Professional Documents
Culture Documents
301
301
Education
Ques 1:- What is Business Policy? How does Business Policy make the Study of
Management more meaningful?
Ans:- Business Policy:-
The term Business Policy may be used interchangeably
with Strategic Management, corporate planning etc.
Primarily the term Business Policy means a long-term planning for the total business –
“as a whole”.
SURVIVAL
EXPANSION
DIVERSIFICATION ETC.
The planning of the overall Business is done by the top-level managers who have the
relevant skills experience and knowledge to take a strategic decision for the overall
corporate.
Acc to Christensen:-
“Business Policy is the study of the functions and
responsibilities of Senior Management, the crucial problems that affect success in the
total enterprise, and the decision that determine the direction of the Organization and
shape its future.”
From the above definition it may be understood that Business Policy attempts to study
what path is the Organization going to take in future.
-------------GAP-------------------------
2. Top-Management:-
Business Policy deals with the long term perspective of the
Organization. These decision are taken by the managers at the senior level of
management. Therefore, Business Policy attempts to Study the functions and
responsibilities of the senior management which primarily concerns itself to the crucial
problems or decisions of the organization.
3. Future –Oriented:-
As the Study of Business Policy entails what should be done
to take a desired future course of position it is future-oriented. The Senior level
managers anticipate and predict the future and take a policy decision in the present.
4. Choice of a Position:-
The study of a Business Policy involves evaluating
Various courses of action and various desired future positions and ultimately choosing
one of the best suitable future position.
Leader
Follower
Choice of a position
Challenger
Initiator
5. Choice of a Strategy:
It also involves an evaluation and choice of a
Strategy to reach upto the desired future position.
6. Mobilization of Resources:-
The study of Business Policy is also concerned with the optimum and
mobilization of the available and the required resources in an organisatio9n for the
achievement of the :
Organizational Goals
2
O.D.M Computer & Mgt. Education
Future
Strategic thinking
1980’s
Strategic Management
1960’s
Strategy Paradigm
1930-40’s
Mid 1930’s
Ad-hoc Policy-making
1911
In the Initial days managers used to do with day to day planning methods. The first
phase in mid 1930’s was the premise of ad-hoc policy-making mainly due to the
nature of the business of that period.
The second phase in 1930’s and 1940’s was marked by the increasing environmental
changes. Planned Policy formulation replaced ad-hoc policy making, which led to the
emphasis shift to the integration of functional areas.
The third phase during 1960’s was based on strategy paradigm. It was the effect and
relationship of the business with the environment, which guided the process of policy
making.
In the early eighties, the patterns changed again companies went global and
competition increased Japanese Companies unleashed a force across the world
along with other Asian companies and possed threats for the U.S. and European
Companies.
Strategic Management
• Importance
3
O.D.M Computer & Mgt. Education
Students Executives
For Students:-
For Executives:-
CONCLUSIONS:-
The purpose of the business policy course is to integrate the knowledge gained in
various functional areas, to adopt a generalist approach and to comprehend the
complex interaction taking place within the organization. It is a core subject that
integrates all the knowledge & experience gained for future of the organization.
Example-1 The study of the planning & activation of a joint venture between ONGC
Mittal Energy (OME) and ONGC Videsh (OVL) as Mittal Steel Group is a strategic
decision.
Example-2 The kolkata based – ITC, known primarily for its tobacco products has
taken a strategic decision to enter into Soaps by targeting SEC-A consumers using
products in the Rs. 15/- range.
4
O.D.M Computer & Mgt. Education
Acc to Parikh:-
1. Good visions are inspiring.
2. Visions represent a discontinuity and shows the company what is to be achieved
as an ultimate position.
3. Good visions helps in the certain of a common identity and a shared sense of
purpose.
4. Good visions are competitive, original and unique. They give a sense of identity to
all the employees in an organization.
5. Visions foster long-term thinking and guides the organizational working towards a
common philosophy.
6. A Vision represent integrity and may be useful for the benefit of people.
Thus a good Visions may be inspiring & motivating to the management. It may guide
the working of a dream i. e. a Vision. A vision articulates the position that a firm would
like to attain in the distant future.
E.g. :-
IOC’s Vision
“Indian Oil aims to achieve international standards of excellence in all aspects
of energy an diversified business with focus on customer delight through quality
products and services.”
Thus Vision constitutes future aspirations that lead to an inspiration to be the
best in one’s field of activity.
Mission: A mission is a statement which defines the role that an organization plaus
in a society. It is the link that the organization develops between its existence and the
need of the society.
While the essence of a vision is forward-looking view of what an organization
wishes to become Mission is what an organization is and why it exists.
According to Thomson.
5
O.D.M Computer & Mgt. Education
Formulated
Dream to be achieved
Informally Vision in future
* CHARACTERISTICS OF A MISSION STATEMENT:
1. Feasible:-
A mission statement should always aim high should not be an impossible statement.
It should be realistic and achievable.
According to Havell’s:
VISION:- “We are committed to the cause of enriching the quality of life by ensuring
safe, efficient and convenient use of electricity.”
MISSION: ” Better Technology
Better Quality
Better Tomorrow”
CONCLUSION:-
Therefore from the above discussion it may be concluded that a vision is a future
dream of the promoters of an organization. Based on this foundation, the top
management designs a statement for the very reason of its existence in the society,
which is called Mission. The two terms are different in concept yet they complement each
other in giving a purpose to the existence of an organization and guides its activities
towards a future position.
Strategic Intent
Vision
Mission
Business (Corporate level)
Objectives
Divisional Objectives
Departmental/ Functional
Objectives
Operational Objectives
6
O.D.M Computer & Mgt. Education
Circumstances
Influences
Environment Situation
Conditions
Pressure
Directly
Environmental
Influence on
organization Indirectly
*Characteristics of Environment:-
a) Complex: The environment consists of a number of factors and variables directly or indirectly
influencing the operations of any business organization. All the factors and conditions which form
a part of the environment are interrelated and interdependent. One factor influences or get
influenced by another factor. Thus environment is a very complex phenomenon whose parts may
be easily understood in isolation but a total picture may require sufficient understanding and
knowledge.
Globalisation
Liberalisation
Technological
advancement
Competition
Infrastructure
development
Environment sub-systems
b) Dynamic:
Due to so many forces operating in the environment the nature of environment is
constantly changing and is thus dynamic in nature.
7
O.D.M Computer & Mgt. Education
c) Multi-Faceted:
The character of the environment is understood by the person who is observing it.
It has got many angles. It ultimately depends upon the perception of the observer, what
he derives out of the development of the events. For example the de-licensing of the
industries may be considered as an opportunity by some who want to enter the business.
However the same may be considered as a threat by those who were earlier having a
monopoly in a particular business.
d) Far-reaching impact:
The developments and events shaping the environment have a far reaching
influence on the operations of a business. For example any change in the tastes & linking
of customers affect the growth & profitability of a firm.
For any business organization the study of environment is of utmost important to
be able to adjust itself to the latest developments and to be able to reap the benefits of
the opportunities arising in the market. The complexities of any environment may be
understood by dividing it into different categories.
Environment
A) INTERNAL ENVIRONMENT:
The internal environment of a business consists of various factors existing within
an organization which results into building its strengths & weaknesses.
It includes:-
Employees & their skill base.
Level of Technology available
Availability of various resources like finance, infrastructure etc.
Process
Organizational design and structure
Organizational work culture- Procedures – policies.
B) EXTERNAL ENVIRONMENT: -
The external environment of a business includes all the factors outside the organization.
It is this set of factors which provide an opportunity or pose threats to the organization. It
includes
i) Market Environment: Customers needs, preferences, attitudes, perception,
bargaining & purchasing power, satisfaction etc.
Product: features, functions, ingredients, image, price, differentiation, availability,
substitutes, services etc.
Marketing intermediary: Channel, levels, costs, logistics, delivery, service & financial
schemes etc.
Competitor related factors: types & number of competitors, entry & exit of competitors,
nature & strategy of competition.
ii) Technological Environment:
Sources of technology, cost of technology acquisition,
Technological development, stages of development change & rate of change, research &
development.
8
O.D.M Computer & Mgt. Education
about it. The general environment offers a common set of opportunities and poses a
common set of threats to all the players in the industry. However, the organization may
not be influenced by each factor of the general environment.
D) Relevant Environment:-
Every business organization is concerned with a set of environment aspects, which have
a direct, or an immediate affect on the business. This part of the general environment
which is of an immediate concern to the business is termed as Relevant environment.
What constitutes a relevant envornment depends upon the perception & working of the
business and the industry a firm is in.
PORTER’S FIVE FORCES MODEL OF EXTERNAL ENVIRONMENT
Potential Entrants
Relative power of Unions Threat of New Entrants
and Government etc.
Other Buyers
Stockholders Industry
Competitors Bargaining power of
suppliers
Suppliers
Bargaining power ofRivalry among existing firms
buyers Threat of substitute
Products or services
Substitutes
According to Michael Porter:
“Competitive strategy must grow out of a sophisticated understanding of the rules of
competition that determine an industry’s attractiveness.”
CONCLUSION:-
Thus the study of various aspects of the environment is undertaken by the
strategist in order to determine positive & negative trends that could impact upon
organizational performance. Change is a continuous phenomenon in the external
environment and that change is unpredictable from the perspectives of timing & strength.
A manager’s ability to recognize and anticipate environmental changes plays a key role
in shaping the company’s future. Understanding of the external environment helps to
build the company’s base of knowledge and information, which can help improve a
company’s competitive position, buffer the company from environmental impacts & build
bridges to influence stakeholders of the company. This will improve the company’s
opportunities to successfully adopt its strategic direction to the trend of the environment.
10
O.D.M Computer & Mgt. Education
S W O T
Internal External
Environment Environment
The strengths & Weaknesses of any organization are inherent and reside in the
internal environment of a business.
The Opportunities & Threats are the development or events which exist in the
external environment and are open to all the players in the industry.
a) Strengths:
A strength of a business is its capacity or ability to perform or to possess any
resource relevant for the success or otherwise of a firm, which may not be possessed by
a rival player in the industry.
For e.g.
Skilled manpower
Level of technology
Economy of Scales or availability of cheap finance
Intense distribution channels
Raw materials/ components at least cost.
Efficient suppliers etc.
The strengths possessed by a firm gives it a strategic advantage over the other
firms either in the short run or in the long run business can take a risk based on one of its
strengths. This strength, if realized can help strategic planning of a firm.
b) Weaknesses:
A weakness of a business is its shortcoming or unability to do something or to
possess something which a rival firm may have. This weakness determines the level of
strategic advantage gained by a competitive firm over a business. A weakness could be
poor availability or poor retention of skilled manpower.
High cost of capital
Outdated or expensive technology
High cost of production
Unreliable suppliers.
Shallow distribution channels
Poor state of logistics & physical distribution
Every organization should try to further strengthen its abilities and try to overcome
or hide or compensate its weaknesses. These weaknesses or shortcoming are generally
made known to the customers by competitors. The firm should always have a ready
strength available to be able to compensate any or all of its weaknesses in the eyes or
the customers.
For example:
11
O.D.M Computer & Mgt. Education
c) Opportunities:
d) Threats
Threats exists in the external environment. It is in accordance of an event or the
potential occurrence of an event which may adversely affect the organisation’s
functioning or potentiality to lead over the competitors in today’s time or in future. The
above mentioned opportunities may well act as a threat to an organization
If it is not suiting its style or working, resources or business strategy.
It is very significant for any business organization to do its SWOT analysis on a
regular interval to make use of its strength & opportunities, to overcome its weaknesses
and to avoid the threats in hampering its business.
Implementation
12
O.D.M Computer & Mgt. Education
Formulation
Program
Environment
Analysis
SWOT
External
Internal
Business
Mission
CONCLUSION:
A Successful strategist concentrates his efforts on the understanding of both
external as well as the internal analysis. The knowledge of competitive moves and
counter moves and the recognition of the potential competitive advantages of the
organization. Both are equality important to be realized by a Strategist.
Q.5. Differentiate between BCG and GE matrix tools used for Strategic planning.
Ans:- BCG GROWTH- SHARE MATRIX:
The Boston Consulting Group (BCG) a leading management-consulting firm
developed and popularized a growth share matrix. The matrix comprises of four
quadrants each describing the size and position of the strategic business unit owned by
an organization.
14
O.D.M Computer & Mgt. Education
L H
Relative Market Share
Growth
On the vertical axis is the Market Growth rate of the market in which the business
operates. A market growth rate above 10 percent is considered to be high.
On the horizontal axis is the Relative Market Share. It refers to the Strategic
Business Unit’s market share as compared to the firm, which is its largest competitor in
the segment under consideration. The relative market share serves a measure of the
company’s strength in the market segment.
The two axis are divided into high & low. The growth matrix is divided into four
cells each indicating a different type of business profile.
1. Question marks:These are Businesses that operate in high- growth markets but
have low relative market shares. A question mark requires a lot of cash because the
company has to spend money on plant, equipment and personnel to keep up with the
fast growing market and because it wants to overtake the market leader. The company
has to think hard about whether to keep on investing money into this business or put an end.
2. Stars: It is a market leader in a high growth market. A star does not necessarily
produce a positive cash flow for the company. The company must spend substantial
funds to keep up with the high market growth an to fight off competitor attacks. A star is a
potential business which has the competitive advantage to be a market leader in an
industry that is growing fast.
3. Cash cows: Stars with a falling growth rate that still have the largest relative
market share and produce a lot of cash for the company is called a cash cow. The
company does not have to finance expansion because the markets growth rate has
slowed because the business is the market leader it enjoys economies of scale and
higher profit margins. The company uses its cash cows to pay bills and support other
business.
4. Dogs
Businesses that have weak market shares in low-growth markets are in the dog
category. The company should consider whether they are expecting a turn around in the
market growth rate or a new chance for market leadership else they should divest this
business. It would be fruitless to spend and money on this matrix business.
G-E MATRIX
15
O.D.M Computer & Mgt. Education
A refined version of the BCG Matrix is the one pioneered by General Electric. An
SBU’s appropriate objectives cannot be determined solely by its position I the growth
share matrix. If additional factors are considered the growth-share matrix can be seen as
a special case of multifactor portfolio matrix.
High
Medium
Build Selectively Manage for Limited
Earnings Expansion or
Harves
Each business is rated in terms of two major dimensions – market attractiveness and
business strength. Companies are successful to the extent that they enter attractive
markets and posses the required business strengths to succeed in the markets. If one of
these fact is missing the business will not produce outstanding results. Neither a strong
company operating in an attractive market will do very well.
To measure the two dimensions, strategic planners must identify the factors underlying
each dimension and find a way to measure them and combine them.
Market attractiveness varies with the market’s size, annual market growth rate,
historical profit margins etc. business strength varies with the company’s market share,
share of growth, product, quality etc.
While the BCG matrix considers only two factors, the GE portfolio matrix helps the
strategic planners to look at more factors in evaluating an actual or potential business
than the BCG model does.
As against the BCG matrix the GE matrix is divided into nine cells, which in turn
falls into zones.
High
16
O.D.M Computer & Mgt. Education
Market Attractiveness
Medium
Low
Business Strength
The three cells in the upper left corner indicates strong SBU’s in which the company
should invest or grow. The diagonal cells stretching from the lower left to the upper right
indicate SBU’s that are medium in overall attractiveness.
The company should pursue selectively and manage for earnings. The three cells
in the lower-right corner indicate SBU’s that are low in overall attractiveness. The
company should give serious thought to harvesting or divesting these business units.
Apart from the BCG and GE portfolio matrix, three more portfolio matrix are used to
evaluate the strength of business units and facilitate strategic planning.
A) Direction Policy
B) Space Matrix
CONCLUSION:
Portfolio models have helped managers to think more strategically, to understand
the economics of their businesses better, improve the quality of their plans, improve
communication between business and corporate management, eliminate weaker
businesses & strengthen their investment in more promising businesses.
However, portfolio models must be used cautiously. They may lead the company
to place too much emphasis on market-share growth and entry into high growth
businesses or to neglect its current businesses because may end up in the same cell
position though differ greatly in underlying ratings & weights.
Q.6. : “The core of general management is Strategy” Elaborate. Also discuss the
role that a strategist play in strategic management.
Ans: STRATEGY:
THE concept of Strategy is central to understanding Business Policy and Strategic
Management. The term ‘Strategy’ is derived from the Greek word ‘Strategos’ which
means generalship. The term Strategy means the art of the managing or adopting a
course of action. A course of action may be:
- to take advantage of opportunities
- to devise ways to counter threats etc.
17
O.D.M Computer & Mgt. Education
Corporate Level
Strategy Corporate
Office
Business Level
Strategy
Apart from the three levels mentioned, many a times a strategy may be designed
at higher levels. Such strategies may be called the Societal Strategies.
The strategies may be set at levels lower than the functional level, which are
called Operational Strategies.
“The stream of decisions and actions which leads to the development of a an
effective strategy or strategies to help achieve corporate objectives.”
-Glueck (1984)
Strategy is the most significant concept in Business policy and Strategic Management. It
guides the functional and operational decisions by defining the broad course of action.
For example, for an old and very well established company, which had been the
market leader for several years, suddenly faces threat from the emergence of
competitors has e.g. Bajaj Scooters faced competition from LML scooters. A course of
action may involve strategies like expansion diversification, focus, turn around, stability or
divestment phases in the Strategic Management.
18
O.D.M Computer & Mgt. Education
Strategic Control
Role of strategists:
Strategists are individuals or groups who are primarily involved in the formulation,
implementation and evaluation of strategy. For different levels of managers and
sometimes even outside experts are involved.
a) Board of Directors:
The Board of Directors are the ultimate legal authority which is elected by the
owners of the organization. The board is responsible for providing guidance and
establishing the directives. There may be difference between the role played by the
Boards of different Organisations.
c) Role of Entrepreneurs:-
An Entrepreneur is the person who starts a new business and has a high level of
“achievement-motivation”. Since the entrepreneurs are the initiators and owners they
19
O.D.M Computer & Mgt. Education
provide a sense of direction to the organization and set objectives and formulates
strategies to achieve them. An entrepreneur usually play all strategic roles
simultaneously.
d) Senior Management:-
The Senior Management consists of managers at the highest level of the
managerial hierarchy. Managers at the senior level may serve the Board of Directors on
rotational basis, may be as a part of executive committees formed to deal with new
project.
e) Consultants:-
There may be Organisations, which do not have corporate planning department
because of small size, infrequent requirements, financial constraints etc. Such
organisations hire external consultants for strategic planning they may be.
Individuals
Academicians
Consultancy companies etc.
They provide professional service by specially trained & experienced persons to
advise and assist managers & administrators to improve their performance &
effectiveness of their Organisations. e.g. A.F.Ferguson, McKinsey & Co.
Conclusion:
Thus there are various parties involved in the strategy Formulation, Implementation &
evaluation. Strategies give a direction to the company. They coordinate the efforts of all
functions & all levels towards a predetermined common organisational purpose. It
facilitates an optimum resource allocation & helps programming all organisational
activities in advance.
Q.7. What are the different types of Strategies under Corporate- level Strategies (a)
Stability (b) Expansion (c) Retrenchment (d) Combination. Discuss its advantages
& disadvantages.
Ans: CORPORATE – LEVEL STRATEGY:-
Corporate level strategies are basically about choice of direction that a firm adopts
in order to achieve its objectives. These strategies guide decision – making related to
allocating resources among the different businesses of a firm, transferring resources from
one set of business to others and managing & nurturing a portfolio of businesses in such
a way that the overall corporate objectives are achieved.
There are different types of grand strategies.
20
O.D.M Computer & Mgt. Education
I) STABILITY STRATEGY
It is a strategy, which aims at an incremental improvement of its functional
performance. It may aim at marginally changing any one aspect of the business:-
Customer segment
Alternative Technology
Product mix etc.
A stability strategy is adopted because
It is less risky
Environment faced is relatively unstable.
Expansion may not be suitable.
There may be three types of stability strategies.
No-change
Strategy
Proceed with
caution/pause
strategy
Profit strategy
a) No-change Strategy:-
It involves a conclusions decision to do nothing new and to continue with the
present business.
b) Profit Strategy:
There may be a situation when the firm tries to sustain its profitability by reducing
investments, cutting costs, raising prices, increasing productivity etc.
c) Pause Strategy:-
It is a strategy to give a pause to the blasting expansion strategy in the past or toe
move cautiously before moving into a new business aspect.
II EXPANSIONS STRATEGY:
THIS strategy aims at high growth by substantially broadening the scope of one or
more of its businesses. It aims at the improvement of its overall performance in business.
There may be five types of Expansion Strategies.
Cooperation Concentration
Integration
Internationalisation
21 Diversification
O.D.M Computer & Mgt. Education
Conglomerate mergers
Horizontal mergers (2 unrelated firms)
(2 firms in same business)
Concentric mergers
Vertical mergers (2 related firms)
(2 firms creating
complementary products)
Takeover:-
It is a strategy where an attempt is made by one firm to acquire ownership or
control over another firm against the wishes of the latter’s management.
22
O.D.M Computer & Mgt. Education
Joint venture:-
It is a strategy where two or more companies combine to form a new company in
order to make use of the strengths of the partners to gain access to a new business. Eg.
Maruti-Suzuki.
Strategic alliance:-
Two or more firms unite to pursue a set of agreed upon goals but remain independent
subsequent to the formation of the alliance.
High
Global Transnational
Cost Pressures Strategy Strategy
International Multidomestic
Low Strategy Strategy
Low High
a) Turnaround Strategies:-
It means devising a strategy to reversing the trend, negatively affecting the
organisation. The strategy implemented internally focus on the ways and means of
reversing the process of decline.
b) Divestment:-
It is a strategy which cuts-off the loss- making units or divisions, a product list or
any of its decline causing function etc. it involves a sale of a portion of business. It is
adopted in case a turn-around strategy is not successful.
c) Liquidation:- It is a strategy adopted to abandon all its activities completely.
It involves closing down a firm and setting its assets. It is considered to be the last resort
for any strategist as it involves both loss to employees as well as to the organisation.
Advantages of Retrenchment strategy
23
O.D.M Computer & Mgt. Education
**********************************************************************************************
24
O.D.M Computer & Mgt. Education
Rationality
Variability
Creativity
Factors in
Decision making
Individual Vs. Group
Person Related factor decision-making
Choice of an alternative
Implementation of decision
This approach holds that all the steps involve an effort to reach to a quality decision.
Extensive information Search and a logical analysis is done by a decision – making
function.
However such an approach undermines personal & the psychological factors
which play an important role in the process of decision-making. Not all managers may be
able to collect, consider & analysis the details & the information.
b) Human Approach:-
The Human approach of Decision – Making maintains that the human factors
plays a significant role in decision – making. Not all decisions may be made rationally. A
personal touch, emotional analysis and psychological factors like perception; motivation
& attitude etc. may affect the process of Decision- making.
c) Combination:-
25
O.D.M Computer & Mgt. Education
Human Rational
Approach Approach
Combination Approach
This approach states that practically decisions are not completely rational or
completely emotional. These are taken in combination of the two. A Strategist tries to
take a decision based on an extensive research however he may have some personal
factors affecting his choice of an alternative. Thus it’s the combination, which is the most
practical approach of decision-making.
**********************************************************************************************
Control
Operational Control
Reactive
Allocation & use of organisation resources
Focus on internal environment
Process of Operational Control
Feedback
TECHNIQUES FOR OPERATIONAL CONTROL
The techniques for Operational control are based on organisatonal appraisal i.e.
internal environmental performance. Broadly speaking there are three sets of
Techniques. Internal Analysis
Comparative Analysis
Comprehensive
Analysis
a) INTERNAL ANALYSIS:-
it is the analysis of the internal environment of the organisation strengths &
weaknesses etc. this analysis can be done by various methods:-
i) Value-chain Analysis:-
Value chain is the sequence of activities starting from production to marketing. The
value – chain analysis focuses on a set of these inter-related activities undertaken in an
organisation. The importance of this technique is that the total tasks of an organisation
are segregated into different parts and then evaluated.
ii) Quantitative Analysis:-
It is an operational technique which makes use of a physical unit in quantitative
terms for the purpose of performance assessment. It is one of the most popularly used
methods.
Quantitative techniques
27
O.D.M Computer & Mgt. Education
Present performance
Of an organisation. VS Industry norms/average
of performance
Performance
Of an organisation
VS The best practices
in the Industry
c) COMPREHENSIVE ANALYSIS:-
As the name suggests, it is a technique, which encompasses total activities of an
organisation for the purpose of analysis.
i) Balanced Scorecard:-
This method is based on the identification of four key performance measures of –
customer perspective, internal business perspective, innovation & learning perspective &
financial perspective. The performance of an organisation is measured taking into
account various parameters.
ii) Key Factor Rating:-
It is a very comprehensive method taking a holistic view of the organisational
performance. It takes into account key factors in several areas & then evaluates
performance.
28
O.D.M Computer & Mgt. Education
Competitors:- They have impact on out business. Their every step influence us.
INTERNATIONAL ENVIRONMENT
Buyers
Jockeying Threats of
for position entry
Michael
porter’s
analysis
Powerful
Substitute Suppliers
Products
Powerful
buyers
i) Threats of Entry
i) The economies of scale
ii) Brand identification
iii) Govt. Limitations (License requirement)
A. Industry Attractiveness
B. Competitive Position.
Industry Attractiveness:-
30
O.D.M Computer & Mgt. Education
a) Growth potential
b) Profitability of the industry
c) Relative abilities of players.
Competitive Position:-
Where does the firm stand in comparison to others ina particular Industry.
INDUSTRY ANALYSIS
1. Basic Features:-
Size of Industry
Product offering
Volume
2. Industry Environment:-
Fragmented Industry
Emerging Industry
Nature of Industry
Declining Industry
Global Industry
3. Industry Structure:
Market Size
Number of players
Shares of players
Nature of competitions.
4. Industry attractiveness:-
Profit Potential
Growth Prospects.
Barriers in industry entry
5. Industry performance:-
Production
Sales
Profitability
6. Industry Practices:-
Product Policy
Pricing Strategies
Promotion Policy
Distribution Policy etc.
7. Future Scenario:-
Change in consumer Preferences
Product innovations
Entry or exit of firms in a market.
Rate of growth etc.
Conclusion:-
For any strategist to plan for a policy for future requires a complete internal as well
as external analysis. In the external environmental analysis special effort is put on
31
O.D.M Computer & Mgt. Education
Industry Analysis. The analysis of the Industry includes the overall variables of the
industry includes the overall variables of the industry incorporating its size, nature,
performance, attractiveness, relative market share etc. by analysing the industry, a
Strategist can very well evaluate whether it should enter into a given business with
investments or refrain from going ahead.
Threat of entry:-
New
Entrant
Barriers
to entry
Retaliatio
n from
Incumben
Economics of scale:-
New entrants have to enter the industry in big way to reap economies of scale. There will
be a risk of a strong retaliation to over come these barriers. Auto mobile manufacturers
have customized their product.
Expected retaliation:-
Retaliation (Strong) can be expected if incumbent has a major share in industry but
industry growth is slow.
Product differentiation:-
Product differentiation refers to physical/perceptional differences that make a product
special/Unique. Companies such as Pepsi, Coke spend huge amount on advertisement
and create emotional bondings. It is very difficult to switch customers from them.
Capital Requirement:-
Competing in new Industry needs huge capital investment. Even when competing in a
new industry is attractive, the huge capital needed for successful market entry may
create a barrier.
Cost disadvantages;-
32
O.D.M Computer & Mgt. Education
Established companies have cost advantages that new entrants can not duplicate e.g.
favourable locations Mc Donalds.
Switching costs:-
If a buyer were to change his supplies from an established supplier to new comer then
cost may have to be paid in form of new handling equipment, training cost etc.
b) Intensity of Rivalry:-
Firms operating within an industry are mutually dependent. Action takes by one firm
usually attract competitive retaliation in from of price cutting modifications in product or
promotion etc. This variable studies the extent of competition amongst the competing
firms.
c) Powerful suppliers:-
A supplier is said to be powerful when:-
Strong Supplier:-
It is dominated by a few large companies & is more concentrated than the industry
to which it sells Selling to fragmented buyers means that concentrated suppliers will be
able to exert great influence over price, quality etc. for e.g. pharmaceutical industry.
No Substitute:-
If there are no substitute products to buyers and if they have no alternative
sources of supply then all buyers are weak in relation to existing suppliers.
Buyer’s Importance as a Customer:-
If the buying industry is not an important customer of the supplier then the supplier
is in a strong position for example, McDonald is a much more important customer of soft
drink producer than a small disc would be.
Suppliers ability to enter the buying Industry:-
When supplier can enter the Industry of their customer, then their bargaining
power is increased. If the firm has its own production, R & D and has no distribution
channel, they can put great pressure on buyers, by threatening them to enter the market.
d) Powerful buyers:-
Customers can force price down demanding better quality or more service & play
competition off against each other, in case they are stronger that the suppliers.
Buyer’s Concentration:-
Buyers are concentrated at one place or buy in large quantities related to total
industry sales. In such scenario buyers can get deals stuck in their favour. For e.g.
Computer & Automobile industry.
Price Sensitivity:-
If the product that the buyers purchase represent a large portion of buyer’s cost. In
such a case, price is an important issue for buyers. They all are keen to bargain for
favourable terms & indulge in selective buying. For e.g. Refrigerator v/s Cigarettes.
Standardized products:-
If the products that the buyers purchase are standardized, in such case buyers
have a tendency to play one seller against another. For example steel is a standardized
product, all automobile like Maruti, Hyundai can have bargaining power for that.
e) Threat of Substitute products:
Substitute products are different goods or services from outside a given industry that
perform similar or the same function as a product that the industry produces. The
presence of substitute products poses a threat on prices that can be changed by an
industry. When relative price of substitute product rise, for example Tea & Coffee, plastic
33
O.D.M Computer & Mgt. Education
bag vs paper beg, Oil vs LPG. Customers tend to switch their localities towards the
substitute products because of low price.
CONCLUSION:
After having a view of Porter’s model we conclude that how a firm can do its competitive
analysis & which can be done to avoid this by studying porter’s five forces and make
effective strategic planning.
Future objective
where will emphasis
in future?
Current Strategy
VS
How are we currently
competing?
Response
What will our
Assumptions competitors do in
Are we operating future?
under a status quo?
Capabilities
What are our strengths
& weakness?
Ques:- What do you mean by competitive advantage? What are the determinants of
national competitive advantage? Explain approaches and types of competitive advantage?
Ans:- Definition:- Competitive Advantage – a situation in which there is a match between the
distinctive competencies of a firm and the factors critical for success within its industry that
permits the firm to out per form competitors. Competitive Advantage profile a statement showing
34
O.D.M Computer & Mgt. Education
Firm Strategy
structure & rivalry
Factor conditions
Demand Condition
Related &
supported
Industries
1. Factor Condition:- Factor that provide base for undertaking various business activities.
These resources can be divide into five broad categories-human resources, knowledge
resource, physic resource, capital resource & infrastructure.
2. Demand Condition:- The nature of demand conditions for an organization’s or industry’s
product services in the country is important because it determines the rate of and nature
of improvement & innovation by the organisations. These factors either train organisations
for world-class competitive or fail to adequately prepare them to competent in the global
market place
3. Related & supporting Industries:- Apart from the main industry in which context
competitive advantage is talked about, the conditions of related & supporting industries
also determine industry’s competitive advantage. However the Long run , the relationship
between main industry & related & supporting industries becomes reciprocal. For ex.:- If
the main Industry is developed, the relate industries will also develop with a time lag. In
the same way, the related industries will provide support to the further development of the
main industry.
4. Firmstrategy,structure & Rivalry:- Differences in strategy, structure & rivalry create
advantages or disadvantages to firms. Competing in different types of industries in a
nation. The aggregate of these determines national competitive advantage. The way
different firms shape their strategy- ranging from a broad outlook and long-term
profitability to narrow range and short term profitability-determine how the nation will be
35
O.D.M Computer & Mgt. Education
competitive. For ex.:- US companies rank return on investment, share price increase, &
market share in that order.
Approaches for Competitive Advantage:-
These approaches are as follows:-
1. Generic competitive strategy
2. STRATEGIC intent
3. Bench Marketing
4. Synergistic approach
5. critical success factors approach.
1. Generic competitive strategy:- A basic strategy based on the principle that the achievement of
competitive advantage is at the case of superior market strategy.
COST DIFFERENTIATION
Competitive Base
(a) Overall coat leadership:- an organization’s position as the Industry’s least cost
producer in broadly defined markets or a wide mix of products.
(b) Cost Focus:- a situation in which an organisation focus on a narrow market
segment & offers product at the lower price than its competitors based on cost
advantage.
(c) Differentiation:- is the act of designing a set of meaning full differences of
distinguish the organisations offerings from competitor’s offerings
(d) Focused Differentiation:- differentiation of activities to generate competitive
advantage in a narrowly defined market/ coustmor segment.
II. Strategic Intent:- ambitions and obsession for winning which are used a means for
generating competitive advantage.
According to Hamel & Prahalad:-
(a) Building layers of advantage
(b) Searching for loose bricks
(c) Changing the rules for engagement
(d) Collaborating
III. Bench Marking:- It is another tool which can be used to generate competitive advantage. It
is a process of identifying, understanding, and adapting outstanding practices from within the
same organization or from other business to help improve performance.
Types of Benchmarking:-
1. Product Benchmarking
2. Competitive bench marking
3. process bench marking
4. strategic benchmarking
5. global benchmarking.
IV. Synergic Approach:- can be used as a means do generating competitive advantage to an
organisation if the managers are sufficiently aware about how synergistic effect is developed.
Synergy is the process of putting two or more elements together to achieve a sum total greater
than the sum total of individual elements separately. This effect is described as 2+2=5 effect.
36
O.D.M Computer & Mgt. Education
FEW MANY
Volume Specialized
LARGE
Size of advantage
SMALL
Stalemated Fragmented
37