MODULE-3

STRATEGY FORMULATION AND CHOICE OF ALTERNATIVES

Diversification

Diversification is a form of growth marketing strategy for a company. It seeks to increase profitability through greater sales volume obtained from new products and new markets. Diversification can occur either at the business unit or at the corporate level. At the business unit level, it is most likely to expand into a new segment of an industry in which the business is already in. At the corporate level, it is generally and its also very interesting entering a promising business outside of the scope of the existing business unit.

Diversification is part of the four main marketing strategies defined by the Product/Market Ansoff matrix

Ansoff pointed out that a diversification strategy stands apart from the other three strategies. The first three strategies are usually pursued with the same technical, financial, and merchandising resources used for the original product line, whereas diversification usually requires a company to acquire new skills, new techniques and new facilities. Therefore, diversification is meant to be the riskiest of the four strategies to pursue for a firm.

Diversification

Diversification

The different types of diversification strategies There are three types of diversification: concentric, horizontal and

conglomerate:Concentric diversification This means that there is a technological similarity between the

industries, which means that the firm is able to leverage its technical know-how to gain some advantage. For example, a company that manufactures industrial adhesives might decide to diversify into adhesives to be sold via retailers. The technology would be the same but the marketing effort would need to change. It also seems to increase its market share to launch a new product which helps the particular company to earn profit. However, there's one more example, Addition of tomato ketchup and sauce to the existing "Maggi" brand processed items of Food Specialties Ltd. is an example of Technological-related concentric diversification.

Horizontal diversification The company adds new products or services that are

technologically or commercially unrelated (but not always) to current products, but which may appeal to current customers. In a competitive environment, this form of diversification is desirable if the present customers are loyal to the current products and if the new products have a good quality and are well promoted and priced. Moreover, the new products are marketed to the same economic environment as the existing products, which may lead to rigidity and instability. In other words, this strategy tends to increase the firm’s dependence on certain market segments. For example company was making note books earlier now they are also entering into pen market through its new product.

The different types of diversification strategies

Conglomerate diversification (or lateral diversification) The company markets new products or services that

have no technological or commercial synergies with current products, but which may appeal to new groups of customers. The conglomerate diversification has very little relationship with the firm’s current business. Therefore, the main reasons of adopting such a strategy are first to improve the profitability and the flexibility of the company, and second to get a better reception in capital markets as the company gets bigger. Even if this strategy is very risky, it could also, if successful, provide increased growth and profitability.

The different types of diversification strategies

Integration strategy

Integration strategy is more than processes and controls. It is about integrated performance information management and connectedness. For a successful integration strategy, organizations need persistent access and leverage to knowledge and information. This is an imperative.

In microeconomics and management, the term vertical integration describes a style of management control. Vertically integrated companies are united through a hierarchy with a common owner. Usually each member of the hierarchy produces a different product or service, and the products combine to satisfy a common need. It is contrasted with horizontal integration. Vertical integration is one method of avoiding the hold-up problem. A monopoly produced through vertical integration is called a vertical monopoly, although it might be more appropriate to speak of this as some form of cartel. Andrew Carnegie actually introduced the idea of vertical integration. This led other businessmen to use the system to promote better financial growth and efficiency in their companies and businesses.

Vertical integration is the degree to which a firm owns its upstream suppliers and its downstream buyers. However to horizontal integration, which is a consolidation of many firms that handle the same part of the production process, vertical integration is typified by one firm engaged in different parts of production (e.g. growing raw materials, manufacturing, transporting, marketing, and/or retailing).

There are three varieties: backward (upstream) vertical integration, forward (downstream) vertical integration, and balanced (horizontal) vertical integration.

A company exhibits backward vertical integration when it controls subsidiaries that produce some of the inputs used in the production of its products. For example, an automobile company may own a tire company, a glass company, and a metal company. Control of these three subsidiaries is intended to create a stable supply of inputs and ensure a consistent quality in their final product. It was the main business approach of Ford and other car companies in the 1920s, who sought to minimize costs by centralizing the production of cars and car parts.

Integration strategy

A company tends toward forward vertical integration when it controls distribution centers and retailers where its products are sold.

Balanced vertical integration means a firm controls all of these components, from raw materials to final delivery.

The three varieties noted are only abstractions; actual firms employ a wide variety of subtle variations. Suppliers are often contractors, not legally owned subsidiaries. Still, a client may effectively control a supplier if their contract solely assures the supplier's profitability. Distribution and retail partnerships exhibit similarly wide ranges of complexity and interdependence. In relatively open capitalist contexts, pure vertical integration by explicit ownership is uncommon -- and distributing ownership is commonly a strategy for distributing risk

Integration strategy

Mergers

The phrase mergers and acquisitions (abbreviated M&A) refers to the aspect of corporate strategy, corporate finance and management dealing with the buying, selling and combining of different companies that can aid, finance, or help a growing company in a given industry grow rapidly without having to create another business entity.

Classifications of mergers Horizontal merger - Two companies that are in direct

competition and share the same product lines and markets.

Vertical merger - A customer and company or a supplier and company. Think of a cone supplier merging with an ice cream maker.

Market-extension merger - Two companies that sell the same products in different markets.

Product-extension merger - Two companies selling different but related products in the same market.

Conglomeration - Two companies that have no common business areas.

Mergers

occur where two merging firms are in the same general industry, but they have no mutual buyer/customer or supplier relationship, such as a merger between a bank and a leasing company. Example: Prudential's acquisition of Bache & Company.

There are two types of mergers that are distinguished by how the merger is financed. Each has certain implications for the companies involved and for investors:

Purchase Mergers - As the name suggests, this kind of merger occurs when one company purchases another. The purchase is made with cash or through the issue of some kind of debt instrument; the sale is taxable.

Acquiring companies often prefer this type of merger because it can provide them with a tax benefit. Acquired assets can be written-up to the actual purchase price, and the difference between the book value and the purchase price of the assets can depreciate annually, reducing taxes payable by the acquiring company.

Consolidation Mergers - With this merger, a brand new company is formed and both companies are bought and combined under the new entity. The tax terms are the same as those of a purchase merger.

A unique type of merger called a reverse merger is used as a way of going public without the expense and time required by an IPO.

Mergers

Distinction between Mergers and Acquisitions Although they are often uttered in the same breath and used as though they were

synonymous, the terms merger and acquisition mean slightly different things. When one company takes over another and clearly established itself as the new

owner, the purchase is called an acquisition. From a legal point of view, the target company ceases to exist, the buyer "swallows" the business and the buyer's stock continues to be traded.

In the pure sense of the term, a merger happens when two firms, often of about the same size, agree to go forward as a single new company rather than remain separately owned and operated. This kind of action is more precisely referred to as a "merger of equals". Both companies' stocks are surrendered and new company stock is issued in its place. For example, both Daimler-Benz and Chrysler ceased to exist when the two firms merged, and a new company, DaimlerChrysler, was created.

In practice, however, actual mergers of equals don't happen very often. Usually, one company will buy another and, as part of the deal's terms, simply allow the acquired firm to proclaim that the action is a merger of equals, even if it is technically an acquisition. Being bought out often carries negative connotations, therefore, by describing the deal euphemistically as a merger, deal makers and top managers try to make the takeover more palatable.

Takeover

In business, a takeover is the purchase of one company (weaker company-the target) by another (the acquirer, or bidder). In the UK, the term refers to the acquisition of a public company whose shares are listed on a stock exchange, in contrast to the acquisition of a private company

Friendly takeovers

Before a bidder makes an offer for another company, it usually first informs that company's board of directors. If the board feels that accepting the offer serves shareholders better than rejecting it, it recommends the offer be accepted by the shareholders.

Hostile takeovers

A hostile takeover allows a suitor to bypass a target company's management unwilling to agree to a merger or takeover. A takeover is considered "hostile" if the target company's board rejects the offer, but the bidder continues to pursue it, or the bidder makes the offer without informing the target company's board beforehand.

Reverse takeovers

A reverse takeover is a type of takeover where a private company acquires a public company. This is usually done at the instigation of the larger, private company

Joint Venture

A joint venture (often abbreviated JV) is an entity formed between two or more parties to undertake economic activity together. The parties agree to create a new entity by both contributing equity, and they then share in the revenues, expenses, and control of the enterprise. The venture can be for one specific project only, or a continuing business relationship such as the Fuji Xerox joint venture. This is in contrast to a strategic alliance, which involves no equity stake by the participants, and is a much less rigid arrangement

Reasons for forming a joint venture

Internal reasons Build on company's strengths Spreading costs and risks Improving access to financial resources Economies of scale and advantages of size Access to new technologies and customers Access to innovative managerial practices Competitive goals Influencing structural evolution of the industry Pre-empting competition Defensive response to blurring industry boundaries Creation of stronger competitive units Speed to market Improved agility Strategic goals Synergies Transfer of technology/skills Diversification

Turn around

Turnaround strategy must be a part of developing a long-term transformation strategy for your organization in transition that turns momentum toward sustainable growth, profitability and overall value

NEED FOR TURNAROUND STRATEGY

There are times when your business gets into unfamiliar waters, when outside forces threaten a company's profitability and even its existence. In today's business environment, you would often find your traditional businesses in such turnaround situations.

A successful turnaround strategy re-ignites growth while leveraging the organization’s core competencies, sustains that success in an often turbulent and unpredictable future and implement a realistic solution that creates a platform for long-term corporate health and success.

Three Stages Of A Turnaround Strategy

There are three stages of a turnaround strategy: I – Pre-turnaround II – Period of Crisis III – Period of Recovery The first stage is the period just before the profitability begins to decline.

The company is still considered profitable at this point, but losing ground. The second period is known as the period of crisis. At this point the company needs to turnaround. This stage is marked by a decline in profits (even negatives), a fall in market share and the company's poor cash situation.

The third stage is the period of recovery or the turning point. This is the stage where serious action is taken to turnaround the company. Important decisions like scaling back production or returning to an aggressive growth stage are taken. At this point, the company's strategy is clear. The company can choose to rely on a centralised and low cost system and continue profitably. Alternatively, it might decide to combine these benefits with a growth strategy. This is the longest period and may last for

Steps in turnaround strategy

Steps in turnaround strategy

Changing the leadership: A change in leadership ensures that those techniques, which resulted in the company’s failure, are not used. The new leader has to motivate employees, listen to their views and delegate powers.

Redefining strategic focus: This involves re-evaluating the company's business and deciding which ones to change and which to retain. Diversified companies need to review their portfolio on the basis of long-term profitability and growth prospects.

Selling or divesting unnecessary assets: Sometimes, although the assets are profitable, they must be liquidated to contribute to the strategic focus. The cash received from the sale of such assets should be used to repay debts. Self-sustaining businesses are ideal candidates to do so.

Improving Profitability: To do this the company has to take drastic steps like:-

1. Assigning profit responsibility to individual divisions2. Tightening finance controls and reducing unnecessary overheads.3. Laying off workers wherever necessary4. Investing in labour saving equipment5. Building a new inventory management system and manage debt efficiently through negotiating long-term loans.

Making careful acquisitions: The company must be careful while making acquisitions. It should be in an area related to its core business enabling the company to quickly rebuild or replace its weak divisions.

Divestment

Divestment is a form of retrenchment strategy used by businesses when they downsize the scope of their business activities. Divestment usually involves eliminating a portion of a business. Firms may elect to sell, close, or spin-off a strategic business unit, major operating division, or product line. This move often is the final decision to eliminate unrelated, unprofitable, or unmanageable operations.

Divestment is commonly the consequence of a growth strategy. Much of the corporate downsizing of the 1990s has been the result of acquisitions and takeovers that were the rage in the 1970s and early 80s. Firms often acquired other businesses with operations in areas with which the acquiring firm had little experience. After trying for a number of years to integrate the new activities into the existing organization, many firms have elected to divest themselves of portions of the business in order to concentrate on those activities in which they had a competitive advantage.

REASONS TO DIVEST

In most cases it is not immediately obvious that a unit should be divested. Many times management will attempt to increase investment as a means of giving the unit an opportunity to turn its performance around. Portfolio models such as the Boston Consulting Group (BCG) Model or General Electric's Business Screen can be used to identify operations in need of divestment. For example, products or business operations identified as "dogs" in the BCG Model are prime candidates for divestment.

Decisions to divest may be made for a number of reasons:MARKET SHARE TOO SMALL. Firms may divest when their market share is too small for them to

be competitive or when the market is too small to provide the expected rates of return.

Decisions to divest may be made for a number of reasonsAVAILABILITY OF BETTER ALTERNATIVES. Firms may also decide to divest because they see better investment opportunities. Organizations

have limited resources. They are often able to divert resources from a marginally profitable line of business to one where the same resources can be used to achieve a greater rate of return.

NEED FOR INCREASED INVESTMENT. Firms sometimes reach a point where continuing to maintain an operation is going to require

large investments in equipment, advertising, research and development, and so forth to remain viable. Rather than invest the monetary and management resources, firms may elect to divest that portion of the business.

LACK OF STRATEGIC FIT. A common reason for divesting is that the acquired business is not consistent with the image and

strategies of the firm. This can be the result of acquiring a diversified business. It may also result from decisions to restructure and refocus the existing business.

LEGAL PRESSURES TO DIVEST. Firms may be forced to divest operations to avoid penalties for restraint of trade. Service

Corporation Inc., a large funeral home chain acquired so many of its competitors in some areas that it created a regional monopoly. The Federal Trade Commission required the firm to divest some of its operations to avoid charges of restraint of trade.

IMPLEMENTATION OFDIVESTMENT STRATEGIES Firms may pursue a divestment strategy by spinning off

a portion of the business and allowing it to operate as an independent business entity. Firms may also divest by selling a portion of the business to another organization. RJR Nabisco used both of these forms of divestment. In 1985 Nabisco Brands was bought by R.J. Reynolds, the manufacturer of Winston, Camel, and many other cigarette brands. Fueled in part by fears of legal liability resulting from tobacco law-suits and by complaints from investors that the tobacco side of RJR Nabisco was dragging the food business down, in early 1999 the decision was made to spin-off the domestic tobacco operations into a separate company. Later in 1999 the decision was made to sell the overseas tobacco business to Japan Tobacco.

Another way to implement a divestment decision is to simply close a portion of the firm's operations. Faced with a decline in its market share of almost half in the 14 to 19 male age group and no introduction of a successful new product in years, and rising manufacturing costs, Levi Strauss has found it necessary to divest some of its operations. Since 1997 the company has announced plans to shut twenty-nine factories in North America and Europe and to eliminate 16,310 jobs. Selling many of the plants probably was not feasible as many other clothing manufacturers are also closing plants and moving operations overseas, depressing the price for clothing manufacturing facilities. Besides, the most likely buyers for the Levi's plants would be competitors and Levi Strauss probably would not want them to have the added capacity.

IMPLEMENTATION OFDIVESTMENT STRATEGIES

In law, liquidation refers to the process by which a company (or part of a company) is brought to an end, and the assets and property of the company redistributed. Liquidation can also be referred to as winding-up or dissolution, although dissolution technically refers to the last stage of liquidation. The process of liquidation also arises when customs, an authority or agency in a country responsible for collecting and safeguarding customs duties, determines the final computation or ascertainment of the duties or drawback accruing on an entry.

Liquidation

Compulsory liquidation

The parties who are entitled by law to petition for the compulsory liquidation of a company vary from jurisdiction to jurisdiction, but generally, a petition may be lodged with the court for the compulsory liquidation of a company by:

the company itself any creditor who establishes a prima facie case contributories[2] the Secretary of State (or equivalent) the Official Receiver [edit] Grounds The grounds upon which one can apply for a compulsory liquidation also vary between jurisdictions,

but the normal grounds to enable an application to the court for an order to compulsorily wind-up the company are:

the company has so resolved the company was incorporated as a public company, and has not been issued with a trading certificate

(or equivalent) within 12 months of registration it is an "old public company" (i.e., one that has not re-registered as a public company or become a

private company under more recent companies legislation requiring this) it has not commenced business within the statutorily prescribed time (normally one year) of its

incorporation, or has not carried on business for a statutorily prescribed amount of time the number of members has fallen below the minimum prescribed by statute the company is unable to pay its debts as they fall due it is just and equitable to wind up the company

Voluntary liquidation

Voluntary liquidation occurs when the members of the company resolve to voluntarily wind-up the affairs of the company and dissolve. Voluntary liquidation begins when the company passes the resolution, and the company will generally cease to carry on business at that time (if it has not done so already). If the company is solvent, and the members have made a statutory declaration of solvency, the liquidation will proceed as a members' voluntary winding-up. In such case, the general meeting will appoint the liquidator(s). If not, the liquidation will proceed as a creditor's voluntary winding-up, and a meeting of creditors will be called, to which the directors must report on the company's affairs. Where a voluntary liquidation proceeds by way of creditor's voluntary liquidation, a liquidation committee may be appointed.

Where a voluntary winding-up of a company has begun, a compulsory liquidation order is still possible, but the petitioning contributory would need to satisfy the court that a voluntary liquidation would prejudice the contributories.

In addition, the term liquidation is sometimes used when a company wishes to divest itself of some of its assets. This is used, for instance, when a retail establishment wishes to close stores. They will sell to a company that specializes in store liquidation instead of attempting to run a store closure sale themselves.

Strategic Choice

The choice of a strategy is not a routine or easy decision. Strategic choice,like all decisions, is made in the context of the decision maker and the decision situation. The manager's attitude toward risk and feeling about where the enterprise fits block out certain choices from view. In 1910 John Dewey asserted "we do not approach any problem with a wholly naive mind; we approach it with certain acquired habitual modes of understanding, with a certain store of previously evolved meanings or at least of experiences from which meanings may be educed". Unable to follow the "rational model" of strategic choice because of lack of ability, the lack of costly information, or fast-changing conditions, the strategist focuses on choices from alternatives which change the status quo by increments.

How can we explain how the strategist focuses on less than all the possible strategic choices? is one attempt. Imagine that the whole rectangle represents all possible strategies. But the factors discussed earlier eliminate some possible choices. For example, time or resource limitations force us to ignore some possibilities. External dependencies won`t allow certain strategies because they are not feasible.

Risk aversion is such that other choices are viewed as too risky. Political problems within the firm screen out other choices, and the past strategy is the beginning point of the strategic choice. So these factors screen out many choices. And the strategist looks at and ranks only the new incremental choices within what we call the "choice zone". This figure shows the small choice zone that is left after the risky, unfeasible, and unacceptable choices are eliminated. Well, how does the strategist decide within this choice zone?

Strategic Choice

Synergy

Synergy is when the result is greater than the sum of the parts. Synergy is created when things work in concert together to create an outcome that is in some way of more value than the total of what the individual inputs is.

To achieve and maintain synergy, it is clearly necessary to eliminate dysergy-or at least to reduce it to manageable proportions. Accordingly, a considerable amount of research has been devoted to the development of ideas and techniques for the elimination of dysergy.

Synergetics may be defined as the art and science of producing synergy and reducing dysergy in complex systems. Applied to the minds of individuals, it enables people to live happier, more effective lives. Applied to groups, it promotes the development of a high degree of mutual understanding, trust, teamwork, and love. And while its application to larger institutions has been minimal to date, there is every reason to believe that highly rewarding results may be achieved.

Indeed, the combined process of producing synergy and reducing dysergy is itself synergic. For the more synergy is produced, the easier it is to reduce dysergy.

Conversely, the more dysergy is reduced, the easier it is to produce synergy. A cycle can be set up which, if maintained, results in synergic growth and development.

Dysergy

Dysergy The term "dysergy" is a coined word meaning "difficult

working." It is used in place of "conflict" because conflict is not necessarily dysergic. The conflict between athletes, for example, can at least sometimes challenge the competing athletes to peak performance. At other times, such conflict may be dysergic.

Dysergy is to be found everywhere in human activities. Few individuals are free of dysergy in their own minds. Some dysergy is present in even the most synergic human groups; and there is a lot of dysergy in almost every group. The organizations, institutions, economic systems, political entities, and other functional structures of mankind are all beset by dysergy in a variety of forms.

Gap analysis

In business and economics, gap analysis is a business resource assessment tool enabling a company to compare its actual performance with its potential performance. At its core are two questions: "Where are we?" and "Where do we want to be?" If a company or organization is under-utilizing its current resources or is forgoing investment in capital or technology, then it may be producing or performing at a level below its potential. This concept is similar to the base case of being below one's production possibilities frontier.

The goal of gap analysis is to identify the gap between the optimized allocation and integration of the inputs, and the current level of allocation. This helps provide the company with insight into areas which could be improved. The gap analysis process involves determining, documenting and approving the variance between business requirements and current capabilities. Gap analysis naturally flows from benchmarking and other assessments. Once the general expectation of performance in the industry is understood, it is possible to compare that expectation with the company's current level of performance. This comparison becomes the gap analysis. Such analysis can be performed at the strategic or operational level of an organization.

Gap analysis is a formal study of what a business is doing currently and where it wants to go in the future. It can be conducted, in different perspectives, as follows:

Organization (e.g., human resources) Business direction Business processes Information technology

Gap analysis provides a foundation for measuring investment of time, money and human resources required to achieve a particular outcome (e.g. to turn the salary payment process from paper-based to paperless with the use of a system). Note that 'GAP analysis' has also been used as a means for classification of how well a product or solution meets a targeted need or set of requirements. In this case, 'GAP' can be used as a ranking of 'Good', 'Average' or 'Poor'.

Gap analysis

Gap analysis is a very useful tool for helping marketing managers to decide upon marketing strategies and tactics. Again, the simple tools are the most effective. There's a straightforward structure to follow. The first step is to decide upon how you are going to judge the gap over time. For example, by market share, by profit, by sales and so on

Gap analysis

What is Gap Analysis

Your next step is to close the gap. Firstly decide whether you view from a strategic or an operational/tactical perspective. If you are writing strategy, you will go on to write tactics - see the lesson on marketing plans. The diagram below uses Ansoff's matrix to bridge the gap using strategies:

The diagram below uses Ansoff's matrix to bridge the gap using strategies

Strategic Gap Analysis.

Tactical Gap Analysis

You can close the gap by using tactical approaches. The marketing mix is ideal for this. So effectively, you modify the mix so that you get to where you want to be. That is to say you change price, or promotion to move from where you are today (or in fact any or all of the elements of the marketing

Tactical Gap Analysis

Porter's five forces analysis

Porter's five forces analysis is a framework for the industry analysis and business strategy development developed by Michael E. Porter of Harvard Business School in 1979 . It uses concepts developed in Industrial Organization (IO) economics to derive five forces which determine the competitive intensity and therefore attractiveness of a market. Attractiveness in this context refers to the overall industry profitability. An "unattractive" industry is one where the combination of forces acts to drive down overall profitability. A very unattractive industry would be one approaching "pure competition".

The threat of substitute products The existence of close substitute products increases the propensity of customers to switch to alternatives in response to price increases (high elasticity of demand).

buyer propensity to substitute relative price performance of substitutes buyer switching costs perceived level of product differentiation

Porter's five forces analysis

The threat of the entry of new competitors Profitable markets that yield high returns will draw firms. This results in many new entrants, which will effectively decrease profitability. Unless the entry of new firms can be blocked by incumbents, the profit rate will fall towards a competitive level (perfect competition).

the existence of barriers to entry (patents, rights, etc.) economies of product differences brand equity switching costs or sunk costs capital requirements access to distribution absolute cost advantages learning curve advantages expected retaliation by incumbents government policies

Porter's five forces analysis

The intensity of competitive rivalry For most industries, this is the major determinant of the competitiveness of the industry. Sometimes rivals compete aggressively and sometimes rivals compete in non-price dimensions such as innovation, marketing, etc.

number of competitors rate of industry growth intermittent industry overcapacity exit barriers diversity of competitors informational complexity and asymmetry fixed cost allocation per value added level of advertising expense* Economies of scale Sustainable competitive advantage through improvisation

Porter's five forces analysis

The bargaining power of customers Also described as the market of outputs. The ability of customers to put the firm under pressure and it also affects the customer's sensitivity to price changes.

buyer concentration to firm concentration ratio degree of dependency upon existing channels of distribution bargaining leverage, particularly in industries with high fixed costs buyer volume buyer switching costs relative to firm switching costs buyer information availability ability to backward integrate availability of existing substitute products buyer price sensitivity differential advantage (uniqueness) of industry products RFM Analysis

Porter's five forces analysis

The bargaining power of suppliers Also described as market of inputs. Suppliers of raw materials, components, labor, and services (such as expertise) to the firm can be a source of power over the firm. Suppliers may refuse to work with the firm, or e.g. charge excessively high prices for unique resources.

supplier switching costs relative to firm switching costs degree of differentiation of inputs presence of substitute inputs supplier concentration to firm concentration ratio employee solidarity (e.g. labor unions) threat of forward integration by suppliers relative to the threat of

backward integration by firms cost of inputs relative to selling price of the product. This five forces analysis is just one part of the complete Porter

strategic models. The other elements are the value chain and the generic strategies.

Porter's five forces analysis

McKinsey’s 7-S Strategy Framework

McKinsey introduced the 7-S framework for strategy in the late 1970s, The framework maps seven interrelated factors that influence an organization’s ability to change—shared values, skills, staff, strategy, structure, style, and systems—and shows how these forces interact. Unlike Porter’s Framework, 7-S Framework emphasizes coordination more strongly; 7-S suggests that they can make significant progress in any of their parts only if they progress in the others. As seen in the diagram, the interrelations between these elements are equally important compared to the elements themselves. They all work together.

McKinsey’s 7-S Strategy Framework

McKinsey’s 7-S Strategy Framework-Description of 7- S Strategy: Strategy is the plan of action an organisation

prepares in response to, or anticipation of, changes in its external environment. Strategy is differentiated by tactics or operational actions by its nature of being premeditated, well thought through and often practically rehearsed. It deals with essentially three questions 1) where the organisation is at this moment in time, 2) where the organisation wants to be in a particular length of time and 3) how to get there. Thus, strategy is designed to transform the firm from the present position to the new position described by objectives, subject to constraints of the capabilities or the potential (Ansoff, 1965

Structure: Business needs to be organised in a specific form of shape that is generally referred to as organisational structure. Organisations are structured in a variety of ways, dependent on their objectives and culture. The structure of the company often dictates the way it operates and performs (Waterman et al., 1980). Traditionally, the businesses have been structured in a hierarchical way with several divisions and departments, each responsible for a specific task such as human resources management, production or marketing. Many layers of management controlled the operations, with each answerable to the upper layer of management. Although this is still the most widely used organisational structure, the recent trend is increasingly towards a flat structure where the work is done in teams of specialists rather than fixed departments. The idea is to make the organisation more flexible and devolve the power by empowering the employees and eliminate the middle management layers

McKinsey’s 7-S Strategy Framework-Description of 7- S

Systems: Every organisation has some systems or internal processes to support and implement the strategy and run day-to-day affairs. For example, a company may follow a particular process for recruitment. These processes are normally strictly followed and are designed to achieve maximum effectiveness. Traditionally the organisations have been following a bureaucratic-style process model where most decisions are taken at the higher management level and there are various and sometimes unnecessary requirements for a specific decision (e.g. procurement of daily use goods) to be taken. Increasingly, the organisations are simplifying and modernising their process by innovation and use of new technology to make the decision-making process quicker. Special emphasis is on the customers with the intention to make the processes that involve customers as user friendly as possible (Lynch, 2005).

McKinsey’s 7-S Strategy Framework-Description of 7- S

Style/Culture: All organisations have their own distinct culture and management style. It includes the dominant values, beliefs and norms which develop over time and become relatively enduring features of the organisational life. It also entails the way managers interact with the employees and the way they spend their time. The businesses have traditionally been influenced by the military style of management and culture where strict adherence to the upper management and procedures was expected from the lower-rank employees. However, there have been extensive efforts in the past couple of decades to change to culture to a more open, innovative and friendly environment with fewer hierarchies and smaller chain of command. Culture remains an important consideration in the implementation of any strategy in the organisation (Martins and Terblanche, 2003).

McKinsey’s 7-S Strategy Framework-Description of 7- S

Staff: Organisations are made up of humans and it's the people who make the real difference to the success of the organisation in the increasingly knowledge-based society. The importance of human resources has thus got the central position in the strategy of the organisation, away from the traditional model of capital and land. All leading organisations such as IBM, Microsoft, Cisco, etc put extraordinary emphasis on hiring the best staff, providing them with rigorous training and mentoring support, and pushing their staff to limits in achieving professional excellence, and this forms the basis of these organisations' strategy and competitive advantage over their competitors. It is also important for the organisation to instil confidence among the employees about their future in the organisation and future career growth as an incentive for hard work (Purcell and Boxal, 2003).

McKinsey’s 7-S Strategy Framework-Description of 7- S

Shared Values/Superordinate Goals: All members of the organisation share some common fundamental ideas or guiding concepts around which the business is built. This may be to make money or to achieve excellence in a particular field. These values and common goals keep the employees working towards a common destination as a coherent team and are important to keep the team spirit alive. The organisations with weak values and common goals often find their employees following their own personal goals that may be different or even in conflict with those of the organisation or their fellow colleagues (Martins and Terblanche, 2003).

McKinsey’s 7-S Strategy Framework-Description of 7- S

The General Electric Company, with the aid of the Boston Consulting Group and McKinsey and Company, pioneered the nine cell strategic business screen illustrated here. The circle on the matrix represents your enterprise. Both axes are divided into three segments, yielding nine cells. The nine cells are grouped into three zones:

The Green Zone consists of the three cells in the upper left corner. If your enterprise falls in this zone you are in a favorable position with relatively attractive growth opportunities. This indicates a "green light" to invest in this product/service.The Yellow Zone consists of the three diagonal cells from the lower left to the upper right. A position in the yellow zone is viewed as having medium attractiveness. Management must therefore exercise caution when making additional investments in this product/service. The suggested strategy is to seek to maintain share rather than growing or reducing share.

The Red Zone consists of the three cells in the lower right corner. A position in the red zone is not attractive. The suggested strategy is that management should begin to make plans to exit the industry.

GE 9 CELL MATRIX

Characterize Your EnterpriseThe vertical axis represents the industry attractiveness. The expert system will position your enterprise on the chart based upon your description of:

bargaining power of the buyers bargaining power of the suppliers internal rivalry the threat of new entrants the threat of substitutes The horizontal axis represents the firm's competitive strength or ability to

compete in the industry. It includes an analysis of: the value and quality of the offering market share staying power experience You can trace through the supporting analysis and its conclusions, adjusting

your input until you are satisfied your description accurately characterizes your enterprise

GE 9 CELL MATRIX

Boston Consulting Group Matrix

The BCG matrix (aka B.C.G. analysis, BCG-matrix, Boston Box, Boston Matrix, Boston Consulting Group analysis) is a chart that had been created by Bruce Henderson for the Boston Consulting Group in 1970 to help corporations with analyzing their business units or product lines. This helps the company allocate resources and is used as an analytical tool in brand marketing, product management, strategic management, and portfolio analysis

To use the chart, analysts plot a scatter graph to rank the business units (or products) on the basis of their relative market shares and growth rates.

Cash cows are units with high market share in a slow-growing industry. These units typically generate cash in excess of the amount of cash needed to maintain the business. They are regarded as staid and boring, in a "mature" market, and every corporation would be thrilled to own as many as possible. They are to be "milked" continuously with as little investment as possible, since such investment would be wasted in an industry with low growth.

Boston Consulting Group Matrix

Dogs, or more charitably called pets, are units with low market share in a mature, slow-growing industry. These units typically "break even", generating barely enough cash to maintain the business's market share. Though owning a break-even unit provides the social benefit of providing jobs and possible synergies that assist other business units, from an accounting point of view such a unit is worthless, not generating cash for the company. They depress a profitable company's return on assets ratio, used by many investors to judge how well a company is being managed. Dogs, it is thought, should be sold off.

Question marks (also known as problem child) are growing rapidly and thus consume large amounts of cash, but because they have low market shares they do not generate much cash. The result is a large net cash consumption. A question mark has the potential to gain market share and become a star, and eventually a cash cow when the market growth slows. If the question mark does not succeed in becoming the market leader, then after perhaps years of cash consumption it will degenerate into a dog when the market growth declines. Question marks must be analyzed carefully in order to determine whether they are worth the investment required to grow market share.

Stars are units with a high market share in a fast-growing industry. The hope is that stars become the next cash cows. Sustaining the business unit's market leadership may require extra cash, but this is worthwhile if that's what it takes for the unit to remain a leader. When growth slows, stars become cash cows if they have been able to maintain their category leadership, or they move from brief stardom to dogdom.

Boston Consulting Group Matrix

Boston Consulting Group Matrix

Distinctive Competitiveness

Distinctive Competitiveness 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: patents, exclusive licenses, strong brands, effective leadership, teamwork, or tacit knowledge.

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

Strategic Choice

Michael Porter has described a category scheme consisting of three general types of strategies that are commonly used by businesses to achieve and maintain competitive advantage. These three generic strategies are defined along two dimensions: strategic scope and strategic strength. Strategic scope is a demand-side dimension (Porter was originally an engineer, then an economist before he specialized in strategy) and looks at the size and composition of the market you intend to target. Strategic strength is a supply-side dimension and looks at the strength or core competency of the firm. In particular he identified two competencies that he felt were most important: product differentiation and product cost (efficiency).

Cost leadership Differentiation Focus Value chain

Cost Leadership Strategy

This strategy emphasizes efficiency. By producing high volumes of standardized products, the firm hopes to take advantage of economies of scale and experience curve effects. The product is often a basic no-frills product that is produced at a relatively low cost and made available to a very large customer base. Maintaining this strategy requires a continuous search for cost reductions in all aspects of the business. The associated distribution strategy is to obtain the most extensive distribution possible. Promotional strategy often involves trying to make a virtue out of low cost product features

Differentiation Strategy

Differentiation is aimed at the broad market that involves the creation of a product or services that is perceived throughout its industry as unique. The company or business unit may then charge a premium for its product. This specialty can be associated with design, brand image, technology, features, dealers, network, or customers service. Differentiation is a viable strategy for earning above average returns in a specific business because the resulting brand loyalty lowers customers' sensitivity to price. Increased costs can usually be passed on to the buyers. Buyers loyalty can also serve as an entry barrier-new firms must develop their own distinctive competence to differentiate their products in some way in order to compete successfully. Examples of the successful use of a differentiation strategy are Hero Honda, Asian Paints, HLL, Nike athletic shoes, Perstorp BioProducts, Apple Computer, and Mercedes-Benz automobiles. Research does suggest that a differentiation strategy is more likely to generate higher profits than is a low cost strategy because differentiation creates a better entry barrier. A low-cost strategy is more likely, however, to generate increases in market share. This may or may not be true.

Focus Strategy

In this strategy the firm concentrates on a select few target markets. It is also called a segmentation strategy or niche strategy. It is hoped that by focusing your marketing efforts on one or two narrow market segments and tailoring your marketing mix to these specialized markets, you can better meet the needs of that target market. The firm typically looks to gain a competitive advantage through product innovation and/or brand marketing rather than efficiency. It is most suitable for relatively small firms but can be used by any company. A focus strategy should target market segments that are less vulnerable to substitutes or where a competition is weakest to earn above-average return on investment.

Value Chain Analysis

The value chain is a systematic approach to examining the development of competitive advantage. It was created by M. E. Porter in his book, Competitive Advantage (1980). The chain consists of a series of activities that create and build value. They culminate in the total value delivered by an organisation. The 'margin' depicted in the diagram is the same as added value. The organisation is split into 'primary activities' and 'support activities.'

Primary Activities. Inbound Logistics. Here goods are received from a company's suppliers. They are stored until they are

needed on the production/assembly line. Goods are moved around the organisation. Operations. This is where goods are manufactured or assembled. Individual operations could

include room service in an hotel, packing of books/videos/games by an online retailer, or the final tune for a new car's engine.

Outbound Logistics. The goods are now finished, and they need to be sent along the supply chain to

wholesalers, retailers or the final consumer. Marketing and Sales. In true customer orientated fashion, at this stage the organisation prepares the

offering to meet the needs of targeted customers. This area focuses strongly upon marketing communications and the promotions mix.

Service. This includes all areas of service such as installation, after-sales service, complaints

handling, training and so on.

Value Chain Analysis

Support Activities. Procurement. This function is responsible for all purchasing of goods, services and materials. The aim is to

secure the lowest possible price for purchases of the highest possible quality. They will be responsible for outsourcing (components or operations that would normally be done in-house are done by other organisations), and ePurchasing (using IT and web-based technologies to achieve procurement aims).

Technology Development. Technology is an important source of competitive advantage. Companies need to innovate to

reduce costs and to protect and sustain competitive advantage. This could include production technology, Internet marketing activities, lean manufacturing, Customer Relationship Management (CRM), and many other technological developments.

Human Resource Management (HRM). Employees are an expensive and vital resource. An organisation would manage recruitment and

s election, training and development, and rewards and remuneration. The mission and objectives of the organisation would be driving force behind the HRM strategy.

Firm Infrastructure. This activity includes and is driven by corporate or strategic planning. It includes the Management

Information System (MIS), and other mechanisms for planning and control such as the accounting department.

Value Chain Analysis

Benchmarking

Benchmarking is the process of comparing the cost, cycle time, productivity, or quality of a specific process or method to another that is widely considered to be an industry standard or best practice. Essentially, benchmarking provides a snapshot of the performance of your business and helps you understand where you are in relation to a particular standard[1]. The result is often a business case for making changes in order to make improvements. The term benchmarking was first used by cobblers to measure ones feet for shoes. They would place the foot on a "bench" and mark to make the pattern for the shoes. Benchmarking is most used to measure performance using a specific indicator (cost per unit of measure, productivity per unit of measure, cycle time of x per unit of measure or defects per unit of measure) resulting in a metric of performance that is then compared to others

Types of benchmarking

Process benchmarking - the initiating firm focuses its observation and investigation of business processes with a goal of identifying and observing the best practices from one or more benchmark firms. Activity analysis will be required where the objective is to benchmark cost and efficiency; increasingly applied to back-office processes where outsourcing may be a consideration.

Financial benchmarking - performing a financial analysis and comparing the results in an effort to assess your overall competitiveness.

Performance benchmarking - allows the initiator firm to assess their competitive position by comparing products and services with those of target firms.

Product benchmarking - the process of designing new products or upgrades to current ones. This process can sometimes involve reverse engineering which is taking apart competitors products to find strengths and weaknesses.

Strategic benchmarking - involves observing how others compete. This type is usually not industry specific meaning it is best to look at other industries.

Functional benchmarking - a company will focus its benchmarking on a single function in order to improve the operation of that particular function. Complex functions such as Human Resources, Finance and Accounting and Information and Communication Technology are unlikely to be directly comparable in cost and efficiency terms and may need to be disaggregated into processes to make valid comparison.

SERVICE BLUE PRINTING

A tool for simultaneously depicting the service process, the points of customer contact, and the evidence of service from the customer’s point of view.

Service blueprinting is a process analysis methodology proposed by Shostack (Shostack, 1982, 1984). Shostack’s methodical procedure draws upon time/motions method engineering, PERT/project programming and computer system and software design. The proposed blueprint allows for a quantitative description of critical service elements, such as time, logical sequences of actions and processes, also specifying both actions/events that happen in the time and place of the interaction (front office) and actions/events that are out of the line of visibility for the users, but are fundamental for the service.

Service Blueprint Components

Service blueprinting

Service blueprinting involves the description of all the activities for designing and managing services, including schedule, project plans, detailed representations (such as Use cases) and design plans, or service platforms.Blueprinting is often supported by methodologies that elicit functional elements of services, as well as their qualitative/implicit characteristics, including TQM techniques, such as Quality Function Deployment (Ramaswamy, 1996), Just in Time, and capacity planning