2. Business Strategy: 2. Business Strategy:

An Introduction to Market Driven StrategyAn Introduction to Market Driven Strategy

Introduction to Business StrategyIntroduction to Business Strategy

• Business strategy can be defined as long-term organizational as long-term organizational

policies policies that a company forms in order to do business.• To succeed, different business organizations formulate and adopt

various business policies.

Basis of Policies Formulations:

• type of industry, choice of product, expansion or contraction of

production from one line of product to another line, adoption of

new technology, launching of new products, managing

employees with new type of employment contract.

Two Approaches to Business StrategyTwo Approaches to Business Strategy

a) Market Driven Strategy,b) Resource Driven Strategy.

A)A) MARKET DRIVEN STRATEGY: MARKET DRIVEN STRATEGY: it suggests that much of the differences in performance between 2 firms in on account of their doing business in different industries.

- each industries have their own characteristics; like…- each industries have their own characteristics; like…

Industry with high entry barrier & low dependency on monopoly Industry with high entry barrier & low dependency on monopoly

supplier or on few large customer are likely to provide more supplier or on few large customer are likely to provide more ROI.ROI.

Low entry barrier with superior profit will attract more new players.Low entry barrier with superior profit will attract more new players.

How Barriers can be created by an organisation?How Barriers can be created by an organisation?• On other hand with few supplier & more buyer decrease

Profitability of an org.

• A business org. always face competition from their competitors.

BUSINESS COMPETES IN 2 MARKETS:A) Product Market,B) Factor Market

All organizations keep their watch on their competitors move and on the basis of it they make their reactive strategies.

At conceptual level, strategic planning may be considered as a sseries of decisions with respect to –

- what goods to produce inside, what goods to buy from outside, which market to choose to sale its manufactured goods???

Organization will have many alternatives for each of these decisions.

Ex: Entrepreneur who want to do start business of Cycle. Ex: Entrepreneur who want to do start business of Cycle.

Organization strategy is also affected by many industrial & environmental factors.

FORMULATION OF MARKET DRIVEN STRATEGYFORMULATION OF MARKET DRIVEN STRATEGY

• As we have seen the different factors influencing business org.

• When a company goes by Market Driven Strategy it takes these

environmental forces as given & tries to adopt a policy to maximize its environmental forces as given & tries to adopt a policy to maximize its

business goal. business goal.

• This approach assumes that one single player cannot change

environmental set up.

• These environmental forces provides 100’s of opportunities, it should

choose its business product line in such a way that their effects are

minimal.

• 1st Task organization has to do is Carry out their SWOT ANALYSIS

5 Stages to Formulate Strategy5 Stages to Formulate Strategy

1. Understanding company Vision, Mission, and objectives.

2. Analyzing the environmental factors.3. Identifying company competitiveness positions.4. Assessing company capabilities.5. Examining the strategic options available.

1. Understanding company Vision, Mission, and Objectives:1. Understanding company Vision, Mission, and Objectives:

• Organizational VISION express the company’s Long-Term Goal.

• Company’s MISSION Statements provides the purpose for which it exists & what it would like to do in future.

• it will also give the restrictive criteria of their operations.

• It also reflects Short & Long term objectives in both quantitative & qualitative terms, and sometime it also highlights Philosophy & Value System.

• Company’s OBJETIVES sets a general guidelines to its managers & other employees as to how they should work & what they should work for to reach its long-term action

2. Analyzing Environmental Factors2. Analyzing Environmental Factors

• Environmental Scanning is most critical stage in strategic

planning process of an orgn.

• There are many agents / environ. Factors which affect

company.

• How this changes occurred in these factors can not be

judged & No orgn. has much control over the

environmental factors.

• Due to lack of Control, most of business considered them

as opportunity or threats.

• It require knowledge about it & provide to allocate org.

resources.

2.1 Steps of Environmental Scanning2.1 Steps of Environmental Scanning

a. Auditing of Environmental Influences: Listing out

forces & their strengths / degree that affects business.

b. Identify & Understand dynamism or volatility of

the forces.

c. Mapping the Structure of Industry: position of

competitors in industry.

A. Auditing of Environmental A. Auditing of Environmental Influences:Influences:

• There are 4 institutional forces of environment but they may be sub categories.

• But all these factors will not equally import ants for all companies.

EX: A bicycle manufacturing company, regulatory forces not that

much critical, but it will be more critical to chemical &

Pharmaceutical industry.

• So as an business you have to identify important environmental forces which affects business org.

HOW BUSINESS CAN IDENTIFY THOSE FACTORS?????HOW BUSINESS CAN IDENTIFY THOSE FACTORS?????• Orgn. Can identify by way of relates/interaction with such factors.Orgn. Can identify by way of relates/interaction with such factors.

EXEX: if company regularly high low-skilled worker from the market, it may be quite vulnerable to any change in government regulation regarding minimum wages for such worker.

B. Identify & Understand B. Identify & Understand

dynamism or volatility of the dynamism or volatility of the

forces.forces.• Profit based as well as NGOs, relates with its environment through

various interaction & exchange processes.

• This exchange may happen by way of manpower, goods, and service.

• Through exchange process which give indication of company’s

dependency on particular set of environment influences.

• Due to compositions, some forces may change quickly & some may

change slowly.

EX:EX: change in societal expectation on orgn will change the way of hiring,

voluntary turnover, or firing process.

EX: EX: an org. which has strong link with capital market is likely to sensitive

to any change in gov. policy of money supply & interest rates.

• To understand dynamism of the forces, one should list

out the linkage between org. & its environment along with their

time dependency.

• Another Important to understand it is that….

- a strategy of “Doing Nothing” may run strategy than a

costly strategic exercise.

- Unstable Environment may get lot of infromation which are

useful for short period only..

C. Mapping industry Structure: C. Mapping industry Structure:

• Apart from institutional factors, competitors and collaborators

are to be considered as a force that company should think

when formulating any strategic plan.

• Thus, the structure of an industry & nature of the competitors

be considered when making strategic plans.

• Immediate environmental factors have direct & strong effect

on profitability & long run growth of a firm.

• We learn Porters Five Force Model to Understand the

Structure of Industry OR Industry analysis.

i)i) Threats Of Entry:Threats Of Entry:

• How easy is it for a new player to enter my business

space?

• If these entry barriers are low, than what

consequences???

• Entry barrier is must to for continuous high profitability of an industry.

• Entry Barriers are of various kinds:Entry Barriers are of various kinds:

- Regulatory forces: Small scale sector & no private player in defense business.

- Large size of Plant & Distribution of orgn.: Automobile & petroleum

Refineries.

- Requirement of large financial capital: Tata Nano invest 1500 cores.

- Proprietary right over mineral deposits; technology: Microsoft over MS Office,

Intel.

ii) Power of suppliers:ii) Power of suppliers:• Big orgn. Relies on many other org. for supply of raw materials & parts & for supply of raw materials & parts &

components needed to manufacture final products. components needed to manufacture final products.

• Availability of steady raw materials is essential requirement for long term

success of company. Mere availability of technology will not ensure the

continuous operations.

• When a manufacturer buys a lot its manufacturing requirements from a single

supplier it can be vulnerable to supplier’s strategic moves or failures.

• So, many org. go for multiple suppliers.

• Knowing buyers dependency, a supplier may raise the cost of raw materials

OR they will start its business by way of forward integration. EX: Gionee

Mobile Manufacturer.

• Example: In 2006, Steal Authority of India (SAIL) went for acquiring coal

mines overseas because it wanted to insulate itself from the irregular coal

supply from Coal India.

iii) Power of Buyers: • When a large part of a company’s output is sold to only one or a few buyers, it can be

vulnerable to strategic intents of the buyers.

EX: if you build infrastructure & distribution network according to buyer needs than it EX: if you build infrastructure & distribution network according to buyer needs than it

can not change.can not change.

• Examples:

a) NTPC sells a lot of its power outputs to State Electricity Boards (SEB).

But most SEB’s are poor pay masters. SEB’s sickness was affecting

the health of NTPC quite badly.

b) Burn Standard and Company Ltd, Braithewaite and Co Ltd and

Jessop Construction Ltd were faithful suppliers of wagons to Indian

Railway for many years. After economic liberalization, Indian Railway

went for more diversified suppliers that led to sickness of those loyal

wagon suppliers of 1960’s and 1970’s!

iv) Threats of Substitutes:iv) Threats of Substitutes:• How easy is it for an existing competitor to come out with How easy is it for an existing competitor to come out with

a substitute product that you have just launched as a new a substitute product that you have just launched as a new innovation? innovation?

Example:• During the later part of last century Indian pharmaceutical industry

had lots of medicinal formulations with very similar therapeutic values.

This affected serious investment in development of drugs in India.

What will be the prospect Consequences on

our business if you will find the substitute

products for our business?

V) Rivalry among existing playersV) Rivalry among existing players

• How many players are operating in the industry and how keenly

are they watching each other?

• High rivalry among the players will make them to go for

excessive expenditure on product promotion and customer

relations raising to their annual operating cost which

ultimately is likely to cut into their actual profits.

EX: Media war between coke & Pepsi.

Promotional Policy adopted by HUL & PG.

A new Entrepreneur could just stop at this stage to make

its strategic policy.

3. Identifying Company Competitive Position: 3. Identifying Company Competitive Position:

• Environ. Scanning needs to be done before deciding in which industry one should do business.

• Environmental Scanning provides static analysis about about companies position in industrycompanies position in industry.

• 2 angles are available to check market position of an organization:- how total market size of a product is changing with time,- which group of products it belongs to. Total market share for product will be different for

different Product Life Cycle Stage…

22ndnd Way of Doing Analysis is – STRATEGIC GROUP Way of Doing Analysis is – STRATEGIC GROUP ANALYSIS…ANALYSIS…

4. Assessing Company Capabilities: 4. Assessing Company Capabilities:

• Knowing competitive position of firm will provide an idea about kind of opportunities & threats a new entrepreneur is likely to face.

• These opportunities will only captured only and only when organization poses certain internal capabilities, functional strengths, strengths & weakness.

• Organizational Capability Analysis is the assessment of is the assessment of this internal resource strengths of a company. this internal resource strengths of a company.

3 Techniques are their to do it: 3 Techniques are their to do it:

a)a) Resource Positions Resource Positions

b)b) Company Internal Value ChainCompany Internal Value Chain

c)c) Efficiency in Resource Allocation or product Portfolio Analysis Efficiency in Resource Allocation or product Portfolio Analysis

a) Resource Positions a) Resource Positions • It means getting an idea about the stock & verities of resources available with

company.

• These resources are classified in to 2 categories: Tangible Resources &

Intangible Resources of an organization.

• Intangible Assets can not be quantified as tangible assets.

• Intangible Assets may further classified in : Human and Non-Human

resources.

• Human Resources are: KSAs of Employees, a skilled inventory can be

built using the employees work, academic, training background, and HRIS can be

used.

• Non-Human Resources are: company work culture, good will, brand name,

patents.

This intangible assets require to sustain in the competitive environment. This intangible assets require to sustain in the competitive environment.

B) Company Internal Value Chain

c) Efficiency in Resource Allocation or Product portfolio Analysis

5. Examining the Strategic Options Available5. Examining the Strategic Options Available

Cost Leadership:

When product from all manufacturers appear same to the customers, then

every manufacturer will try to capture the market by selling at the lowest cost.

Example: primary education, basic banking or health care service for common citizens.

– In 2006, there was craze among Indian Cement manufacturers for captive

power plant because power from state grid cost Rs 3.5 to Rs 4.5 per KWH

while that from captive

Differentiation:• When the product has many special characteristics, a manufacturer

may try to do business with those customers who like those

characteristics more than other characteristics.

Example:

• Maruti, Indica and Honda City are all cars but Maruti is known for

its fuel efficiency, Indica is known for its suspension and Honda

City is known for its looks! And, there are different people who

prefer these characteristics of a car.

Focus: • Instead of segmenting the total market based on product

characteristics, this strategy is based on segmentation of the product

market based on geography location, customer income, education,

industry etc. A manufacturer will do business in one of the other

market.

Example: Newspapers in Kolkata

• There are English papers The Telegraph, The Statesman, the Times of

India and a few others;

• Then there are Bengali newspapers e.g. Anandabazar Patrika,

Barthaman, Satyayug then there are Hindi news papers e.g. Sanmarg.

• Do you think all of them give the same headline for their respective

papers? Most likely not. They are different because they are catering

to the news appetite of different markets.

Key learning

• Product markets are heterogeneous. Different companies choose to do

their businesses in different product markets.

• Different product markets can be broadly classified into different

industries.

• Profitability of an industry depend on presence of entry barrier, power of

suppliers, power of buyers, threat of substitutes and rivalry among the

existing players.

• A business organizations may choose to adopt any one of the three

generic strategies viz. cost leadership, differentiation and focus.