization to meet its uncertain situations with due diligence. Without a strategy, the
organization is like a ship without rudder. It is like a tramp, which has no particular destination to go to.
Without an appropriate strategy effectively implemented, the future is always dark and hence, more are
the chances of business failure.
A few aspects regarding nature of strategy are as follows:
 Strategy is a major course of action through which an organization relates itself to its
environment particularly the external factors to facilitate all actions involved in meeting the
objectives of the organization.
 Strategy is the blend of internal and external factors. To meet the opportunities and threats
provided by the external factors, internal factors are matched with them.
 Strategy is the combination of actions aimed to meet a particular condition, to solve certain
problems or to achieve a desirable end. The actions are different for different situations.
 Due to its dependence on environmental variables, strategy may involve a contradictory action.
An organization may take contradictory actions either simultaneously or with a gap of time. For
example, a firm is engaged in closing down of some of its business and at the same time
expanding some.
 Strategy is future oriented. Strategic actions are required for new situations which have not arisen
before in the past.
 Strategy requires some systems and norms for its efficient adoption in any organization.
 Strategy provides overall framework for guiding enterprise thinking and action.
The purpose of strategy is to determine and communicate a picture of enterprise through a system of
major objectives and policies. Strategy is concerned with a unified direction and efficient allocation of an
organization's resources. A well made strategy guides managerial action and thought. It provides an
integrated approach for the organization and aids in meeting the challenges posed by environment.
1.1 Levels of strategy

It is believed that strategic decision making is the responsibility of top management. However, it is
considered useful to distinguish between the levels of operations of the strategy. Strategy operates at three
levels: Corporate Level, Business Level, Functional Level.
There are basically two categories of companies- one, which have different businesses organized as
different directions or product groups known as profit centres or strategic business units (SBUs) and
other, which consists of companies which are single product companies. The example of first category

can be that of Reliance Industries Limited which is a highly integrated company producing textiles, yarn,
and a variety of petro chemical products and the example of the second category could be Ashok
Leyland Ltd which is engaged in the manufacturing and selling of heavy commercial vehicles.
The SBU concept was introduced by General Electric Company (GEC) of USA to manage product
business. The fundamental concept in the SBU is the identification of discrete independent product/
market segments served by the organization. Because of the different environments served by each
product, a SBU is created for each independent product/ segment. Each and every SBU is different from
another SBU due to the distinct business areas it is serving. Each SBU has a clearly defined
product/market segment and strategy. It develops its strategy according to its own capabilities and needs
with overall organizations capabilities and needs. Each SBU allocates resources according to its
individual requirements for the achievement of organizational objectives.
Figure: Levels of strategy
The three levels are explained as follows:
Corporate Level Strategy

At the corporate level, strategies are formulated according to organization wise polices. These are value
oriented, conceptual and less concrete than decisions at the other two levels. These are characterized by
greater risk, cost and profit potential as well as flexibility. Mostly, corporate level strategies are futuristic,
innovative and pervasive in nature. They occupy the highest level of strategic decision making and cover
the actions dealing with the objectives of the organization. Such decisions are made by top management
of the firm. The examples of such strategies include acquisition decisions, diversification, structural
redesigning etc. The board of Directors and the Chief Executive Officer are the primary groups involved
in this level of strategy making. In small and family owned businesses, the entrepreneur is both the
general manager and chief strategic manager.
Business Levels Strategy

The strategies formulated by each SBU to make best use of its resources given the environment it faces,
come under the gamut of business level strategies. At such a level, strategy is a comprehensive plan
providing objectives for SBUs, allocation of resources among functional areas and coordination between
them for achievement of corporate level objectives. These strategies operate within the overall
organizational strategies i.e. within the broad constraints and polices and long term objectives set by the
corporate strategy. The SBU managers are involved in this level of strategy. The strategies are related
with a unit within the organization. The SBU operates within the defined scope of operations by the

corporate level strategy and is limited by the assignment of resources by the corporate level. Business
strategy relates with the "how" and the corporate strategy relates with the "what".
Functional Level Strategy

This strategy relates to a single functional operation and the activities involved therein. This level is at the
operating end of the organization. The decisions at this level within the organization are described as
tactical. The strategies are concerned with how different functions of the enterprise like marketing,
finance, manufacturing etc. contribute to the strategy of other levels. Functional strategy deals with a
relatively restricted plan providing objectives for specific function, allocation of resources among
different operations within the functional area and coordination between them for achievement of SBU
and corporate level objectives.
Sometimes a fourth level of strategy also exists. This level is known as the operating level. It comes
below the functional level strategy and involves actions relating to various sub functions of the major
function. For example, the functional level strategy of marketing function is divided into operating levels
such as marketing research, sales promotion etc.
2. Process of Strategy
The process of strategy is cyclical in nature. The elements within it interact among themselves. According
to C.K. Prahalad, the process comprises of following six steps:
I. Strategic Intent
II. Environmental Analysis
III. Evaluation of strategic alternatives
IV. Choice
V. Strategy Implementation
VI. Strategy Evaluation and Control
We will discuss each of these steps in detail.
2.1 Strategic intent
Setting of organizational vision, mission and objectives is the starting point of strategy formulation. The
hierarchy of strategic intent lays the foundation for the strategic management of any organization. The
strategic intent makes clear what an organization stands for. It is reflected through vision, mission,
business definition and objectives.
Vision serves the purpose of stating what an organization wishes to achieve in long run. The process of
assigning a part of a mission to a particular department and then further sub dividing the assignment
among sections and individuals creates a hierarchy of objectives. The objectives of the sub unit contribute
to the objectives of the larger unit of which it is a part. From strategy formulation point of view, an
organization must define ‘why’ it exists, ‘how’ it justifies that existence, and ‘when’ it justifies the
reasons for that existence. The answers to these questions lie in the organization’s mission, business
definition, objectives and goals. These terms become the base for strategic decisions and actions.
The vision of an organization is the expectation of the owner of the organization and putting this vision
into action is mission. Often these terms are used interchangeably, but both are different. Mission is
relatively less abstract, subjective, qualitative, philosophical and non-imaginative. Mission has a societal
orientation and is a statement which reveals what an organization intends to do for a society. It is a public

statement which gives direction for different activities which organizations have to carry on. It motivates
employees to work in the interest of the organization.
The answer to the question that ‘how’ does an organization justifies its existence is defining business of
the organization. A business definition is the clear cut statement of the business or a set of businesses, the
organization engages or wishes to pursue in the future. It also defines the scope of the organization.
Once the organization’s mission and vision have been determined, its objectives, desired future positions
that it wishes to reach, should be identified. Organizational objectives are defined as ends which the
organization seeks to achieve by its existence and operation. Objectives represent desired results which
the organization wishes to attain. They indicate the specific sphere of aims, activities and
accomplishments. An organization can have objectives in terms of profitability and productivity.
Objectives provide a direction to the organization and all the divisions work towards the attainment of the
set objectives. Objectives and goals are the terms which are used interchangeably.
2.2 Environmental analysis
Every organization operates within an environment. This environment may be internal or external. For
conducting an environmental analysis, the strategic intent has to be very clear. This clarity in definition of
mission and objectives helps in the detailed analysis of the environment. Environmental analysis, also
known as environmental scanning or appraisal, is the process through which an organization monitors and
comprehends various environmental factors and determines the opportunities and threats that are provided
by these factors. There are two aspects involved in environmental analysis:
I. Monitoring the environment i.e. environmental search

II. Identifying opportunities and threats based on environmental monitoring i.e. environmental
diagnosis.
The environmental analysis plays a very important role in the process of strategy formulation. The
environment has to be analysed to determine what factors in the environment present opportunities for
greater accomplishment of organizational objectives and what factors present threats. Environmental
analysis provides time to anticipate the opportunities and plan to meet the challenges. It also warns the
organization about the threats. The analysis provides for elimination of alternatives which are inconsistent
with the organizations objectives. Due to the element of uncertainty, environmental analysis provides for
certain anticipated changes in the organization’s network. The organization equips itself to meet the
unanticipated changes and face the ever increasing competition.
An organization has to continuously grow in term of its core business and develop core competencies.
Through organizational analysis, the organization has to understand its strengths and weaknesses. It has to
identify the strengths and emphasize on them. At the same time, it has to identify its weaknesses and
improve them or try to eliminate them. Organizational threats and opportunities, strengths and
weaknesses help in identifying the relevant environmental factors for detailed analysis.
2.3 Evaluation of strategic alternatives

After environmental analysis, the next step is to identify the various strategic alternatives. After the
identification of strategic alternatives they have to be evaluated to match them with the environmental
analysis. All alternatives cannot be chosen even if all of these provide the same results. Obviously,
managers evaluate them and limit themselves. There are basically four grand strategic alternatives:

I. Stability
II. Expansion
III. Retrenchment
IV. Combination
Stability: In this, the company does not go beyond what it is doing now. The company serves with same
product, in same market and with the existing technology. This is possible when environment is relatively
stable.
Expansion: This is adopted when environment demands increase in pace of activity. Company broadens
its customer groups, customer functions and the technology. These may be broadened either singly or
jointly. This kind of a strategy has a substantial impact on internal functioning of the organization.
Retrenchment: If the organization is going for this strategy, then it has to reduce its process of strategy
scope in terms of customer group, customer function or alternative technology. It involves partial or total
withdrawal from three things. For example L & T getting out of the cement business. The objective varies
from company to company.
Combination: When all the three strategies are taken together, this is known as combination strategy.
This kind of strategy is possible for organizations with large number of portfolios.
Apart from these four grand strategies, different strategies which are used commonly are as follows:
Modernization: In this, technology is used as the strategic tool to increase production and productivity or
reduce cost. Through modernization, the company aims to gain competitive and strategic strength.
Integration: The company starts producing new products and services of its own either creating facility
or killing others. Integration can either be forward or background in terms of vertical integration. In
forward integration it gains ownership over distribution or retailers, thus moving towards customers
while in backward integration the company seeks ownership over firm’s suppliers thus moving towards
raw materials. When the organization gains ownership over competitors, it is engaged in horizontal
integration.
Diversification: Diversification involves change in business definition either in terms of customer

functions, customer groups or alternative technology. It is done to minimize the risk by spreading over
several businesses, to capitalize organization strength and minimize weaknesses, to minimize threats, to
avoid current instability in profit & sales and to facilitate higher utilization of resources. Diversification
can be either related or unrelated, horizontal or vertical, active or passive, internal or external. It is of the
following types:
I. Concentric diversification
II. Conglomerate diversification
III. Horizontal diversification
Joint Ventures: In joint ventures, two or more companies form a temporary partnership ( consortium).
Companies opt for joint venture for synergistic advantages to share risk, to diversify and expand, to bring
distinctive competences, to manage political and cultural difficulty, to take technological advantage and
to explore unexplored market.

Strategic Alliance: When two or more companies unite to pursue a set agreed upon goals but remain
independent it is known as strategic alliance. The firms share the benefits of the alliance and control the
performance of assigned tasks. The pooling of resources, investment and risks occur for mutual gain.
Mergers: It is an external approach to expansion involving two or more than two organizations.
Companies go for merger to become larger, to gain competitive advantage, to overcome weaknesses and
sometimes to get tax benefits. Merger takes place with mutual consent and common goals.
Acquisition: For the organization which acquires another, it is acquisition and for organization which is
acquired, it is merger.
Takeovers: In takeovers, there is a strong motive to acquire others for quick growth and diversification.
Divestment: In divestment, the company which is divesting has no ownership and control in that business
and is engaged in complete selling of a unit. It is referred to the disposing off a part of the business.
Turnaround Strategy: When the company is sick and continuously making losses, it goes for turnaround
strategy. It is the efforts in reversing a negative trend and it is the efforts to keep an organization alive.
All these alternatives are available to an organization and according to its objectives, it can decide on the
one which is most suitable.
2.4 Choice
The next logical step after evaluation of strategic alternatives is choice of the most suitable alternative.
For a business group, it may be possible to choose all strategic alternatives but for a single company it is
quite difficult. The strategic alternatives have to be matched with the problem. While making a choice,
two types of factors have to be considered:
I. Objective factors
II. Subjective factors
Objective factors are the ones which can be quantified while subjective factors are the ones which cannot
be quantified and are based on experience and opinion of people. Strategic choice is like a decision
making process. There are three objective ways to make a choice:
I. Corporate Portfolio Analysis

II. Competitor Analysis
III. Industry Analysis
Corporate Portfolio Analysis

When the company is in more than one business, it can select more than one strategic alternative
depending upon demand of the situation prevailing in the different portfolios. It is necessary to analyze
the position of different business of the business house which is done by corporate portfolio analysis. This
analysis can be done by using any of the seven technologies given below:
I. Experience curve
II. Product Life Cycle PLC concept
III. BCG Matrix
IV. GE nine cell Matrix

In the experience curve technique, the experience of the strategist enables him to decide which
businesses to enter or quit.
Depending upon the stage of the product life cycle of the business, one can make a strategic choice for
different portfolio.
Boston consultancy developed a matrix called BCG Matrix which is helpful to make strategic choice. In
this, the products are positioned based on various external and internal factors to know the continuity,
growth and discontinuing product. The factors given are specific in nature and attempt has been made to
quantify them.
The GE Nine Cell Matrix is a matrix in which nine positions are defined in terms of business strength
factors and industry attractiveness factors. The business strength factors include market share, profit
margin, ability to compete, market knowledge, competitive position, technology, and management caliber
and the industry attractiveness factor include market size, growth rate, profit, competition, economics
of scales, technology and other environmental factors. Nine cells are divided into three zones and
depicted by different colours i.e. green, yellow and red. Each zone of matrix presents a specific type of
strategy or set of strategies.
Competitor Analysis
In this analysis, we try to assess what the competitor has and what he does not have. We explore
everything with respect to the competitor. In competitor analysis, focus is on external environment as one
of the components of external environment is the competitor. The difference between SWOT analysis and
competitor analysis is that in competitor analysis we are concerned with only one component of the
environment i.e. competitor while in SWOT analysis we take about all the factors of the environment.
Industry Analysis
In industry analysis, all the competitors belonging to the particular industry with which the organization is
associated, are looked at. All the members of the industry are considered as a whole. In competitive
analysis, only the major competitors are assessed while in industry analysis all the competitors belonging
to the industry are looked at.
2.5 Strategy implementation

After the evaluation of the alternatives, the choice of strategy is made. This choice now needs to be
implemented i.e. strategy is now put into action. This step of strategy process is the implementation step.
This includes the activation of the strategic alternatives chosen. Strategy making and strategy
implementation are two different things. Strategy making requires person with vision while strategy
implementation requires a person with administrative ability. If the strategy made is not implemented
properly then the objectives would be lost. Strategy implementation is as good as starting a new business.
The stage requires looking at the problems and eliminating them. In strategy implementation, one has to
pass through different steps:
I. Project Implementation
II. Procedural Implementation
III. Resource Allocation
IV. Structural Implementation
V. Functional Implementation
VI. Behavioural Implementation

2.6 Strategy evaluation and control

This is the last step of the strategy making process. This is an ongoing process and evaluation and control
have to be done for future course of action as well. To get successful results and to achieve organizational
objectives, there has to be continuous monitoring of the implementation of strategy.
The evaluation and control of strategy may result in various actions that the organization may have to take
for successful well being, such actions may involve any kind of corrective measures concerned with any
of the steps involved in the whole process be it choice for setting mission or objectives. The process of
strategy formulation is considered as a dynamic process wherein corrective actions are taken and change
is brought in any of the factors affecting strategy.
Evaluation of strategy is done by the top managers to determine whether their strategic choice is
implemented in a manner that it is meeting the organization’s objectives. Evaluation emphasizes
measurement of results of a strategic action. On the other hand, control emphasizes on taking necessary
action in the light of gap that exists between intended results and actual results in the strategic action.
When evaluation and control is carried out efficiently, it contributes in three basic areas:
I. Measurement of organizational process

II. Feedback for future actions
III. Linking performance and rewards
3. Mission, Vision and Values

Strategies are involved in the formulation, implementation and evaluation of process. The hierarchy of
strategic intent lays the foundation for strategic management process. The process of establishing the
hierarchy of strategic intent is very complex. In this hierarchy, the vision, mission, business definition and
objectives are established. Formulation of strategies is possible only when strategic intent is clearly set
up. This step is mostly philosophical in nature. It will have long term impact on the organization.
3.1 Strategic Intent
The foundation for the strategic management is laid by the hierarchy of strategic intent. The concept of
strategic intent makes clear “what an organization stands for”. Hamel and Prahalad coined the term
strategic intent. A few aspects about strategic intent are as follows:
 It is an obsession with an organization.

 This obsession may even be out of proportion to their resources and capabilities.
 It envisions a derived leadership position and establishes the criterion, the organization will use to
chart its progress.
 It involves the following:
o Creating and Communicating a vision
o Designing a mission statement
o Defining the business
o Setting objectives
Vision serves the purpose of stating what an organization wishes to achieve in the long run. Mission
relates an organization to society. Business explains the business of an organization in terms of customer
needs, customer groups and alternative technologies. Objectives state what is to be achieved in a given
time period.

The concept of stretch and leverage is relevant in this context. Stretch is a misfit between resources and
aspirations. Leverage concentrates, accumulates, conserves and recovers resources so that a meagre
resource base can be stretched. Leverage reduces the stretch and focuses mainly on efficient utilization of
resources. The strategic fit matches organizational resources and environment. This positions the firm by
assessing organizational capabilities and environmental opportunities.
3.2 Vision
It is at the top in the hierarchy of strategic intent. It is what the firm would ultimately like to become.
Kotler defines vision as “description of something (an organization, corporate culture, a business, a
technology, an activity) in the future. The definition itself is comprehensive and states clearly the
futuristic position.
A few important aspects regarding vision are as follows:

 It is more of a dream than articulated idea.
 It is an aspiration of organization. Organization has to strive and exert to achieve it.
 It is powerful motivator to action.
 Vision articulates the position of an organization which it may attain in distant future.
For example vision statement of Tata Power is:
To be the most admired and responsible Integrated Power Company with international footprint,
delivering sustainable value to all stakeholder.
3.3 Mission
The mission statements stage the role that organization plays in society. It is purpose or reason for the
organization’s existence. Another definition may be “A mission provides the basis of awareness of a
sense of purpose, the competitive environment, degree to which the firm’s mission fits its capabilities and
the opportunities which the environment offers.
The above definition reveals the following:

 It is the essential purpose of organization.
 It answers “ why the organization is in existence”.
 It is the basis of awareness of a sense of purpose.
 It fits its capabilities and the opportunities which environment offers.
For example mission statement of Tata Power is:
We will become the most admired and responsible Power Company delivering sustainable value by:
 Operating our assets at benchmark levels

 Executing projects safely, with predictable benchmark quality, cost and time
 Growing the Tata Power businesses, be it across the value chain or across geographies, and
also in allied or new businesses
Difference in Mission and Vision
A Mission statement tells you the fundamental purpose of the organization. It concentrates on the present.
It defines the customer and the critical processes. It informs you of the desired level of performance. On

the other hand, a Vision statement outlines what the organization wants to be. It concentrates on the
future. It is a source of inspiration. It provides clear decision-making criteria.
Figure: Vision and mission statements
A mission statement can resemble a vision statement in a few companies, but that can be a grave mistake.
It can confuse people. Following are the differences between vision and mission:
 The vision describes a future identity while the Mission serves as an ongoing and time-
independent guide.
 The vision statement can galvanize the people to achieve defined objectives, even if they are
stretch objectives, provided the vision is specific, measurable, achievable, relevant and time
bound. A mission statement provides a path to realize the vision in line with its values. These
statements have a direct bearing on the bottom line and success of the organization.
 A mission statement defines the purpose or broader goal for being in existence or in the business
and can remain the same for decades if crafted well while a vision statement is more specific in
terms of both the future state and the time frame. Vision describes what will be achieved if the
organization is successful.
3.4 Values
Core Values are the essential and enduring tenets of an organization. They may be beliefs of top
management regarding employees’ welfare, costumer’s interest and shareholder’s wealth. The beliefs
may have economic orientation or social orientation. The core values of Tata’s are different from core
values of Birla’s or Reliance. The entire organization structure revolves around the philosophy coming
out of core values.
A few characteristics of core purpose are as follows:

 It is the overall reason for the existence of organization.
 It is why of an organization.
 This mainly addresses to the issue which organization desires to achieve internally.
 It is the broad philosophical long term rationale.
 It is the linkage of organization with its own people.

Infosys had pursued value system of C-LIFE — Customer focus, Leadership by example, Integrity and
transparency, Fairness and Excellence in execution, to achieve its goals.
4. Environmental Analysis
Strategic analysis is basically concerned with the structuring of the relationship between a business and
its environment. The environment in which business operates has a greater influence on their successes or
failures. There is a strong linkage between the changing environment, the strategic response of the
business to such changes and the performance. It is therefore important to understand the forces of
external environment the way they influence this linkage. The external environment which is dynamic
and changing holds both opportunities and threats for the organisations. The organisations while
attempting at strategic realignments, try to capture these opportunities and avoid the emerging threats. At
the same time the changes, in the environment affect the attractiveness or risk levels of various
investments of the organizations or the investors.
4.1 PESTEL Framework
The PESTEL framework is designed to provide managers with an analytical tool to identify different
macro-environmental factors that may affect business strategies, and to assess how different
environmental factors may influence business performance now and in the future.
The PESTEL Framework includes six types of important environmental influences: political, economic,
social, technological, environmental and legal. These factors should not be seen as independent factors.
Political factors are how and to what degree a government intervenes in the economy. Specifically,
political factors include areas such as tax policy, labour law, environmental law, trade restrictions, tariffs,
and political stability. Furthermore, governments have great influence on the health, education, and
infrastructure of a nation
Economic factors include economic growth, interest rates, exchange rates and the inflation rate. These
factors have major impacts on how businesses operate and make decisions. For example, interest rates
affect a firm's cost of capital and therefore to what extent a business grows and expands. Exchange rates
affect the costs of exporting goods and the supply and price of imported goods in an economy
Social factors include the cultural aspects and include health consciousness, population growth rate, age
distribution, career attitudes and emphasis on safety. Trends in social factors affect the demand for a
company's products and how that company operates. For example, an aging population may imply a
smaller and less-willing workforce (thus increasing the cost of labor). Furthermore, companies may
change various management strategies to adapt to these social trends (such as recruiting older workers).
Technological factors include technological aspects such as R&D activity, automation, technology
incentives and the rate of technological change. They can determine barriers to entry, minimum efficient
production level and influence outsourcing decisions. Furthermore, technological shifts can affect costs
quality, and lead to innovation.

Figure: PESTLE framework
Environmental factors include ecological and environmental aspects such as weather, climate, and
climate change, which may especially affect industries such as tourism, farming, and insurance.
Furthermore, growing awareness of the potential impacts of climate change is affecting how companies
operate and the products they offer, both creating new markets and diminishing or destroying existing
ones.
Legal factors include discrimination law, consumer law, antitrust law, employment law, and health and
safety law. These factors can affect how a company operates, its costs, and the demand for its products.
5. Competitive Environment
We just discussed the first level of the external analysis i.e. understanding of the macro environment,
which have an influence on the success or failure of an organisation’s strategies. However, it is the
immediate competitive environment which also influences an organisation and therefore has to be
understood alongside the general environment. The impact of the changes of the macro environment is
felt on the organisation and its strategies through their influences on the competitive forces of the
competitive environment. Hence an in-depth understanding of the industry is the next important step for
an organization as part of its external analysis.
5.1 Porter’s 5 forces model

Michael Porter provided a framework that models an industry as being influenced by five forces. The
strategic business manager seeking to develop an edge over rival firms can use this model to better
understand the industry context in which the firm operates. These five "competitive forces" are:
I. The threat of entry of new competitors (new entrants)

II. The threat of substitutes
III. The bargaining power of buyers
IV. The bargaining power of suppliers
V. The degree of rivalry between existing competitors

Figure: Porter’s 5 forces
I. Threat of New Entrants: New entrants to an industry can raise the level of competition, thereby
reducing its attractiveness. The threat of new entrants largely depends on the barriers to entry.
High entry barriers exist in some industries (e.g. shipbuilding) whereas other industries are very
easy to enter (e.g. estate agency, restaurants).
II. Threat of Substitutes: The presence of substitute products can lower industry attractiveness and
profitability because they limit price levels. The threat of substitute products depends on Buyers'
willingness to substitute, the relative price and performance of substitutes, the costs of switching
to substitutes.
III. Bargaining Power of Suppliers: Suppliers are the businesses that supply materials & other
products into the industry. The cost of items bought from suppliers (e.g. raw materials,
components) can have a significant impact on a company's profitability. If suppliers have high
bargaining power over a company, then in theory the company's industry is less attractive. The
bargaining power of suppliers will be high when there are many buyers and few dominant
suppliers.
IV. Bargaining Power of Buyers: Buyers are the people / organisations who create demand in an
industry. The bargaining power of buyers is greater when there are few dominant buyers and
many sellers in the industry, products are standardized.
V. Intensity of Rivalry: The intensity of rivalry between competitors in an industry will
depend on the structure of competition, the structure of industry costs, Degree of
differentiation, Switching costs.

The diagram shows all the factors of Porter’s five forces.
5.2 Strategic group mapping
Strategic Group Mapping is analytical tool used for showing the different market or competitive
positions that rival firms occupy in the overall industry. It is very important to analyze the industry’s
competitive structure and indentify the strategic groups (strategic group is a set of business units or firms
that pursue similar strategies with similar resources). Each industry contains one or more than one
strategic group depending upon the strategies and market positions of industry members.
Figure: Group mapping
Purpose of Strategic Group Maps
 Identification of close and distant rivals. This is important to know because close strategic groups
have stronger cross-group competitive rivalry.
 Identification of attractive and unattractive positions of the firms in industry. This attractiveness
depends upon the industry driving forces, prevailing competitive pressures and profit potentials of
different strategic groups.
 Strategic group mapping helps in identifying the strategic group a firm should consider entering.
Steps in the Construction of Strategic Group Maps
I. Analyzing the overall industry and indentifying those competitive characteristics that differentiate
firms in the industry. Variables selected as axes for the map could be identified during the process
of industry analysis. Variables selected as axes for the map could be product-line breadth (wide,

narrow), price (high, medium, low), quality (high, medium, low), geographic coverage (local,
regional, national, global) etc.
II. Using two-variable map, plot all the firms in the industry. For example price (high, medium, low)
can be taken on x axis whereas product-line breadth (wide, narrow) on y axis and all the firms can
be plotted accordingly.
III. All the firms that fall in the same strategy space should be allocated to the same strategic group.
IV. Finally, sketch circles around each strategic group. The size of the circles depends upon the share
of a strategic group in the total industry sales revenue.
Group mapping of retails stores in USA are shown in figure. Two variables chosen are price and
number of locations.
6. Internal Analysis
We have learnt how the ever changing nature of external environment, both at macro and micro level
affect an organisation’s business. The changes in the environment may create opportunities, which the
organisations try to exploit or may bring threats for the organisations, which the latter tries to control or
neutralize.
However, in order to develop successful strategies to exploit such opportunities or control the threats,
analysis of an organisation’s internal capabilities is important for strategy making which aims at
producing a good fit between a country’s resource capability and its external situation. Internal analysis
helps us understand the organizational capability which influences the evolution of successful strategies.
Many of the issues of strategic development are concerned with changing strategic capability better to fit
a changing environment. However, looking at strategic development from a different perspective i.e.
stretching and exploiting the organizations capability to create opportunities, it again becomes important
to understand these capabilities.
6.1 Resource based view of the firm

There are three types of resources – assets, capabilities and competencies, which have been identified
under Resource Based View of the firm (RBV). Strategic thinkers explaining the RBV suggest that the
organizations are collections of tangible and intangible assets combined with capabilities to use those
assets. These help organizations develop understanding these three types of resources and help us to know
how a firm’s internal strength and weaknesses affect its ability to compete.
Core Competencies
Core competencies are those capabilities that are critical to a business achieving competitive advantage.
The concept in management theory was originally advocated by CK Prahalad, and Gary Hamel. In their
view a core competency is a specific factor that a business sees as being central to the way it, or its
employees, works. It fulfills three key criteria:
I. provide access to a wide variety of markets, and

II. contribute significantly to the end-product benefits, and
III. be difficult for competitors to imitate.
Core competencies are what make your organization unique. They are the skills your organization
possesses that set it apart from its peers. They are the sources of competitive advantage. They are the
building blocks to future opportunities.
A core competency can take various forms, including technical/subject matter know-how, a reliable
process and/or close relationships with customers and suppliers. It may also include product development

or culture, such as employee dedication, best Human Resource Management (HRM), good market
coverage etc.
Apple’s unique competence seems to be its product design process. With the iPod, Apple combined the
elements of jukebox software, which could organize a large amount of songs, and MP3 players, which
held lots of songs. Apple combined these elements in a way that was simple to use. Simplicity turned out
to be the core attribute that made the iPod a revolutionary product, one that changed consumer
expectations.
6.2 Critical success factors

Critical success factors are those which contribute to organization’s success in a competitive environment
and therefore the organization needs to improve on them since poor results may lead to declining
performance. Organizations depending on the environment they operate in and their own internal
conditions can identify relevant critical success factors. CSF for a retail store may be:
 low sales and administrative expense

 efficient distribution systems
 reputation for value
 organization culture
 top management turnover
 supplier relationships
6.3 Value chain framework

This is the other framework most commonly used to guide analysis of any firm’s internal strengths and
weaknesses. In this framework, any business is seen as a number of linked activities, each producing
value for the customer. By creating additional value, the firm may charge more or is able to deliver same
value at a lower cost, either of this leading to a higher profit margin. This ultimately adds to the
organization’s financial performance.
Value Chain Analysis describes the activities that take place in a business and relates them to an analysis
of the competitive strength of the business. The figure shows the list of activities. Influential work by
Michael Porter suggested that the activities of a business could be grouped under two headings:
Primary Activities - those that are directly concerned with creating and delivering a product (e.g.
component assembly); and
Support Activities, which whilst they are not directly involved in production, may increase effectiveness
or efficiency (e.g. human resource management). It is rare for a business to undertake all primary and
support activities.

Figure: Value chain analysis
What activities a business undertakes is directly linked to achieving competitive advantage. For example,
a business which wishes to outperform its competitors through differentiating itself through higher
quality will have to perform its value chain activities better than the opposition. By contrast, a strategy
based on seeking cost leadership will require a reduction in the costs associated with the value chain
activities, or a reduction in the total amount of resources used.
Primary Activities (Line functions)
Primary Description
Activity
Inbound logistics All those activities concerned with receiving and storing externally sourced materials
Operations The manufacture of products and services - the way in which resource inputs (e.g.
materials) are converted to outputs (e.g. products)
Outbound All those activities associated with getting finished goods and services to buyers
logistics
Marketing and Essentially an information activity - informing buyers and consumers about products
sales and services (benefits, use, price etc.)
Service All those activities associated with maintaining product performance after the product
has been sold
Value chain analysis can be broken down into a three sequential steps:
I. Break down a market/organisation into its key activities under each of the major headings in the
model;
II. Assess the potential for adding value via cost advantage or differentiation, or identify current
activities where a business appears to be at a competitive disadvantage;
III. Determine strategies built around focusing on activities where competitive advantage can be
sustained

Support Activities (Staff functions)
Secondary Description
Activity
Procurement This concerns how resources are acquired for a business (e.g. sourcing and
negotiating with materials suppliers)
Human Those activities concerned with recruiting, developing, motivating and rewarding the
Resource workforce of a business
Management
Technology Activities concerned with managing information processing and the development and
Development protection of "knowledge" in a business
Infrastructure Concerned with a wide range of support systems and functions such as finance,
planning, quality control and general senior management
6.4 Balance scorecard
The Balanced Scorecard (BSC) is a strategic performance management framework that allows
organisations to manage and measure the delivery of their strategy. The concept was initially introduced
by Robert Kaplan and David Norton in a Harvard Business Review.
The Balanced Scorecard is a strategic performance management framework that has been designed to
help an organisation monitor its performance and manage the execution of its strategy. In a recent world-
wide study on management tool usage, the Balanced Scorecard was found to be the sixth most widely
used management tool across the globe which also had one of the highest overall satisfaction ratings. In
its simplest form the Balanced Scorecard breaks performance monitoring into four interconnected
perspectives: Financial, Customer, Internal Processes and Learning & Growth. The figure shows
essence of all four perspectives.
Here is the definition for the four Balanced Scorecard perspectives:
I. The Financial Perspective covers the financial objectives of an organisation and allows
managers to track financial success and shareholder value.
II. The Customer Perspective covers the customer objectives such as customer satisfaction, market
share goals as well as product and service attributes.
III. The Internal Process Perspective covers internal operational goals and outlines the key
processes necessary to deliver the customer objectives.
IV. The Learning and Growth Perspective covers the intangible drivers of future success such as
human capital, organisational capital and information capital including skills, training,
organisational culture, leadership, systems and databases.

Figure: Balanced score card
6.5 Benchmarking
Benchmarking compares an organization’s performance against ‘best in class’ performance wherever that
is found. Managers seek out the best examples of a particular practice in other companies as part of an
effort to improve the corresponding practice in their own firm.
When the search for best practices is limited to competitors, the process is called competitive
benchmarking. Other times managers may seek out the best practices regardless of what industry they
are in, called functional benchmarking.
6.6 SWOT analysis
A scan of the internal and external environment is an important part of the strategic planning process.
Environmental factors internal to the firm usually can be classified as strengths (S) or weaknesses (W),
and those external to the firm can be classified as opportunities (O) or threats (T). Such an analysis of the
strategic environment is referred to as a SWOT analysis.
The SWOT analysis provides information that is helpful in matching the firm's resources and capabilities
to the competitive environment in which it operates. As such, it is instrumental in strategy formulation
and selection. The following diagram shows how a SWOT analysis fits into an environmental scan.
Strengths: A firm's strengths are its resources and capabilities that can be used as a basis for developing a
competitive advantage. Examples of such strengths include:
 patents
 strong brand names

Figure: SWOT Analysis
 good reputation among customers

 cost advantages from proprietary know-how
 exclusive access to high grade natural resources
 favorable access to distribution networks
Weaknesses: The absence of certain strengths may be viewed as a weakness. For example, each of the
following may be considered weaknesses:
 lack of patent protection
 a weak brand name
 poor reputation among customers
 high cost structure
 lack of access to the best natural resources
 lack of access to key distribution channels
In some cases, a weakness may be the flip side of a strength. Take the case in which a firm has a large
amount of manufacturing capacity. While this capacity may be considered a strength that competitors do
not share, it also may be a considered a weakness if the large investment in manufacturing capacity
prevents the firm from reacting quickly to changes in the strategic environment.
Opportunities: The external environmental analysis may reveal certain new opportunities for profit and
growth. Some examples of such opportunities include:
 an unfulfilled customer need

 arrival of new technologies

 loosening of regulations
 removal of international trade barriers
Threats: Changes in the external environmental also may present threats to the firm. Some examples of
such threats include:
 shifts in consumer tastes away from the firm's products
 emergence of substitute products
 new regulations
 increased trade barriers
7. Industry Life Cycle

There exist a circle of life for every living creature in this world and so does for the industries. We have
already studied stages of product life cycle, PLC (Introduction, Growth, Maturity and Decline). The
industry’s life cycle also consists of following four stages:
I. Fragmentation
II. Shake-out
III. Maturity
IV. Decline
The figure shows how sales volume vary against different stages of industry life cycle.
Figure: Industry life cycle
Fragmentation Stage: The first stage of new industry is fragmentation stage. In this stage, the new
industry begins developing the business. It is in the fragmentation stage, when the new industry normally

arises as soon as the entrepreneur overcomes both the problems of innovation and invention, and works
on the upbringing of new products or services within the market.
Shakeout: The second stage of industry life cycle is the shakeout stage. The emerging of new industry
begins in this stage. During this shakeout stage, the competitors begin to realize and figure out the
business opportunities involved in emerging the industry. Therefore, value of the industry quickly starts
rising.
Maturity: The third stage of industry life cycle is the maturity. In the maturity stage, efficiencies of the
dominant business model render these organizations a competitive advantage over the very competition.
The competition within the industry is growing rather aggressive because of many competitors and
substitute products in the field. All these factors price, competition, and cooperation are taking on
complex form. In fact, some companies are shifting some of its production overseas to obtain competitive
advantage.
Decline: In order to compete within the industry effectively and successfully, it is essential and
prerequisite for the companies to understand well, the use of industry life cycle as it is a survival
equipment for businesses these days. Information regarding the industry life cycle can be easily obtained
from business management books. Undoubtedly, several variations in the lifecycle model have been made
in order to address the development of products, market and industry.
The figure shows how different industry characteristics vary at different stages if industry life cycle.
8. Porter’s Generic Strategies

A firm positions itself by leveraging its strengths. Michael Porter has argued that a firm's strengths
ultimately fall into one of two headings: cost advantage and differentiation. By applying these strengths in
either a broad or narrow scope, three generic strategies result: cost leadership, differentiation, and focus.
These strategies are applied at the business unit level. They are called generic strategies because they are

not firm or industry dependent. The figure shows generic strategies against competitive scope and
competitive advantage.
Figure: Porter’s generic strategies
Cost Leadership Strategy
This generic strategy calls for being the low cost producer in an industry for a given level of quality. The
firm sells its products either at average industry prices to earn a profit higher than that of rivals, or below
the average industry prices to gain market share.
Some of the ways that firms acquire cost advantages are:

 by improving process efficiencies,
 gaining unique access to a large source of lower cost materials,
 making optimal outsourcing and vertical integration decisions,
 avoiding some costs altogether,
 high level of expertise in manufacturing process engineering,
 efficient distribution channels.
Examples of Cost Leadership Strategy: Deccan airlines, Chinese spare parts.
Differentiation Strategy
A differentiation strategy calls for the development of a product or service that offers unique attributes
that are valued by customers and that customers perceive to be better than or different from the products
of the competition. The value added by the uniqueness of the product may allow the firm to charge a
premium price for it. The firm hopes that the higher price will more than cover the extra costs incurred in
offering the unique product.
Firms that succeed in a differentiation strategy often have the following internal strengths:

 Access to leading scientific research.

 Highly skilled and creative product development team.
 Strong sales team with the ability to successfully communicate the perceived strengths of the
product.
 Corporate reputation for quality and innovation.
Examples of Differentiation Strategy: Mercedes cars, iPhone
Focus Strategy
The generic strategy of focus rests on the choice of a narrow competitive scope within an industry. The
focuser selects a segment or group of segments in the industry and tailors its strategy to serving them to
the exclusion of others.
The focus strategy has two variants:
I. In cost focus a firm seeks a cost advantage in its target segment, while in
II. differentiation focus a firm seeks differentiation in its target segment.
Both variants of the focus strategy rest on differences between a focuser's target segment and other
segments in the industry. The target segments must either have buyers with unusual needs or else the
production and delivery system that best serves the target segment must differ from that of other industry
segments. Cost focus exploits differences in cost behaviour in some segments, while differentiation focus
exploits the special needs of buyers in certain segments.
Stuck in the Middle
These generic strategies are not necessarily compatible with one another. If a firm attempts to achieve an
advantage on all fronts, in this attempt it may achieve no advantage at all. For example, if a firm
differentiates itself by supplying very high quality products, it risks undermining that quality if it seeks to
become a cost leader. Even if the quality did not suffer, the firm would risk projecting a confusing image.
For this reason, Michael Porter argued that to be successful over the long-term, a firm must select only
one of these three generic strategies. Otherwise, with more than one single generic strategy the firm will
be "stuck in the middle" and will not achieve a competitive advantage.
9. Corporate Strategies
Some organizations are groups of different business and functional units, each of them must be having its
own set of goals, which may not necessarily be same as the goals of the corporate headquarters looking
after the interests of the entire organization. Since the goals are different and the means to achieve them
are different, strategies are likely to be different. This understanding has led to the hierarchical division of
strategy at two levels: a business-level (competitive) strategy and a company-wide strategy
(corporate strategy). In addition to these strategies, many authors also mention functional strategies,
practiced by the functional units of a business unit, as another level of strategy.
We have already introduced corporate, business and functional strategies in first chapter.
In a nutshell, corporate-level strategy identifies the portfolio of businesses that in total will comprise the
corporation and the ways in which these businesses will relate. The competitive strategy identifies how to
build and strengthen the business’s long-term competitive position in the marketplace while the functional

strategies identify the basic courses of action that each department will pursue to contribute to the
attainment of its goals.
In this unit we will study corporate strategies.
There are four types of generic corporate strategies. They are:

I. Stability strategies: make no change to the company’s current activities (also called
consolidation strategies)
II. Growth strategies: expand the company’s activities (also called expansion strategies)
III. Retrenchment strategies: reduce the company’s level of activities (also called divestment
strategies)
IV. Combination strategies: a combination of above strategies
Each one of the above strategies has a specific objective. For instance, a concentration strategy seeks to
increase the growth of a single product line while a diversification strategy seeks to alter a firm’s strategic
track by adding new product lines. A stability strategy is utilized by a firm to achieve steady, but slow
improvements in growth while a retrenchment strategy (which includes harvesting, turnaround,
divestiture, or liquidation strategies) is used to reverse poor-organizational performance. Once a strategic
direction has been identified, it then becomes necessary for management to examine business and
functional level strategies of the firm to make sure that all units are moving towards the achievement of
the company-wide corporate strategy.
9.1 Stability Strategy
Stability strategy is a strategy in which the organization retains its present strategy at the corporate level
and continues focusing on its present products and markets. The firm stays with its current business and
product markets; maintains the existing level of effort; and is satisfied with incremental growth. It does
not seek to invest in new factories and capital assets, gain market share, or invade new geographical
territories. Organizations choose this strategy when the industry in which it operates or the state of the
economy is in turmoil or when the industry faces slow or no growth prospects. They also choose this
strategy when they go through a period of rapid expansion and need to consolidate their operations before
going for another bout of expansion. This is also called consolidation strategy.
9.2 Growth Strategy

Firms choose expansion strategy when their perceptions of resource availability and past financial
performance are both high. The most common growth strategies are diversification at the corporate
level and concentration at the business level. Reliance Industry, a vertically integrated company
covering the complete textile value chain has been repositioning itself to be a diversified conglomerate by
entering into a range of business such as power generation and distribution, insurance,
telecommunication, and information and communication technology services. Diversification is defined
as the entry of a firm into new lines of activity, through internal or external modes.
The primary reason a firm pursues increased diversification are value creation through economies of scale
and scope, or market dominance. In some cases firms choose diversification because of government
policy, performance problems and uncertainty about future cash flow. In one sense, diversification is a
risk management tool, in that its successful use reduces a firm’s vulnerability to the consequences of
competing in a single market or industry. Diversification is accomplished through external modes
through acquisitions and joint ventures. Concentration can be achieved through vertical or horizontal
growth. Vertical growth occurs when a firm takes over a function previously provided by a supplier or a

distributor. Horizontal growth occurs when the firm expands products into new geographic areas or
increases the range of products and services in current markets.
Ansoff’s Product-Market Expansion Grid

The product/market grid first presented by Igor Ansoff , has proven to be very useful in discovering
growth opportunities. This grid best illustrates the various intensification options available to a firm. The
product/market grid has two dimensions, namely, products and markets. Combinations of these two
dimensions result in four growth strategies. According to Ansoff’s Grid, four distinct strategies are
possible for achieving growth through the intensification route. As shown in figure, these are:
Figure: Ansoff’s Product-Market Expansion Grid
I. Market Penetration: The firm seeks to achieve growth with existing products in their current
market segments, aiming to increase its markets share.
II. Market Development: The firm seeks growth by targeting its existing products to new market
segments.
III. Product Development: The firm develops new products targeted to its existing market segments.
IV. Diversification: The firm grows by diversifying into new businesses by developing new products
for new markets.
Expansion through Integration

In contrast to the intensive growth (Ansoff’s Grid), integration strategy involves expanding externally by
combining with other firms. Combination involves association and integration among different firms and
is essentially driven by need for survival and also for growth by building synergies.
Combination of firms may take the merger or consolidation route. Merger implies a combination of two
or more concerns into one final entity. The merged concerns go out of existence and their assets and
liabilities are taken over by the acquiring company. A consolidation is a combination of two or more
business units to form an entirely new company. All the original business entities cease to exist after the
combination. Since mergers and consolidations involve the combination of two or more companies into a
single company, the term merger is commonly used to refer to both forms of external growth.
There are many forms of integration, but the two major ones are vertical and horizontal integration.
Vertical Integration: Vertical integration refers to the integration of firms involved in different stages of
the supply chain. Thus, a vertically integrated firm has units operating in different stages of supply chain

starting from raw material to delivery of final product to the end customer. An organization tries to gain
control of its inputs (called backwards integration) or its outputs (called forward integration) or both.
Vertical integration may take the form of backward or forward integration or both.
The concept of vertical integration can be visualized using the value chain. Consider a firm whose
products are made via an assembly process. Such a firm may consider backward integrating into
intermediate manufacturing or forward integrating into distribution. Backward integration sometimes is
referred to as upstream integration and forward integration as downstream integration. For instance,
Nirma undertook backward integration by setting up plant to manufacture soda ash and linear alkyl
benzene, both important inputs for detergents and washing soaps, to strengthen its hold in the lower-end
detergents market. Forward integration refers to moving closer to the ultimate customer by increasing
control over distribution activities. For example, a personal computer assembler could own a chain of
retail stores from which it sells its machines (forward integration). Some companies expand vertically
backwards and forward. Reliance Petrochemicals grew by leveraging backward and forward integration:
it began with manufacturing of textiles and fibres, moved to polymers and other intermediates then went
into the manufacture of fibres, then to petrochemicals and oil refining.
In essence, a firm seeks to grow through vertical integration by taking control of the business operations
at various stages of the supply chain to gain advantage over its rivals.
Horizontal Combination / Integration: The acquisition of additional business in the same line of
business or at the same level of the value chain (combining with competitors) is referred to as horizontal
integration. Horizontal growth can be achieved by internal expansion or by external expansion through
mergers and acquisitions of firms offering similar products and services. A firm may diversify by growing
horizontally into unrelated business. Integration of oil companies, Exxon and Mobil, is an example of
horizontal integration. Aditya Birla Group’s acquisition of L&T Cements from Reliance to increase its
market dominance is an example of horizontal integration. This sort of integration is sought to reduce
intensity of competition and also to build synergies.
International Expansion
An organization can “go international” by crossing domestic borders as it employs any of the strategies
discussed above. International expansion involves establishing significant market interests and operations
outside a company’s home country.
Foreign markets provide additional sales opportunities for a firm that may be constrained by the relatively
small size of its domestic market and also reduces the firm’s dependence on a single national market.
Firms expand globally to seek opportunity to earn a return on large investments such as plant and capital
equipment or research and development, or enhance market share and achieve scale economies, and also
to enjoy advantages of locations. Other motives for international expansion include extending the product
life cycle, securing key resources and using low-cost labour.
There are several methods for going international. Each method of entering an overseas market has its
own advantages and disadvantages that must be carefully assessed. Different international entry modes
involve a tradeoff between level of risk and the amount of foreign control the organization’s managers are
willing to allow. It is common for a firm to begin with exporting, progress to licensing, then to
franchising finally leading to direct investment. As the firm achieves success at each stage, it moves to the
next. If it experiences problems at any of these stages, it may not progress further. If adverse conditions
prevail or if operations do not yield the desired returns in a reasonable time period, the firm may
withdraw from the foreign market.

Expansion into foreign markets can be achieved through: Exporting, Licensing, Joint Venture, Direct
Investment:
Exporting: Exporting is marketing of domestically produced goods in a foreign country and is a

traditional and well-established method of entering foreign markets. It does not entail new investment
since exporting does not require separate production facilities in the target country. Most of the costs
incurred for exporting products are marketing expenses.
Licensing: Licensing permits a company in the target country to use the property of the licensor. Such
property usually is intangible, such as trademarks, patents, and production techniques. The licensee pays a
fee in exchange for the rights to use the intangible property and possible for technical assistance.
Licensing has the potential to provide a very large ROI since this mode of foreign entry also does require
additional investments. However, since the licensee produces and markets the product, potential returns
from manufacturing and marketing activities may be lost.
Joint Venture: There are five common objectives in a joint venture: market entry, risk/reward sharing,
technology sharing and joint product development, and conforming to government regulations. Other
benefits include political connections and distribution channel access that may depend on relationships.
Joint ventures are favoured when:

 The partners’ strategic goals converge while their competitive goals diverge;
 The partners’ size, market power, and resources are small compared to the industry leaders; and
 Partners’ are able to learn from one another while limiting access to their own proprietary skills.
The critical issues to consider in a joint venture are ownership, control, length of agreement, pricing,
technology transfer, local firm capabilities and resources, and government intentions.
Direct Investment: Direct investment is the ownership of facilities in the target country. It involves the
transfer of resources including capital, technology, and personnel. Direct investment may be made
through the acquisition of an existing entity or the establishment of a new enterprise. Direct ownership
provides a high degree of control in the operations and the ability to better know the consumers and
competitive environment. However, it requires a high degree of commitment and substantial resources.
Global integration and local responsiveness
There are two main considerations when going international, global integration (standardization) and
local responsiveness. Look at the figure. There are three major strategy options for going international
along these two parameters.
Multi-domestic: The organization decentralizes operational decisions and activities to each country in
which it is operating and customizes its products and services to each market. For examples McDonald
food chain introduced “aloo tikki” burger in India for localization needs. For years, U.S. auto
manufacturers maintained decentralized overseas units that produced cars adapted to different countries
and regions. General Motors produced Opel in Germany and Vauxhall in Great Britain while Chrysler
produced the Simca in France and Ford offered a Canadian Ford.
Global: The organization offers standardized products and uses integrated operations. Example: Ford is
treating its Contour as a car for all world markets—one that can be produced and sold in any
industrialized nation. The same Tata Nano exported in all countries that is being used in India.

Figure: International entry strategies
Transnational: The organization seeks the best of both the multidomestic and global strategies by
globally integrating operations while tailoring products and services to the local market. In other words a
company ‘thinks globally but acts locally’. Many authors refer to this concept as ‘Glocalization’. Global
electronic communications and connectivity can help integrate operations while flexible manufacturing
enables firms to produce multiple versions of products from the same assembly line, tailoring them to
different markets. This gives more choice in locating facilities to take advantage of cheaper labor or to get
the best of other factors of production
9.3 Retrenchment strategy

Many firms experience deteriorating financial performance resulting from market erosion and wrong
decisions by management. Managers respond by selecting corporate strategies that redirect their attempt
to turnaround the company by improving their firm’s competitive position or divest or wind up the
business if a turnaround is not possible. Turnaround strategy is a form of retrenchment strategy, which
focuses on operational improvement when the state of decline is not severe. Other possible corporate level
strategic responses to decline are growth and stability.
Many organizations decline due to falling sales, declining profits and more importantly declining demand.
Demand in an industry declines for a variety of reasons. New substitutes emerge (computers with word
processing capabilities replacing manual electronic typewriters) often with higher quality and lower cost
(PVC pipes for GI pipes, Ball pens for fountain pens) or buyers shrink or simply disappear (jute
industries). Changing customer needs, lifestyles and tastes also lead to declining demand (vanaspati oil,
cigarettes, agarbattis, etc.). Also cost of inputs may increase and reduce demand for products (Petrol cars).
In such situations, top managers must find a strategy that will stop the organization’s decline and put it
back on a successful path.
Organizational decay is a slow, long-term deterioration of the firm’s operations caused by its inability to
change and adapt to its external environment. It is a function of environmental adversity (external
opportunities and threats) and internal adversity (organizational negative aspects). HMT Watches
Division, a market leader in mechanical watches, is a case of an organization, which could not adapt itself

to the rapid technological changes. The company was not quick enough to latch on the growing digital
watches market and its premier position in the process.
The three major variants of retrenchment strategy are turnaround strategy, survival strategy and
liquidation strategy. These are discussed in the following sections.
Turnaround Strategy
Turnaround management is a process dedicated to corporate renewal. It uses analysis and planning to save
troubled companies and returns them to solvency. Turnaround Management involves management
review, activity based costing, root failure causes analysis, and SWOT analysis to determine why the
company is failing. Once analysis is completed, a long term strategic plan and restructuring plan are
created. These plans may or may not involve a bankruptcy filing. Once approved, turnaround
professionals begin to implement the plan, continually reviewing its progress and make changes to the
plan as needed to ensure the company returns to solvency.
Retrenchment is an integral component of turnaround strategy. The critical role of retrenchment in

providing a stable base from which to launch a recovery phase of the turnaround process is well
established. Many firms that have achieved a reversal of financial or competitive decline inevitably refer
to the presence of retrenchment as a precursor or prelude to the implementation of a successful recovery
strategy.
Survival Strategy
When the company is on the verge of extinction, it can follow several routes for renewing the fortunes of
the company. These are discussed in the following sections.
Divestment: An organization divests when it sells a business unit to another firm that will continue to
operate it. The TATA group has, in some form or the other, been realigning its portfolio since the early
1990s. But in the past few years it had done this in a more structured manner. The divestment of Tomco
and Tata Steel’s cement plant was a conscious decision.
Spin-Off: In a spin-off, a firm sets up a business unit as a separate business through a distribution of
stock or a cash deal. This is one way to allow a new management team to try to do better with a business
unit that is a poor or mediocre performer. For instance, Indian Rayon and Industries Ltd (IRIL), an Aditya
Birla group enterprise, has decided to spin-off its insulators business under Jaya Shree Insulator Division,
in favour of a new company - Vikram Insulators Private Ltd (VIPL).
Restructuring the Business Operations: The company tries to survive by restructuring its
management team, financial reengineering or overall business reengineering. Business reengineering
involves throwing aside all old business processes and starting from scratch to design more efficient
processes. This may cut costs and assist a turnaround situation. This is much easier to visualize in a
manufacturing process, where each step of assembly is examined for improvement or elimination. It
would be foolish to find more efficient ways to perform processes that should be abandoned and hence,
reengineering is strongly suggested in such cases.
Liquidation Strategy
Liquidation is the final resort for a declining company. This is the ultimate stage in the process of
renewing company. Sometimes a business unit or a whole company becomes so weak that the owners
cannot find an interested buyer. A simple shutdown will prevent owners from throwing good money after

bad once it is clear that there is no future for the business. In such a situation, liquidation is the best
option. A case in point is the liquidation of loss-making Bharat Starch, a BM Thapar group company,
following the sale of its starch and citric acid divisions to English India Clays and Bilt Chemicals,
respectively. This was done as a part of financial restructuring to relieve the company of its outstanding
liabilities.
Bankruptcy is a last resort when the business fails financially. The court will liquidate its assets. The
proceeds will be used to pay off the firm’s outstanding debts. Some companies file for bankruptcy instead
of liquidating. Under this option, the firm reorganizes its operations while being protected from its
creditors. If the firm can emerge from bankruptcy, it pays off its creditors as best as it can.
9.4 Combination Strategy
The three generic strategies can be used in combination; they can be sequenced, for instance growth
followed by stability, or pursued simultaneously in different parts of the business unit. Combination
Strategy is designed to mix growth, retrenchment, and stability strategies and apply them across a
corporation’s business units. A firm adopting the combination strategy may apply the combination either
simultaneously (across the different businesses) or sequentially.
For instance, Tata Iron & Steel Company (TISCO) had first consolidated its position in the core steel
business, then divested some of its non-core businesses. Reliance Industries, while consolidating its
position in the existing businesses such as textile and petrochemicals, aggressively entered new areas such
as Information Technology.
10. Diversification
Diversification involves moving into new lines of business. When an industry consolidates and becomes
mature, most of the firms in that industry would have reached the limits of growth using vertical and
horizontal growth strategies. If they want to continue growing any further the only option available to
them is diversification by expanding their operations into a different industry.
Diversification of a firm can take the form of concentric and conglomerate diversification. Concentric
(Related) diversification is appropriate when a firm has a strong competitive position but industry
attractiveness is low. Conglomerate (unrelated) diversification is an appropriate strategy when current
industry is unattractive and that the firm lacks exceptional and outstanding capabilities or skills in related
products or services. Generally, related diversification strategies have been demonstrated to achieve
higher value creation (profitability and stock value) than unrelated diversification strategies
(conglomerates).
10.1 Related Diversification (Concentric Diversification)

In this alternative, a company expands into a related industry, one having synergy with the company’s
existing lines of business, creating a situation in which the existing and new lines of business share and
gain special advantages from commonalities such as technology, customers, distribution, location,
product or manufacturing similarities, and government access.
In essence, in concentric diversification, the new industry is related in some way to the current one. This
is often an appropriate corporate strategy when a company has a strong competitive position and
distinctive competencies, but its existing industry is not very attractive. Thus, a firm is said to have
pursued concentric diversification strategy when it enters into new product or service area belonging to

different industry category but the new product or service is similar to the existing one with respect to
technology or production or marketing channels or customers.
For example if makers of ‘Maggi’ acquires a company that produces tomato ketchup, it will be an
instance of technological-related concentric diversification.
10.2 Unrelated Diversification (Conglomerate Diversification)

Conglomerate diversification is a growth strategy in which a company seeks to grow by adding entirely
unrelated products and markets to its existing business. A company that consists of a grouping of
businesses from unrelated streams is called a conglomerate. In conglomerate diversification, a firm
generally introduces new products using different technologies in new markets. A conglomerate consists
of a number of product divisions, which sell different products, principally to their own markets rather
than to each other.
Gujarat Narmada Valley Fertilizers Ltd. has diversified from fertilizers to personal transport, chemicals
and electronic industries, while Arvind group, hitherto confined to textiles, diversified into unrelated
activities such as manufacturing of agro- products, floriculture and export of fresh fruits. Likewise, BPL
has decided to venture into sectors like power generators, cement, steel and agricultural inputs in a big
way. Wipro is another company with wide ranging business interests encompassing vegetable oils,
computer hardware, and software, medical equipment, hydraulic systems, consumer products, lighting,
export of leather shoe nippers and has recently entered into financial services
10.3 Rationale for Diversification

Under strict assumptions of an efficient market theory, there is no convincing rationale for one company
to acquire another, especially less efficient or unrelated businesses. Since the markets are imperfect and
do not follow the norms of efficient market theory, companies do diversify for several reasons given
below:
 Economies of Scale and Scope (Synergy): The merger of two companies producing similar
products should allow the combined firms to pool resources and attain lower operating costs.
 Widen Market Base and Enhance Market Power: Large number of collaborations and
acquisitions are aimed at expanding the market for the firm’s products. For instance, HCL and
Hewlett Packard Ltd., Tata-IBM, Ranbaxy Laboratories and Eli Lilly Company, Hindustan
Motors and General Motors and Tata Tea and Tetley of USA, entered into tie-up arrangements
mainly to exploit the market opportunities.
 Mergers and acquisitions can increase a firm’s market share when both firms are in the same
business.
 Profit Stability: Acquisition of new business can reduce variations in corporate profits by
expanding the company’s lines of business. This typically occurs when the core business depends
on sales that are seasonal or cyclical.
 Improve Financial Performance: Large firms generate cash that can be invested in other
ventures. The firm acts as a banker of an internal capital market. The core business sustains itself
on its moneymaking ventures, and uses this cash flow to create new ventures that generate
additional profits. A firm may also be tempted to exploit diversification opportunities because it
has liquid resources far in excess of the total expansion needs.

 Growth: Diversification is basically a way to grow. Indeed, managers often cite growth as the
principle reason for diversification. The most important factor that motivates management to
diversify is to achieve higher growth rate than which is possible with intensification strategy. If
the management feels that the existing products and markets do not have the potential to deliver
expected growth, the only alternative they have is to diversify into new territories.
 Counter Competitive Threats: Organizations are driven at times towards external

diversification through merger by competitive pressures. Such a strategic move is expected to
counter the competitive threats by reducing the intensity of competition.
 Access to Latest Technology: Many Indian firms enter into strategic alliances with foreign firms
to gain access to the latest technologies without spending huge amount of money on R&D. For
instance, Johnson and Nicholson India Ltd., a leading domestic paint manufacturer, has
strengthened its position in the Indian market and also diversified into industrial electronics along
with its German partner, Carl Schevek AG of Germany.
 Regulatory Factors: A large number of organizations have diversified their operations

geographically to exploit opportunities in different regions and countries and also to take
advantage of the incentives being offered by the various governments to attract investment.
10.4 Mergers and acquisitions

Mergers and acquisitions and corporate restructuring—or M&A for short—are a big part of the corporate
finance. One plus one makes three: this equation is the special alchemy of a merger or acquisition. The
key principle behind buying a company is to create shareholder value over and above that of the sum of
the two companies. Two companies together are more valuable than two separate companies—at least,
that’s the reasoning behind M&A. This idea is particularly attractive to companies when times are tough.
Strong companies will act to buy other companies to create a more competitive, cost-efficient company.
The companies will come together hoping to gain a greater market share or achieve greater efficiency.
Because of these potential benefits, target companies will often agree to be purchased when they know
they cannot survive alone.
A corporate merger is essentially a combination of the assets and liabilities of two firms to form a single
business entity. Although they are used synonymously, there is a slight distinction between the terms
‘merger’ and ‘acquisition’. Strictly speaking, only a corporate combination in which one of the companies
survives as a legal entity is called a merger. In a merger of firms that are approximate equals, there is
often an exchange of stock in which one firm issues new shares to the shareholders of the other firm at a
certain ratio. In other words, a merger happens when two firms, often about the same size, agree to unite
as a new single company rather than remain as separate units. This kind of action is more precisely
referred to as a “merger of equals.” Both companies’ stocks are surrendered, and new company stock is
issued in its place.
When a company takes over another to become the new owner of the target company, the purchase is
called an acquisition. From the legal angle, the ‘target company’ ceases to exist and the buyer “gulps
down” the business and stock of the buyer continues to be traded.
In summary, “acquisition” is generally used when a larger firm absorbs a smaller firm and “merger” is
used when the combination is portrayed to be between equals. For the sake of discussion, the firm whose
shares continue to exist (possibly under a different company name) will be referred to as the acquiring
firm and the firm’s whose shares are being replaced by the acquiring firm will be referred to as the target
firm.

Synergy is the main reason cited for many M&As. Synergy takes the form of revenue enhancement and
cost savings. By merging, the companies hope to benefit through staff reductions, economies of scale,
acquisition of technology, improved market reach and industry visibility. Having said that, achieving
synergy is easier said than done-synergy is not routinely realized once two companies merge. Obviously,
when two businesses are combined, it should results in improved economies of scale, but sometimes it
works in reverse. In many cases, one and one add up to less than two.
Different forms of Mergers
There are a whole host of different mergers depending on the relationship between the two companies that
are merging. These are:
I. Horizontal Merger: Merger of two companies that are in direct competition in the same product
categories and markets. A merger between Coca-Cola and the Pepsi beverage division, for
example, would be horizontal in nature.
II. Vertical Merger: Merger of two companies which are in different stages of the supply chain.
This is also referred to as vertical integration. A company taking over its supplier’s firm or a
company taking control of its distribution by acquiring the business of its distributors or channel
partners are examples of this type of merger. Suppose that a jewelry retailer purchased a company
that manufactures jewelry. This would be a vertical merger. Or, suppose that a pharmaceutical
company acquired a drugstore chain.
III. Market-extension Merger: Merger of two companies that sell the same products in different
markets. If a regional news channel of Haryana merges with news channel of Punjab, it will be
market extension merger.
IV. Product-extension Merger: Merger of two companies selling different but related products in
the same market. If a regional news channel of Punjab merges with regional music channel of
Punjab, it will be product extension merger.
V. Conglomeration Merger: Merger of two companies that have no common business areas. If
Microsoft were to purchase a fast food chain, this would be a conglomerate merger. Software has
no relationship to fast food.
11. Business portfolio analysis

Portfolio analysis is an analysis of the corporation as a portfolio of different business with the objective of
managing it for returns on its resources. The business may be in the forms of organizational units, such as
different subsidiaries or divisions of a parent company or Strategic Business Units (SBUs).
Thus, portfolio analysis looks at the corporate investments in different products or industries under the
common corporate jurisdiction. The corporate manager analyses the future implications of their present
resource allocations and continuously evaluates which operations or products to expand or add, and which
ones to be curtailed or disposed off, so that the overall portfolio balance is maintained or improved. The
focus is on the present as well as the future.

Many different approaches involving different display matrices have evolved over the years, with the
common objective of successful diversification. Some of the common display matrices for portfolio
analysis are:
 BCG’s Growth-share Matrix

 McKinsey Matrix
 Product Life cycle, PLC
 Experience Curve
11.1 BCG’s growth share matrix
BCG’s Portfolio Analysis is based on the premise that majority of the companies carry out multiple
business activities in a number of different product-market segments. Together these different businesses
form the Business Portfolio which can be characterized by two parameters:
I. Company’s relative market share for the business

II. Overall growth rate of that business.
The BCG model proposes that for each business activity within the corporate portfolio, a separate strategy
must be developed depending on its location in a two by two portfolio matrix of high and low segments
on each of the above mentioned axes.
Relative Market Share is stressed on the assumption that the relative competitive position of the
company would determine the rate at which the business generates cash. An organization with a higher
relative share of the market compared to its competitors will have higher profit margins and therefore
higher cash flows. Relative Market Share is defined as the market share of the relevant business divided
by the market share of its largest competitor.
The selection of the Rate of Growth of the associated industry is based on the understanding that an
industrial segment with high growth rate would facilitate expansion of the operations of the participating
company. It will also be relatively easier for the company to increase its market share, and have profitable
investment opportunities. High growth rate business provides opportunities to plough back earned cash
into the business and further enhance the return on investment.
The BCG matrix classifies the business activities along the vertical axis according to the ‘Business
Growth Rate” (meaning growth of the market for the product), and the ‘Relative Market Share’ along the
horizontal axis. The two axes are divided into Low and High sectors, so that the BCG matrix is divided
into four quadrants. Businesses falling into each of these quadrants are classified with broadly different
strategic categories, as explained below:

Figure: BCG matrix
Cash Cows: The businesses with low growth rate and high market share are classified in this quadrant.
High market share leads to high generation of cash and profits. The low rate of growth of the business
implies that the cash demand for the business would be low. Thus, Cash Cows normally generate large
cash surpluses. Cows can be ‘milked’ for cash to help to provide cash required for running other diverse
operations of the company. Cash Cows provide the financial base for the company. These businesses have
superior market position and invariably low costs. But, in terms of their future potential, one must keep in
mind that these are mature businesses with low growth rate.
Dogs: If the business growth rate is low and the company’s relative market share is also low, the business
is classified as DOG. The low market share normally also means poor profits. As the growth rate is also
low, attempts to increase market share would demand prohibitive investments. Thus, the cash required to
maintain a competitive position often exceeds the cash generated, and there is a net negative cash flow.
Under such circumstances, the strategic solution is to either liquidate, or if possible harvest or divest the
DOG business.
Question Marks: Like Dogs, Question Marks are businesses with low market share but the businesses
have a high growth rate. Because of their high growth, the cash requirement is high, but due to their low
market share, the cash generated is also low. As the business growth rate is high, one strategic option is to
invest more to gain market share, pushing from low share to high. The Question Mark business then
moves to a STAR (discussed later) quadrant, and subsequently has the potential to become cash low,
when the business growth rate reduces to a lower level. Another strategic option is when the company
cannot improve its low competitive position (represented by low market share). The management may
then decide to divest the Question Mark business.
These businesses are called Question Marks because they raise the question as to whether more money
should be invested in them to improve their relative market share and profitability, or they should be
divested and dropped from the portfolio.

Stars: Businesses which have high growth rate and high market share, are called Stars. Such businesses
generate as well as use large amounts of cash. The Stars generate high profits and represent the best
investment opportunities for growth. The best strategy regarding Stars is to make the necessary
investments and consolidate the company’s high relative competitive position.
11.2 GE’s strategic business planning grid

In consulting engagements with General Electric in the 1970's, McKinsey & Company developed a nine-
cell portfolio matrix as a tool for screening GE's large portfolio of strategic business units (SBU). This
business screen became known as the GE/McKinsey Matrix and is shown below:
Figure: McKinsey GE Matrix
The GE / McKinsey matrix is similar to the BCG growth share matrix in that it maps strategic business
units on a grid of the industry and the SBU's position in the industry. The GE matrix however, attempts to
improve upon the BCG matrix in the following two ways:
 The GE matrix generalizes the axes as "Industry Attractiveness" and "Business Unit Strength"
whereas the BCG matrix uses the market growth rate as a proxy for “industry attractiveness” and
relative market share as a proxy for the “strength of the business unit”.
 The GE matrix has nine cells vs. four cells in the BCG matrix.
Industry attractiveness and business unit strength are calculated by first identifying criteria for each,
determining the value of each parameter in the criteria, and multiplying that value by a weighting factor.
The result is a quantitative measure of industry attractiveness and the business unit's relative performance
in that industry.
Industry Attractiveness: The vertical axis of the GE / McKinsey matrix is industry attractiveness, which
is determined by factors such as the following:
 Market growth rate

 Market size
 Demand variability
 Industry profitability

 Industry rivalry
 Global opportunities
 Macro-environmental factors
Business Unit Strength: The horizontal axis of the GE / McKinsey matrix is the strength of the business
unit. Some factors that can be used to determine business unit strength include:
 Market share
 Growth in market share
 Brand equity
 Distribution channel access
 Production capacity
 Profit margins relative to competitors
Each business unit can be portrayed as a circle plotted on the matrix, with the information conveyed as
follows:
 Market size is represented by the size of the circle.

 Market share is shown by using the circle as a pie chart.
 The expected future position of the circle is portrayed by means of an arrow.
The following is an example of such a representation:
The shading of the above circle indicates a 38% market share for the strategic business unit. The arrow in
the upward left direction indicates that the business unit is projected to gain strength relative to
competitors, and that the business unit is in an industry that is projected to become more attractive. The
tip of the arrow indicates the future position of the center point of the circle.
Resource allocation recommendations can be made to grow, hold, or harvest a strategic business unit
based on its position on the matrix as follows:
 Grow strong business units in attractive industries, average business units in attractive industries,
and strong business units in average industries.
 Hold average businesses in average industries, strong businesses in weak industries, and weak
business in attractive industries.
 Harvest weak business units in unattractive industries, average business units in unattractive
industries, and weak business units in average industries.
There are strategy variations within these three groups. For example, within the harvest group the firm
would be inclined to quickly divest itself of a weak business in an unattractive industry, whereas it might
perform a phased harvest of an average business unit in the same industry.
While the GE business screen represents an improvement over the more simple BCG growth-share
matrix, it still presents a somewhat limited view by not considering interactions among the business units

and by neglecting to address the core competencies leading to value creation. Rather than serving as the
primary tool for resource allocation, portfolio matrices are better suited to displaying a quick synopsis of
the strategic business units.
11.3 Product life cycle, PLC

Like human beings, products also have an arc. From birth to death, human beings pass through various
stages e.g. birth, growth, maturity, decline and death. A similar life-cycle is seen in the case of products.
The product life cycle goes through multiple phases, involves many professional disciplines, and requires
many skills, tools and processes. Product life cycle (PLC) has to do with the life of a product in the
market with respect to business/commercial costs and sales measures. To say that a product has a life
cycle is to assert three things:
I. Products have a limited life, and thus every product has life cycle
II. Product sales pass through distinct stages, each posing different challenges, opportunities, and
problems to the seller
III. Products require different marketing, financing, manufacturing, purchasing, and human resource
strategies in each life cycle stage.
The four main stages of a product's life cycle and the accompanying characteristics (4P’s) are:
Introduction Stage: In the introduction stage, the firm seeks to build product awareness and develop a
market for the product. The impact on the marketing mix is as follows:
 Product branding and quality level is established, and intellectual property protection such as
patents and trademarks are obtained.
 Pricing may be low penetration pricing to build market share rapidly, or high skim pricing to
recover development costs.
 Distribution is selective until consumers show acceptance of the product.
 Promotion is aimed at innovators and early adopters. Marketing communications seeks to build
product awareness and to educate potential consumers about the product.
Growth Stage: In the growth stage, the firm seeks to build brand preference and increase market share.
 Product quality is maintained and additional features and support services may be added.
 Pricing is maintained as the firm enjoys increasing demand with little competition.
 Distribution channels are added as demand increases and customers accept the product.
 Promotion is aimed at a broader audience.

Figure: Stages of product life cycle
Maturity Stage: At maturity, the strong growth in sales diminishes. Competition may appear with similar
products. The primary objective at this point is to defend market share while maximizing profit.
 Product features may be enhanced to differentiate the product from that of competitors.
 Pricing may be lower because of the new competition.
 Distribution becomes more intensive and incentives may be offered to encourage preference
over competing products.
 Promotion emphasizes product differentiation.
Decline Stage: As sales decline, the firm has several options:
 Maintain the product, possibly rejuvenating it by adding new features and finding new uses.
 Harvest the product - reduce costs and continue to offer it, possibly to a loyal niche segment.
 Discontinue the product, liquidating remaining inventory or selling it to another firm that is
willing to continue the product.

11.4 Experience curve
In the 1960's, management consultants at The Boston Consulting Group observed a consistent
relationship between the cost of production and the cumulative production quantity (total quantity
produced from the first unit to the last). Data revealed that the production cost declined by 20 to 30
percent for each doubling of cumulative production quantity:
Figure: Experience curve
The vertical axis of this logarithmic graph is the real unit cost of adding value, adjusted for inflation. It
includes the cost that the firm incurs to add value to the starting materials, but excludes the cost of those
materials themselves, which are subject the experience curves of their suppliers.
Note that the experience curve differs from the learning curve. The learning curve describes the observed
reduction in the number of required direct labor hours as workers learn their jobs. The experience curve
by contrast applies not only to labor intensive situations, but also to process oriented ones.
The experience curve has important strategic implications. If a firm is able to gain market share over its
competitors, it can develop a cost advantage. Penetration pricing strategies and a significant investment in
advertising, sales personnel, production capacity, etc. can be justified to increase market share and gain a
competitive advantage.
When evaluating strategies based on the experience curve, a firm must consider the reaction of
competitors who also understand the concept. Some potential pitfalls include:
 The fallacy of composition holds: if all other firms equally pursue the strategy, then none will
increase market share and will suffer losses from over-capacity and low prices. The more
competitors that pursue the strategy, the higher the cost of gaining a given market share and the
lower the return on investment.
 Competing firms may be able to discover the leading firm's proprietary methods and replicate the
cost reductions without having made the large investment to gain experience.
 New technologies may create a new experience curve. Entrants building new plants may be able
to take advantage of the latest technologies that offer a cost advantage over the older plants of the
leading firm.

12. Strategy and Structure

Whether strategy precedes structure or structure precedes strategy is again debatable. There are arguments
for and against the two positions. Research findings are conflicting. As a matter of fact, strategy and
structure are mutually interdependent. In most of the cases it is found that strategy and structure are
interactive.
Suppose a company decides to pursue “differentiation” (based on quality improvement/new product

development) through intensive R &D efforts as its competitive strategy, this may involve the creation of
a new or substantial revamping of existing R & D department. This would mean enlargement of the
present organizational structure. If the quality control manager is made to report to the production
manager, a conflict of interests may ensue and the thrust of the new strategy may be lost. The quality
control manager may therefore be made to report to the chief operating manager. This would also imply
change in the organization structure. This was a simple example where structure follows strategy.
However, the opposite is also possible. And this would be the case when strategy has to take into account
the prevailing structure. Let us take the example of a shoe chain store which believes in aggressive price
competition as its strategy for market penetration. If the company has a centralized organization structure
where the prices are to be determined by corporate headquarters, the managers of the local chain stores
have only to implement the new price list received from the headquarters (i.e., change the price tags). On
the other hand if the structure is decentralized with authority for fixing or altering price vested in the
stores’ managers, the strategy for price competition would be quite different.
Since the landmark research study by Alfred D. Chandler several authors have veered round the view
that organization structure follows the strategy of the enterprise. It has been suggested that the
organization structure should be so designed that it matches to the particular needs of the strategy.
A logical conclusion of Chandler’s study is that not all forms of organization structure are equally
supportive of implementing a given strategy. The thesis that structure follows strategy has a strong
appeal. How the work in an organization is structured is just a means to an end and not an end itself.
Structure is a managerial device for facilitating the implementation and execution of the organization’s
strategy and, ultimately, for achieving the intended performance and results. The structural design of an
organization helps people pull together in their performance of diverse tasks. It is a means of tying the
organizational building blocks together in ways that promote strategy accomplishment and improved
performance. The top management, and for that purpose also the general managers, have to provide for
the necessary linkages between strategy and structure for improved performance.
13. Evaluation of strategy

Strategy evaluation is the last stage of the strategic management process and comes after strategy
formulation and implementation. An organization can have one of the best formulated and implemented
strategies but if the evaluation of these are not done, they become obsolete over a period of time.
Therefore, it becomes important to have an effective evaluation system so as to help the organization to
achieve its objectives. The evaluation process involves the control mechanism, which helps in taking
corrective actions.
13.1 Process of Evaluation

The key to a successful strategy is the effective implementation and evaluation system. Any kind of error
in the strategic decisions will harm the organization, which in the long-run may be highly dangerous.

Therefore, it is very necessary for the management to have a continuous evaluation system based on
which the corrective actions may be taken.
Figure: Evaluation of strategy
The first phase of this process consists of selecting the key success factors, developing measures and
setting standards for the same, and collecting information about actual state (performance on these
measures).
The second phase consists of comparison with the standards laid down and initiating action to alter
performance, wherever necessary. The follow up action could relate to people/business or both and could
be tactical or strategic. For instance, if the business has not picked up as expected, it may be necessary to
increase promotional efforts, or revise the product policy, or as a last resort, the firm may pull out of a
particular business. It is necessary to maintain a distinction between the follow up action towards
business/people and evaluation/control process. If major changes in environment have taken place and if
major assumptions about environment have gone wrong, it may be improper to give credit or discredit to
the people for the deviation in performance from standard set. At the same time good performance of a
strategy may not be due to good performance of the people as there may be windfall gains due to changes
in the environment not imagined at the time of setting the standards of performance or targets.
From Figure it can be realized that the process of evaluation is quite complex and there are several pitfalls
in proper evaluation and control. The success of an organization is gauged by its effectiveness and
efficiency. Effectiveness is measured by the degree to which the organization has achieved its objectives
while efficiency refers to the manner of resource utilization for achieving the output.
14. Competitive Advantage of Nations

The central question in economics is why a nation becomes a home base for successful international
competitors in an industry? Hence why are firms in a particular nation able to create and sustain
competitive advantage against the best competitors? The answers to these questions are of central concern
to firms that must compete in the international markets. These answers have implication to all firms in a
country.

A nation’s standard of living in the long term depends on its ability to attain a high level of productivity
in the industries in which its firms compete. This rests on the firm’s capacity to achieve improved quality
or greater efficiency.
The Diamond model of Michael Porter for the Competitive Advantage of Nations offers a model that can
help understand the competitive position of a nation in global competition. This model can also be used
for other major geographic regions. Porter describes four keys to a nation’s competitive advantage
relative to other countries:
I. Demand conditions
II. Related and supporting industries
III. Factor conditions
IV. Company strategy, structure, rivalry
Figure: Diamond model of Michael Porter
Factor Conditions: The nation’s relative position in vital industrial production factors such as skilled
labour or infrastructure, are important determinants of national competiveness. Both the level of
individual factors and the overall composition of the resource mix must be considered. Factors can be
country specific or industry specific. For example, Japan’s large pool of engineers -- reflected by a much
higher number of engineering graduates per capita than almost any other nation -- has been vital to
Japan’s success in many manufacturing industries.
Demand Conditions: The nature of home demand for an industry’s products and services requires
considering both the quantity and quality of the demand. For example, Japan’s sophisticated and

knowledgeable buyers of cameras helped stimulate the Japanese camera industry to improve product
quality and to launch new, innovative models.
Related and Supporting Industries: The presence or absence in the nation of internationally
competitive supplier and related industries is a key factor. Until the mid-1980s for example, the
technological leadership in the U.S. semiconductor industry provided the basis for U.S. success in
personal computers and several other technically advanced electronic products. Adoption of the
automobile took off in the USA after the construction of a national system of highways and gas stations.
Company Strategy, Structure and Rivalry: The national conditions that determine how companies are
created, organised and managed, as well as the nature and extent of domestic rivalry. For example, the
predominance of engineers on the top-management teams of German and Japanese firms results in
emphasizing the improvement of the manufacturing processes and product design. Furthermore, domestic
rivalry creates pressure to launch new products, to improve quality, to reduce costs and to invest in new,
more advanced technologies.
15. WTO and RTP

The World Trade Organization (WTO) is the only body making global trade rules with binding effects on
its Members. It is not only an institution, but also a set of agreements. The WTO regime is known as the
rules-based multilateral trading system. The history of the Organization dates back to 1947, when the
General Agreement on Tariffs and Trade (GATT), was set up to reduce tariffs, remove trade barriers and
facilitate trade in goods. Over the years, GATT evolved through eight rounds of multilateral trade
negotiations, the last and most extensive being the Uruguay Round (1986-1994). The WTO came into
being at Marrakesh on 1 January 1995, following the conclusion of the Uruguay Round. GATT then
ceased to exist, and its legal texts were incorporated into the WTO as GATT 1994. RTP stands for
“restrictive trade practices”.
The major functions of the WTO include:

 administering the WTO agreements
 handling trade disputes
 monitoring national trade policies
 serving as a forum for trade negotiations
 cooperating with other international organizations
Most of the issues that the WTO focuses on derive from previous trade negotiations. Agreement of 1994
focuses on six main parts:
I. The Agreement Establishing the WTO

II. Goods and investment — the Multilateral Agreements on Trade in Goods including the GATT
1994 and the Trade Related Investment Measures (TRIMS)
III. Services — the General Agreement on Trade in Services (GATS)
IV. Intellectual property — the Agreement on Trade-Related Aspects of Intellectual Property Rights
(TRIPS)
V. Dispute settlement (DSU)
VI. Reviews of governments' trade policies (TPRM)

15.1 Doha Round (The Doha Agenda)
The Doha Development Round started in 2001 and continues even today.
WTO is attempting to complete negotiations on the Doha Development Round, which was launched in
2001 with an explicit focus on addressing the needs of developing countries. It was the biggest
negotiating mandate on trade ever agreed: the talks were going to extend the trading system into several
new areas, notably trade in services and intellectual property, and to reform trade in the sensitive sectors
of agriculture and textiles; all the original GATT articles were up for review. As of June 2012, the future
of the Doha Round remains uncertain.
The negotiations have been highly contentious. Disagreements still continue over several key areas
including agriculture subsidies.
15.2 Principles of the trading system
The WTO establishes a framework for trade policies; it does not define or specify outcomes. That is, it is
concerned with setting the rules of the trade policy games. Five principles are of particular importance in
understanding both the pre-1994 GATT and the WTO:
I. Non-discrimination: It has two major components: the most favoured nation (MFN) rule, and the
national treatment policy. Both are embedded in the main WTO rules on goods, services, and
intellectual property, but their precise scope and nature differ across these areas. The MFN rule
requires that a WTO member must apply the same conditions on all trade with other WTO
members, i.e. a WTO member has to grant the most favorable conditions under which it allows
trade in a certain product type to all other WTO members. "Grant someone a special favour and
you have to do the same for all other WTO members." National treatment means that imported
goods should be treated no less favorably than domestically produced goods (at least after the
foreign goods have entered the market) and was introduced to tackle non-tariff barriers to trade
(e.g. technical standards, security standards et al. discriminating against imported goods).
II. Reciprocity: It reflects both a desire to limit the scope of free-riding that may arise because of
the MFN rule, and a desire to obtain better access to foreign markets. A related point is that for a
nation to negotiate, it is necessary that the gain from doing so be greater than the gain available
from unilateral liberalization; reciprocal concessions intend to ensure that such gains will
materialize.
III. Binding and enforceable commitments: The tariff commitments made by WTO members in a
multilateral trade negotiation and on accession are enumerated in a schedule (list) of concessions.
These schedules establish "ceiling bindings": a country can change its bindings, but only after
negotiating with its trading partners, which could mean compensating them for loss of trade. If
satisfaction is not obtained, the complaining country may invoke the WTO dispute settlement
procedures.
IV. Transparency: The WTO members are required to publish their trade regulations, to maintain
institutions allowing for the review of administrative decisions affecting trade, to respond to
requests for information by other members, and to notify changes in trade policies to the WTO.
These internal transparency requirements are supplemented and facilitated by periodic country-
specific reports (trade policy reviews) through the Trade Policy Review Mechanism (TPRM).

V. Safety valves: In specific circumstances, governments are able to restrict trade. The WTO’s
agreements permit members to take measures to protect not only the environment but also public
health, animal health and plant health.
15.3 Agreements in WTO
The WTO oversees about 60 different agreements which have the status of international legal texts.
Member countries must sign and ratify all WTO agreements on accession. A discussion of some of the
most important agreements follows:
 The Agreement on Agriculture, AOA came into effect with the establishment of the WTO at the
beginning of 1995. The AoA has three central concepts, or "pillars": domestic support, market
access and export subsidies.
 The General Agreement on Trade in Services, GATS was created to extend the multilateral
trading system to service sector, in the same way as the General Agreement on Tariffs and Trade
(GATT) provided such a system for merchandise trade. The agreement entered into force in
January 1995.
 The Agreement on Trade-Related Aspects of Intellectual Property Rights, TRIP sets down
minimum standards for many forms of intellectual property (IP) regulation. It was negotiated at
the end of the Uruguay Round of the General Agreement on Tariffs and Trade (GATT) in 1994.
 The Agreement on the Application of Sanitary and Phytosanitary Measures—also known as the
SPS Agreement—was negotiated during the Uruguay Round of GATT, and entered into force
with the establishment of the WTO at the beginning of 1995. Under the SPS agreement, the WTO
sets constraints on members' policies relating to food safety (bacterial contaminants, pesticides,
inspection and labelling) as well as animal and plant health (imported pests and diseases).
 The Agreement on Technical Barriers to Trade is an international treaty of the World Trade
Organization. It was negotiated during the Uruguay Round of the General Agreement on Tariffs
and Trade, and entered into force with the establishment of the WTO at the end of 1994. The
object ensures that technical negotiations and standards, as well as testing and certification
procedures, do not create unnecessary obstacles to trade".
India has bilateral agreements with the following countries and blocs:
 SAFTA (Bangladesh, Bhutan, the Maldives, Nepal, Pakistan, Sri Lanka and Afghanistan)
 ASEAN (ASEAN–India Free Trade Area)
 European Union (final stage)
15.4 Stages of economic integration

Stages of economic integration include; The preferential Trade Area(PTA), Free Trade Area (FTA),
Customs Union(CU), Common Market (CM), Economic Community or Monitory Union and Economic
Union or Political Federation.
Countries engage in economic integration in order to eliminate barriers to international trade, facilitate
payments and factor mobility within the economic bloc. Issues under consideration vary from stage of
economic integration to another. In general however the Free Trade Area includes trade arrangements on

preferential terms in accordance with the rules of origin. The Customs Unions involves mainly a common
external tariffs, dispute settlement mechanisms, common external policy and common regional
institutions. The Common Market includes free movement of factors of production and natural persons. A
monitory union involves a common monetary (common currency) and fiscal policies between parties
while under a political federation parties agree to implement uniform political institutions and policies
between themselves. Political federation is the last of the Stages of economic integration. Below we
discuss each stage of economic integration in detail.
Preferential Trade Area PTA: Parties to this econmic integration arrangement trade on preferential
terms. Parties reduce tariff rates on agreed list of goods they trade between themselves. A rules of origin
regime is employed to ensure that no foreign goods can take advantage of their economic integration.
Free Trade Area FTA: Parties to the arrangement trade on duty-free and quota-free terms for goods
meeting agreed rules of origin. Under both the PTA and FTA stages of economic integration, parties need
origin verification procedures and dispute settlement mechanisms to ensure predictability and fairness in
the trading arrangements. For PTA or FTA to be effective, it needs rules of origin to help distinguish
between goods produced in territories of parties to agreement (entitled to preferential or duty-free
treatment) and those originating from outside the territories of the contracting parties (which are liable to
full duties).
PTA and FTA regional integration agreements are not really economic integration, but they are rather
more co-operation arrangements in the area of trade since these stages of economic integration are
founded mainly on inter-governmental co-operation.
Customs Union(CU): Parties to the economic integration agreement trade on duty-and quota-free basis
and also agree on a common external tariff. They agree on common regulations and measures of trade to
apply on goods from third parties. While a Customs Union is similar to a PTA or an FTA in that it still
focuses on trading arrangements, it is fundamentally different from a PTA or an FTA in that at this stage
of economic integration, parties to the arrangement must go beyond intraregional trade and must begin to
fully embrace common external policy and common regional institutions. In short, real regional economic
integration begins at this stage and intergovernmental co-operation begins to fade away. A real integration
begins with a customs union because it combines an FTA and CET together with common regulations or
measures to trade and supranational institutions to govern and regulate trade in the CU.
Common Market: This is a deeper stage of economic integration. It allows the free of goods & services
plus free movement of factors of production. This includes and focuses mostly on labour (work-related
movement) and capital. Free movement of labour also entails free movement of persons (movement of
persons on a visa-free or relaxed visa requirements basis). At this stage economic integration can only be
successful if it based on a supranational framework. Inter-governmentalism cannot work.
Monitory Union or Economic Community: This stage of economic integration includes duty- and
quota-free trade in goods and services, free movement of factors of production, common monetary and
fiscal policies and a single currency issued by one monetary authority. Economic policies are harmonized
and managed centrally (through supranational institutions).
Under Economic Union or Political Federation: This is the highest level of the stages of economic
integration. Parties under an Economic Community unify political institutions and policies. They
establish political institutions to direct economic and political policy. This is the deepest stage of
integration. While inter-governmentalism does not exist in the economic arena, harmonization of political
institutions and structures is based on intergovernmental co- operation, unless Parties decide to merge
their countries into a single country, e.g. Germany.

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What are the different stages of economic integration?

What are the different stages of economic integration?

What are the key differences between a preferential trade area and a free trade area?

What are the key differences between a preferential trade area and a free trade area?

Strategic Management

We specialize in Management subject for UGC NET

Human Peritus, www.humanperitus.com 2

Human Peritus, www.humanperitus.com 3

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A few aspects regarding nature of strategy are as follows:

1.1 Levels of strategy

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Figure: Levels of strategy

The three levels are explained as follows:

Corporate Level Strategy

Business Levels Strategy

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Functional Level Strategy

We will discuss each of these steps in detail.

2.1 Strategic intent

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2.2 Environmental analysis

I. Monitoring the environment i.e. environmental search

2.3 Evaluation of strategic alternatives

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Diversification: Diversification involves change in business definition either in terms of customer

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I. Corporate Portfolio Analysis

Corporate Portfolio Analysis

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2.5 Strategy implementation

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2.6 Strategy evaluation and control

I. Measurement of organizational process

3. Mission, Vision and Values

3.1 Strategic Intent

 It is an obsession with an organization.

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A few important aspects regarding vision are as follows:

For example vision statement of Tata Power is:

The above definition reveals the following:

For example mission statement of Tata Power is:

 Operating our assets at benchmark levels

Difference in Mission and Vision

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Figure: Vision and mission statements

A few characteristics of core purpose are as follows:

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4.1 PESTEL Framework

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Figure: PESTLE framework

5.1 Porter’s 5 forces model

I. The threat of entry of new competitors (new entrants)

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Figure: Porter’s 5 forces

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The diagram shows all the factors of Porter’s five forces.

5.2 Strategic group mapping