Short Notes for STM

7/24/2019 Short Notes for STM

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Short Notes for STM

What do we mean by 'Strategic Management'?

The art & science of formulating, implementing and evaluating cross-functional decisions thatenable an organization to achieve its objectives.

What does a STRATEGIST do? (his job function)

-Track industry and competitive trends

-spot emerging market opportunities

-identify threats

-develop creative plans

Types of strategy

Strategy can be formulated on three different levels:

corporate level

business unit level

functional or departmental level.

STRATEGIC MANAGEMENT MODEL / STRATEGIC PLANNING PROCESS

In today's highly competitive business environment, budget-orientedplanning or forecast-based planning methods are insufficient for a large corporation

to survive and prosper. The firm must engage in strategic planningthat clearly

defines objectives and assesses both the internal and external situation to

formulate strategy, implement the strategy, evaluate the progress, and mae

adjustments as necessary to stay on trac.


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! simplified vie" of the strategic planning process is sho"n by the follo"ing

diagram:

What question goes with 'Mission Stateent' ?

What is our business?

What question goes with '!ision Stateent' ?

What do e ant to become?

Gi"e the ste#s of the st$ategic anageent #$ocess o$ ode%? (f$o &$ed R a"id)


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strategy formulation

strategy implementation

strategy evaluation

ae * non+,nancia% tangib%e bene,ts that st$ategic anageent o-e$s to

co#anies?

identifying and prioritizing of opportunities

!rovides objective vie of management problems

"ontrol activities

Mention . of the / co#onents of Mission Stateent

"ustomers #ho are the company$s customers%

!roduct or services #hat is the company$s product%

arket

Technology

What a$e the 0 catego$ies of E1TERA2 facto$s?

'conomic forces

(overnmental forces

)ocial, cultural forces

Technological forces

"ompetitive forces

ae the &i"e fo$ces ode% of 3o$te$ that is used fo$ de"e%o#ing st$ategies?

*ivalry among competing firms

!otential entry of ne competitors

!otential development of substitute product

+argaining poer of suppliers

+argaining poer of consumers

What is the #u$#ose of 3o$te$'s Mode%?

To determine if the industry is attractiveprofitable

What is eant b4 5&o$wa$d Integ$ation5?

(aining control over istributors or *etailers or selling

What is eant b4 56o$i7onta% Integ$ation5?


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(aining control over your competitor,erging

ae 8 of the 9 guide%ines fo$ a business to use I!ERSI&I:ATI; st$ateg4?

When a company is in a no-gro or slo-gro industry

When adding ne related product increases the sale of "**'/T products

What a$e the * defensi"e st$ategies?

*etrenchment

ivestiture

0i1uidation

EXTERNAL ENIRONMENT

It refers to the environment that has an indirect influence on the business. The

factors are uncontrollable by the business. The t"o types of external environment

are micro environment and macro environment.

a! MICRO ENIRONMENTAL "ACTORS

These are external factors close to the company that have a direct impact on the

organi#ations process. These factors include:

i! S#are#ol$ers

!ny person or company that o"ns at least one share $a percentage of

o"nership% in a company is no"n as shareholder. ! shareholder may

also be referred to as a &stocholder&. !s organi#ation reuires greater

in"ard investment for gro"th they face increasing pressure to move

from private o"nership to public. (o"ever this movement unleashes

the forces of shareholder pressure on the strategy of organi#ations.

ii! S%ppliers

!n individual or an organi#ation involved in the process of maing a

product or service available for use or consumption by a consumer or

business user is no"n as supplier. Increase in ra" material prices "ill

have a noc on affect on the mareting mix strategy of an

organi#ation. )rices may be forced up as a result. ! closer supplier


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relationship is one "ay of ensuring competitive and uality products

for an organi#ation.

iii! Distri&%tors

*ntity that buys non-competing products or product-lines, "arehousesthem, and resells them to retailers or direct to the end users or

customers is no"n as distributor. +ost distributors provide strong

manpo"er and cash support to the supplier or manufacturer's

promotional efforts. They usually also provide a range of services

$such as product information, estimates, technical support, after-sales

services, credit% to their customers. ften getting products to the end

customers can be a major issue for firms. The distributors used "ill

determine the final price of the product and ho" it is presented to the

end customer. hen selling via retailers, for example, the retailer has

control over "here the products are displayed, ho" they are priced

and ho" much they are promoted in-store. ou can also gain a

competitive advantage by using changing distribution channels.

i'! C%sto(ers

! person, company, or other entity "hich buys goods and services

produced by another person, company, or other entity is no"n as

customer. rgani#ations survive on the basis of meeting the needs,

"ants and providing benefits for their customers. /ailure to do so "ill

result in a failed business strategy.

'! Co(petitors

! company in the same industry or a similar industry "hich offers a

similar product or service is no"n as competitor. The presence of one

or more competitors can reduce the prices of goods and services as

the companies attempt to gain a larger maret share. 0ompetition also

reuires companies to become more efficient in order to reduce costs./ast-food restaurants +c1onald's and 2urger 3ing are competitors, as

are 0oca-0ola and )epsi, and al-+art and Target.

'i! Me$ia


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)ositive or adverse media attention on an organisations product or

service can in some cases mae or brea an organisation.. 0onsumer

programmes "ith a "ider and more direct audience can also have a

very po"erful and positive impact, hforcing organisations to change

their tactics.

MACRO ENIRONMENTAL "ACTORS

!n organi#ation's macro environment consists of nonspecific aspects in the

organi#ation's surroundings that have the potential to affect the organi#ation's

strategies. hen compared to a firm's tas environment, the impact of macro

environmental variables is less direct and the organi#ation has a more limited

impact on these elements of the environment. The macro environment consists offorces that originate outside of an organi#ation and generally cannot be altered by

actions of the organi#ation. In other "ords, a firm may be influenced by changes

"ithin this element of its environment, but cannot itself influence the environment.

+acro environment includes political, economic, social and technological factors. !

firm considers these as part of its environmental scanning to better understand the

threats and opportunities created by the variables and ho" strategic plans need to

be adjusted so the firm can obtain and retain competitive advantage.

Political "actors

)olitical factors include government regulations and legal issues and define

both formal and informal rules under "hich the firm must operate. Some

examples include:

4 tax policy

4 employment la"s

4 environmental regulations

4 trade restrictions and tariffs

4 political stability

Econo(ic "actors


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*conomic factors affect the purchasing po"er of potential customers and the

firm's cost of capital. The follo"ing are examples of factors in the

macroeconomy:

4 economic gro"th

4 interest rates

4 exchange rates

4 inflation rate

Social "actors

Social factors include the demographic and cultural aspects of the external

macro environment. These factors affect customer needs and the si#e of

potential marets. Some social factors include:

4 health consciousness

4 population gro"th rate

4 age distribution

4 career attitudes

4 emphasis on safety

Tec#nological "actors

Technological factors can lo"er barriers to entry, reduce minimum efficient

production levels, and influence outsourcing decisions. Some technological

factors include:

4 561 activity

4 automation

4 technology incentives

4 rate of technological change

Wh4 can 3o$te$'s I&&ERETATI; st$ateg4 be dange$ous?


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-ni1ue product may not be valued highly enough by customers

-"ompetitors can copy the differentating features

What is a


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THREAT OF THE

ENTRY OF NEW

COMPETITORS

INTENSITY OF

COMPETITIVE

RIVALRY

BARGAINING

POWER OF

SUPPLIERS

THREAT OF

SUBSTITUTE

PRODUCTS OR

SERVICES

BARGAINING POWER

OF CUSTOMERS

erger and 6c1uisitions

6n ac1uisition is here organizations take onership of another organization and erger

implies mutually agreed decisions for joint onership beteen organizations.

6c1uisitions can be9

5orizontal- Takes place beteen firms in same line of business

:ertical- 6 merger beteen to companies producing different goods or services for one

specified finished goods, eg9 a car manufacturer purchasing a tire company.

Mic#ael Porter)s * forces (o$el

;ndustry 0ife cycle


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INDUSTRY LIFE

CYCLE (BY

KOTLER)

TIME

I@STRB;@T3@T

&RAGMETATI;

S6ACE ;@T

MAT@RITB

E:2IE

Application of in$%stry life cycle

It is important for companies to understand the use of the industry lifecycle

because it is a survival tool for businesses to compete in the industry effectively

and successfully. The main aspects in terms of strategic issues of the industry

lifecycle are described belo":

Co(peting o'er e(erging in$%stries

The game rules in industry competition can be undetermined and the

resources may be constrained. Thus, it is vital for firms to identify maret

segments that "ill allo" them to secure and sustain a strong position

"ithin the industry.

The product in the industry may not be standardised so it is necessary for

companies to obtain resources needed to support ne" product

development and rapid company expansion. The entry barriers may be lo" and the potential competition may be high,

thus companies must adapt to shift the mobility barriers.

0onsumers may be uncertain in terms of demand. !s a result, determining

the time of entry to the industry can help companies to tae business

opportunities before their rivals.

Co(peting $%ring t#e transition to in$%stry (at%rity

hen competition in the industry increases, firms can have a sustainable

competitive advantage that "ill provide a basis for competing against othercompanies.

The ne" products and applications are harder to come by, "hile buyers

become more sophisticated and difficult to understand in the maturity

stage of the industry lifecycle. Thus, consumer research should be carried

out and this could help companies in building up ne" product lines.


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Slo"er industry gro"th constrains capacity gro"th and often leads to

reduced industry profitability and some consolidation. Therefore,

companies can focus greater attention on costs through strategic cost

analysis.

The change in the industry is rather dynamic, and an understanding of theindustry lifecycle can help companies to monitor and tacle these changes

effectively. /irms can develop organisational structures and systems that

can facilitate the transition.

Some companies may see business opportunities overseas "hen the

industries reach the maturity stage because during this stage, the demand

in the maret starts to decline.

Co(peting in $eclining in$%stries

The characteristics of declining industries include the follo"ing:

1eclining demand for products

)runing of product lines

Shrining profit margins

/alling research and development advertisement expenditure

1eclining number of rivals as many are forced to leave the industry

/or companies to survive the dynamic environment, it is necessary for them to:

+easure the intensity of competition

!ssess the causes of decline

Single out a viable strategy for decline such as leadership, liuidation and

harvest.

COMPETITIE ADANTAGE+

0ompetitive advantage leads to superior profitability. !t the most basic level,

ho" profitable a company becomes depends on three factors:

7. The amount of value customers place on the company8s product.

9. The price that a company charges for its products.

. The cost of creating that value.

;alue is something that customers assign to a product. It is a function of the

attributes of the product, such as its performance, design, uality, 6 point < of SI?*SS >?IT =*;*=

/>?0TI?!= =*;*=

CORPORATE STRATEG.

0orporate strategy tells us primarily about the choice of direction for the firm as a

"hole. In a large multi business company, ho"ever, corporate strategy is also about


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managing various product lines and business units for maximum value. *ven

though each product line or business unit has its o"n competitive or cooperative

strategy that it uses to obtain its o"n competitive advantage in the maret place,

the corporation must coordinate these difference business strategies so that the

corporation as a "hole succeeds.

0orporate strategy includes decision regarding the flo" of financial and other

resources to and from a company8s product line and business units. Through a

series of coordinating devices, a company transfers sills and capabilities developed

in one unit to other units that need such resources.

! corporation8s l strategy is composed of three general orientations $also called

grand strategies%:

A! Gro3t# strategiesexpand the company8s activities.

0! Sta&ility strategiesmae no change to the company8s current activities.

C! Retrenc#(ent strategiesreduce the company8s level of activities.

1% Co(&ination strategiesis the combination of the above three strategies.

(aving chosen the general orientation a company8s managers can select from more

specific corporate strategies such as concentration "ithin one product line@industry

or diversification into other products@industries. These strategies are useful both to

corporations operating in only one product line and to those operating in many

industries "ith many product lines.

2y far the most "idely pursued corporate directional strategies are those designed

to achieve gro"th in sales, assets, profits or some combination. 0ompanies that do

business in expanding industries must gro" to survive. 0ontinuing gro"th means

increasing sales and a chance to tae advantage of the experience curve to reduce

per unit cost of products sold, thereby increasing profits. This cost reduction

becomes extremely important if a corporation8s industry is gro"ing uicly and

competitors are engaging in price "ars in attempts to increase their shares of the

maret. /irms that have not reached Acritical massB $that is, gained the necessary

economy of large scale productions% "ill face large losses unless they can find and


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fill a small, but profitable, niche "here higher prices can be offset by special

product or service features. That is "hy +otorola Inc., continues to spend large

sum on the product development of cellular phones, pagers, and t"o-"ay radios,

despite a serious drop in maret share and profits. !ccording to +otorola8s

0hairman Ceorge /isher, A"hat8s at stae here is leadershipB. *ven though theindustry "as changing uicly, the company "as "oring to avoid the erosion of its

maret share by jumping into ne" "ireless marets as uicly as possible. 2eing

one of the maret leaders in this industry "ould almost guarantee +otorola

enormous future returns.

! 0orporation can gro" internally by expanding its operations both globally and

domestically, or it can gro" externally through mergers, acuisition and strategic

alliances. ! (ergeris a transaction involving t"o or more corporations in "hich

stoc is exchanged, but from "hich only one corporation survives. +ergers usually

occur bet"een firms of some"hat similar si#e and are usually AfriendlyB. The

resulting firm is liely to have a name derived from its composite firms. ne

example in the )harma Industry is the merging of Claxo and Smithline illiams to

form Claxo Smithline. !n !cuisition is the purchase of a company that is

completely absorbed as an operating subsidiary or division of the acuiring

corporation. *xamples are )rocter 6 Camble8s acuisition of 5ichardson-;ics,

no"n for its il of lay and ;ics 2rands, and Cillette, no"n for shaving

products.

The Corporate Directional Strategiesare:

!% Cro"th

$i% 0oncentration

(ori#ontal gro"th

;ertical gro"th

- /or"ard integration

- 2ac"ard integration

$ii% 1iversification

0oncentric

0onglomerate

2% Stability


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$i% )ause@)roceed "ith 0aution

$ii% ?o 0hange

$iii% )rofit

0% 5etrenchment

$i% Turnaround

$ii% 0aptive 0ompany

$iii% Sell-out @ 1ivestment

$iv% 2anruptcy @ =iuidation

!% GROWTH STRATEGY

!cuisition usually occurs bet"een firms of different si#es and can be either friendly

or hostile. (ostile acuisitions are often called taeovers. ! Strategic !lliances is a

partnership of t"o or more corporations or business units to achieve strategically

significant objectives that are mutually beneficial. Cro"th is a very attractive

strategy for t"o ey reasons.

Cro"th is based on increasing maret demand may mas fla"s in a company

$fla"s that "ould be immediately evident in a stable or declining maret. !

gro"ing flo" of revenue into a highly leveraged corporation can create a large

amount of organi#ation slac. $unused resources% that can be used to uicly

resolve problems and conflicts bet"een departments and divisions. Cro"th also

provides a big cushion for a turnaround in case a strategic error is made. =arger

firms also have more bargaining po"er than do small firms and are more liely

to obtain support from ey stae holders in case of difficulty.

! gro"ing firm offers more opportunities for advancement, promotions, and

interesting jobs, gro"th itself is exciting and ego enhancing for 0*8s. The

maretplace and potential investors tend to vie" a gro"ing corporation as a

"inner or on the move. *xecutive compensation tends to get bigger as an

organi#ation increases in si#e. =arge firms also more difficult to acuire than are

smaller onesD thus an executive8s job is more secure.


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4i! CONCENTRATION STRATEG.+ If a company8s current product lines have

real gro"th potential, concentration of resources on those product lines maes

sense as a strategy for gro"th. The t"o basic concentration strategies are

vertical gro"th and hori#ontal gro"th. Cro"ing firms in a gro"ing industry tend

to choose these strategies before they try diversifications.

Vertical growthcan be achieved by taing over a function previously provided

by a supplier or by a distributor. The company, in effect, gro"s by maing its

o"n supplies and@or by distributing its o"n products. This may be done in

order to reduce costs, gain control over a scarce resource, guarantee uality

of ey input, or obtain access to potential customers.Eg+ (enry /ord used internal company resources to build his 5iver

5ouge )lant outside 1etroit. The manufacturing process "as integrated

to the point that iron ore entered one end of the long plant and

finished automobiles rolled out the other end into a huge paring lot.

0isco Systems, the maer of Internet (ard"are, chose the external

route to vertical gro"th by purchasing 5adiata, Inc., a maer of chips

sets for "ireless net"ors. This acuisition gave 0isco access to

technology permitting "ireless communications at speeds, previously

possible only "ith "ired connections.

;ertical gro"th results in vertical integration, the degree to "hich a

firms operates vertically in multiple locations on an industry8s value

chain from extracting ra" materials to manufacturing to retailing.

+ore specifically, assuming a function previously provided by a

supplier is called &ac53ar$ integration $going bac"ard on an

industry8s value chain%. The purchase of )entasia 0hemicals by !sian

)aints =imited for the chemicals reuired for the manufacturing of

paints is an example of bac"ard integration.

!ssuming a function previously provided by a distributor is labeled

for3ar$ integration $going for"ard an industry8s value chain%.


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!rvind mills, *gample, used for"ard integration "hen it expanded out

of its successful fabric manufacturing business to mae and maret its

o"n branded shirts and pants.

Horizontal Growth can be achieved by expanding the firm8s products into

other geographic locations and@or by increasing the range of products and

services offered to current maret. In this case, the company expands

side"ays at the same location on the industry8s value chain.

Eg: 5anbaxy =abs follo"ed a hori#ontal gro"th strategy "hen it

extended its pharmaceuticals business to *urope and to >S* company

can gro" hori#ontally through internal development or externally

through acuisitions or strategic alliances "ith another firm in the

same industry.

Horizontal growthresults in hori#ontal integrations < the degree to

"hich a firm operates in multiple geographic locations at the same

point in an industry8s value chain. (ori#ontal integration for a firm may

range from full to partial o"nership to long term contract.

4ii! DIERSI"CATION STRATEG.+ hen an industry consolidates and becomes

mature, most of the surviving firms have reached the limits of gro"th using vertical

and hori#ontal gro"th strategies. >nless the competitors are able to expand

internationally into less mature marets, they may have no choice but to diversify

into different industries if they "ant to continue gro"ing. The t"o basic

diversification strategies are concentric and conglomerate.

Concentric Diversification(Related) into a related industry may be a very

appropriate corporate strategy "hen a firm has a strong competitive position

but industry attractiveness is lo". 2y focusing on the characteristics that

have given the company its distinctive competence, the company uses those

very strengths as its means of diversification. The firm attempts to secure

strategic fit in a ne" industry "here the firm8s product no"ledge, its

manufacturing capabilities, and the mareting sills it used so effectively in

the original industry can be put to good use.


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Conglomerate Diversification(Unrelated) taes place "hen management

reali#es that the current industry is unattractive and that the firms lacs

outstanding abilities or sills that it could easily transfer to related products,

or services in other industries, the most liely strategy is conglomerate

diversification < diversifying into an industry unrelated to its current one.5ather than maintaining a common threat throughout their organi#ation,

strategic managers "ho adopt this strategy are primarily concerned "ith

financials considerations of cash flo" or ris reductions.

B) STABILITY STRATEGIES

! corporation may choose stability over gro"th by continuing its current activities

"ithout any significant change in direction. !lthough sometimes vie"ed as lac of

strategy, the stability family of corporate strategies can be appropriate for a

successful corporation operating in a reasonably predictable environment.

i) !a"se#!rocee$ Wit% Ca"tion Strateg&6 In effect, a time out or an

opportunity to rest before continuing a gro"th or retrenchment strategy. It is

a very deliberate attempt to mae only incremental improvements until a

particular environmental situation changes. It is typically conceived as a

temporary strategy to be used until the environmental becomes more

hospitable or to enable a company to consolidate its resources after

prolonged rapid gro"th.

ii) 'o C%ange Strateg& ( Is a decision to do nothing ne" $a choice to

continue current operation and policies for the foreseeable future%. 5arely

articulated as a definite strategy, a no change strategy8s success depends on

a lac of significant change in a corporation8s situation. The relative stability

created by the firm8s modest competitive position in an industry facing little

of no gro"th encourages the company to continue on its current course.

+aing only small adjustments for inflation in the sales and profit objectives,

there are no obvious opportunities or threats nor much in the "ay of

significant strengths of "eanesses. /e" aggressive ne" competitors are

liely to enter such an industry.


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iii) !rofit Strateg& 6 Is a decision to do nothing ne" in "orsening

situation but instead to act as though the company8s problems are only

temporary. The profit strategy is an attempt to artificially support profits

"hen a company8s sales are declining by reducing investment and short term

discretionary expenditures. 5ather than announcing the company8s poorposition to shareholders and the investment community at large, top

management may be tempted to follo" this very seductive strategy. 2laming

the company8s problems on a hostile environment $such as anti-business

government policies% management defers investments and @ or buts

expenses to stabili#e profit during this period.

C) RETRE'CHE'T STRATEGIES

! company may pursue retrenchment strategies "hen it has a "ea competitive

position in some or all of its product lines resulting in poor performance-sales are

do"n and profits are becoming losses. These strategies impose a great deal of

pressure to improve performance.

i) T"rnaro"n$ Strateg&6 *mphasi#es the improvement of operational efficiency

and is probably most appropriate "hen a corporation8s problems are pervasive but

not yet critical. !nalogous to a "eight reduction diet, the t"o basic phases of a

turnaround strategy are 0?T5!0TI? and 0?S=I1!TI?.

Contractionis the initial effort to uicly Astop the bleedingB "ith a

general across the board cutbac in si#e and costs.

Consoli$ation, implements a program to stabili#e the no"-leaner

corporation. To streamline the company, plans are developed to reduce

unnecessary overhead and to mae functional activities cost justified.

This is a crucial time for the organi#ation. If the consolidation phase is

not conducted in a positive manner, many of the best people leave the

organi#ation.

ii) Ca*tive Strateg&< Is the giving up of independence in exchange for security.

! company "ith a "ea competitive position may not be able to engage in a full

blo"n turnaround strategy. The industry may not be sufficiently attractive to justify

such an effort from either the current management or from investors. ?evertheless

a company in this situation faces poor sales and increasing losses unless it taes

some action. +anagement desperately searches for an AangelB by offering to be a


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0ompulsory "inding up under the supervision of the court.

;oluntary "inding up under the supervision of the court.

H?ote: The benefit of liuidation over banruptcy is that the board of directors, as

representatives of the shareholders, together "ith top management maes the

decisions instead of turning them over to the court, "hich may choose to ignore

shareholders completely.

D! COM0INATION STRATEGIES

It is the combination of stability, gro"th 6 retrenchment strategies adopted by anorganisation, either at the same time in its different businesses, or at different

times in the same business "ith the aim of improving its performance. /or example,

it is certainly feasible for an organi#ation to follo" a retrenchment strategy for a

short period of time due to general economic conditions and then pursue a gro"th

strategy once the economy strengthens.

The obvious combination strategies include $a% retrench, then stabilityD $b%

retrench, then gro"thD $c% stability, then retrenchD $d% stability, then gro"thD $e%

gro"th then retrench, and $f% gro"th, then stability.

5easons for adopting combination strategies are given belo"

4 5apid *nvironment change

4 =iuidate one unit, develop another

4 Involves both divestment 6 acuisition $tae over%

It is commonly follo"ed by organi#ations "ith multiple unit diversified product 6

?ational or Clobal maret in "hich a single strategy does not fit all businesses at aparticular point of time.

0,SINESS STRATEG.


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The plans and actions that firms devise to compete in a given product@maret scope

or setting and ass the uestion A(o" do "e compete "ithin an industryJB is a

business strategy. It focuses on improving the competitive position of a company8s

business unit8s products or services "ithin the specific industry or maret segment

that the company or business unit serves.

It can be:

!% Co"petiti#e< battling against all competitors for advantage "hich includes =o"-

cost leadership, 1ifferentiation and /ocus strategiesD and@or

2% Cooperati#e< "oring "ith one or more competitors to gain advantage against

other competitors "hich is also no"n as Strategic alliances.

Eg+et grinder companies lie Shantha and So"bhagya sees differentiation in atargeted maret segment.

A! COMPETITIE 0,SINESS STRATEG. 4PORTER)S GENERIC STRATEG.!

)orter's generic strategies frame"orconstitutes a major contribution to the

development of the strategic managementliterature. Ceneric strategies "ere first

presented in t"o boos by )rofessor +ichael )orter of the (arvard 2usiness

School $)orter, 7EKF%. )orter suggested that some of the most basic choices faced

by companies are essentially the scope of the marets that the company "ould

serve and ho" the company "ould compete in the selected marets. 0ompetitive

strategies focus on "ays in "hich a company can achieve the most advantageous

position that it possibly can in its industry. The profit of a companyis essentially

the difference bet"een its revenues and costs. Therefore high profitability can be

achieved through achieving the lo"est costs or the highest prices facing the

competition. )orter used the terms Lcost leadership' and Ldifferentiation', "herein

the latter is the "ay in "hich companies can earn a price premium.

Main aspects of Porter7s Generic Strategies Analysis
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!ccording to )orter, there are three generic strategies that a company can

undertae to attain competitive advantage: cost leadership, differentiation, and

focus.

0,ILDING AND RE8STR,CT,RING T2E CORPORATION

There are various methods for the firms to enter into a ne" business and

restructure the existing one. /irms use follo"ing methods for building:

Start8%p ro%te+ In this route, the business is started from the scratch by

building facilities, purchasing euipments, recruiting employees, opening up

distribution outlet and so on.

Ac9%isition+ !cuisition involves purchasing an established company,

complete "ith all facilities, euipment and personnel.

:oint ent%re+ Moint venture involves starting a ne" venture "ith the helpof a partner.

Merger+ +erger involves fusion of t"o or more companies into one company.

Ta5eo'er+ ! company "hich is in financial distress can undergo the process

of taeover. ! taeover can be voluntary "hen the company reuests another


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company to tae over the assets and liabilities and save it from becoming

banrupt.

Strategic C#oice process

MC1INSE.)S ;S "RAMEOR1

The frame"or suggests that there is a multiplicity of factors that influence an

organi#ation8s ability to change and its proper mode of change. 2ecause of the

interconnectedness of the variables, it "ould be difficult to mae significant

progress in one area "ithout maing progress in the others as "ell. There is no

starting point or implied hierarchy in the shape of the diagram, and it is not

obvious "hich of the seven factors "ould be the driving force in changing a

particular organi#ation at a certain point of time. The critical variables "ould be

different across organi#ations and in the same organi#ations at different points

of time.


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CORPORATE PORT"OLIO ANAL.SIS

A! 0CG MATRIX< the bcg matrix "as developed by 2oston 0onsulting group in

7ENFs. It is also called as the gro"th share matrix. This is the most popular and

most simplest matrix to describe the corporation8s portfolio of businesses or

products.

The 20C matrix helps to determine priorities in a product portfolio. Its basic

purpose is to invest "here there is gro"th from "hich the firm can benefit, and

divest those businesses that have lo" maret share and lo" gro"th prospects.

*ach of the products or business units is plotted on a t"o dimensional matrix

consisting of

a% relative maret share < is the ratio of the maret share of the concerned

product or business unit in the industry divided by the share of the

maret leader

b% maret gro"th rate < is the percentage of maret gro"th, by "hich sales

of a particular product or business unit has increased

i% Stars < high gro"th, high maret share

Stars are products that enjoy a relatively high maret share in a strongly gro"ing

maret. They are potentially profitable and may gro" further to become an

important product or category for the company. The firm should focus on and invest

in these products or business units. The general features of stars are -

(igh gro"th rate means they need heavy investment

(igh maret share means they have economies of scale and generate large

amount of cash


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2ut they need more cash than they generate

The high gro"th rate "ill mean that they "ill need heavy investment and "ill

therefore be cash users. verall, the general strategy is to tae cash from the cash

co"s to fund stars. 0ash may also be invested selectively in some problem children

$uestion mars% to turn them into stars. The other problem children may be

miled or even sold to provide funds else"here.

ver the time, all gro"th may slo" do"n and the stars may eventually become

cash co"s. If they cannot hold maret share, they may even become dogs.

ii% 0ash 0o"s < =o" gro"th, high maret share

These are the product areas that have high relative maret shares but exist in lo"-

gro"th marets. The business is mature and it is assumed that lo"er levels of

investment "ill be reuired. n this basis, it is therefore liely that they "ill be able

to generate both cash and profits. Such profits could then be transferred to support

the stars. The general features of cash co"s are

Short Notes for STM

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