Jagannath International Management School

(Affiliated to GGS Indraprastha University, Delhi)

A Grade NAAC Accredited & ISO 9001:2008 Quality Certified
Vasant Kunj, New Delhi-110070

SOLVED END TERM EXAMINATION PAPER

SIXTH SEMESTER BBA MAY-JUNE 2016

Paper Code: BBA 302

Subject: Business Policy & Strategy
Time: 3 Hours Maximum Marks: 75

Q1 Discuss the evolution of business policy as a subject and highlight it’s scope and
importance.Illustrate your answer with suitable examples.

Evolution of Business Policy as a subject

Business Policy has been traditionally related with the courses in Business Schools. It is
rooted in the practice of management and has been passed through different stages before
taking into shape of current strategic management. In management studies, business policy
as a field of study evolved in 1911 at Harvard Business School. It has been developed in
management courses out of the experience of corporate enterprises and the history of
success and failure of business over a period of time. It is the outcome of senior
management decision bearing of the future of ongoing enterprises. Major objective of the
management course was to enhance general management capability.
Numerous expert studies on business education and the Business policy course were made
obligatory for all Business Schools in USA. Since then, Business Policy was commenced as a
vital course in the management degree/diploma programmes in many nations including
India. However, there have been changes in focus of the Business Policy course since the
1980s. The modern approach is focused on Strategic Management. The generic term
business policy denotes to all of an organization's processes and procedures. This can
range from human resources policies to the company's marketing schedule and its plans
for expansion and development. Business policy is strongly associated with strategic
management because the policies are basically the strategies put into action.
Business policy in Indian context:
In India, formal education began in 1950s and received huge enhancement in 1960 with the
establishment of Indian institute of Management and Administrative Staff College of India.
IIM colleges structured their curriculum and teaching system on the basis of Harvard
model. With the setting up numerous management Institutes all over the country, India has
experienced unparalleled boom. Subsequently, All India council for technical education was
established in 1990 to regulate the technical and management education India. All India
Council for Technical Education prescribed business policy and strategic management as a
compulsory course in the curriculum of management studies.
Importance of Business Policy course

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The Business policy course is integrative in nature. It enables the learner to understand the
importance of looking at the organization as a unified whole. The functional flavor and
emphasis is needed to motivate people to peak performance. But in the race to get ahead of
other departments, especially where resources have to be put to effective use, one should
not lose sight of the broad, overall interests of an organization.
A course in Business Policy seeks to integrate the knowledge and experience gained in
various functional areas of Management. Individual departments may suffer from certain
unique problems. Marketing may complain against poor quality, Production may look at
poor sales support. Finance may find it difficult to come out with appropriate budgetary
allocations and HR Department may criticize the poor compensation plans coming in the
way of improved performances. Sectional interests no doubt have to be taken care of. Every
attempt must be made to put out the internal fires by emphasizing the overall goals for
which the organization is known.
Business Policy course is multi-disciplinary in nature. It draws rich inputs from other
disciplines such as Psychology, Economics, and Sociology etc. The students are made to
examine the important issues from various angles. Sectional interests, sectoral demands,
tunnel visions and departmental loyalties and a host of other disintegrating factors are
examined and cross examined bit by bit, piece by piece while arriving at mutually satisfying
decisions the course helps participants to cross fertilize ideas, synchronize thoughts and
deal with issues dispassionately. They can come out of the shell cross functional
boundaries and take effective decisions keeping the best interests of the organizations in
mind. They are willing to look at the other side of the coin more closely. They are willing to
listen and toss around ideas freely, interact openly and take everything good or bad in their
stride.
A course in Business policy also helps participants to improve their decision making
capabilities in a significant way. Participants are encouraged to gather information from
diverse sources, investigate facts thoroughly examine the opinions of affected parties
initially and resolve issues through joint, interactive sessions. Strategic decision making is
not a one man show. Both the manager and the subordinates must be willing to dissolve
their differences, examine facts objectively and arrive at decisions to mutual satisfaction.
One can develop skills of this nature of course only through experience and observation. A
Course in Business policy helps participants to understand the linkages between various
functional specialties and then decide things objectively and rationally.

Benefits of the Course:

1) Helps the participant to understand why functional boundaries are created and
appreciate why the various sub units have to move in close coordination while
realizing the overall objective(s).
2) Helps to resolve to different between individual and organizational goals. Every
attempt is made to pull all the functions and activities together
3) Helps participants to work in an orderly manner appreciating the work put in by
others. They understand and adjust with each other by developing mutual trust,
cooperation and understanding Production knows its target maintenance keeps

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 equipment and tools in good order finance arranges funds and security takes care of
goods and services.
4) Creates an understanding of how overall objectives and policies are formulated why
everyone has to focus attention on pre-set targets and goals, why one should
appreciate the viewpoint of the other while translating rhetoric into action; why one
needs to anticipate changes and adjust accordingly. The course will certainly
improve the capabilities of participants in monitoring events, forecasting problems
and solving them proactively rather than reactively.

Q 2.What are the various approaches to the Environment Scanning Process. Explain
by giving suitable examples.
The first step of the Strategic Management process is Environmental Analysis. An
organization can only be successful if it is appropriately matched to its environment.
Environmental Analysis is the study of the organizational environment to pinpoint
environmental factors that can significantly influence organizational operations.
Managers commonly perform Environmental Analysis to help them understand what is
happening both inside and outside their organizations and to increase the probability that
the organizational strategies they develop will appropriately reflect the organizational
environment.
Organizational environment consists of both external and internal factors. Environment
must be scanned so as to determine development and forecasts of factors that will
influence organizational success. Environmental scanning refers to possession and
utilization of information about occasions, patterns, trends, and relationships within
an organization’s internal and external environment. It helps the managers to decide
the future path of the organization. Scanning must identify the threats and opportunities
existing in the environment. While strategy formulation, an organization must take
advantage of the opportunities and minimize the threats. A threat for one organization may
be an opportunity for another.
In order to perform an environmental analysis efficiently and effectively, a manager must
thoroughly understand how organizational environments are structured.
For purposes of environmental analysis, the environment of an organization is generally
divided into 3 distinct levels:
1. General Environment
2. Operating Environment
3. Internal Environment
Managers must be well aware of these 3 organizational environmental levels,understand
how each level affects organizational performance and then formulate organizational
strategies in response to this understanding.
THE GENERAL ENVIRONMENT:
The components normally considered part of the general environment are:
 Economic
 Social: Including Demographics and Social Values
 Political
 Legal

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  Technological
THE OPERATING ENVIRONMENT:
The operating Environment includes various components like:
 Customer
 Competition
 Labour
 Supplier
 International Issues.
THE INTERNAL ENVIRONMENT:
The level of an organization’s environment that exists inside the organization and normally
has immediate and specific implications for managing the organization is the internal
environment.
It includes marketing, finance and accounting,planning,organizing, influencing and
controlling within the organization.
Environmental Analysis in Strategic Management plays a crucial role in businesses by
pinpointing current and potential opportunities or threats outside the company in its
external environment. The external environment includes political, environmental,
technological and sociological events or trends that can affect the business directly or
indirectly. An environmental analysis is generally conducted when a strategic plan is being
developed. Managers practicing strategic management must conduct an environmental
analysis quarterly, semi-annually, or annually, depending on the nature of the business's
industry. Being able to identify events or conditions in the external environments helps
businesses achieve a competitive advantage and decrease its risk of not being prepared
when faced with oncoming threats.
The purpose of an environmental analysis is to help in strategy development by keeping
decision-makers within an organization informed on the external environment. This may
include changing of political parties, increasing regulations to reduce pollution,
technological developments, and shifting demographics. If a new technology is developed
and is being used in a different industry, a Strategic Manager would see how this
technology could also be used to improve processes within his business. An analysis allows
businesses to gain an overview of their environment to find opportunities or threats.
The role of environmental analysis in strategic management is to find any potential
opportunities and threats, and to create a plan to take advantage of opportunities or to
avoid threats. If a threat cannot be avoided, such as a shifting demographic that is causing a
decline in sales, then a plan should be created to minimize its effects. For instance, the
business could develop a product to target the new demographic majority.
How often this type of analysis should be conducted depends on the nature of the industry.
If the industry is fast-paced or susceptible to changing legislation, then the business should
consider doing its analysis quarterly or semi-annually. An industry that does not face
constant changes or is not sensitive to changes in the external environment may only need
an annual analysis. A business that conducts an environmental analysis often is more
aware of opportunities opening and can take advantage of them quicker than can its
competitors. Increasing how often an environmental analysis is conducted can also help the

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business see potential risks sooner, allowing it additional time to develop a strategic plan
to avoid or decrease its potential affects.

Q3.Briefly explain the difference between Vision and Mission statements. With the
help of a suitable example, outline the strategic management process for the
formulation of a strategy.
Difference between Vision and Mission statements
The starting point for the formulation of any strategy is establishing the Vision & Mission
statements of a Company.

Vision Statements and Mission Statements are the inspiring words chosen by successful
leaders to clearly and concisely convey the direction of the organization. By crafting a clear
mission statement and vision statement, you can powerfully communicate your intentions
and motivate your team or organization to realize an attractive and inspiring common
vision of the future. These statements create a sense of direction and opportunity. They
both are an essential part of the strategy-making process.

"Mission Statements" and "Vision Statements" do two distinctly different jobs.

• A Mission statement tells you the fundamental purpose of the organization. It
defines the customer and the critical processes. It informs you of the desired level of
performance.
• A Vision statement outlines what the organization wants to be, or how it wants the
world in which it operates to be. It concentrates on the future. It is a source of
inspiration. It provides clear decision-making criteria.
Strategic Management Process for the formulation of Strategy
As the strategic management process stimulates future thinking, the strategic managers
will be prepared to respond to uncertain environments. It provides an organization with
consistency of action without allowing to drift in different directions. It involves different
levels of management to encourage commitment on the part of participating managers &
reduces resistance to proposed changes.

The benefits can be summarized as follows :-

 Improved financial performance in terms of profit & growth.

 Encouraging & rewarding employees enhance problem prevention capability.
 Improved quality of strategic decisions through group interaction.
 Greater employee motivation leading to better understanding of priorities &
operation thereby reducing gaps & overlaps in activities. Thus increases employees
productivity.
 Minimum resistance to change.

Phases in Strategic Management Process:

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There are 5 essential phases in the strategic management process. Each phase of the
strategic management process consists of number of elements that are discrete &
identifiable activities performed in logical & sequential manner.

 Establishment of strategic intent:

1. Creating & communicating a vision.
2.Designing a mission statement.
3.Defining the business.
4. Setting objectives.

 Formulation of strategies:
1. Performing environmental appraisal.
2. Doing organizational appraisal.
3. Considering corporate & business level strategies.
4. Undertaking strategic analysis.
5. Exercising strategic choice.
6. Preparing strategic plan.

 Selection or choice of strategies:

1. Best alternative matching organizational requirements subject to resources
available.
 Implementation of strategies:
1. Designing structures & systems.
2. Managing functional &behavioral implementation.
3. Operationalizing strategies.

Performing strategic evaluation & control:

1. Performing strategic evaluation.

2. Exercising strategic control.
3. Reformulating strategies.

Q4 Explain ETOP as a diagnostic tool for Environmental Analysis. Give suitable

examples.

The preparation of ETOP involves dividing the environment into different sectors and then
analyzing the impact of each sector on the organization. A comprehensive ETOP requires
subdividing each environmental sector into sub factors and then the impact of each sub
factor on the organization is described in the form of a statement.

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A summary ETOP may only show the major factors for the sake of simplicity. The table 1
provides an example of an ETOP prepared for an established company, which is in the Two
Wheeler industry.

The main business of the company is in Motorcycles manufacturing for the domestic and
exports markets. This example relates to a hypothetical company but the illustration is
realistic based n the current Indian business environment.

Table 1: Environmental Threat and Opportunity Profile (ETOP) for a Motorcycle

company:
Environmental Sectors Impact of each sector
Customer preference for
motorbike, which are
fashionable, easy to ride and
Social (↑) durable.

Political (→) No significant factor.

Growing affluence among urban

consumers; Exports potential
Economic (↑) high.

Two Wheeler industry a thrust

Regulatory (↑) area for exports.

Industry growth rate is 7-10

percent per year, For motorbike
growth rate is 12-15 percent,
Market (↑) largely Unsaturated demand.

Mostly ancillaries and

associated companies supply
parts and components, REP
licenses for imported raw
Supplier (↑) materials available.

Technological (↑) Technological up gradation of

industry in progress. Import of

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 machinery under OGL list
possible.

As shown in the table motorbike manufacturing is an attractive proposition due to the

many opportunities operating in the environment. The company-can capitalize on the
burgeoning demand by taking advantage of the various government policies and
concessions. It can also take advantage of the high exports potential that already exists.

Since the company is an established manufacturer of motorbike, it has a favorable supplier

as well as technological environment. But contrast the implications of this ETOP for a new
manufacturer who is planning to enter this industry.

Though the market environment would still be favorable, much would depend on the
extent to which the company is able to ensure the supply of raw materials and components,
and have access to the latest technology and have the facilities to use it. The preparation of
an ETOP provides a clear picture for organization to formulate strategies to take advantage
of the opportunities and counter the threats in its environment.

The strategic managers should keep focus on the following dimensions,

1. Issue Selection:
Focus on issues, which have been selected, should not be missed since there is a likelihood
of arriving at incorrect priorities. Some of the impotent issues may be those related to
market share, competitive pricing, customer preferences, technological changes, economic
policies, competitive trends, etc.

2. Accuracy of Data:
Data should be collected from good sources otherwise the entire process of environmental
scanning may go waste. The relevance, importance, manageability, variability and low cost
of data are some of the important factors, Which must be kept in focus.

3. Impact Studies:
Impact studies should be conducted focusing on the various opportunities and threats and
the critical issues selected. It may include study of probable effects on the company’s
strengths and weaknesses, operating and remote environment, competitive position,
accomplishment of mission and vision etc. Efforts should be taken to make assessments
more objective wherever possible.

4. Flexibility in Operations:

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There are number of uncertainties exist in a business situation and so a company can be
greatly benefited buy devising proactive and flexible strategies in their plans, structures,
strategy etc. The optimum level of flexibility should be maintained.

Some of the key elements for increasing the flexibility are as follows:
(a) The strategy for flexibility must be stated to enable managers adopt it during unique
situations.

(b) Strategies must be reviewed and changed if required.

(c) Exceptions to decided strategies must be handled beforehand. This would enable
managers to violate strategies when it is necessary.

(d) Flexibility may be quite costly for an organization in terms of changes and compressed
plans; however, it is equally important for companies to meet urgent challenges.

Q5.Briefly explain the process of conducting Resource Audit for a firm.Illustrate your
answer with suitable examples.

A Resource Audit is the process of going through everything that your business or
organization has available to it. These resources can take on many forms, and are not
limited to just obvious items like cash and inventory.

Understanding what you have available to you as a business owner or manager is a crucial
part of the overall puzzle. If you don’t know what resources you have at your disposal, you
have no way to making good decisions that maximize your opportunities while minimizing
your risks. That is the balancing act that every business must play, so understanding
exactly what resources are at your disposal should be high on your priority list.
A resource audit is the process of going through everything that your business or
organization has available to it. These resources can take on many forms, and are not
limited to just obvious items like cash and inventory. The resource audit for your
organization is likely to be unique to you because it will take into consideration specific
needs that your industry has for things like experience and knowledge in a particular field.
While it might take some time and effort to perform a proper resource audit on your
organization, the information that this strategy process will reveal to you can be invaluable.
Let’s take a look at some of the categories of resources that could relate to your business.
Some of the following will be obvious to you, but some of these items you might not have
thought about as obvious resources up until this point.
Physical Resources

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This is probably the first thing you think about when considering the resources that you
have on hand. These are things like equipment, inventory, and even buildings that allow
you to do what it is you do. Most likely, you are already making the most of these resources
since they are the ones that get the most time and attention.
However, it is always worth taking a fresh look at your physical resources to see if you
could be getting more value from them than you currently are. Is some of the space in your
buildings going unused, or being wasted on an unnecessary purpose? Are your machines
being used to their fullest capacity as frequently as possible? When you take the time to
review everything that you do and how you use what you have, you might be surprised to
notice inefficiencies where you didn’t think any existed.
Financial Resources
Another category that receives plenty of attention. Unless your organization is hopelessly
disorganized, you certainly already know what kind of financial resources you have
available to you. Accurate financial records are one of the essentials for any organization,
so this is an area that you hopefully have under control already.
As with your physical resources, a review of financial resources is something that should be
happening on an ongoing basis. You should always be finding ways to be more efficient
with your money, so that the organization squeezes every last cent out of each dollar. In the
competitive business environment that exists today, no company can afford to just give
away money due to poor decision making or laziness among management. If you aren’t
going to be smart with your financial resources, you can assume that your competitors will
be.
Human Resources
This is where it starts to get interesting from a management perspective, and where you
can start to make real improvements in your organization. Each person that works within
your company has a specific set of skills and experiences that is unique to them. If you want
to get the best possible performance from your business as a whole, it starts by getting the
most out of each individual person that you have available to you. Wages make up a huge
part of any organizations budget, so make sure you get getting the best possible return
from the investment you have made in these people.
One of the most commonly made mistakes in terms of using human resources is putting
people ‘into a box’ in terms of what they can do. Just because someone has been hired into
your organization for a specific purpose doesn’t mean that they don’t have more to offer.
Instead of trying to keep all of your employees or team members stuck in the same role that
they are currently filling, encourage exploration and collaboration so you can uncover skills
that you didn’t know existed within the work force. In doing this, you might find that you
don’t need to hire as many new people when new projects come up – because the skills and
experience are already found within your team. Give your employees the benefit of the
doubt and provide them with opportunities to impress you by going outside of their usual
routine.
The Intangibles
What else does your organization have going for it beyond what you can see within the
building? Intangible resources can include things like a great reputation within the

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community, many years in business, or a presence in a niche market that lacks significant
competition.

Q6. Distinguish between the BCG Model and the Directional Policy Matrix model
highlighting their advantages and disadvantages.
BCG Matrix
 The BCG Matrix is a two-by-two matrix that classifies businesses, divisions or
products according to the present market share and the future growth of that
market.
 Growth is seen as the best measure of market attractiveness.
 Market share is seen to be a good indicator of competitive strength
Products are then shown in a diagram where the money value of sales is indicated by the
relative size of the circle:

Based on this there are four possible classifications as under:

Cash cow
A Cash cow has a high relative market share in a low-growth market and should be
generating substantial cash inflows.

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  The period of high growth in the market has ended (the product life cycle is in the
maturity or decline stage), and consequently the market is less attractive to new
entrants and existing competitors.
 Cash cow products thus tend to generate cash in excess of what is needed to sustain
their market positions.
 Profits support the growth of other company products.
 The firm's strategy is oriented towards maintaining the product's strong position in
the market.
Star
A Star has a high relative market share in a high-growth market. A star may be only cash-
neutral despite its strong position, as large amounts of cash may need to be spent to defend
an organisation's position against competitors.
 Competitors will be attracted to the market by the high growth rates.
 Failure to support a star sufficiently strongly may lead to the product losing its
leading market share position, slipping eastwards in the matrix and becoming a
problem child.
 A star, however, represents the best future prospects for an organisation.
 Market share can be maintained or increased through price reductions, product
modifications, and/or greater distribution.
 As industry growth slows, stars become cash cows.
Problem child
A problem child (sometimes called 'question mark') is characterised by a low market
share in a high-growth market. Substantial net cash input is required to maintain or
increase market share.
 The company must decide whether to do nothing (but cash continues to be
absorbed) or market more intensively (requiring substantial investment) or get out
of this market ("double or quit").
 The questions are whether this product can compete successfully with adequate
support and what that support will cost.
Dog
The dog product has a low relative market share in a low-growth market. Such a product
tends to have a negative cash flow, that is likely to continue.
 It is unlikely that a dog can wrest market share from competitors without getting
bigger but the market is not attractive enough to warrant such investment.
 Competitors, who have the advantage of having larger market shares, are likely to
fiercely resist any attempts to reduce their share of a low-growth or static market.
 An organisation with such a product can attempt to appeal to a specialised market,
delete the product or harvest profits by cutting back support services to a minimum.
Measurement issues
Assessing the rate of market growth as high or low is difficult because it depends on the
market. New markets may grow explosively while mature markets grow hardly at all. The
midpoint of the growth dimension is usually set at 10% annual growth rate; markets
growing in excess of 10% are considered to be high-growth markets and those growing at
less are low-growth markets.

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Relative market share is defined by the ratio of market share to the market of the largest
competitor. The log scale is used so that the midpoint of the axis is 1.0, the point at which
an organisation's market share is exactly equal to that of its largest competitor. Anything to
the left of the midpoint indicates that the organisation has the leading market share
position.
Having a balanced portfolio
An organisation would want to have in a balanced portfolio:
 cash cows of sufficient size and/or number that can support other products in the
portfolio
 stars of sufficient size and/or number which will provide sufficient cash generation
when the current cash cows can no longer do so
 problem children that have reasonable prospects of becoming future stars
 no dogs or, if there are any, there would need to be good reasons for retaining them.
Strategic movements on the BCG matrix
A product's place in the matrix is not fixed for ever as the rate of growth of the market
should be taken into account in determining strategy.
 Stars tend to move vertically downwards as the market growth rate slows, to
become cash cows.
 The cash that they then generate can be used to turn problem children into stars,
and eventually cash cows.
The ideal progression is illustrated below:

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Criticisms of the BCG matrix
(1)The matrix uses only two measures
The only two measures used in the BCG matrix are growth and market share. These may
be too limited as a basis for policy decisions.The Boston Consulting Group has now
developed a further matrix to meet this criticism:

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The vertical axis now indicates the number of ways in which a unique advantage may be
achieved over competitors, and the horizontal axis is a measure of the size advantage that
may be created over competitors. The new matrix makes the exercise much more a matter
of qualitative judgement.
(2)The matrix encourages companies to adopt holding strategies
The strategic principles involved advocate that companies with large market shares in
static or low-growth markets (i.e. cash cows) adopt holding or harvesting strategies rather
than encouraging them to try to increase the total demand of the markets in which their
products are selling. Compliance with these strategic tenets has led to devastating results
for some companies.
There are a number of dangers in assuming that a product is a 'cash cow'. (BCG defines a
cash cow as a product occupying a strong position in a static or slow growing market.)
First, management may be tempted to pull back on investment, by treating the product as
in 'safe-water', and second make assumptions about future cash flow that may be
unrealistic. Yamaha destroyed the dominance of the well-established US musical
instrument manufacturers who concentrated on milking their mature products for profit
rather than on planning how to defend their market shares.
(3)The matrix implies only those with large market shares should remain
There are many examples of businesses with a low market share continuing to operate
profitably. Sometimes this is because the market is not unitary, but fragmented, and the
small competitor has found itself a particular market niche; on other occasions large
companies may prefer smaller competitors to preserve the impression of competition.
The link between profitability and market share may be weak because:

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  low share competitors entering the market late may be on the steepest experience
curve
 low share competitors may have some in-built cost advantage
 not all products have costs related to experience
 large competitors may receive more government attention and regulation.
(4)The matrix implies that the most profitable markets are those with high growth
Again this is not always so, due to:
 high entry barriers, especially in high-technology industries
 high price competition.
Both of these problems are typified by the microcomputer business. Despite impressive
rates of growth, a number of companies have been unable to make profits because of the
high levels of initial investment followed by extreme price competition from low-cost late
entrants.
(5)Not all dogs should be condemned
A very large number of small but successful businesses are 'dogs', and according to the BCG
concept are ripe for reinvestment or liquidation. However, this would not always be the
case. Dog products are often used not with the primary aim of maximising the profit from
the product itself, but to provide economies of scale in manufacturing, marketing and
administration to sustain the overall business.
Furthermore, the BCG portfolio theory does not seem to take into account the need for
competitive strategy. A company might, for example, launch a product to act as a 'second
front' to support the thrust of its main offering, although the product, by definition, is a
dog.
When the Clorox company (the market leader in the US for bleach) introduced a new
product, 'Wave', the purpose was to try to deflect Procter & Gamble's attack by creating a
'second front', rather than to generate substantial profits from Wave.
Despite these criticisms, in certain circumstances the model provides a useful method by
which a company can
 attempt to achieve overall cost leadership in its market(s) through aggressive use of
directed efficiency;
 focus its expenditures and capital investment programmes.
 plan for an appropriate balance of resources between conflicting product-market
claims. Also the information and analysis required to construct the matrix will
provide meaningful indicators. It should, however, not be used in a rigid, stereotype
manner.
The model ought to be used as a means to an end, not as representing the end objective in
itself.
The evidence
Several studies have been carried out into the use of the BCG, and on the whole these would
not encourage uncritical use of the model. In particular, the link between quadrant and
cash flow is not particularly strong, and there are many exceptions. Fortune once described
this model as the worst business model ever devised.
Directional Policy Matrix

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The Directional Policy Matrix (DPM) is a method of business portfolio analysis
formulated by Shell International Chemical Company.
The model diagram is given below.

Rather than simply market growth and share, the DPM considers a range of factors
including the following.
Business sector prospects
 Market - demographic factors, growth, seasonality, maturity.
 Competition - number and size of competitors, price competition, barriers to entry,
substitutes.
 Technology - sophistication, rate of change, lead time, patents.
 Economic - leverage, capital intensity, margins.
 Government - subsidies/grants, purchases, protection, regulation, taxation.
 Geography - location, markets, communications, environment.
 Social - pressure groups, trade unions, availability of labour.
Competitive capabilities
 Market - share, growth, product maturity, product quality, product mix, marketing
ability, price strategy, customer loyalty.
 Technological - skills, patent protection, R&D, manufacturing technology.
 Production - costs, capacity utilisation, inventory control, maintenance, extent of
vertical integration.
 Personnel - employee quality, top management quality, industrial relations, trade
union strength, training, labour costs.

Prof. B. Manchanda JIMS-VK Page 17

  Financial - resources, capital structure, margins, tax position, financial control,
investment intensity.
DPM strategic choices
Possible strategic choices
The cell labels shown in the diagram above represent possible strategic choices or types of
resource deployments most appropriate for the firm, given its score on each of the two
axes. More specifically these cell labels have the following implications.
 Withdrawal - probably already losing money; net cash flow negative over time.
Losses may be minimised by divesting or even liquidation.
 Phased withdrawal - probably not generating sufficient cash to justify continuation;
assets can be redeployed.
 Cash generation - equivalent to a 'cash cow' in the BCG grid. This cell would be
occupied by a firm or product in later stages of the life cycle that does not warrant
heavy investment, but can be 'milked' of cash due to its strong competitive position.
 Proceed with care - similar to a 'problem child'; firms falling in this sector may
require some investment support but heavy investment would be extremely risky.
 Growth - a firm, product or SBU in these sectors would call for investment support
to allow growth with the market. It should generate sufficient cash on its own.
 Double or quit - units in this sector should become 'high fliers' in the not-too-distant
future. Consequently those in the upper right corner of this cell should be singled
out for full support. Others should be abandoned.
 Try harder - external financing may be justified to push a unit in this sector to a
leadership position. However, such a move will require judicious application of
funds.
 Leader - the strategy for this segment is to protect this position by external
investment (funds beyond those generated by the unit itself - occasionally);
earnings should be quite strong and a major focus may be maintaining sufficient
capacity to capitalise on strong demand.
Strategic movements
In addition to considering the position on the Directional Policy matrix in static terms,
changes over time need also to be considered.
 Ideally, products in the cash-generating sectors should be able to finance
expenditure on products in the attractive business/weak position sectors, so as to
move them to the attractive business/strong position sectors.
 Later these products move down to become cash generators themselves and the
cycle is completed.

Q7. Explain Profit Impact of Market Strategy (PIMS) Model for Portfolio analysis. Give
suitable examples.
The Profit Impact of Market Strategies (PIMS) is a comprehensive, long-term study of the
performance of strategic business units (SBUs) in 3,000 companies in all major industries.
The PIMS project began at General Electric in the mid-1960s. It was conducted at Harvard
University between 1972 and 1974. In 1975 PIMS was taken over by a Massachusetts-
based nonprofit organization, formed for that purpose, called The Strategic Planning

Prof. B. Manchanda JIMS-VK Page 18

Institute (SPI). Since then, SPI researchers and consultants have continued working on the
development and application of PIMS data. The PIMS database is available to individuals
for a subscription price (in 2006) of $995 for one month's use and $2,500 for three months'
use. Longer periods of subscription are available from SPI by special arrangement.
The PIMS database is "a collection of statistically documented experiences drawn from
thousands of businesses, designed to help understand what kinds of strategies (e.g., quality,
pricing, vertical integration, innovation, advertising) work best in what kinds of business
environments. The data constitute a key resource for such critical management tasks as
evaluating business performance, analyzing new business opportunities, evaluating and
reality testing new strategies, and screening business portfolios."
The main function of PIMS is to highlight the relationship between a business's key
strategic decisions and its results. Analyzed correctly, the data can help managers gain a
better understanding of their business environment, identify critical factors in improving
the position of their companies, and develop strategies that will enable them to create a
sustainable advantage. PIMS principles are taught in business schools, and the data are
widely used in academic research. As a result, PIMS has influenced business strategy in
companies around the world.
THE PIMS DATABASE
The information comprising the PIMS database is drawn from member companies of SPI.
These companies contribute profiles of their SBUs that include financial data as well as
information on customers, markets, competitors, and operations. The SBUs in the database
are separated into eight classifications: producers of consumer durables, consumer non-
durables, capital goods, raw materials, components, or supplies; wholesale and retail
distributors; and providers of services. Specific companies and industries are not
identified. Each SBU profile includes financial data from the income statement and balance
sheet, as well as information about quality, price, new products, market share, and
competitive tactics.
The classifications are rather broad, at least from a small business perspective. The
category of consumer durables, for instance, includes such diverse products as
refrigerators, cell phones, air conditioners, computers, microwave ovens, lawnmowers,
television sets, and much else. Thus data averaged from such a category have a rather
rough granularity. The data are also drawn from large corporations and then averaged.
Judging by generic, pro-forma sample tabulations available on SPI's web site, the user
comes to the database with his or her financial and other ratios as an input and can then
derive comparative data from the broad categories listed above and held in the PIMS
database. The outputs appear to be statistical and rely on the assumption that broad
category averages can effectively guide strategy. PIMS data appear to be a good approach to
benchmarking—provided that broad categories are sufficient for the PIMS data users. SPI
also provides consulting services, based on PIMS, as SPI Associates, Inc.
SMALL BUSINESS RELEVANCE
Interest in PIMS as an analytical approach does not appear very high in the mid-2000s if
recent coverage of the subject in the technical and business press is any indication. A
search of Infotrac brings just a few references from the 1990s and 1980s. The most recent
book on the subject by Paul W. Farris and Michael J. Moore is largely a look backward—an

Prof. B. Manchanda JIMS-VK Page 19

attempt to assess the contribution PIMS has made to the field of management science.
Looking forward, the authors analyze how the PIMS project might be structured if it were
launched in the current era. Another broad study of contemporary marketing by Louis E.
Boone and David L. Kurtz mentions a comprehensive use of PIMS by the Marketing Science
Institute. The MSI study came to the not-so-startling conclusion that (in Boone's and
Kurtz's words) "two of the most important factors influencing profitability were product
quality and market share."
PIMS was from the outset—and apparently continues as—a "big company" methodology to
measure broad strategies capable of being captured by statistical measures. The reliance of
this method on concepts (and measurements) like market share performance and
marketing expenditures seems to make its relevance to small business marginal at best.
Small companies on average find it very difficult even to guess at their own market shares
and only very rarely engage in the kinds of major marketing efforts associated with the
GEs, IBMs, and Coca-Colas of the world.

Q8.Write short notes on any two of the following:

8 A Corporate Capabilities
Corporate Capabilities Defined
Capability represents the identity of your firm as perceived by both your employees and
customers. It is your ability to perform better than competitors using a distinctive and
difficult to replicate set of business attributes. Capability is a capacity for a set of
resources to integratively perform a stretch task.
Core Competencies Capabilities – the Basis of Your Competitive Advantage
Through continued use, capabilities become stronger and more difficult for competitors
to understand and imitate. As a source of competitive advantage, a capability "should be
neither so simple that it is highly imitable, nor so complex that it defies internal steering
and control."4 Capabilities grow through use, and how fast they grow is critical to your
success.
 
According to the resource-based view of the company, sustainable competitive advantage
is achieved by continuously developing existing and creating new resources and
capabilities in response to rapidly changing market conditions. Among these resources
and capabilities, in the new economy, knowledge represents the most important value-
creating asset.
Distinctive and Reproducible Capabilities
The opportunity for your company to sustain your competitive advantage is determined
by your capabilities of two kinds – distinctive capabilities and reproducible capabilities –
and their unique combination you create to achieve synergy. 
Your distinctive capabilities – the characteristics of your company which cannot be
replicated by competitors, or can only be replicated with great difficulty – are the basis of
your sustainable competitive advantage. Distinctive capabilities can be of many kinds:

Prof. B. Manchanda JIMS-VK Page 20

 patents, exclusive licenses, strong brands, effective leadership, teamwork, tacit
knowledge, or trust-based working relationships.
Reproducible capabilities are those that can be bought or created by your competitors
and thus by themselves cannot be a source of competitive advantage. Many technical,
financial and marketing capabilities are of this kind. Your distinctive capabilities need to
be supported by an appropriate set of complementary reproducible capabilities to enable
your company to sell its distinctive capabilities in the market it operates.
Master of Business Synergies (MBS)
A corporation that builds on core competencies utilizes skills that combine to strengthen
→value chains and build greater competitive advantages. This leads to synergies among
business units, whereby they become more productive together than independently. 
Coherence
Coherence is the glue that binds various pieces of your firm together, enabling them to
act as one. Anyone who wants to achieve solutions to the problems of tomorrow must
acquire this vital trait ie. coherence. You cannot realize the benefits of the new business
model without this glue that holds together its elements. Coherence is what makes a
corporation greater than the sum of it parts.
7 Dimensions of Strategic Innovation
Systemic Innovation:
The Strategic Innovation framework weaves together seven dimensions to produce a
range of outcomes that drive growth.
Core Technologies and Competencies is the set of internal capabilities, organizational
competencies and assets that could potentially be leveraged to deliver value to
customers, including technologies, intellectual property, brand equity and strategic
relationships... More
Creating Competitive Disruption
→Blue Ocean vs. Red Ocean Strategy
The principles of competitive disruption can help you create temporary advantage by
combining a vision of disruption with the capabilities necessary for disruption, and by
obtaining advantage through tactics. The two fundamental capabilities necessary to
create disruption are speed and →surprise. 
→3Ss of Winning in Business
→Creating Sustainable Profits: 9 Questions To Answer
Organizational Capability Approach vs. Traditional Functional Paradigm
In the capability model, →senior managers are predominantly concerned with issues
about the quality of products and services provided to customers (external and internal),
the flow of value-added work, and roles and responsibilities.
MegaChange – a New Approach to Organizational Transformation

Prof. B. Manchanda JIMS-VK Page 21

 MegaChange3 is a total system wide →cultural transformation of your organization. It
means designing and transforming organizations based on assumptions of human
capability rather than limitations.
 British Petroleum (BP)
To enhance organizational capability, BP reduced or removed central functions, and
business units were empowered to chose their own routes to implement changes. A flat
organization was established. The number of management levels was reduced from 13 to
5.

Q 8A Value Chain Analysis

Value chain analysis is a process where a firm identifies its primary and support activities
that add value to its final product and then analyze these activities to reduce costs or
increase differentiation.
Value chain represents the internal activities a firm engages in when transforming inputs
into outputs.
Value Chain Analysis is a strategy tool used to analyze internal firm activities. Its goal is to
recognize, which activities are the most valuable (i.e. are the source of cost or
differentiation advantage) to the firm and which ones could be improved to provide
competitive advantage. In other words, by looking into internal activities, the analysis
reveals where a firm’s competitive advantages or disadvantages are. The firm that
competes through differentiation advantage will try to perform its activities better than
competitors would do. If it competes through cost advantage, it will try to perform internal
activities at lower costs than competitors would do. When a company is capable of
producing goods at lower costs than the market price or to provide superior products, it
earns profits.
Michael Porter introduced the generic value chain model in 1985. Value chain represents
all the internal activities a firm engages in to produce goods and services. VC is formed of
primary activities that add value to the final product directly and support activities that
add value indirectly.
Although, primary activities add value directly to the production process, they are not
necessarily more important than support activities. Nowadays, competitive advantage
mainly derives from technological improvements or innovations in business models or
processes. Therefore, such support activities as ‘information systems’, ‘R&D’ or ‘general
management’ are usually the most important source of differentiation advantage. On the
other hand, primary activities are usually the source of cost advantage, where costs can be
easily identified for each activity and properly managed

Competitive advantage types

Cost advantage Differentiation advantage
This approach is used when organizations try to The firms that strive to create
compete on costs and want to understand the superior products or services use
sources of their cost advantage or disadvantage and differentiation advantage approach.

Prof. B. Manchanda JIMS-VK Page 22

 Competitive advantage types
Cost advantage Differentiation advantage
what factors drive those costs.
 Step 1. Identify the firm’s primary and
 Step 1. Identify the customers’
support activities.
value-creating activities.
 Step 2. Establish the relative importance of
 Step 2. Evaluate the
each activity in the total cost of the product.
differentiation strategies for
 Step 3. Identify cost drivers for each activity.
improving customer value.
 Step 4. Identify links between activities.
 Step 3. Identify the best
 Step 5. Identify opportunities for reducing
sustainable differentiation.
costs.
Value Chain Analysis Example

Step 1 - Firm's primary activities

Purchasing
Distribution
Design and materials Testing and Sales and
Assembly and dealer
engineering and quality control marketing
support
components
Step 2 - Toal cost and importance

$164 M $410 M $524 M

$10 M $384 M $230 M
less very very
not important important less important
important important important

Step 3 - Cost drivers

 Order  Size of
 Number
size adverti
 Numb  Scale of
 Averag sing
er and of dealers
e value budget
freque plants  Level of  Sales
of  Strengt
ncy of  Capacit quality per
purcha h of
new y targets dealer
ses per existin
model utilizat  Frequen  Frequen
supplie g
s ion cy of cy of
r reputa
 Sales  Locatio defects defects
 Locatio tion
per n of requirin
n of  Sales
model plants g repair
supplie Volum
recalls
rs e
Step 4 - Links between activities
1. High-quality assembling process reduces defects and costs in quality control and
dealer support activities.

Prof. B. Manchanda JIMS-VK Page 23

 Competitive advantage types
Cost advantage Differentiation advantage
2. Locating plants near the cluster of suppliers or dealers reduces purchasing and
distribution costs.
3. Fewer model designs reduce assembling costs.
4. Higher order sizes increase warehousing costs.
Step 5 - Opportunities for reducing costs
1. Create just one model design for different regions to cut costs in designing and
engineering, to increase order sizes of the same materials, to simplify assembling
and quality control processes and to lower marketing costs.
2. Manufacture components inside the company to eliminate transaction costs of
buying them in the market and to optimize plant utilization. This would also lead to
greater economies of scale.

Q 8 d. Porter’s Five Forces Model

The Porter's Five Forces tool is a simple but powerful tool for understanding where power
lies in a business situation. This is useful, because it helps you understand both the strength
of your current competitive position, and the strength of a position you're considering
moving into.
With a clear understanding of where power lies, you can take fair advantage of a situation
of strength, improve a situation of weakness, and avoid taking wrong steps. This makes it
an important part of your planning toolkit.
Conventionally, the tool is used to identify whether new products, services or businesses
have the potential to be profitable. However it can be very illuminating when used to
understand the balance of power in other situations.
Understanding the Tool
Five Forces Analysis assumes that there are five important forces that determine
competitive power in a business situation. These are:
1. Supplier Power: Here you assess how easy it is for suppliers to drive up prices.
This is driven by the number of suppliers of each key input, the uniqueness of their
product or service, their strength and control over you, the cost of switching from
one to another, and so on. The fewer the supplier choices you have, and the more
you need suppliers' help, the more powerful your suppliers are.
2. Buyer Power: Here you ask yourself how easy it is for buyers to drive prices down.
Again, this is driven by the number of buyers, the importance of each individual
buyer to your business, the cost to them of switching from your products and
services to those of someone else, and so on. If you deal with few, powerful buyers,
then they are often able to dictate terms to you.
3. Competitive Rivalry: What is important here is the number and capability of your
competitors. If you have many competitors, and they offer equally attractive
products and services, then you'll most likely have little power in the situation,
because suppliers and buyers will go elsewhere if they don't get a good deal from

Prof. B. Manchanda JIMS-VK Page 24

 you. On the other hand, if no-one else can do what you do, then you can often have
tremendous strength.
4. Threat of Substitution: This is affected by the ability of your customers to find a
different way of doing what you do – for example, if you supply a unique software
product that automates an important process, people may substitute by doing the
process manually or by outsourcing it. If substitution is easy and substitution is
viable, then this weakens your power.
5. Threat of New Entry: Power is also affected by the ability of people to enter your
market. If it costs little in time or money to enter your market and compete
effectively, if there are few economies of scale in place, or if you have little
protection for your key technologies, then new competitors can quickly enter your
market and weaken your position. If you have strong and durable barriers to entry,
then you can preserve a favorable position and take fair advantage of it.
These forces can be neatly brought together in a diagram like the one in figure 1 below:
Figure 1 – Porter's Five Forces
This is provided in the next page.

 
Q 8d Major issues in the implementation of Strategy
Problems of successful implementation centre around how well or badly the existing
organization responds and how adequate its reporting proves to be.

Prof. B. Manchanda JIMS-VK Page 25

Crafting a strategy and execution are both sides of the same coin and need to resonate
together. 
Strategic planning is a process, an outcome, and, in its best form, a roadmap used by
stakeholders throughout an institution to move the institution toward higher levels of
achievement. Strategic planning is also a much maligned endeavor, subject to the usual
(and frequent) criticisms: too much time, too much money, and too little action.There are
many reasons strategic plans fail, but the following ten challenges are among the most
common:

Top Ten Challenges in Strategy Execution

1. Strategy is formulated on assumptions – but the environment may have changed
at some point of time during implementation. The assumptions too would need
periodic revisits.
2. Vision, value statementsand trust – are emphasized during formulation of the
strategy but during implementation – forgotten. An ‘End justifies the means’
approach results in a compromise of values and eroding ‘trust and shared values’.
The answer lies in transparency and communication and admitting mistakes.
3. Hubris(or overconfidence) in leaders – where the leaders and organizational
members believe their brand is more powerful than the competitors leading to
complacency in implementation. Forecasts are based on what may happen in future
often based on optimistic estimates of uncertainties. As such one must be realistic. 
4. Organizational trap – is an excessive focus on efficiency with no flexibility to adapt
to changes. A no mistake-syndrome prevails. No questioning or challenging the
current strategy. 
5. The status quo bias – risk aversion. It is the entrepreneurial spirit that helps
overcome hitches. This has to be built into the culture by encouragement.
6. Strategy before people – strategy not aligned to organizational culture will meet
with resistance and opposition. Meaningful communication is the key.
7. Strategy and structure not being in sync. -E.g., a diversification strategy may have
a better fit with a divisional structure.
8. Effective leadership – failure occurs due to weak empowerment and lack of
perseverance. Focus on knowing rather than doing. Things get worse before they get
better so inspiring the team with the vision and mission is important. 
9. High emotional intelligence in leaders – will banish negative emotions from
breeding in the workplace. What are needed are positive energy and a calm mind to
deal with the fluid situation.
10. The sunk cost effect – A familiar problem with investments is called the sunk-cost
effect, otherwise known as “throwing good money after bad.” When large projects
overrun their schedules and budgets, the original economic case no longer holds,
but companies still keep investing to complete them rather than change.

Prof. B. Manchanda JIMS-VK Page 26