Strategic Management

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BAMG – 4216 – STRATEGIC MANAGEMENT Rao, P. Subba. Strategic Management, Global Media, 2009. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/momp/detail.action?docID=3011189. Created from momp on 2018-12-26 23:43:18.

FOREWORD The following is a compilation of some chapters taken from different study

materials/books which are available through the Pro-Quest Central as per

the instruction coming from the Ministry of

Manpower:(http://ebookcentral.proquest.com/lib/momp/detail.action?docID=3

011189. Created from momp on 2018-12-26 23:43:18.

The compilation were from the following books: 1. Rao, Subba P. Strategic Management, Globsal Media, 2009, ProQuest

Ebook Central ,

http://ebookcentral.proquest.com/lib/momp/detail.action?docID=3011189.

Created from momp on 2018-12-26 23:43:18.

2. Jeyarathmm, M.. Strategic Management, Global Media, 2007. ProQuest

Ebook Central,

http://ebookcentral.proquest.com/lib/momp/detail.action?docID=3011305.

Created from momp on 2019-04-21 03:02:42

Note:The sources of images were duly referenced.

The following will be used as a study materials for the Strategic Management

(BAMG 4216) students of the Higher College of Technology (HCT).

COURSE OUTCOMES

BAMG 4216 Strategic Management 3 Credit Hours

Prerequisites: NONE

Goal The course focuses on the formal decision making process called "strategic management." The primary course aim is to acquaint students with the process of developing a business strategy and how to implement that strategy

Objectives Outcomes

The course should enable the student to:

1. To provide understanding of the strategic management model, its components and processes .

2. To provide understanding of the relationship between strategic management and business and corporate objectives and strategies .

3. Learn how to make business decisions based on strategic management analysis.

The students should be able to:

1. Describe the fundamentals of business strategy, the strategic process and business objectives

2. Describe and analyze the internal and external business environment of an organization.

3. Identify key elements in business planning and performance measurement.

4. Explain the concept of competitive advantage and conduct a simple analysis of an organization’s competitive position.

5. Identify the ways in which businesses fulfill their responsibilities to different groups of people and institutions.

6. Explain the impact upon business of contemporary developments such as globalization and technological advances

SUMMARY OF COURSE DELIVERY Semester 1, 2019-2020

Topics to be covered

Time plan

(Week no.)

Coverage of Learning

Outcomes

Coverage of Graduate Attributes

Methods for coverage of Outcomes

1. Describe the fundamentals of business strategy, the strategic

process and business objectives.

Chapter 2 - Utility & Application

of Strategic Management (Rao, pp

20-51)

1,3,4,5,6,8,9

Theory & Practical

2. Describe and analyze the internal and external business environment

of an organization.

Chapter 3 -Environment Appraisal

(Rao, pp.52-76)

2 & 3

2 1,2,4,7,8,9,10 Theory & Practical

3. Identify key elements in business planning and performance

measurement.

Chapter 4 -Strategic Planning

(Rao, pp. 77-118)

4 & 5

3 1,3,5,7,8,10 Theory & Practical

4. Explain the concept of competitive advantage and conduct a simple

analysis of an organization’s

competitive position.

Chapter 5 - Implementation of

Strategies (Rao, pp. 119-151)

6 & 7

4 2,3,4,6,7,8,9,10, Theory & Practical

5. Identify the ways in which businesses fulfill their

responsibilities to different groups

of people and institutions.

Chapter 7 -Social Responsibilities

(Rao, pp. 165-176)

8 & 9

5 1,2,4,5,6,7,8,9,10 Theory & Practical

6. Explain the impact upon business of contemporary developments

such as globalization and

technological advances.

Chapter 6 - Strategy Evaluation

(Rao, pp.152-164)

10 & 11

6 1,3,4,5,8,9,10 Theory & Practical,

Assignments

7. Case Studies

12&13

1,2,3,4,5, & 6 10 Students’ Participation

CHAPTER ONE - INTRODUCTION

OUTCOME 1 Describe the fundamentals of business strategy, the strategic process and business objectives. Conceptual Framework for Strategic Management In earlier times, the managers focused on "today's decisions for today's business". However, the rapid changes experienced by companies have made the managers to anticipate the future and prepare for it. They have prepared systems, procedures and manuals and evolved budgets and planning and control systems, which included capital budgeting and management by objectives. The inadequacy of these techniques has led to the emergence of long range planning which in turn gives rise to strategic planning and subsequently to strategic management. Strategic management deals with decision making and actions which determine an enterprise's ability to excel, survive or die by making the best use of a firms' resources in a dynamic environment. The main purpose of study of strategic management is to examine why some organizations succeed while others fail and yet others completely change. The decisions regarding upgradation of product mix, joint ventures and expansion have a long term impact on the activities and such crucial decisions are taken by senior management. The top management is mainly responsible for providing a sense of direction and guiding future course of action for any firm. Strategic management deals with long-term decisions taken by top management which gives overall direction to the organization. Strategic Management provides a cooperative, integrated and enthusiastic approach for tackling problems and realising opportunities. An enterprise's success mainly depends on three broad factors

• The industry, it belongs to.

• The nation, it is located and

• Its own resources, capabilities and strategies.

Fig 1.1: Determinants of Company Performance

Source: Jeyarathmm, M.. Strategic Management, Global Media, 2007. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/momp/detail.action?docID=3011305. Created from momp on 2019-04-21 03:02:42.

Industry Context

National Context

Company resources capabilities and

strategies

Company Performance

Industry: Some industries are profitable than others due to industry attractiveness. A company in attractive industry will achieve success compared to a firm in a less attractive industry. During the last decade software industry is more profitable than pharmaceutical industry. Nation: The country also influences the competitiveness of companies based within the nation. Some countries enjoy competitive advantage with regard to certain industries. For example, the world's most successful automobile and consumer electronics companies are located in Japan. The most successful pharmaceutical companies are located in U.S. and Switzerland. Many of the successful financial services companies are located in the United States and Great Britain. The success or failure of individual firms depends on national competitive advantage. Company: Firms' resources, capabilities and strategies are, by far, the strongest reasons for the success or failure of the firm. Some firms thrive even in less attractive industry whereas some firms perform poorly in spite of being in profitable industry. Often one comes across wide variation in the performance of companies within the same industry and enjoying same national competitive advantage. There is a grave need to understand the causes of success and failure in order to develop strategies, which will increase the probability of success and reduce the probability of failure. Top executives, who formulate strategy draw information from several publications in order to keep abreast of current developments in their industry and business. Some of the online sources of business strategy news are as follows:

1. Fortune - www.fortune.com.

2. Forbes - www.forbes.com.

3. Wall street - www.wsj.com.

Strategic management tends to develop a generalist approach to managerial problems and it enables one to view organizational issues in its totality. Hence business is viewed as a system consisting of number of subsystems and the narrow outlook of a specialist is not recommended for solving business problems. For instance, employee turnover apparently looks like a personnel problem. If one probes deeply into the problem, its genesis may be deeper. Employee turnover may be attributable to unsuitable recruitment policy, poor training, MNC's attractive package, declining demand for the products of the company, poor morale, lack of job satisfaction, uncertainty of the tenure, underutilization of capability and so on. Apparently it looks like a personnel problem but truly speaking, it is due to various factors beyond the purview of the Personnel Department. Hence a generalists' outlook, rather than that of specialists, is desirable to deal with organizational problems in its totality. Analytical techniques and skills are needed for developing and exploiting strategies successfully. Understanding strategy is the first step in strategic management. Source: Jeyarathmm, M.. Strategic Management, Global Media, 2007. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/momp/detail.action?docID=3011305. Created from momp on 2019-04-21 03:02:42

MEANING AND DEFINITION A strategy is defined as, "a unified, comprehensive, and integrated plan that relates to the strategic advantages of the firm to the challenges of the environment. It is designed to ensure that the basic objectives of the enterprise are achieved through proper execution by the organisation."

DIFFERENT DEFINITIONS OF “STRATEGY”

 Alfred D. Chandler defines strategy as, "the determination of the basic long term goals and objectives of an enterprise and the adoption of the courses of action and the allocation of resources necessary for carrying out these goals."

 Arthur Sharplin – defines strategy as "a plan or course of action which is of vital pervasive, or continuing importance to the organisation as a whole."

 James Brain Quinn defines the term strategy as, "the pattern of plan that integrates an organisation's major goals, policies and action sequences into a

cohesive whole." • ANALYSIS OF DEFINITIONS OF STRATEGY The analysis of various definitions of strategy presents the following points:

 Strategy is a central understanding of the strategic management process.

 Strategy is the determination of basic long-term goals and objectives of an organisation.

 Determining the courses of action to attain the predetermined goals and objectives.

 Allocating the necessary resources for implementing the course of action.

 Developing the company from its present position to the desired future position.

 The common thread pulls the policies, plans, goals, objectives of the different functional areas of business such as finance, marketing production/operations and human resource together and interweaves them as a unified comprehensive and integrated plan, action and evaluation.

 Set a clear direction.

 Enterprise knows its strengths and weaknesses compared with those of its competitors.

 Recognise which competitor's actions need critical attention.

FORMS AND KINDS OF STRATEGIES Strategy is a plan - some sort of consciously intended course of action. Some of them may be unrealised. Some actions, may emerge in the meanwhile. These two form into a realised strategy as shown in Figure 2.1

Fig. 1.2: Forms of Strategy

Various Kinds of Strategies, From Rather Deliberate to Mostly Emergent Planned Strategy: Precise intentions are formulated and articulated by a central leadership, and backed up by formal controls to ensure their surprise-free implementation in an environment that is benign, controllable, or predictable (to ensure no distortion of intentions); these strategies are highly deliberate. Entrepreneurial Strategy: Intentions exist as the personal, unarticulated visions of a single leader, and so are adaptable to new opportunities; the organization is under the personal control of the leader and located in a protected niche in its environment; these strategies are relatively deliberate but can emerge too. Ideological Strategy: Intentions exist as the collective vision of all the members of the organisation, controlled through strong shared norms; the organization is often proactive vis-a-vis its environment; these strategies are rather deliberate. Umbrella Strategy: A leadership in partial control of organisational actions defines strategic targets or boundaries within which others must act (for example, that all new products be high priced and at the technological cutting edge, although what these actual products are to be is left to emerge); as a result, strategies are partly deliberate (the boundaries) and partly emergent (the patterns within them); this strategy can also be called deliberately emergent, in that the leadership purposefully allows others the flexibility to manoeuvre and form patterns within the boundaries. Process Strategy: The leadership controls the process aspects of strategy (who gets hired and so gets a chance to influence strategy, what structures they work within, etc.), leaving the actual content of strategy to others; strategies are again partly deliberate (concerning process) and partly emergent (concerning content), and deliberately emergent.

Deliberate Strategy

Realized Strategy Unrealized Emergent

Strategy Strategy

Integrated Strategy

Disconnected Strategy: Members or subunits loosely coupled to the rest of the organisation produce patterns in the streams of their own actions in the absence of, or in direct contradiction to the central or common intentions of the organisation at large; the strategies can be deliberate for those who make them. Consensus Strategy: Through mutual adjustment, various members converge on patterns that pervade the organisation in the absence of central or common intentions; these strategies are rather emergent in nature. Imposed Strategy: The external environment dictates patterns in actions, either through direct imposition (say by an outside owner or by a strong customer) or through implicitly preempting or bounding organisational choice (as in a large airline that must fly jumbo jets to remain viable); these strategies are organizationally emergent, although they may be internalized and made deliberate. Source: James Brain Qumn, Henry Mintzberg and Robert M. James (Eds.): "The Strategy Process", Prentice Hall, Englewood Cliffs, 1988, p. 16.

KEY AREAS IN DEVELOPING A STRATEGY The managers have to consider the following key areas in developing a strategy:

(i) The type of goods and/or services that the firm will produce and will sell.

(ii) The mode of producing goods and rendering services.

(iii) Who are and will be the firm's customers.

(iv) The methods of financing the various operations of the firm.

(v) The amount of risk that the firm will take.

(vi) Method of implementing the strategy.

DEFINITIONS OF STRATEGIC MANAGEMENT "Strategic management is concerned with deciding on strategy and planning how that strategy is to be put into effect." It can be thought of as having these elements within it viz., strategic analysis, strategic choice and strategic implementation as shown in Figure 1.3 Strategic analysis seeks to understand the strategic position of the firm. Strategic choice is to do with the formulation of possible course of action. Strategic implementation is concerned with planning how the choice of strategy can be implemented.

Fig. 1.3: Simple Model of Strategic Management Process

Strategic Analysis Strategic choice Strategic Implementation

Evaluation Process

Analysis of the Definitions of Strategic Management The study of the above mentioned definitions of strategic management presents the following analysis: Strategic management is a continuous process and it does mean that the organisation never finishes its strategic work. Managers always will be focusing or reflecting on some aspect of strategic management, though different aspects of strategic management require different emphasis and effort of varying intensity at different times.

Phase 1: Basic Financial Planning: The first phase of. the strategic development is fairly simple routine of basic financial planning. The main concern during this phase was simply meeting annual budget requirement, operational functions like production, marketing, finance and human resources and emphasising on the operational control.

Phase 2: Forecast-based Planning: During this phase the primary concern was mainly on effective plans, environmental scanning, plan for the future and allocation of resources.

Phase 3: Externally-oriented Planning: There is a remarkable shift during and competition, complete situational analysis and assessment of competitive strength, evaluation of strategic alternatives and allocation of resources based on changing needs from time to time.

Phase 4: Strategic Management: The focus shifts over time from meeting the budget to planning for the future to thinking abstractly, to working to create desired future. To create future, decision-makers orchestrate and integrate all their organisation's resources to gain a competitive advantage. They build flexibility into the organisational planning process,' and foster a supportive, participative climate within the organisation.

Thus, developing an effective and efficient strategic management process can be a long and difficult task. It requires sustained effort, enormous patience and sharp political skills. Strategic management requires efficient leadership.

BENEFITS OF STRATEGIC MANAGEMENT Several corporations and institutions have been using strategic management. Organisations reap several benefits from effective strategic management. The benefits of strategic include:

(i) Strategic management helps an organisation to be proactive rather than reactive in shaping its future.

(ii) It helps organisations not only to respond to its relevant environment, but also to

initiate and influence its environment and thereby exert control over its destiny.

(iii) It helps organisations to make effective strategies through the use of a more systematic, logical, and rational approach to strategic choice.

(iv) It helps the organisations to achieve understanding and commitment from all

managers and employers. Managers and employers become creative and innovative when they understand and commit to the company's strategic management. This process results in employee empowerment. Empowerment is the act of strengthening an individual's sense of effectiveness.

(v) It encourages the organisations to decentralise the management process involving

lower level managers and employees.

(vi) A significant number of research studies have suggested that a well-designed strategic management can boost profits.

(vii) A number of research studies have also indicated that systematic long-run

planning resulted in high performance of the businesses. Of course, an organisation cannot guarantee these benefits just by practicing strategic management. Success is never automatic as strategic management process may have inherent flaws. Many of the large computer hardware firms have learned this hard lesson. STRATEGIC MANAGEMENT PROCESS - Introduction As we have discussed earlier, strategic management is a process or series of steps. The basic steps of the strategic management process are (presented in figure 1.4):

(a) identifying or defining business mission, purpose and objectives,

(b) environmental (including global) analysis to identity present and future opportunities

and threats,

(d) developing alternative strategies and choosing the best strategy,

(e) strategy implementation, and

(f) strategic evaluation and control

Fig. 1.4: Major Steps in Strategic Management Process

Step 1 Step 2 Step 3 Step 4 Step 5 Step 6

Identifying/ Defining Business Mission Purpose & Objectives

Environ- mental Analysis

Revise Organisa -tional Direction

Alternative Strategic Choice

Strategy Implemen- tation

Strategic Evaluation & control

Steps of Strategic Management Process

Step 1: Identifying/Defining Business Mission, Purpose and Objectives: Identifying or defining an organisation's existing mission, purpose and objectives. is the logical starting point as they lay foundation for strategic management. Every organization has a mission, purpose and objectives, even if these elements are not consciously designed, written and communicated. These elements relate the organisation with the society and states that it has to achieve for itself and to the society. Step 2: Environmental Analysis: Environmental factors both internal environment and external environment are analysed to:

(i) identify changes in the environment, (ii) identify present and future threats and opportunities, and (iii) assess critically its own strengths and weaknesses.

Organisational environment encompasses all factors both inside and outside the organization that can influence the organisation positively and negatively. Environmental factors may help in building a sustainable competitive advantage. Exhibit 1.3 depicts some environmental factors to monitor for strategic management.

Managers must understand the purpose of environmental analysis and recognise the multiple organisational environments in which they operate.

Exhibit 1.1: Some Environmental Factors to Monitor for Strategic Management

Source: Modified version from Samuel C. Certo and J. Paul Peter, op.cit., p. 16

Internal Environment Organizational Characteristics

 Quality of Products

 Discretionary Cash flow/Gross Capital Investment

 Workforce Commitment

 Workforce Skills and Efficiency

 New Product Development

 Product Strengths

Markets and Consumer Behaviour 1 Market Segmentation 1 Market Size 1 New Mrket Development 1 Buyer Loyalty

Industry Structure  Rate of Technological Change in

Products or Processes

 Degree of Product Diiferentiation

 Industry Price/Cost Structure

 Economies Scale

 New Product Development

Supplier  Major changes in availability of

price of raw materials/supply position

 Technological nd emergence of new types of raw materials

Global Structure  Emerging Global Competitors

 Technological Innovatives/Obsolenscence

 Changes in economic policies of Various Governments

 Emerging foregin markets

Social and Economic  GNP Trend

 Interest Rates

 Energy Availability

 Cultural Factors

Government and Political  Government established and

legally enforceable regulations.

 Changes in political system

 Market economies

Step 3: Revise. Organisational Direction: A thorough analysis of organisation's environment pinpoints its strengths, weaknesses, opportunities and threats (SWOT). This can often help management to reaffirm or revise jts organisational direction. Step 4: Strategic Alternatives and Choice: Many alternative strategies are formulated based on possible options and in the light of organisational analysis and environmental appraisal. Alternative strategies will be ranked based on the SWOT analysis. The best strategy out of the alternatives will be chosen. The steps from identification of business mission, purpose and objectives of alternative strategies and choice can be grouped into the broad step of strategy formulation. Step 5: Strategy Implementation: The fifth step of strategic management process is the implementation of strategy. The logically developed strategy is to be put into action. The organisation cannot reap the benefits of strategic management, unless the strategy is effectively implemented. The managers should have clear vision and idea about the competitor's strategy, organisation's culture, handling change, skills of the managers-in-charge of implementation and the like. The progress from the stage of identification of business mission, purpose and objectives to the stage of achieving desired performance must overcome many obstacles. Eight sources of frequent breakdowns that can hinder a manager's navigation are presented in Exhibit 1.1. Step 6: Strategic Evaluation and Control: The final step of strategic management process is strategic evaluation and control. It focuses on monitoring and evaluating the strategic management process in order to improve it and ensure that it functions properly. The managers must understand the process of strategic control and the role of strategic audit to perform the task of control successfully. Strategic management process is presented as a series of discrete steps for the purpose of simplicity in the learning process. But, managers find that an organisation's strategic management effort requires that they perform several steps simultaneously and/or perform them in different order. Managers must be creative and dynamic in designing and operating strategic management systems. They must be flexible enough to tailor the use of those systems to the organisational circumstances that confront them. During the periods of uncertainty, the managers may use the contingency planning model of strategic management process. STRATEGIC DECISION MAKING Most part of the strategic management is done through strategic decision-making. Strategic decision-making is not only crucial but also complex strategic decisions are made by the top level managers and other strategists. These decisions are related to the contribution to the organisational objectives and goals significantly.

Characteristics of strategic decisions are:

• They affect either total organisation or the major part of the organisation.

• They contribute directly and significantly towards the achievement of organisational

objectives and goals.

• They introduce change in organisational policies, business, customes, product and

human relations policies.

• They require interweaving a number of factors.

• They require trade-offs betweel1 conflicting factors.

REASONS FOR FAILURE OF STRATEGIC MANAGEMENT

Strategic management faces different kinds of challenges viz., technological advancement and obsolescence, product or service innovations and development etc. The recent additions to the challenges are: global issues consequent upon economic liberalisation, quality issues consequent upon the total quality management concept by the Japanese firms and social issues. We shall discuss these challenges for strategic management.

(i) Technological Advancements and Strategic Management:

As necessity is the mother of invention, competition and a host of other reasons arc responsible for the rapid technological advancements and innovations. These advancements and innovations of one firm poses challenges for the strategic decision-making of ~he competing firms. Further, the continuous technological advancements led to the obsolescence of the existing technologies. It creates a challenge for the strategic management of those firms using obsolescent technologies. The strategic managers should be fully aware of technological advances and innovations while formulating strategies.

(ii) Product/Service Innovation and Development and Strategic Management:

Technological advancements and innovations together with changes in consumer tastes and preferences, needs and conveniences led to the continuous product/service development and innovation of new products. The firms with new products/services widely accepted by the customers enjoy distinctive strategic advantage whereas other firms in the same industry suffer from strategic disadvantage. This leads to further competition and creates new challenges for strategic management. Strategic managers are expected to be aware of these developments and innovations in the industry while formulating their strategies.

(iii) Global Issues and Strategic Management:

With the announcement of economic liberalisation in India and consequently opening up of the economy to the rest of the world in 1991, business activities have tended to cross-national boundaries more intensely and frequently. Due to the increase in scale and variety of operations of multinational and transnational corporations in the country, even firms with no international operations are experiencing the impact of globalisation on their markets an operation.

Since this trend is expected to continue, almost all the organisations, irrespective of their size, nature of operations and markets will have to consider global issues in their strategic management process.

The strategic managers must be fully aware of critical international variables that might considerably affect their strategic operations, before they determine how their strategic management process can most effectively accommodate global environmental factors.

(iv) Quality Issues and Strategic Management:

The quality movement., spearheaded by W. Edwards Dening has had a significant impact on the method of strategic management process of organisations 10 the 1990s. Sea changes took place in the concept of quality. The concept of post- production quality control changed into Total Quality Management (TQM). It further changed to feed forward and zero-defect of the product. Further, quality today does mean an organisation wide commitment to enhance the value of a good or service to the customer at each and every stage - from the stage of product design, raw material, every stage of production process, to the place of marketing (or selling) to post sale service. In fact, Japanese firms once produced cheap products, presently they are producing not only low cost but most qualitative products. In fact, today's customers feel happy to buy a Japanese made product in view of its quality. Hence, Japanese firms enjoy strategic advantage position in this regard.

Managers involved in the strategic management process at all levels, are expected to understand the history of this movement and its day to day developments in order to appreciate the crucial role it plays in modern organisational strategy. (v) Social Issues and Strategic Management:

Since the organisation is part and parcel of the society, most of the organisations are of the view that, social responsibility is the managerial obligation to act, protect and promote both organisational interests and welfare of the society. Strategic management process of an organisation will be affected by recognising this obligation. The strategic managers should have a clear idea about:

(i) the societal constituencies that the organisation will serve the obligation,

(ii) the areas of the business to be affected by this obligation,

(iii) method of conducting social audit to facilitate the strategic management process

(iv) the areas of strategic advantages that the organisation will be enjoying.

STRATEGISTS AND THEIR ROLES IN STRATEGIC MANAGEMENT It is a general view that the general manager is the main ingredient in understanding the strategic management. One should not take such a narrow view of the strategist. Anyone in the organisation who controls the key or precedent setting actions can be called a strategist. It is also viewed that the strategist can be a collection of people. However, the senior general managers are key candidates for such roles as their perspective is broader than any of their subordinates.

The strategist includes· • Board of directors • Chief executive officer / Managing director • Entrepreneurs • SBU level managers • Senior managers • Middle-level managers • Lower level managers

As a strategist, the manager has to integrate all the roles in decision-making and performing his tasks.

Fig. 1.5: Role of a Strategic Manager

Formal Authority and Status

Interpersonal Roles

 Figurehead

 Leader

 Liaison

Informational Roles

 Monitor

 Disseminator

 Spokesman

Decisional Roles

 Entrepreneur

 Disturbance Handler

 Resource Allocator

 Negotiator

QUESTIONS FOR DISCUSSION 1. Define the term 'Strategy' and explain its characteristics 2. Explain the criteria for effective strategy. 3. What are the different kinds of strategies? Explain them briefly. 4. What are the key areas in developing a strategy? 5. Define the term strategic management. Explain how do you manage a strategy? 6. Discuss the need for and benefits of strategic management. 7. Discuss the process of strategic management. 8. What are the" reasons for the failure of strategic management? 9. Explain the roles of various strategists.

CHAPTER TWO– ENVIRONMENT ANALYSIS

OUTCOME 2 Describe and analyze the internal and external business environment of an organization. THE CONCEPT OF ENVIRONMENT The fundamental basis for strategy formulation is the environmental analysis. Environment provides the opportunities to the business to produce and sell a particular product. For example, the present day business environment provides wide opportunity for internet. Environment, sometimes poses threats and challenges to the business. Business should enhance its strengths in order to face the challenges posed by the environment. For example, China dumped steel at cheap prices in the Indian market and posed a threat to the Indian 'steel industry particularly to SAIL and, TISCO. Consequently, Indian steel industry improved its technology in order to meet the challenges. Study of environment helps the business to formulate strategies and run the business efficiently in the competitive global market. We understand that environment has significant and crucial impact on the business. Thus, business depends on environmental dynamics. Now, we study the meaning of business environment. MEANING OF BUSINESS ENVIRONMENT Environment means surrounding. Business environment means the factors activities those surround/encircle the business. In other words, business environment means the factors that affect or influence the business.

Strategic management involves three levels of analysis viz., the organisation's macro environment/general environment, the industry in which the organization operates, and the organisation itself. Every company operates within a complex network of external environmental forces both international and national. Macro environment refers to all external forces which have an impact on the functioning of an organisation. According to Barry M. Richnam and Melvyn Copen. "Environment factors or constraints are largely, if not totally, external and beyond the control of individual industrial enterprises and their managements. These are essentially the 'givers' within which firms and their managements must operate in a specific country and they vary, often greatly, from country to country." The macro environment is not simply the forces operating outside the organisation. The forces create opportunities for the business organisations for their existence and development and pose threats or challenges affecting the business adversely. The environment includes factors outside the firm "which can lead to opportunities for or threats to the firm." Environmental analysis is the process by which strategists monitor the environmental factors to determine opportunities for and threats to their firms

Analysis also involve~ studying the minutes of each factor to find its nature, function and relationship. Strategic manager, essentially searches for opportunities and threats, their sources and their impact on the business. Environmental diagnosis consists of managerial decisions made by assessing the significance of the data (opportunities and threats) of the environmental analysis. A strategist examines the relationship between the company's strategy "and the environment. Then, he/she forecasts the future environment. Then, he/she compares the strategy with the future environment. If these are the gaps, he/she reformulates the strategy after revising the business mission and objectives. Otherwise he will continue with the present strategy as presented in Figure 2.1. COMPANY AND ITS ENVIRONMENT Company is a system by itself which converts the input into within itself. Thus, the environment within the company is called internal environment. Internal environment of the company includes finance. Company converts input into output with the help of these environmental factors. The company can do this conversing process efficiently if the internal environmental factors are strong (strengths). In other words, the internal environmental factors are weak (weaknesses). Company draws inputs from the external environment and supplies the output from the external environment. The company can draw the inputs and sell the output profitably. if the external environment provides opportunities. Otherwise the company may tend to incur losses, if the environment possesses threats. The strengths, weaknesses, opportunities and threats (SWOT) analysis helps to formulate right strategies for the business firm. The external environment comprises of:

• International Environment

• Economic Environment

• Political Environment

• Technological Environment

• Socio-cultural Environment

• The Industry Environment

Strategic Management Process

Fig. 2.1: Strategic Management Process

Impact of International Environment on Domestic Business Global environment consists of international political environment, policies of various governments, level of technology, social and cultural factors, level of economic development of different countries, level of industrial development etc., has its impact on the business organisations of the domestic country. The impact is -discussed hereunder. (i) Configuring anywhere in the world: An MNC can choose the location of its plants or

business units in different countries on the basis of availability of raw material, consumer markets, availability of cheap labour etc. Thus, an MNC competes with the domestic company for inputs as well as selling the output.

(ii) Interliked and interdependent economies: Economic policy of most of the nations

is to develop the countries through interlinkage and interdependence. Therefore, domestic industries also develop interlinkage and interdependency with the foreign companies.

Feedforward

Strategy Formulation

 Organisational Strategic Alternatives And Revised (if Necessary) Business Choices Mission Objectives Environmental Appraisal

Strategy

Implenetation

 Project

 Procedural

 Structural

 Behavioral

 Functional

Implementation

Strategy

Evaluation and Control

 Evaluation

 Control of Strategy

Business

Mission

Objectives

(iii) Minimisation of trade and tariff barriers: The recent trend towards globalisation in most of the nations in the world, resulted in minimization of trade and tariff barriers. Consequently, the protection provided to the home industry has been withdrawn. Therefore, the domestic industry is affected by the quality, price and convenience of the foreign products and services.

(iv) Effect on related industries and ancillary units: Globalisation may render many

companies sick and mortal. This effect is more in case of ancillary industrial unit~ and small scale industrial units compared to large scale industrial units.

(v) Infrastructural resources and inputs at international prices: The prices of

infrastructural resources like banking, transportation and telecommunications and inputs like raw materials and human resources adjust at international prices. In other words, prices of these factors, which were lower before globalisation would increase due to increase in demand for the same.

(vi) Increasing trend towards privatisation: Governments in many countries recently started withdrawing their capital from public sector industrial units and/or privatising these units after globalisation.

(vii) Entrepreneur and his unit have a central economic role: The trend of shifting

the business from the bureaucrat to the entrepreneur has started, consequent upon globalisation of business.

(viii) Mobility of skilled resources: The traditional factors of production viz., land,

labour, capital and organisation are no more immobile. Globalisation has resulted in the inflow of these factors into the potential developing countries.

(ix) Market side efficiency: Integration of global markets implies that costs, quality,

processing time and terms of business become dominant competitive drivers.

(x) Formation of regional blocks: A final corollary to globalisation is the formation of trade blocks like North American Free Trade Area (USA, Canada and Mexico), European Economic Community and South Asian Preferential Trading Agreements. These regional blocks provide the opportunities to the business from within and creates threats to the business from other areas.

General (National) Environment: The purpose of general (national) environmental analysis is to predict the state of external events of the future, which will shape the organisation's environment. The prediction serves three important purposes viz.,

(a) it enables the firm to review and revise (if necessary) the mission and objectives concerning how it wishes to interact with future events,

(b) it identifies the fundamental requirements for success in future, and (c) it permits the firm to formulate strategy to accomplish the goals within the constraints of the fundamental requirements for success.

The national environment consists of:

(i) Economic environment

(ii) Political environment,

(iii) Technical environment, and

(iv) Socio-cultural environment.

ECONOMIC ENVIRONMENT There are three distinct economic philosophies viz., capitalism, socialism and communism. Economic environment refers to all those economic factors which have a bearing on the functioning of a business. Economic environment and business are mutually interdependent. In fact, the dependence of the business on the economic environment is more. The important economic factors that constitute the economic environment are:

(a) Growth strategy (b) Economic system (c) Economic planning (d) Industry (e) Agriculture (f) Infrastructure (g) Financial and fiscal sectors (h) Removal of regional imbalances (i) Price and distribution controls (j) Economic reforms (k) Population (l) Per capita and national income.

POLITICAL ENVIRONMENT The political system prevailing in a country dictates policies and controls of business. The democratic political system promotes and encourages business while the authoritarian political system controls the business very much. A stable, honest, and efficient political system is a primary and essential factor for economic development in general and business growth in particular. The basic political philosophies are democracy and totalitarianism. The democratic societies provide freedom for business development while the totalitarian or authoritarian societies impose controls on business. Exhibit 2.1: Key Political, Government and Legal Factors

 Government regulations or deregulations

 Changes in tax laws and Special tariffs

 Changes in patent laws

 Environmental protection laws.

 Level of defense expenditure

 Level of government subsidies

 Export-Import regulations

 State laws, taxes etc.

 Political conditions in foreign countries

 Lobbying activities

 Size of government budgets,

 Local, state and central elections.

 Government fiscal and monetary policy changes

Sources: Modified version from Fred R. David, op. cit., p. 113

TECHNOLOGICAL ENVIRONMENT Technological environment exerts significant influence on business. Revolutionary technological changes like computer engineering, thinking computers, robotics, unmanned factories, miracle drugs, space communications, lasers, cloning, satellite networks, fibre optics and electronic fund transfers are having a dramatic impact on organisations. New microprocessor-based equipment and process technologies are burgeoning, computer- aided design and manufacturing (CAD/CAM), direct numerical control (DNC), computer- centralised numerical control (CNC), flexible production centres, equipment and process technology and computer integrated manufacturing. The influence of technology on a company's products, services, markets, suppliers, distributors, competitors, customers, manufacturing processes, marketing practices and competitive position is phenomenal. Further, technological improvements can create new markets, result in proliferation of new and improved products, change the relative competitive cost position in an industry and make existing products and services obsolete. SOCIO-CULTURAL ENVIRONMENT Social and cultural environment refers to the influence exercised by certain social factors which are beyond the company's gate. The socio-cultural factors include: attitude of people to work, attitude to wealth, family, marriage, religion, education and ethics. Culture creates people like hardworking, sincere, committed, individualistic and people working in a team. Culture broadly determines the type of goods and services a business should produce; the type of food, clothes, beverages, building materials, etc. The need for understanding and appreciating cultural differences across countries is essential as business units go international. The social factors describe characteristics of the society in which the organisation exists. Literacy rates, education levels, customs, beliefs, values, lifestyles, the age distribution, the geographic distribution and the mobility of the population all contribute to the social environment. The socio-cultural factors also include the family structure and changes, attitude towards the family, the post-married life, role of women in. the family, in employment/earning and in society, religious beliefs, status symbols, social institutions, motivations etc. The strategists should take into consideration, the trend towards small families and thereby demand for housing and durable goods, changing culture of eating outside and thereby demand for hotel industry etc. Further, the increasing trend towards maintenance of social status will increase the demand for convenience, status symbol goods and shopping goods. The impact of family would be on maintaining quality in child-rearing. This will enhance the demand for t-aby and children products.

Natural Environment Natural environmental factors like climate, soil, mineral and material resources, land form, rivers, seas, oceans, coast lines, natural resources (like forest resources) flora and fauna have considerable influence on business. These factors affect the strategic decisions like location of the factory, expansion and diversification, mode of transportation, storage of bulk materials, and types of products and services demanded based on physical and biological conditions. THE INDUSTRY ENVIRONMENT Industry is a group of firms producing (or rendering) the same or similar products (or services) which depend on others for inputs. The strategies of the firm will be affected by the attractiveness of the industry in which it chooses to do business and its relative competitive position within that industry. The important factors of this environment include: Market, suppliers, creditors and competitors. The Market Environment The market environment consists of all factors and groups having impact on the demand, for the firm's products and/or services, competitors etc. The factors influencing the firm's market environment include:

• Product design, configuration, demand, packing, uses, life-cycle etc. • Place of the market, special features of the market etc. • Place also includes customer related factors like customer taste, preference, needs, perceptions, values, bargaining abilities, satisfaction, dealers, distributors, wholesalers, retailers etc. • Price of the product, payment terms and conditions, special offers, discount, competitor's price, Price of the substitute and complementary products etc. • Promotional factors like expenditure and effectiveness of advertising, personal selling and sales promotion of the firm and competing firms.

Customer The significant factor of the marketing environment is the customer. The strategists are mostly concerned with the customers of the firm and their needs and desires. In fact, the customer has become king to the strategists in the country with the liberalisation of the economy in 1991. The strategists are interested in not only the present customers but also the potential and future customers. According to Lawrence R. Jauch and William F.Glueck. strategists include three factors as part of their industry analysis of customer sector, viz. buyer identification, demographic factors and geographic locations of markets. Buyer Identification: Markets normally indicate three distinct classes of customers. Different factors affect each class of customers in making their purchase decision. Strategists identify the nature of these customers and their utilities in order to avoid threats of loss of customers and to find or create opportunities for themselves to find new customers or to sell more to existing ones.

Demographic Factors The demographic factors that influence the industry analysis include:

(i) Changes in population size and structure;

(ii) Age shifts in the population; and

(iii) income distribution and changes of the population.

Geographic Factors The strategists should also analyse the geographic environment to know the opportunities and threats as part of analysing customer sector. The strategist should think of extending the market to new locations. Supplier: Suppliers provide material, capital and the like to a firm. The strategist should analyse the supplier changes in the environment like price of the material, continuous supply of material, providing material on credit etc. Michael Porter summarised this environment as follows:

(i) The power of the supplier to raise prices. The farther away the supplier is, the greater is its power.

(ii) The power of the supplier to raise the prices is less, if the buying firm is monopolist or oligopolist.

(iii) The power of the supplier to raise prices is greatest when the buyer is not an important customer or when the supplier can have forward linkage.

Competitors The strategist analyses the demand for and supply of the product that the firm produces. Further, he examines the level and nature of competition the firm faces and will face. Factors to be examined regarding competition are:

(i) entry and exit of major competitors,

(ii) substitutes and complements for current products and services and

(iii) major strategic changes by current competitors.

Barriers to entry or exit determine the entry or exit. Michael Porter contends that the following factors must be appraised with respect to their impact on barriers to entry in an industry.

(i) Product differentiation; (ii) Economies of scale; (iii) Absolute cost advantages; (iv) Access to marketing channels; and (v) Likely reaction of current firms.

According to Porter, the following are the barriers to exit from an industry:

(i) Managerial valves prevent it, (ii) Other products or services are related to exit candidates, (iii) Costs are sunk in assets (iv) Direct exist costs are high, and (v) Indirect costs may reduce exit behaviour.

Analysing the Strength of Competitive Forces One of the cornerstones of industry and competitive analysis involves carefully studying the industry's competitive process to discover the main sources of competitive pressure and how strong they are. Competition in an industry is a composite of five competitive forces. They are:

1. The rivalry among competing sellers in an industry. 2. The market attempts of companies in other industries to win customers to their own substitute products. 3. The potential entry of new competitors 4. The bargaining power and leverage exercisable by suppliers of key raw materials and components. 5. The bargaining power and leverage exercisable by buyers of the product.

Competitor Analysis Studying the actions and behaviour of close competitors is essential. Unless a company knows what competitors are doing, it ends up "flying blind" into battle. Therefore, successful strategists take great pains in scouting competitors - understanding their strategies, watching their strategies, watching their actions, sizing up their strengths and weaknesses and trying to anticipate what moves they will make next. This activity includes the following actions:

1. Identifying competitor's strategies: Strategists can get a quick 'profile of key competitors by studying where they are in industry, their strategic objectives and their basic competitive approaches.

2. Evaluating who the industry's major players are going to be.

3. Predicting competitor's next moves.

4. Pinpointing the key factors for competitive success: Key success factors spell the difference between profit and loss and ultimately between competitive success and failure. A key success factor can be a skill or talent, a competitive capability or a condition a company must achieve, it can relate to technology, manufacturing, distribution, marketing or organizational resources.

5. Drawing conclusions about overall industry attractiveness. Whether an industry is relatively attractive or unattractive depends on several situational considerations.

PORTER'S FIVE FORCES MODEL AND STRATEGIC GROUP An industry consists of a group of companies offering products or services, which are similar and serve as substitutes for each other. Strategists analyze competitive forces within an industry to identify opportunities and threats facing a firm. A model for analyzing the industry environment is developed by Michael. E. Porter: an authority on competitive strategy. This model is known as Five Forces Model and it helps managers to identify and analyze the competitive forces in an industry environment. The five forces, which are focused in this model, are as follows:

• Threat of New Entrants

• Bargaining power of Suppliers.

• Bargaining power of Buyers

• Threat of Substitutes

• Rivalry among Existing Firms.

The collective strength of the five forces determines the ultimate profit potential in the industry. If the forces are stronger, then the ability of company to raise price and earn high profits is limited. Hence, a high competitive force can be regarded as a threat and a low competitive force can be considered as an opportunity as it allows a company to earn high profits. The strategists should recognize opportunities and threats and formulate suitable strategies. In addition, the company should influence one or more of such forces in its favour through appropriate strategy. The essence of strategy formulation is coping with competition. Usually the term 'competition' is viewed in a superficial and narrow sense. It is viewed as being manifested in other players in the same industry. According to Porter, competition is rooted in its underlying economics. Every industry has an underlying economic and technical characteristics, which gives rise to competition and the role of a strategist is to understand, cope up with industry environment and influence the environment to the firm's favour. Each competitive force has certain underlying characteristics. The impact of the five competitive forces on industry is tremendous.

Fig. 2.2: Five Forces Model of Competition

Image source: https://bit.ly/2WyQg5k

Threat of New Entry Entry of potential competitors to an industry is a threat to the profitability of established players. In any industry, new entrants bring in new capacity, substantia: resources and aggressiveness to gain market share. The established companies try to discourage potential competitors from entering to an industry by raising the height of barriers and this obstruction makes it difficult for a new company to enter an industry. The concept of barrier implies a significant cost of joining an industry. The high cost keeps away potential competitors from entry even when the industry returns are high. Sources of possible barriers to entry are identified as follows.

1) Economies of Scale: Economies of scale in production and sale give a Significant cost advantage for existing players over a new rival. Economies of scale is obtained through cost reductions and mass production, discount on bulk purchase of raw materials and advertising. If these cost advantages are significant, the new entrants are discouraged to enter because they will have to take a high risk. Established companies, with economies of scale, have. less threat of new entry. Intel has a significant cost advantage over its new rivals due to scale economies in production and sale of microprocessors. 2) Product Differentiation: A company creates brand loyalty through continuous advertising of brand, product innovation, customer service and high product quality. Heavy advertisement has been done for toilet soaps such as Uril, Lux and Ufeboy to build brand loyalty. The task of breaking down customer loyalty is too costly and reduces threat of new entrants. 3) Cost Advantage: Established firms often acquire cost advantages due to their access to raw materials, cheaper funds, superior production techniques, patents, secret processes, managerial skill, government subsidies, assets acquired in pre inflation prices and advantages arising from learning curve effects. The cost advantages of established companies reduce the threat of new entrants. Microsoft's MS-DOS Operating System for IBM type PCs gave a key advantage to Microsoft over its potential rivals; 4) Capital Requirements: The necessity to invest substantial resources for creating infrastructure facilities, inventories and to wipe out preliminary expenses in industries is a barrier to new entrants. Massive investments required in industries such as Aircraft and Mineral extraction prove to be a significant barrier for new entrants. Xerox created a capital barrier by offering to lease its copiers. So new entrants had to face the problem of maintaining huge sums of cash to finance the leased copiers. 5) Access to Distribution Channels: Small firms often find it difficult to acquire shelf space for distribution of their products because large retailers often give preference to established firms. The established firms are prepared to pay for advertisement needed to create customer demand. TIMEX created its own distribution channels for its watches, as it was not able to get shelf space among established players.

6) Government Policy: The government can limit entry into an industry through licensing requirements, air and water pollution standards and safety regulations. The mandatory requirement of effluent treatment plant in sugar mill, soft drinks unit, milk processing units and plastic manufacturing units has escalated the cost of production in India. This has restricted the entry of potential competitors. 7) Brand Identity: Building a favourable brand image is tough for new comers. Hyundai, Telco spent heavily on advertising to overcome consumer preference for Maruti passenger cars.

Bargaining Power of Suppliers The bargaining power of suppliers is considered a threat to new entrants. Suppliers enjoy bargaining power by raising the price or reduce the quality of purchased goods and services and thereby reduce the profitability of the company. If the suppliers are weak, it is an opportunity for the company to force down prices and demand higher quality. According to Porter, a supplier is said to be powerful, if the following conditions prevail.

• The supplier industry is dominated by a few companies selling to many as it happens in petroleum industry.

• The product or service is differentiated, unique where it has built up switching

costs. (Word processing software)

• Substitutes are not easily available (electricity)

• Suppliers can threaten with forward integration and compete directly with the existing firms. (Raymond, lTC, Grasim)

• A purchasing firm buys a small quantity of the supplier's goods and services and it is unimportant to the supplier.

Bargaining Power of Buyers Buyers are viewed as a threat when they force the companies to charge low prices or demand higher quality and better service with their bargaining power. Buyers can be viewed as weak, if they give the company the opportunity to raise prices and make more profits. According to Porter the buyers are powerful in the following circumstances.

• The suppliers are more in number but the buyers are few

• The buyers buy in large quantity

• More number of alternative suppliers and their products are not standardized and undifferentiated (Automakers get attractive discounts from steel suppliers).

• The cost of changing supplier is not much.

• The supplier depends on the buyer for a large percentage of their total orders.

• The purchased item is not important to the final quality or price of buyer's product.

• The buyer has the potential to integrate backward by producing the product itself.

• The buyers can use the threat of vertical integration as a measure for forcing down prices.

Substitute Products Substitutes are those products, which satisfy similar needs though appear to be different. Tea is a substitute of coffee, water is considered a substitute of soft drinks and saccharine is viewed as a substitute for sugar. According to Porter 'Substitute products limit the potential returns of any industry by placing a ceiling on price, firms in the industry can charge". The existence of close substitutes poses a threat, by limiting the price and profitability of a company. Availability of few substitutes provides opportunity for the company to raise the price and get higher profits. Rivalry Among Existing Players When the intensity of rivalry is weak among established players within an industry, companies can raise prices and earn greater profits. If the rivalry is strong among other players, price competition and price war may result and it will reduce the profit margin. The intensity of rivalry among established players is mainly due to three reasons:

• Industry competitive structure (lCICI Bank Vs SB!) (Duracell Vs Eveready) • Demand conditions • The height of exit barriers in the industry.

Competitive Structure Competitive structure is concerned with size and number of companies in an industry. The structure may be classified as fragmented and consolidated structure. In consolidated structure, a small number of large companies dominate. In fragmented structure, a large number of small companies or medium sized companies are found but nobody dominates. Low entry barriers characterize many fragmented industries and new entrants enter easily when the demand is strong. It leads to building excess capacity, price war and business failures. A fragmented industry structure is a threat than an opportunity. The nature and extent of competition is difficult to predict in consolidated industries where the interdependence between firms is quite perceptible. Hence the competitive action of one company affects the profitability of other firms. The aftermath of such competitive interdependence can be a dangerous competitive spiral, with rivals undercut each other's price and profit. Demand Conditions The growing demand gives a company an opportunity to expand its operations. It can increase profits without fighting a share from other's market. Thus a growing demand moderates’ competition and results in low intensity of rivalry. Under conditions of declining demand, a company can attain growth by taking a share from other companies. This intensifies rivalry and constitutes major threat of entry.

Exit Barriers Exit barriers are serious threat when the demand is dwindling. Exit barriers are economic, strategic and emotional factors which make the companies compete though return is low. Common exit barriers are as follows:

• Investment in plant and machinery has no alternative use and cannot be sold off.

• The cost of exit is high. The terminal benefits of redundant workers are high.

• Strategic interrelationship between business units could be the reason. A low return unit may provide input for high-return units so the firm may not like to quit low-return business.

• Emotional attachment to the business may ruin if the company does not exit the business for sentimental reason. The companies resort to price war to utilize its capacity and secure orders.

• The rivals are varied with respect to strategies, origin and personalities and they have different ideas about how to compete and continuously run head-on into each other in the process.

Finally, the intensity of rivalry is determined by the interaction between competitive structure, demand conditions and exit barriers and it may constitute a threat or opportunity. ENVIRONMENTAL SCANNING The process of environmental scanning has been far from being systematic except with regard to information relating to current developments. Environmental scanning requires information inputs which can be derived from different sources: Scanning Systems There are three types of scanning systems. They are:

(i) Irregular Scanning Systems: These consist of ad hoc studies in response to environmental crises.

(ii) Regular Scanning Systems: These consist of regular reviews of the environment or selected strategic environmental components. These review include annual planning exercises.

(iii) Continuous Scanning Systems: This is an ongoing activity. Established boundary, spanning offices often coordinate this activity. This is more future oriented system.

Exhibit 2.1: Environmental Threat and Opportunity Profile of a Bank Environmental Sectors + Continued emphasis on infrastructural facilities including telecommunications

+ Increase in educational levels and income levels

+ Increase in business activity

o Establishment of financing companies

Technological + increased computerization

o Shortage of computer operators and engineers

Government - Economic liberalizations allowed private banks to operate and compete with the existing banks Customer - Shift from the present banks to the newly established banks with modern facilities.

Supplier - Source of technology will become scarce

Competitor + Less competition from the existing banks

o No competition from cooperative banks

-Strength of the foreign banks in terms of technology, people and funds

Note: “+” indicates opportunity; “-“indicates threat; “o” neutral impact.

RELATING OPPORTUNITIES AND RESOURCES BASED ON ENVIRONMENT

APPRAISAL

As discussed earlier, external environment provides opportunities and threats analysis. Internal environmental analysis provides for reserve analysis in terms of strengths and weaknesses of the firm. Internal Environmental analysis of an organisation is also called situational analysis. Situational Analysis: Situational analysis of an organisation provides for the strengths and weaknesses. Situational analysis consists of analysis of:

• General management functions (like planning, organising, directing/ leading and controlling)

• Marketing management (including customer analysis, selling pattern analysis, product/service analysis, price analysis and distribution analysis).

• Finance management (including investment decisions, financing decisions, dividend decisions, working capital decisions and fixed capital decisions).

• Production/operations management (including process analysis, capacity analysis, inventory analysis, workforce analysis, capacity analysis, inventory analysis, workforce analysis and quality analysis).

• Human Resource Management (including employment analysis, Human resource development, skill and knowledge analysis, compensation analysis, human relations and industrial relations pattern).

The situational analysis provides strategic advantage profile and company situation analysis.

Company Situation Analysis

Steps to conduct company situation analysis. They are:

(1) Evaluating how well the current strategy is working.

(2) Doing a SWOT analysis.

(3) Identifying the corporate capability factors.

(4) Evaluating the company's cost position relative to competitors.

(5) Assessing the company's competitive position and competitive strength.

(6) Determining the strategic issues and problems the company needs to address.

SITUATIONAL AND OPPORTUNITIES AND THREATS ANALYSIS

Organisational appraisal is the process of monitoring an organisation's internal environment to identify strengths and weaknesses that may influence the firm's ability to achieve goals. The internal environment of an organization includes forces that operate inside the organisation with specific implications for managing organisational performance. Internal environmental factors, unlike external environmental factors come from within. These factors, collectively define both trouble spots that need strengthening and the core competencies that the firm can build. An organisation can better analyse how much activity might add value or contribute significantly to shape an effective strategy by

systematically examining its internal environment. Michael Porter has proposed a method for such an evaluation. This method is called value chain analysis. Value chain analysis can identify internal core competencies. Internal core competencies can be identified by analysing functional areas of business. The purpose of analysing an organisation's internal environment is to identify and evaluate organisational strengths and weaknesses.

STRENGTHS AND WEAKNESSES ANALYSIS

Organisational analysis requires data and information about the internal environment. SWOT analysis refines this information by applying a general framework for understanding and managing the environment under which a company operates. (The acronym SWOT stands for strengths, weaknesses, opportunities and threats). A SWOT analysis consists of evaluating a company's internal strengths and weaknesses and its external opportunities and threats. SWOT analysis underscores the basic point that strategy must produce a good fit between a firm's internal capability (its strengths and weaknesses) and its external situation (its opportunities and threats).

Identifying Strengths and Weaknesses

A strength is a strong point for the company i.e., something a company is good at doing or a characteristic that gives it an important capability. A strength can be a skill, a competence, a valuable organisational resource or competitive capability or achievement that gives the company an advantage. A weakness is something the company does not have or does poorly (in comparison to competitors or standards) or a condition that puts it at a disadvantageous position.

A weakness may or may not make an organisation competitively vulnerable, depending on how much it matters in the competition battle. SWOT analysis of a company. Important and crucial strengths are to be identified. These factors count more in determining performance, in competing efficiently and in formulating powerful strategy. Similarly, some weaknesses can be fatal whereas others can be easily remedied. Such weaknesses should also be spotted out. Strengths are like strategic assets and weaknesses are like competitive liabilities.

A company's strengths are more significant. They can be used as cornerstones of the strategy. They are the basis for building competitive advantages. If a company does not have strengths to build competitive advantages, tire management has to develop competencies quickly. These competencies can be the basis for building competitive advantages.

Successful strategists seek to exploit what a company' does best – its expertise, strengths, core competencies and strongest competitive capabilities. At the same time, the successful strategists seek to correct the competitive weaknesses. Otherwise, these weaknesses hurt the company's performance, and disqualify it from pursuing an attractive opportunity. In essence, an organisation's strategy should be well-fitted to company's strengths, weaknesses and competitive capabilities. Thus, the company should built its strategy around the strengths and avoid the arena of weaknesses.

Distinctive/Core Competencies

The company should consolidate its production, technological, marketing, finance and human resource know-how into competencies to enhance its competitiveness. A distinctive or core competence is something a company does especially well in comparison to its competitors. The distinctive competence is the unique capability it gives an organisation in capitalising upon a particular opportunity; the competitive edge it may give a firm in the market place and the potential for- building a distinctive competence and making it the cornerstone of strategy. Thus, a distinctive competence is, "any advantage a company has over its competitors because it can do something which they cannot or it can do something better than they can."

Distinctive or core competencies empower a company to build competitive advantage. Core competencies include excellent quality maintenance, lowest production cost, latest technology utilisation, ability to provide required service, ability to develop new products, high credit worthiness etc. The benefits of core competences in formulating strategies include:

(1) the company gets an added capability in going after a particular market opportunity,

(2) the company gets the competitive edge it can yield in the market place, and

(3) its potential for being cornerstone of strategy

Identifying Opportunities and Threats: Opportunities and threats of a company can also be seen in Exhibit 3.5. There are differences between the industry's opportunities and a firm's opportunities except in one firm industry. Some firms are in better position than other firms in the same industry, in utilising the opportunities. This situation is based on the firm's strengths and weaknesses. The industry opportunities most relevant to a specific firm are those that offer significant avenues for growth and those where a firm has the most potential for competitive advantages. Certain external environmental factors pose threats to a firm. These threats include: adoption of latest technology by the competitors, in-flow of high quality and improved products from foreign markets, entry of multinational and transnational corporations, change in the customer's preferences, change in governmental policies, failure of the markets, etc. Strategy must be formulated to (i) pursue opportunities suited to the firm's strengths or competencies, and (ii) provide a defense against threats posed by the environment. The SWOT analysis should appraise a firm's strengths, weaknesses, opportunities and threats and draw conclusions about the firm's attractiveness.

COMPETITIVE STRENGTH ASSESSMENT Systematic assessment of whether a company' competitive position is strong or weak relative to close rivals is an essential step in company's situational analysis. Particular elements to single out for evaluation are: (1) how strongly the firm holds its present competitive position,

(2) whether the firm's position can be expected to improve or deteriorate if the present strategy is continued,

(3) how the firm ranks relative to key rivals on each important measure of competitive strength and industry key success factor,

(4) whether the firm has a net competitive advantage or disadvantage, and

(5) the firm's ability to defend its position in light of industry driving forces, competitive pressure, and the anticipated moves of rivals."

Exhibit 2.2 The Signs of Strength and Weakness in a Company’s Competitive Position

Signs of Competitive Strength Signs of Competitive Weakness

 Important core competencies  Confronted with competitive disadvantages

 Strong market share (or a leading market share)

 Losing ground to rival firms

 A pacesetting or distinctive strategy  Below-average growth in revenues

 Growing customer base and customer loyalty

 Short on financial resources

 Above-average market visibility  A slipping reputation with customers

 In a favorably situated strategic group

 Trailing in product development

 Concentrating on fastest-growing market segments

 In a strategic group destined to lose ground

 Strongly differentiated products  Weak in areas where there is the most market potential

 Cost advantages  A higher-cost producer

 Above-average profit margins  Too small to be a major factor in the marketplace

 Above-average technological and innovational capability

 Not in good position to deal with emerging threats

 A creative, entrepreneurially alert management

 Weak product quality

 In position to capitalize on opportunities

 Lacking skills and capabilities in key areas

Source: Arthur A. Thompson Jr. and AJ. Strickland III, op. cit., p. 96.

QUESTIONS FOR DISCUSSION

1. What is environment and explain its influence on business in formulating strategies?

2. What is company environment? Explain the relevant factors in company environment.

3. What is international environment? How does it affect the domestic business in strategic management?

4. What is economic environment of business? Explain various factors of economic environment.

5. Discuss political, technological and social environmental factors and their influence on business in strategy formulation.

6. Discuss social and natural environmental factors and their influence on business in strategy formulation.

7. How do you evaluate opportunities and threats from the analysis of the external environment?

8. Explain the factors and techniques of environmental scanning.

9. What is company situational analysis? How do you evaluate the strengths and weaknesses of a company?

10. Discuss Porter’s Five Forces Model.

Reference/s Rao, P. Subba. Strategic Management, Global Media, 2009. ProQuest Ebook Central, \ http://ebookcentral.proquest.com/lib/momp/detail.action?docID=3011189. Created from momp on 2018-12-29 21:26:52.

CHAPTER THREE – STRATEGIC BUSINESS PLANNING

OUTCOME 3 Identify key elements in business planning and performance measurement.

Strategic planning has become a very important part of the top management function due to the influence of external environmental factors and systems approach to the business management. According to Scott, business long range strategic planning is a systematic approach to decision-making about issues which are fundamental and of crucial importance to its continuing long term effectiveness. Long range strategy is designed to provide information about an organization's vision, mission, purpose, direction and objectives. Strategic Plan: Strategic plan provides a means to deal explicitly and systematically with matters of fundamental importance. Strategic plan is, "the process of selecting an organization's goals, determining the policies and strategic programmes necessary to achieve specific objectives enroute to the goals and establishing the methods necessary to assure that the policies and strategic programmes are achieved.". Thus, business planning is derived from strategic planning and strategy. According to Stoner, strategic plan "is not only planning activity of an organization; however, it is one in which the top management's role is most critical. Planning at lower levels is called operational planning. It focuses on present operations and its prime concern is efficiency rather than effectiveness. In the sense that strategic planning provides guidance and boundaries for operational management ...... Effective management must have a strategy and must operate on the day-to-day level to achieve goals." The differences between operational- planning and · strategic planning are presented in the Exhibit 4.1. It is clear from the exhibit that there is a great deal of difference between strategic planning and operational implementation planning. Exhibit 3.1: Differences Between Operational Planning and Strategic Planning

Operational Planning Strategic Planning

Focus Operational Problems Long term, survival and Developmental

Objectives Present Profit Future profit

Constraints Present Resources, Environment

Future Resources, Environment.

Rewards Efficiency, Stability Development of future potential

Information Present Business Future opportunities

Organization Bureaucratic / stable Entrepreneurial/Flexible

Leadership Conservative Inspires Radical changes

Problem-solving Relies on pas experiences Anticipates, finds new approaches

Low Risk High Risk

STRATEGIC PLANNING PROCESS The Steps Involved in Strategic Planning Process: 1. Establishing verifiable goals or set of goals to be achieved: The business plan is based on the enterprise objectives. These objectives are mostly formulated by the top management. The values and beliefs ·held by the top management are reflected in these goals. 2. Establishing planning premises: Planning premises include certain assumptions about the future on the basis of which the plan will be ultimately formulated. Planning premises include:

(a) Internal and external premises (b) Tangible and intangible premises (c) Controllable and non-controllable premises.

(a) Internal premises include sales forecasts, policies and programmes of\the organization, capital investment, managerial competency, human resource skills, other organizational resources. External premises include general business and economic environment, technological changes, Government policies and regulations, population growth, political stability, and social factors. Management would identify the objectives/goals to be achieved or 'where should we go?' 'where are we?' The gap between these two is termed as 'gap analysis'. Many companies have used gap analysis by setting the objectives and identifying the gap between them and the prospective growth of the present. The firms should achieve high performance in order to fill the gap. The following represents the gap-filling analysis.

Fig. 3.1 Broader Aspects of Business Planning

Management Management

Values Values

Social Social

Responsibilities Responsibi lities

Goal

Formulating

Environment

Analysis

Identification of

opprtunities and

threats

Identification of

current objectives

and strategy

Gap analysis

determining the

extent of the

change required

in current

strategy

Resource

analysis

organization

strengths and

weaknesses

Strategic

decision making

developp

alternatives

evaluate

alternatives

select the best

Strategy

Implementation

Measurement

and control of

progress

(b) The premises which can be quantifiable are called tangible premises. The tangible premises include population growth, product demand, past sales, capital invested and the like. The intangible premises are those which cannot be measured quantitatively. These premises include political factors, social factors, technological factors, natural factors etc. (c) Some factors are controllable and some are uncontrollable. Business plans are to be modified and sometimes reformulated due to the presence of and interaction of uncontrollable premises. Uncontrollable premises include strikes, lockouts, wars natural calamities, emergency situations etc. Controllable premises include company's labour policy, investment policy, advertising policy, level of technology competency of managerial personnel, quality of human resources, availability of financial resources etc.,

3. Deciding the Planning Period: After formulating planning premises and long-term goals, the manager have to decide the length of business plan period. The plan of the period should be based on the nature of the business, the vision and mission of the company. Other factors which influence the planning period are: lead time in the development of a new idea busine3s / product, time required to get back the original investment and length of commitments already made. 4. Finding Alternative Courses of Action: After formulating the business plans, the top- level management should find out the alternative courses of actions available in order to accomplish the company's mission. For example, availability of alternative technologies, alternative sources of capital, highly skilled employees abroad etc., 5. Evaluating the Alternative Plans and Selecting a Course of Action: The management has to evaluate the available courses of action through SWOT analysis (Strengths. Weaknesses, Opportunities and Threats) and rank the alternatives. After ranking the alternatives, the management has to select the best business plan. 6. Developing Derivative Plans: The management after selecting the· best business plan, it should formulate the other policies and plans which are the sub plans to the main plan. Management should involve and consult the lower level managers while formulating the derivative plans. 7. Implementation of the Business Plans: After the development and selection of the plans and derivative plans, management has to take initiative to implement the business plan. 8. Measuring and Controlling: After the business plan is put into action, the management has to measure the progress of the plan and compare it with the standards, observe the deviations, if any and correct the deviations.

Corporate Level Strategies After analysing the environment and assessing the internal environment, the next step in the strategic planning process is to develop strategic alternatives to help the organisation in achieving its objectives. Different kinds of strategic alternatives are presented in Figure 3.2. "Strategic alternatives revolve around the question of whether to continue or change the business enterprise is currently in or improve the efficiency and effectiveness with which the firm achieves its corporate objectives in its chosen business sector." Glueck and Jauch identify four grand strategies viz., stability, expansion, retrenchment and combination of these three strategies. Now, we discuss these strategies.

KINDS OF GRAND STRATEGIES

Stability Strategies

Growth Strategies

Retrenchment Strategies

Restructuring Strategies

• Maintenance of Status Quo

 Internal Growth

 Concentration strategies

 Turnaround

 Captive Company

 Transformation

 Divestment

 Liquidation

Portfolio Restructuring

• Sustainable Growth

 Mergers

 Takeover/ Acquisition

 Horizontal Integration

 Conglomerate Diversification

 Vertical Integration

 Joint Ventures

Fig. 3.2 Different Kinds of Grand Strategy Alternatives

STABILITY STRATEGIES Some firms adopt stability strategy instead of using growth strategies. Firms attempt to maintain their size, level of production and sales, serving almost the same customer groups, performing the same customer functions, produces with same technologies and operate the current lines of business. These firms do not attempt to grow either through increased sales or through the development of new products or markets.

This strategy can be of two types viz., maintenance of status quo and sustainable growth. Maintenance of Status Quo Firms adopting this strategy maintain the same level of operations. Small business firms desire satisfactory level of operations rather than growth. Sustainable Growth: Slow growth is more desired rather than maintenance of status quo. In fact, it is very difficult to maintain status quo. Therefore, a sustainable growth strategy is more optimistic than the zero growth. Reasons for Adopting Stability Strategies: Firms adopt the stability strategies due to the following reasons:

(i) Managers of small business desire a satisfactory level of profits rather than increased profits. (ii) Maintenance of status quo involves less risk than a more growth strategy. (iii) Change of any form may disrupt the current working relationships and the consequences may be detrimental to the organisation. (iv) Change may upset the smooth operations and result in poor performance especially, if the firm considers itself successful with the present level of operations. (v) Changing operations to pursue a more aggressive growth strategy usually requires an increased investment and managerial support. Firms, which cannot provide resources, may continue with the stability strategy. (vi) Some executives maintain with the stability strategy due to inertia for change. (vii) In some cases, firms are forced to adopt stability strategy, if they operate in a low- growth or no-growth industry. (viii)Sometimes, firms may find that the cost of growth is more than the benefits of the same. (ix) Firms that dominate its industry through their superior size and competitive advantage may pursue stability to reduce their chances of being prosecuted for engaging in monopolistic practices, and (x) Smaller firms that concentrate on specialised products or services may choose stability because of their concern that growth will result in reduced quality and customer service.

Despite these reasons for adopting stability strategy, there is a danger of pursuing the stability strategy. The danger is that the environment may change and cause the firm or its product line obsolete. Hence, firms plan for adopting growth strategies.

GROWTH STRATEGIES Organisations may select a growth strategy to increase their profits, sales and/or market share. They also pursue growth strategy to reduce cost of production per unit. Growth strategies involve a significant increase in. performance objective. These strategies are adopted when firms remarkably broaden the scope of their customer groups, customer functions and alternative technologies either singly or in combination with each other. The different types of growth strategies are discussed hereunder: EXPANSION STRATEGIES Internal growth is achieved through increasing the firm's production capacity, employees and sales. Some firms prefer this strategy to the strategy of external growth as internal growth preserves their efficiency, quality and image unlike in external growth. Firms pursue concentration strategies to grow while remaining relatively simple. The total efforts of the firm are concentrated on a limited combination of customer groups, customer functions, alternate technologies and products.

Advantages: Lauenstein and Skinner argue that most of the effective organisations focus on a narrow set of objectives. A firm can gain a competitive advantage by concentrating on a specific technology, product or market. Firms pursuing, this strategy are frequently able to identify new developments and trends within the industry and respond to them. Problems: There are certain potential problems of concentration strategies. They are: (i) One of the greatest problems is the risk associated with putting "all the corporate eggs in one basket."

(ii) The introduction of substitute products may also be very detrimental to a firm following a concentration strategy. Substitute products can make a firm's product obsolete particularly when the firm concentrates on only one product or product line.

(iii) Company pursuing concentration strategy may also be affected by the disruption in the supply of essential and crucial raw material.

(iv) Sometimes, the market segment becomes unattractive owing to limited growth opportunities, Substitute products or absence of essential resource availability. In such a case, a firm pursuing a concentration strategy may become locked into an area of business and become unable to move into another line of business.

MERGER STRATEGY Many firms prefer to grow through mergers. Combination of two or more firms is known as a merger. When the firms of similar objectives and similar strategies combine into one firm, such combinations are called mergers. "A merger is a combination of two or more businesses in which one acquires the assets and liabilities of the other in exchange for stock or cash or both. Companies are dissolved and assets and liabilities are combined and new stock is issued." Mergers can take place within one nation or across nations.

Horizontal Integration Many companies expand by creating other firms in their same line of business. The reasons for engaging in this process of horizontal integration are:

(a) to increase the market share

(b) to reduce the cost of operations per unit of business through the large scale economies

(d) to' promote the products and services more efficiently to a larger audience

(e) to have greater access to channels of distribution

(f) to enjoy increased operational flexibility

(g) finally to take the advantage of the benefits of synergy. When the combination of two or more business units (existing and created) results in greater effectiveness and efficiency than the total yielded by those businesses, when they were operated separately, then synergy has been attained.

Conglomerate Diversification Horizontal integration strategy aims at related diversification. In other words, diversification occurs, when the existing firm creates- another business unit in the same industry. But, firms may also expand through unrelated or conglomerate diversification. In other words, firms create new business units that are unrelated to its original business. For example, Gujarat Gas Ltd., created another business unit i.e., Gujarat Finance Company Ltd. Vertical Integration Another growth strategy is vertical integration, in which new products and/ or services, which are complementary to the existing product and/or service lines, are added. Vertical integration is characterised by the extension of the company's business definition in three possible directions from the existing business viz.,

(i) backward integration,

(ii) forward integration, and

(iii)both backward and forward integrations.

Backward vertical integration occurs when the firms acquire or create the company that supply the firm the raw materials or components and other inputs. Forward vertical integration occurs when the firms acquire or create the company that purchases its products and/or services.

Figure 3.3 Shows Both Backward and Forward Linkages.

Fig. 3.3: Backward and Forward Linkages of Petroleum Refining Company

Forward Integration: Many firms start their operation in a limited fashion, and later expand them vertically, when they accumulate enough financial resources. The firms develop forward integration due to the advantages. In brief, there are many reasons for pursuing a diversification strategy and many different means to achieve that diversification. Joint Ventures Joint ventures are partnerships in which two or more firms carry out a specific project or corporate in a selected area of business. Joint ventures can be temporary, disbanding after the project is finished, or long-term. Ownership of the' firms remains unchanged. "Even a successful joint venture may not last forever. Nor does the collapse of a joint venture always imply failure. Actually, corporate partnerships are formed for specific and time-bound objectives which once achieved, leave little reason for the alliance to be continued. Joint ventures that last longer do so because their objectives have been redesigned." When Do Joint Ventures Form? Joint ventures form:

1. When an activity is uneconomical for an organisation to do alone.

2. When the risk of business has to be shared, and therefore, is reduced for the participating firms.

3. When the distinctive competence of two or more organisations can be pooled together.

4. When setting up of an organisation requires surmounting hurdles such as import quotas, tariffs, nationalistic political interest and cultural roadblocks.

Backward Linkage Backward Linkages Original Company Forward Linkage

Forward Linkage

Petroleum Exploration

Petroleum Production

Refining

Sales to Wholesaler/Dealer

Sales to Retailer

RETRENCHMENT STRATEGIES The third major class of strategic alternatives available to a firm is retrenchment strategies. Growth strategies and stability strategies are generally adopted by firms that are in satisfactory competitive positions. But, when a firm's position is disappointing or, at the extreme, when its survival is at stake, then retrenchment strategies may be appropriate. Retrenchment strategies include: Turnaround strategies, captive company strategy. divestment strategy, transformation strategy and liquidation strategy. Reasons for Adopting Retrenchment Strategies: As stated earlier, the firm's poor performance is the major reason for adopting retrenchment strategies. To be specific, the reasons include:

1. Prevalence of poor economic conditions.

2. Competitive pressures may also cause firms to curtail their operations.

3. Operating and production inefficiencies may also cause firms to pursue retrenchment strategies.

4. Inability of the firm to implement latest technology caused by technological revolution.

5. The company is not doing well or perceives itself as doing poorly.

6. The company has not met its objectives and there is pressure from shareholders, customers or others to improve performance.

7. The external environment poses threats and internal strengths are insufficient to face the threats.

8. Better opportunities in the environment are perceived in other area of business/other markets where a firm's strengths can be utilised.

TURNAROUND STRATEGY Improving internal efficiency can be done by adopting turnaround strategy. The aim of turnaround strategy is to transform the organisation into a leaner and more effective business. Turnaround means reverse the negative trend. Indicators of Adopting Turnaround Strategy: Adoption of turnaround strategy is necessary during the adverse conditions of the firm. Specifically, the indicators include:

1. Incurring losses continuously 2. Declining demand for product and/or services 3. Increasing cash outflows and/or declining cash inflows 4. Declining sales and declining market share 5. Declining production and/or productivity 6. Increasing debt and debt service 7. Continuous problems of working capital 8. High rate of employee turnover and employee job dissatisfaction 9. Significant decrease in the market price of the share. Turnaround strategy should aim at setting a reverse trend to this declining or negative situation.

Approaches of Turnaround Strategy Approaches of turnaround strategy should concentrate on the diagnosing the problem accurately and adopting a right approach. The approaches of the strategy include:

(i) Surgical, and (ii) Human resource development.

Surgical approach: The surgical approach is mostly mechanic and requires tough attitude of the top executive. The executive issues direction for change, fires employees, close down divisions/plants, drops the product lines, replaces the machinery, issues production, marketing and finance controls, fixation of accountability for results. This approach continues until the firm is turned around.

Later the chief executive relaxes the tough environment and controls. Human Resource Development (HRD) Approach: Human resource development approach involves:

1. Chief executive conducts a series of meetings, encourages the managers to be open, understand each other, understand the problems and diagnose the root cause for poor performance of the firm.

2. He encourages the employees to suggest methods of turning around, policies, detailed program through a thorough participation, involvement and active discussions in the form of brain-storming sessions.

3. He encourages employees to decide the technique, acquire skills and knowledge, modify their behaviour etc.

4. He encourages the managers and employees to implement the solutions' offered by them in a highly coordinated, committed team spirit.

5. This team spirit is continued at least until the firm is turnaround.

This approach, though difficult, gives effective results. Activities of Turnaround Process The management should carefully undertake different activities of turnaround process. They include:

1. Diagnosing the problem accurately.

2. Analysing the products, its quality, design, configuration, uses, suitability to the changing customer tastes, preferences and needs etc. against competitors' products and substitute products.

3. Analysing production process, technology, competition, competitors' strategies, market segment positioning etc.

4. Analysing the financial position, cost of capital, cost control etc.

5. Feedforward of information to various decision areas and control areas.

6. Take up activities systematically, feedback and control the deviations immediately through action research.

CAPTIVE COMPANY STRATEGY

A captive company strategy is another form of retrenchment strategy. This strategy is pursued when a firm sells the majority of its products to one customer (wholesaler/dealer) who in turn performs some of the functions normally done by an independent firm.

Companies may undertake a captive strategy as one means of reducing labour costs and reducing the size of employees. The customer, in this strategy, provides the product design to the captive manufacturer, who in turn produces according to this design and supplies the products to the customer. The firm need not involve the cost of product design and marketing. The firm can also minimise the risks of marketing.

A captive strategy may also be effective for a new company. The firms with marketing problems and the small companies who cannot launch the full range of marketing activities on their own may adopt a captive strategy. However, the companies may go for their own marketing strategy after they develop their own business. The major limitation of this strategy is that the company is limited by the activities of its captor.

TRANSFORMATION STRATEGY Another retrenchment strategy is the transformation strategy. A transformation occurs when a firm makes a major change in its outlook and operations, usually including moving from one kind of business to another.

Changes in strategy are quite substantial. These strategies are difficult to implement because they require a great deal of flexibility on the part of the entire organisation.

Companies may undertake this strategy when:

1. Returns on current operations are lower than desired.

2. Opportunities in other areas are especially attractive.

3. Investments needed in the current operations exceed when the firm is willing or able to spend.

4. A strong, flexible management team exists.

5. The firm has a strong financial base to support its transformation.

DIVESTMENT STRATEGY Divestment is another form of retrenchment strategy. Company sells or 'spins off one of its business units under the divestment strategy. Divestment strategy is usually adopted when the company is performing poorly or when it no longer fits the company's strategic profile. Causes for Adopting Divestment Strategy

1. Divestment strategy is frequently used when the firm wants to increase the efficiency of a strategic business unit or major operating division or product line which has failed to achieve the desired results.

2. Firms may also adopt this strategy when their market share is negligible to be competitive or when the market size is small to earn desired profit.

3. The availability of better alternatives may also cause firms to divest. The limited resources often force the firms to divest the resources from less profitable business to more profitable business.

4. The need for increased investment at later stages in providing safety facilities, infrastructure facilities cause the firms without additional funds, to divest.

5. Firms sometimes also divest parts of businesses they have acquired as the unit may not fit in the original business of the firm.

6. Continuous increase in the cash outflows more than that of cash inflows from a particular unit force& the firm to divest that unit.

7. Firm's inability to meet the competition, causes the firm to divest.

8. The technological change and inability of the firm to invest additional financial resources forces the firm to divest.

9. Divestment of a part of the business is necessary to allow the remaining business to survive.

10. Divestment of unprofitable wings is necessary as part of the merger agreement.

11. Divestment, sometimes, is necessary to abide by the provisions of the law.

LIQUIDATION STRATEGY The liquidation strategy is generally considered the most extreme retrenchment strategy. This strategy involves closing down a business organization and selling its assets. This is the last alternative strategy as its consequences are severe. The consequences include: loss of jobs of all employees and termination of the opportunities of the firm. Adoption of this strategy implies the total failure of the firm. Reasons for Adopting Liquidation Strategy

1. Partnership firms and small business organisations liquidate when one or more partners/shareholders want to withdraw from the business.

2. When the sole trader wants to withdraw or retire or take-up another job, he has to liquidate the business, unless one of his family members runs the firm.

3. Liquidation is necessary, when one of the partners has to withdraw and all other partners express their inability to buy the withdrawing partner's share.

4. Liquidation may also occur when a firm is worth more as closed down than surviving. In other words, the value of assets of the firm are more worthwhile than the rate of return earned by the firm.

5. Sometimes, owners may receive a "Godfather offer," for their business.

The owners may receive a highly attractive offer and they feel that liquidating the business is more worthwhile. Then the owners will adopt the liquidation strategy.

PORTFOLIO RESTRUCTURING This. strategy is the combination of stability, growth and retrenchment strategies. Combination strategies may involve implementation of two or more strategies. In some cases, particularly during the periods of rapid environmental change, adoption of combination strategy would be necessary. Firms may liquidate one unit, develop another unit and allow the third unit to survive simultaneously to improve the efficiency of the business and maximise the profitability. Once the company's profitability is satisfactory, it may adopt growth strategy. This strategy is common for large scale organisations with multiple units, diversified products and national or global markets. Combination of survival, growth and retrenchment strategies may be either simultaneous or sequential. This strategy is also called portfolio restructuring strategy as it is the mix and percentage makeup of the different types of businesses in the portfolio. It involves both divestment and acquisition/takeover. An Integrative Model of Strategic Alternatives We have discussed the organisational appraisal that enables us to identify the organisation's strengths and weaknesses and environmental analysis that helps to find the opportunities provided by and threats posed by the external environment. Figure 3.4 provides an integrative model for recognising strategic alternatives that would appropriate for a firm that evaluates itself as proposed by Joe G. Thomas. As can be seen from this exhibit, the firms whose strengths, match with the environmental opportunities are the ideal firms. These ideal firms can adopt the strategies like concentration, vertical integration arid horizontal integration. Firms. whose strengths do not match with the opportunities provided by the environment but face with the environmental threats are the threatened firms. In other words, these firms are internally strong but externally are faced with threats from external environment. These firms may adopt the strategies like limited growth, concentric diversification, conglomerate diversification, transformation and joint venture

Fig. 3.4: An Integrative Model of Strategic Alternatives Source: Modified version from Joe G. Thompson, op. cit., p. 227.

FIRMS ENVIRONMENTAL SITUATION

Opportunities are Provided Threats are Posed

Ideal Firm:

 Concentration

 Vertical Integration

 Horizontal Integration

Threathened Firm:

 Limited Growth

 Concentric Diversification

 Conglomerate Diversification

 Transformation

 Joint Ventures

Opportune Firm:

 Turnaround

 Concentration

 Captive Company

 Limited Growth

 Mergers

 Joint Ventures

 Divestment

 Liquidation

Troubled Firm:

 Turnaround

 Divestment

 Liquidation

The internally weak firms provided by environmental opportunities are opportune firms. These firms can adopt the strategies like turnaround, concentration, captive firm, limited growth, mergers, joint ventures, divestment and liquidation. The internally weak firms and posed threats by the environment are troubled firms. These firms can adopt the strategies of turnaround, divestment and liquidation. Leveraged buyouts have allowed firms to divest unprofitable segments of a business by selling them to entrepreneurs who often are able to return the segment to profitability. STRATEGIC BUSINESS UNIT STRATEGIES Competitive strategy includes all the moves and approaches a firm has taken and is taking: (i) to attract buyers, (ii) to withstand competitive pressures, and (iii) to improve its market position. A firm's strategy can be mostly offensive or mostly defensive depending upon the market conditions. There would be countless strategies that the firms adopt in different situations. But, all these strategies can be broadly divided into the following three categories

1. Striving to be the overall low-cost producer in the industry (a low-cost leadership strategy). 2. Seeking to differentiate one's product offering from rival's products (a differentiation strategy). 3. Focusing on a narrow portion of the market rather than the whole market (a focus or niche strategy).

A LOW-COST LEADERSHIP STRATEGY The low-cost -leader's basis for competitive advantage is lower overall costs than competitors. The low-cost strategy is a powerful approach in markets where most of the customers are price sensitive. The purposes of striving to be a low cost producer are:

(i) to fix the price for the products at the lower level compared to that of the competitors. (ii) to gain the maximum market share from the competitors; or (iii) to earn high profit margin and thus maximise the profits.

Thus, this strategy will help the firm initially to gain the market share from the competitors and later to maximise the profits. The danger of this strategy is that, if the firms cut the prices abnormally to kill the competitors, the firms may end-up with problems of a cheap product. Ways to Achieve Cost Advantage The firm should see that their costs in all areas of production are lower than that of the competitors. There are two ways to accomplish this goal. They are:

(a) out-managing rivals on efficiency and cost control and/or

(b) finding creative ways to cut cost-producing activities out of the activity cost chain.

These two approaches can be used independently or simultaneously. Firms to get low cost advantage should pursue cost savings exhaustively throughout the activity cost chain. All areas without exception should be taken care of. Organisational culture of such firms should be symbolically reinforced by Spartan facilities, salaries and benefits to executives and employees are based on demand and supply factors, exhaustive search for low cost materials, find the ways and means to control budget expenditure, minimisation of wastage, recycling of wastage and empowerment of employees to minimise cost.

Advantages of Being a Low-Cost Producer The low-cost producing firms get some attractive defenses against five competitive forces:

1. Strong position to compete with rival competitors. The low-cost firm is in the strong position to compete with rival competitors, offensively based on price, to defend against price war conditions, to use the appeal of a lower price to win sales from rival competitors and earn high profits in price competitive markets.

2. The low-cost firm has partial profit margin protection from powerful customers.

3. Tre low-cost firm is more insulated than competitors from powerful suppliers.

4. The low-cost firm can prevent the entrance of potential competitors into the market through price-cuts.

5. The low-cost firm is better positioned than high-cost rivals against substitute products.

Exhibit 3.1: Distinctive Features of the Generic Competitive Strategies

Type of Feature

Low-Cost Leadership Differential Focus

Strategic

Target

A broad cross-section of the market

A narrow market niche where buyers needs and preferences are distinctively different from the rest of the market

Basis of

Competitive Advantage

Lower costs than the competitors

An ability to offer buyers something different from competitors

Lower cost in serving the niche or an ability to offer niche buyers something customized to their requirements and tastes

Product Line

A good basic product with few frills (acceptable quality and limited selection)

Many product variations, wide selection, strong emphasis on the chosen differentiating features

Customized to fit the specialized needs of the target segment

Product

Emphasis

A continuous search for cost reduction without sacrificing acceptable quality and essential features

Invent ways to create value for buyers

Tailor-made for the niche.

Marketing emphasis

Try to make a virtue out of product features that lead to low-cost

Build in whatever features buyers are willing to pay for.

Charge a premium price to cover the extra costs of differentiating features.

Communicate the focuser’s unique ability to satisfy the buyer’s specialized requirements.

Sustaining

Economical prices/good value All elements of strategy aim at contributing to a sustainable cost advantage – the key is to manage costs down, year after year, in every area of the business.

Communicate the points of difference in credible ways.

Stress constant improvement and use innovation to stay ahead of imitative competitors

Concentrate on a few key differentiating features; use them to create reputation and brand image

Remain totally dedicated to serving the niche better than other competitors; don’t blunt the firm’s image and efforts by entering other segments and adding other product categories to widen market appeal.

Source: Arthur A. Thompson and A.J. Strickland, op. cit., p. 104.

Conditions for the Effectiveness of Low-Cost Strategy The low-cost leadership strategy is particularly effective when:

1. Price competition among rival sellers is dominant competitive force.

2. The industry's product is essentially standardised.

3. There are few ways to achieve product differentiation that have value to buyers.

4. Most buyers use the product in the same ways.

5. Buyers shop for the best price without incurring much cost and inconvenience.

6. Buyers are large and have significant power to bargain down prices.

The Risks a Low-Cost Producer Strategy The low-cost leadership strategy has its disadvantages. They are:

1. Technological advancements adopted by the rivals may result in cost reduction for rivals multiplying the advantage. Past investments and hard-won gains of the low- cost producer will be lost.

2. Rival firms may initiate the low-cost methods adopted by the low-cost producer, thus making any advantage short-lived.

3. It would be very hard to the low-cost producer, to introduce changes in product design, Production process etc. in order to incorporate buyers' preferences.

4. The declining buyer is sensitivity to price due to increase in buyer's income leaves the low-cost producer behind.

Thus, heavy investments in cost-reduction activities can lock a firm into both its present technology and its present strategy, leaving it vulnerable to technological advancements and changing buyers' preferences and tastes other than a lower price. This situation is more significant in times of increase' in buyers' income brackets consequent upon the country's economic development.

Differentiation Strategies Generally, customers' needs, taste and preferences vary from one customer to the another customer. These differences in customers' tastes, preferences and needs can be satisfied by producing the product with different attributes. This situation results in adoption of differentiation strategy by the producer to satisfy the di versified needs of the customer by a standardised product. The producer to make this strategy successful should study the different needs, tastes and preferences of various classes of customers. Further, he should study the buying and consumption behaviour of different classes of customers. The producer, then should incorporate the features into the product offering based on the study. This will make the product much suitable to different customers compared to the competitors' offerings. Consequently, most of the customers will prefer this product to the rivals/competitors. Competitive advantage results when more customers become strongly attached to the attributes of a differentiator's product offering. Advantages of Efficient Differentiation The efficient differentiation brings the following advantages to the differentiator:

(a) The product commands a premium price for the producer.

(b) More number of units are sold as additional customers are won over by the differentiating features.

(d) Differentiation enhances the profitability when the cost of differentiation is less than the extra price of the product.

Disadvantages of Differentiation Though, differentiation brings some advantages, sometimes, its results in loss to the producer. They are:

(a) Differentiation is unsuccessful when the customers do not value the additional features significant enough to buy the product in profitable quantities.

(b) Differentiation results in loss when the cost of differentiation is more than the extra price of the product.

Approaches to Differentiation Differentiation may take several forms. Important among them are:

(i) A different taste

(ii) Special features

(iii) Superior service

(iv) Spare parts availability

(v) Overall value to the customer

(vi) Engineering design and performance

(vii) Product reliability

(viii)Quality manufacturer

(ix) Technological leadership

(x) A full range of services

(xi) Complete line of products

(xii) Top-of-the-line image and reputation.

Achieving Differentiation: Anything a company can do to create customer value represents a potential basis for differentiation. A company should build the value creating attributes into the product at an acceptable cost after finding suitable sources of buyer values. The producer should make sure that the incorporated attributes should:

(i) raise the product's performance, or

(ii) make the product more economical to use, or

(iii) enhance customer satisfaction in tangible or intangible ways. Differentiation possibilities can grow out of activities performed anywhere in the activity-cost chain.

Need for Differentiation: Producers would like to differentiate their products/services as it works as an attractive strategy due to the following reasons:

(i) Differentiation provides some buffer against rival's strategies, as customers become loyal to the brand or model they like most and often like to pay higher price.

(ii) Differentiation erects entry barriers in the form of customer loyalty and uniqueness that newcomers find hard to overcome.

(iii) Differentiation mitigates the bargaining power of major customers as competitors' products are less attractive to them.

(iv) Differentiation helps a company fend off threats from substitutes.

(v) Efficient differentiation creates lines of defense for dealing with competitive forces as it provides price advantage and thereby higher profit margin.

Situations Suitable for Differentiation Strategy Differentiation strategy works better under the following situations:

(i) Where there are many ways to differentiate the product/service and most of the customers feel these differences as valuable.

(ii) Where the customers' tastes, preferences, needs and uses of the item are diverse.

iii) (Where a few competitors follow differentiation strategy.

(iv) Where the differentiation strategies are least subject to quick or inexpensive imitation by competitors. In other words, it should be difficult to competitors to copy quickly and profitably.

(v) Where the differentiation is based on, (a) technical superiority, (b) quality, (c) more customer supportive services and (d) more value for the money.

Limitations of a Differentiation Strategy There is no guarantee that the differentiation will always result in efficient competitive advantage. This is due to the limitations of the differentiation strategy. These limitations include:

(i) Buyers may perceive a little value in uniqueness of the product.

(ii) A significantly low cost strategy may defeat a differentiation strategy.

(iii) Trying to differentiate on the basis of something that does not lower a customer's cost or enhance a customers' well-being (as perceived by the customer).

(iv) Over differentiating results in high cost and high. price compared to that of competitors or product quality or service levels exceed customer's needs.

(v) Trying to charge too high a price premium (the higher the premium, the more number of customers can be lured away by lower priced competitors).

(vi) Ignoring the need to signal value and depending only on tangible product attributes to achieve differentiation.

(vii) Not understanding or identifying what customers consider as value.

DIFFERENTIATION CUM LOW-COST STRATEGY Combining differentiation strategy and low-cost strategy results in giving customers more value for the money with an emphasis on more than minimally acceptable quality, service, features and performance. The purpose is to meeting or exceeding customer's expectations on different product attributes like quality, service, design, performance, features and price. Thus, the producer creates a superior value for the product. In essence, such a hybrid strategy helps a company to combine the competitive advantage appeals of both low-cost and differentiation. FOCUS AND SPECIALISATION STRATEGIES Focusing begins by choosing a market niche where customers have distinctive preferences or requirements. Thompson and Strickland define the term 'niche' as, "geographic uniqueness, by specialised requirements in using the product or by special product attributes that appeal only to niche members." A strategist's basis for competitive advantage is either lower costs than competitors in serving the market niche or an ability to offer niche members something different from that of competitors. If the buyer's needs can be satisfied through a low cost based product compared to the rest of the market, the producer can adopt a focus strategy based on low- cost. Alternatively, if there is a customer segment that demands unique product attributes, then the producer can adopt a focus strategy based on differentiation.

Advantages of Focus Strategy: The advantages of a focus strategy are as follows:

(i) Specialised skills of a producer adopting the focus strategy in serving the target market niche provide a basis for defending against five competitive forces.

(ii) The focused company's competence in serving the market niche creates entry barriers for new firms. Therefore, it is harder for firms outside the niche to enter.

(iii) This strategy also presents a hurdle to the producers of substitute products to enter the niche market.

(iv) The powerful customers' bargaining power is also lowered as the competitor’s ability to serve their needs is less compared to the focused firm.

(v) The niche strategy combined with low-cost and differentiation strategies will enable the producer to enhance market share and profitability.

Limitations of a Focus Strategy

(i) Competitors may find ways and means to match the focused firm in serving the niche.

(ii) The niche customers' taste, preferences, needs may shift towards the product attributes desired by the whole market.

(iii) The high rate of profitability of the focused firm may attract the competitors to share the profits. -

QUESTIONS 1. What are the stability strategies? Explain the circumstances under which these strategies can be employed.

2. What is conglomerate diversification? Explain its limitations. Why do firms adapt this strategy?

3. What are forward and backward linkages? What are their advantages and disadvantages?

4. What is a joint venture? Discuss the types of joint venture.

5. Why do firms adapt joint ventures strategy? Discuss the strategic issues involved in . joint ventures.

6. What are the advantages and disadvantages of joint ventures?

7. What is a retrenchment strategy? Why do firms adapt retrenchment strategies?

8. What is a turn-around strategy? Discuss the approaches of turn-around strategies.

9. Explain captive company and transformation strategies.

10. What is a disinvestment strategy? Why do companies adapt disinvestment strategy?

11. What is liquidation strategy? What are the cautions in adapting liquidation strategy?

12. What are the strategies of "strategic business unit" level strategies?

13. When can firms attack competitors' strengths and weaknesses?

14. Differentiate Cost leadership, differentiation and focus.

CHAPTER FOUR – COMPETITIVE ADVANTAGE

OUTCOME 4 Explain the concept of competitive advantage and conduct a simple analysis of an organization’s competitive position.

COMPETITIVE ADVANTAGE, CAPABILITIES & COMPETENCIES

In environmental scanning, an effort is made to study opportunities and threats; and in organizational appraisal, internal environment is scanned in order to identify strengths and weaknesses. No doubt, the industry structure influences a firm's profit. However, many other factors also affect the firm's profit. Why do some companies perform better than others? What is the basis for competitive advantage of individual firms? The competitive advantage has four dimensions namely. efficiency, quality, innovation and customer responsiveness. These dimensions of competitive advantage are developed by building competencies, resources and capabilities. It is not enough the firms develop competitive advantage once. The competitive advantage should be sustained throughout and should not be lost on any account. Three critical issues are relevant in this regard. • What are the factors that influence competitive advantage?

• Why do successful companies lose their competitive advantage?

• How can companies avoid failures and sustain competitive advantage over time?

Competitive Advantage: Low Cost and Differentiation: A company is said to have attained competitive advantage when the profit rate of a company is higher than industry average. Return on Sales (ROS) and Return on Assets (ROA) are ratios calculated to determine profit rate. Gross Profit margin is the basic deciding factor of a company's profit rate, which is simply the difference between total revenue and total cost divided by total cost.

Gross Profit Margin = Total Revenue- Total Costs

Total Costs

= (Unit Price x Units Sold) -(Unit Cost x Units Sold) (Unit Cost x Units Sold)

If the gross profit margin is to be higher, the following three conditions should be satisfied.

1) The unit price of the company must be higher than that of other average companies. 2) The unit cost of the company must be lower than that of other average companies. 3) The company must have a lower unit cost and a higher unit price. Companies resort to premium pricing when they charge high unit price than the industry average. The companies add value to the product from the consumer's perspective in order to charge premium price. Besides, they go for differentiated products in terms of quality, design, after sales service and delivery time. Low cost and differentiation are classified as generic business level strategies as they represent the two basic ways of attaining competitive advantage. Companies, which go for low cost strategy, do everything possible to reduce unit costs. Firms, which opt for

differentiation strategy, do everything to differentiate product from that of other players. Generic Building Blocks of Competitive Advantage Efficiency, quality, innovation and customer responsiveness are four basic ways for lowering costs and achieving differentiation. The four factors are inter related in the sense, superior quality leads to superior efficiency and innovation will increase efficiency, quality and customer responsiveness.

Fig 4.4: Generic Building Blocks of Competitive Advantage Image Source: https://bit.ly/2WohcAy

Efficiency In a business organization, inputs such as land, capital, raw material, managerial know- how and technological know-how are transformed into outputs such as products/ services. Efficiency is measured as a ratio between the costs of inputs required to produce a given output. Efficiency of operations enables a company to lower the cost of inputs to produce given output and to attain competitive advantage. The employee productivity also plays a significant role in efficiency and low cost of production. Employee productivity is measured in terms of output per employee. The Japanese auto giants have cost based competitive advantage over their near rivals in U.S.

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Quality Quality of goods and services indicates the reliability of doing the job, which the product is intended for. High quality products create a reputation and brand name, which in turn permits the company to charge higher price for the products. Quality is also influenced by greater efficiency. Hence, efficiency, high product quality and productivity move in the same direction. Indirectly, higher product quality means employee's time is not wasted on rework, defective work or substandard work. Higher product quality is synonymous with high employee productivity. In consumer durable industries such as mixers, grinders, gas stoves and water heaters, ISO mark is a basic imperative for survival.

Fig. 4.5: Impact of Quality on Profits

Source Image: https://slideplayer.com/slide/2477734/9/images/13/The+Impact+of+Quality+on+Profits.jpg

Innovation Innovation means new ways of doing things. Innovation results in new knowledge, structures and strategies in a company. Innovation offers something unique, which the competitors may not have, and allows the company to charge high price. Photocopiers developed by Xerox and Sony's Walkman are typical examples of successful product innovation of pioneering companies.

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Customer Responsiveness Companies are expected to provide customers what they are exactly in need of by understanding customer needs and desires. Achieving superior customer responsiveness involves giving customers value for money. The unique needs of individual customers require customization of goods, which is an aspect of customer responsiveness. The firm should look into customer response time (Le.) the time taken to deliver goods or service, which is a source of competitive advantage. Customer responsiveness is determined by customization of products, quick delivery time, quality, design and prompt after sales service. Besides, development of new products with features, which are absent in the existing products in the market, should be given attention to satisfy customer needs. Distinctive Competence Distinctive competence is a unique strength that allows a company to achieve superior efficiency, quality, innovation and customer responsiveness. It allows the firm to charge premium price· and achieve low costs compared to rivals, which results in a profit rate above the industry average.

Fig. 4.6: Building Blocks of Competitive Advantage and Distinctive Competencies

Sources of Distinctive Competencies Distinctive competencies arise from two sources namely,

• Resources and • Capabilities

Caterpillar and Toyota achieved success through distinctive competencies such as after sales service and world class manufacturing process respectively. Resources A resource is an asset, competency, process, skill or knowledge. Resources may be classified as tangible such as land, buildings, plant and machinery and intangible such as brand names, reputation, patents, know-how and R&D. Resources are financial physical, human, technological and organizational in nature. A resource is a strength which provides tile company with competitive advantage and it has the potential to do well compared to competitors. A resource becomes a weakness if it does poorly compare to competitors. The strength and weakness of resources can be measured by:

• The company's past performance

• The company's key competitors and

• The industry as a whole

Distinctive Competences

Superior Efficiency

Superior Quality

Superior Innovation

Superior Customer

Responsiveness

The extent to which it is different from that of the competitors, it is considered as a strategic asset. Distinctive competencies are those capabilities which are superior to those of other competitions. In order to call anything a distinctive competency it should satisfy three conditions.

1. Value: It should give a disproportionate contribution to customer perceived value.

2. Unique: It should be unique compared to competitors.

3. Extendibility: It should be capable of developing new products. The distinctive competencies are built around all functional areas. Exhibit 4.1 shows distinctive competencies in different functional areas. Evaluation of Key Resources Barney has evolved VRIO framework of analysis to evaluate the firm's key resources. The following questions are asked to assess the nature of resources

1) Value - Does it provide competitive advantage?

2) Rareness - Do other competitors possess it?

3) Imitability - Is it costly for others to imitate?

4) Organisation - Does the firm exploit the resource?

A unique resource is one, which is not found in any other company. A resource is considered to be valuable if it helps to create strong demand for the product.

EXHIBIT 4.1: Distinctive Competencies

Technology related

Scientific research expertise; Product innovation capability Expertise in a given technology; Capability to use Internet to conduct various business activities

Manufacturing related

Low-cost production efficiency; Quality of manufacture; High use of fixed assets; Low-cost plant locations; High labor productivity; Low- cost product design; Flexibility to make a range of products

Distribution related

Strong network of wholesale distributors/dealers; Gaining ample space on retailer shelves; having company – owned retail outlets; Low distribution costs; Fast delivery.

Marketing related

Fast, accurate technical assistance; Courteous customer service; accurate filling of orders; Breadth of product line; Merchandising skills; Attractive styling; Customer guarantees; clever advertising.

Skills related

Superior workforce talent; Quality control know-how; Design expertise; Expertise in a particular technology; Ability to develop innovative products; Ability to get new products to market quickly.

Organizational capability

Superior information systems; Ability to respond quickly to shifting market conditions; Superior ability to employ Internet to conduct business; more experience & managerial knowhow

Other types

Favourable image / reputation with buyers; Overall low -cost; Convenient locations; Pleasant, courteous employees; Access to finance; Patent protection.

Capabilities Capabilities are skills, which bring together resources and put them to purposeful use. The organization's structure and control system gives rise to capabilities, which are intangible. In order to possess distinctive competence, a company should have both unique and valuable resources and capabilities to exploit resources and a unique capability to manage common resources. A company is said to have distinctive competence if it possesses both unique and valuable resources and unique capabilities to manage them. Capability drivers enable a firm to build an underlying source of competitive advantage. Some of the capability drivers are patents, licences, favourable locations, established distribution networks (HLL, HPCL), process improvements and interrelationships (lCiCI Strategy and Competitive Advantage The purpose of any strategy is to achieve a competitive advantage. The term strategy refers to all types of strategies like global strategies, corporate strategy, business level strategy and functional level strategy. Companies build strategies on the basis of existing resources and capabilities and try to adopt strategies based on additional resources and capabilities to sustain their competitive position, Walt Disney's successful turnaround in 1984 was mainly based on existing resource base whereas Xerox's financial recovery was due to functional level strategy. Durability of Competitive Advantage Durability of competitive advantage refers to the rate at which the firms capabilities and resource depreciate or become obsolete. Companies try hard to sustain competitive advantage since every other company tries to develop distinctive competencies and gain competitive advantage. Durability depends on three factors:

• Barrier to imitation

• Capability of competitors and

• Dynamism of industry

Barriers to Imitation Barriers are those factors, which make it difficult for a competitor to copy a company's distinctive competencies. The longer the period for the competitor to imitate the distinctive competence, the greater the opportunity that the company has to build a strong market position and reputation with consumers. Imitability refers to the rate at which others duplicate a firm's underlying resources and capabilities. Tangible resources such as land, building and equipment are visible and imitable. Intangible resources like brand names are difficult to imitate and brand names represent the company's reputation. Similarly marketing and technological know-how are also intangible resources. Capabilities are by-products of internal operations and decision-making process of a company and it is difficult for competitors to comprehend it. If the firm's core competence emanates from explicit knowledge (i.e.) knowledge expressed, articulated and communicated, it is easily imitated by competitors. When the capabilities emanate from tacit knowledge (i.e.) knowledge not communicated as it is deep-rooted in organization's culture and employee's experience, imitation will be tough for competitors. Hence a distinctive competence based on unique capabilities is more durable than one based on resources. Capabilities are invisible to outsiders and it is rather difficult to imitate.

Capability of Competitors When a firm is committed to a particular course of action in doing business and develop a specific set of resources and capabilities, such prior commitments serve as a deterrent to imitate the competitive advantage of successful firms. U.S. automobile giants' (General Motors, Ford, Chrysler) investments in large sized cars served as a setback in shifting their massive investments for low cost small sized cars as made by Japanese competitors: Industry Dynamism Dynamic industries are characterized by high rate of innovation and fast changes. In dynamic industries, product life cycle will be short and competitive advantage will not last for a long time. It gives rise to hyper competition. The consumer electronic industry and computer industry are typical examples of dynamic industries. The turbulence in computer industry environment has been contributed by continuous innovations of Apple Computers, IBM, Compaq and Dell. Core Competence Core competence is a fundamental enduring strength, which is a key to competitive advantage. Core competence may be a competency in technology, process, engineering capability or expertise, which is difficult for competitors to imitate. By and large, it is a technological competence, which provides the firm access to a variety of products and markets and contributes to customer delight. One core competence gives rise to several products. Honda's core competence in designing and manufacturing engines had led to several products and business such as cars, motorcycles, lawn mowers, generators etc. 3Ms core competence in substrates and coatings adhesives has given rise to 60,000 products which includes magnetic tapes, photographic films, coated abrasives etc. Sony has a core competence in miniaturization. Dupont has a core competence in chemical technology. Eureka Forbes which manufactures domestic vacuum cleaner develops core competency in door-to-door selling. Building core competence is a long-term process. Firms invest heavily in technology and R&D in order to build core competence. The business units search for emerging technologies and gain expertise over them. The firms bring out proprietary products, which confer on them an advantage over competitors. Developing core competence involves development and training of technical force suitable to the required level. Core competence is the firm's key capabilities and collective learning skills that are fundamental to its strategy, performance, and long term profitability. OFFENSIVE STRATEGIES AND COMPETITIVE ADVANTAGES An offensive strategy, if successful, can open up a competitive advantage over competitors. Figure 4.5 shows the building and eroding of competitive advantage. Strategic moves are successful in producing a competitive advantage during- the buildup period. The buildup period can be short in service industries and it can be longer in capital intensive and technologically sophisticated industries. It would be better for the firm, if an offensive move builds up competitive advantage quickly. Otherwise the competitors may understand and respond to it.

There is a benefit period, after a successful competitive offensive. The firm can enjoy the fruits of competitive advantage. If the competitors take longer time to launch the counter offensives, the firm can enjoy the benefits for a longer period. The vice versa is true if the competitors react quickly. The firm earns above average profits during the benefit period. The best strategic offensives give major competitive advantage and long benefit periods.

The erosion period begins as and when the competitors react with counteroffensives. A company, therefore, must devise a second strategic offensive to sustain its initial advantage during the benefit period itself. A firm must plan in advance of competitors and initiate creative strategic offensive before the competitors.

Types of Attacks: The types of attacks on competitor strengths involve: (a) Price cutting

(b) Comparison advertisements

(d) New plant capacity in a competitor's backyard

(e) New models that match competitors

(f) A good product with a lower price

(g) Get cost advantage and then only attack through lower price

(h) Focus on the competitor's geographic area.

Therefore, challenging larger, entrenched competitors with aggressive price cutting is foolhardy unless the aggressor has either a cost advantage or a greater financial strength. Attacking Competitor Weaknesses Firms, in this offensive approach, focus their competitive attention directly on the competitor's weaknesses. The weaknesses that can be challenged successfully are presented in Exhibit 3.2.

Exhibit 4.2: Weaknesses of Rivals that can be Challenged Successfully

• Attack geographic regions where a rival has a weak market share or is exerting less

competitive effort.

• Attack buyer segments that a rival is neglecting or is weakly equipped to serve.

• Attack rivals that lag son quality, features, or product performance; in such cases, a challenger with a better product can often convince the most performance- conscious customers of lagging rivals to switch to its brand.

• Attack rivals that have done a poor job of servicing customers; in such cases, a service-oriented challenger can win a rival's disenchanted customers.

• Attack rivals with weak advertising and brand recognition; a challenger with strong marketing skills and a good image can often move in on lesser-known rivals.

• Attack market leaders that have gaps in their product line; challengers can exploit opportunities to develop these gaps into strong, new market segments.

• Attack market leaders who are ignoring certain buyer needs by introducing product versions that satisfy these needs.

Source: Arthur A. Thompson and A.J. Strickland. op. cit .• pp. 114-115.

Challenging competitors where they are most vulnerable is more likely to succeed than challenging them where they are strongest, particularly, if the challenger has advantages in the areas where competitors are weak.

Competitive Advantage Potentials Competitive advantage potentials offer the strongest basis for a strategic offensive. These competitive advantage potentials include:

(i) Developing a lower-cost product design.

(ii) Making changes in production operations that lower costs and/or enhance differentiation.

(iii) Developing product features that deliver superior performance or lower user costs.

(iv) Giving customers more responsive post-sale service and support.

(v) Escalating the marketing effort in an under-marketed industry.

(vi) Pioneering a new distribution channel.

(vii) Eliminating wholesalers/distributors/dealers and selling direct to the ultimate consumer/users.

A strategic offensive must be tied to: (a) Competitive strengths or key skills like cost reduction capabilities, customer service skills, technical expertise.

(b) Strong functional competence. This includes engineering and product design, manufacturing expertise, advertising and promotion, marketing know-how etc.

DEFENSIVE STRATEGIES AND COMPETITIVE ADVANTAGES 1. Methods of Protecting Competitive Position There are several methods of protecting the firm's position. The first approach involves trying to block challengers' avenue for mounting an offensive. The options of this approach are presented in Exhibit 4.3. The second approach to defensive strategy entails signaling strong retaliation if a challenger attacks.

These retaliatory counter-measures include:

(i) Publicly announcing management's commitment to maintain the firm's present market share.

(ii) Publicly announcing plans to construct adequate production capacity to meet increasing demand in future, and sometimes building ahead of demand.

(iii) Giving out advance information about a new product, technological breakthrough or the planned introduction of important new brands or models viewing that challengers will delay their own moves until they see if the signaled actions are true.

(iv) Publicly committing the firm to a policy of matching the prices or terms offered by competitors.

(v) Maintaining a war chest of cash and marketable securities.

(vi) Making an occasional strong counter-response to the moves of weak competitors to enhance the firm's image as a tough defender.

2. First-Mover Advantages and Disadvantages Because of first-mover advantages and disadvantages. when to make a move is often as crucial as what move to make. In other words, when to make a strategic move is often as crucial as what move to make.

WHY DO COMPANIES FAIL? A failing company is one whose profit rate is substantially lower than average profit rate of competitors. Declining profit and loss of competitive advantage are some of the reasons for failure of companies. Studies have pointed out the following reasons for failure of companies.

• Inertia

• Prior strategic commitments and

• Too much inner directedness and specialization

Inertia: In changed market conditions, companies find it difficult to change their strategies and structure accordingly. The changed competitive conditions put pressure on the decision makers to introduce suitable changes in developing capabilities. It is difficult to change capabilities because they are embedded into the established decision-making and management process. Those who are wielding power and authority under the present set up. will be scared of change and are afraid of losing their power. The power struggle and the political resistance associated with decision-making process bring in inertia. The typical example is IBM and its inability to adapt to environmental changes. Prior Strategic Commitments: The commitments which are already made in terms of huge investments, direction and facilities prove to be a setback and results in competitive disadvantage. IBM's massive investments in manufacturing, R&D and marketing of mainframe computer proved to be a handicap with respect to newly emerging personal computer business. IBM's massive investments were locked in a shrinking business. Too much Inner Directedness: Icarus, a Greek mythical figure, who was held as prisoner in an island flew so well and went higher and higher up to the sun and met with his fatal end. Many companies, like Icarus are carried away by initial success and lose sight of external environment. They turn out to be inner directed and lose sight of market realities and lose competitive advantage. Procter and Gamble and Chrysler were overconfident of their selling ability and paid no attention to new product development and ended up in inferior products. Avoiding Failure and Sustaining Competitive Advantage Usually imbalance between various dimensions of competitive advantage such as efficiency, quality, innovation and customer responsiveness are considered to be the main reason for failure of many firms. Analyzing best industrial practices through benchmarking will facilitate organizations to build distinctive competencies. Bench marking involves identification of best practices adopted in other companies. It involves measurement of the firm against products, prices, practices and services of some of the most efficient global competitors. When Xerox was in trouble 1980s, Xerox applied bench marking for 240 functions against comparable areas in other companies. The single most significant step in avoiding failure is identification of barriers to change and overcoming such barriers. This step will point out the need for new organizational structure and control systems in response to the changed environment. Appropriate leadership style and prudential use of power will be of help in maintaining competitive advantage

Fig. 4.7 : Bonding the Administrative Fits (The McKinsey 7S Framework)

Image Source: https://upload.wikimedia.org/wikipedia/commons/thumb/e/e7/McKinsey_7S_framework.svg/1200px- McKinsey_7S_framework.svg.png

FUNCTIONAL STRATEGIES All organisations,· irrespective of their size, nature and scope of business must perform the functions like production/operations, finance, marketing, human resource and research and development. Careful planning, execution and coordination of these functions are highly essential for efficient strategic planning, implementation and control. The strategic managers at functional level should understand the interrelationship of these functions in formulation of the strategies at functional levels. The activities of all the functional areas are interwoven in attaining their purposes as well as the purpose of the total firm as shown in Figure. 5.7. In fact, these functional areas of a firm are like different organs of a human body, Therefore, it is needless to say that the organisational strategies are implemented at the functional levels. 1. Production/Operations The basic objectives of production/operations management is to ensure that the outputs produced have a value that exceeds the combined costs of the inputs and the transformation process. In other words, it should add the value to the inputs in the process of transformation.

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Strategies for Small Business Units

(i) Small business units that compete with the niche-low-cost strategy go for low initial investments in their plant, equipment, building outlets etc.

(ii) These business units also go for low investments in semi-variable and variable costs.

(iii) Small business units that adopt the niche-differentiation strategy select strategies that yield superior quality. These units, in some situation may go for hand-crafting processes to differentiate the product and produce according to the customer's preferences.

(iv) Small business units adopting niche-low-cost/differentiation strategy go for strategies that simultaneously lower costs and increase differentiation. This strategy, though, initially involves higher costs, it will result in cost savings and quality improvement in the long-run.

Strategies for Large Business Units

Large business units can take advantage of a number factors. The major advantage is the reduction in cost per unit of output that occurs as a firm gains experience in producing a product or rendering a service. Production/Operations costs may be systematically reduced through larger sales 'volume. The experience curve concept is based on three variables viz, learning, economies of scale capital labour substitution possibilities. Learning refers to the idea of specialisation and its advantages. Economies of scale refer to reductions in costs per unit of output as volume of output increases. Capital-labour substitution is substituting capital for labour and vice versa. This is possible with the increase in the volume of operations. The three variables, put together, will result in decrease in cost per unit as business gains greater market share as it takes the advantages of experience curve.

The business with low cost strategy are particularly vulnerable to business units that are also able to attain quality in addition to low cost.

Fig. 4.8: Interrelationships Among Functional Areas

Image Source :

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analysys-of-strategic-management-23-728.jpg?cb=1233031614

Legends:

F = Finance P/O =Production Operation R and MD = Research and Marketing Development MIS = Management Information System M = Marketing HR = Human Resource

Adopters of differentiation as a generic strategy are vulnerable to competitors that offer alternative products, but at lower, or even predatory prices. However, managers of the business units that adopt differentiation strategy do not actively capitalise on the opportunities presented by lower costs.

Regardless of the generic strategy adopted, large business units may have to bear the risk of experience curve. These risks are due to technological innovations. Consequently, plant and machinery will be obsolete. Crores of rupees of investment may have to be written off.

Quality Considerations: Maintenance of superior and total quality brings the advantages as follow~: (a) Producing a quality product reduces the quantity of defects, which causes yield to increase.

(b) Producing product right the first time reduces the number of rejects and time and money spent on network.

(d) Improvement of quality converts the waste of employee hours and machine time into the manufacture of good product and better service. Improvement in quality naturally and inevitably begets improvement of productivity. (See Figure. 5.8) This process is essential for business unit adopting the niche-low- cost/differentiation or low··cost-differentiation generic strategies.

Fig. 4.9 : The Deming Chain Reaction Image Source: https://images.slideplayer.com/26/8702119/slides/slide_2.jpg

2. Finance Every business unit would like to have a surplus of internally generated cash beyond expenditure, to allow it to reinvest. However, companies may go for borrowed funds, when strategic decisions require cash beyond the generated funds. Long-run capital investment decisions focus on the allocation of resources and are linked to corporate and business unit strategies. Business units that adopt the niche-low-cost or low-cost generic strategies pursue financial strategies that are intended to lower their cost of capital, cost of borrowings, cost of purchase of plant and machinery, cost of purchase of material, cost of imports etc. Business units that compete with the niche-differentiation or differentiation generic strategies pursue financial strategies that fund quality improvements. They upgrade their plants, machinery, production processes to maintain the quality above the level of the competitors and invest finances in these areas. These businesses place the top strategic priority on quality maintenance and improvements. The businesses that compete with the niche-Iow-cost/differentiation, low-cost- differentiation, or multiple strategies use their financial function to lower costs, on one hand, and promote quality improvements on the other hand.

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3. Research and Development The two basic areas of research and development are: (i) product/service R&D, and (ii) process R&D. Product/service R&D refers to efforts that ultimately lead to improvements or innovations in the firm's products/services. Process R&D refers to reducing the costs of operations and making them more efficient. Business units that adopt the niche-low-cost and low-cost strategies emphasise process R&D with a view to reduce the cost of operation. Business units that adopt the niche-differentiation and differentiation strategies give emphasis on product/service R&D to produce improved and innovative product models. Businesses that adopt niche-Iow-cost/differentiation, low-cost differentiation, and multiple strategies simultaneously emphasise both on product/service R&D and process R&D. 4. Marketing The strategic considerations of marketing are: products/services, place of market allocation of outlets, channels of distribution, price and promotional activities. The business units that adopt the niche-low-cost and low-cost generic strategic produce no- frills products/services. Business units that adopt generic strategies of differentiation and low-cost differentiation pursue different marketing strategies. Marketing unique, quality products/services that are distinguishable from that of competitors are some of the strategies followed by these businesses. The business units with compete with niche-differentiation and niche-Iowcost/ differentiation strategies tend to offer specialised, high quality to highest quality products to meet the particular needs of a relatively small market. 5. Human Resources Human resource management function includes the major activities like designing and analysing jobs based on the future organisational needs, planning for future human resource needs, recruiting, selecting and employing people based on the needs of the organisation, training and developing employees to develop their human resources, appraising their performance and move the employees among different levels based on organisational needs and employee career goals, fixing and maintaining the compensation package, maintaining conducive human ;elations, and creating and maintaining high quality of work life. In addition to these activities the firms adopting growth strategies go for the human resource development, creating and maintaining harmonious organisational climate, team building, organisational development, empowering the employees, management of diversified cultures and the like. Companies adopting stability strategy do not bring significant changes in human resource management. Companies adopting retrenchment strategies cut the size of human resources, cut the compensation package etc. 6. Management Information Systems All functional areas of the business can be benefited by a well-designed information system. A computer-based decision support system that contains a central data base permits each functional area to access information its needs and to communicate electronically with the other functional departments as necessary. This facility helps each department to keep abreast of what other departments are doing and coordinate its efforts accordingly.

Information systems of most organisations evolve through four stages of growth. At the first stage, companies use electronic data for cost reduction, accounting applications, etc. Computer applications, in the second stage spread into all functional areas. The activities include: forecasting, inventory control, cash flow, personnel records and sales analyses. The third stage focuses on certain control activities such as in purchasing and scheduling. The final stage is the most sophisticated, involving decision support applications such as planning models, simulations, and on-line uses in human resources, cost analyses and order entries. This stage, enables management to develop competitive advantages. INTEGRATING THE FUNCTIONAL PLANS AND POLICIES All functional areas must be executed in perfect coordination to implement the generic strategy successfully. Overall strategic success depends upon the tight integration of all functional areas. Tight integration requires perfect interweaving of one functional area with all other functional areas. The business firms" integration; and above the competitive advantage by accomplishing full functional integration. 1. Superior Product Design Product design has been recognised in recent years as an important competitive dimension. The concept of product design is being broadened to include the features like designing a product for easy manufacturability, improving the product's functionality and quality. Designing a superior product involves the contributions of not only production/operations department but also the contributions of marketing department and finance and costing departments. A well designed product is attractive and easy to manufacture, market, use and maintain. However, superior service, when combined with superior design, gains substantial competitive advantage. 2. Superior Customer Service The customer perceives service value primarily at the time the service is either rendered or not rendered. Therefore, developing and maintaining qualitative customer service is more challenging than improving product quality. All functional areas must work together, like a team to provide qualitative service to the customer, before as well as after sales. Companies that really provide service can command premium prices for their products. Personal attention to the customers is an important way of providing superior service. 3. Superior Speed Speed in developing, producing, distributing products and providing services will give a business a significant competitive advantage. 4. Superior Guarantee Problems of functioning, quality etc. occasionally arise and result in less than acceptable product/service. Companies, in order to avoid the consequences of these problems to customers, guarantee to the customer against acceptable quality and functioning gains competitive advantage over the competitors. A service guarantee is more challenging to provide than a product guarantee. There are five desirable characteristics that are to be included in service guarantees.

They are: (i) The guarantee should be unconditional, with no exceptions.

(ii) It should be easily understood and written in simple language.

(iii) The guarantee should be meaningful by guaranteeing what is important to the customer and making it worth the customer's time and effort to invoke the guarantee, should he or she be dissatisfied.

(iv) The guarantee should be convenient to invoke and not require the customer to appeal to several layers of bureaucracy.

(v) The customer should be satisfied promptly, without a lengthy waiting period.

QUESTIONS PART A 1) What are the reasons for company's failure in general?

2) How would you overcome inertia in organizations?

3) Write a brief note on core competence.

4) What are the ways by which core competence could be developed?

5) What are the generic building blocks of competitive advantage? Elaborate.

6) How do you implement the functional strategies in order to ensure the

implementation of overall strategies?

7). How do you integrate functional strategies and policies in strategy implementation?

Jeyarathmm, M.. Strategic Management, Global Media, 2007. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/momp/detail.action?docID=3011305. Created from momp on 2019-04-21 03:02:42.

CHAPTER FIVE - CORPORATE SOCIAL RESPONSIBILITIES

OUTCOME 5 Identify the ways in which businesses fulfill their responsibilities to different groups of people and institutions.

CONCEPT OF SOCIAL RESPONSIBILITY

The social responsibility concept is based on the premise that business has greater impact on society than can be measured by profit or loss. As a participant in society, business should contribute to the human and constructive social policies that guide society. The concept of social responsibility is merely a first step towards social effectiveness of business.

According to Steiner, "Social responsibility is to understand public consensus, to recognise it, and to cooperate in achieving this. Each business has responsibilities in some way commensurate with its power."

Boone and Kurtz have defined social responsibility as "management's consideration of social effects as well as economic effects in its decisions." It may be noted that social responsibility simply means fulfilling the obligations towards the society and the components of business, and improving its economic and social conditions by all possible means. In other words, the concepts and responsibility assumes that the business has not only economic and legal obligations but also certain other social responsibilities too, i.e., a businessman man besides taking care of this own interest must also take care of others' interest too, viz., the community members.

Business Owes Its Responsibility Towards Society,

First, as a result of the impact of its own operations, which might prove harmful to the community, such as emission of uncontrolled soot from a factory chimney may pollute air or dirty sewage and solid waste material may pollute water.

Second, since it is the society which permits men and women to engage in business, the business in return make contributions to the society, because it is what society demands from it.

Third, social responsibility also emanates from social power which corporations possess and develop, say as a result of being potential employers in society; or affecting ecology, minorities and other social problems.

Fourth, business can be viewed as a custodian of a society's resources which it uses to aC90mpiish it objectives. Therefore, business has not only to protect the interest of those whom it serves but also of society at large as a wise custodian of the latter's resources.

Fifth, the business operates under a set of cultural strains in the same way that any other person in society does.

Sixth, with problems of society becoming increasingly complex and intractable, business is required to share responsibility of the government to alleviate social problems. Often government's inadequacy in meeting social changes calls for other groups of society - business, voluntary agencies, institutions, charitable organisations, etc. for sharing the government's burden in times of droughts, floods, cyclones, earthquakes, epidemics, and other unforeseen calamities. The enlightened businessmen come forward to fulfil their social responsibility in helping meet the situation.

Seventh, with the passage of time, the era of purely private business for private profits has given place to the new idea that business has a duty to report to the public, whose money it is utilising in order to conduct business itself. Such Social Audit gives factual assessment of the things done, and also of the co-operation between labour and management, and the record of their mutual relationship, the economic, social, and educational standard exhibited by the business, and public relations with the consumers.

Eighth, with the emergence of increased public regulation and public ownership of industries, business has been considered as necessary. The equalisation of private and public sectors has, perforce, focused attention to a greater degree on the role of business community in dealing with pressing social problems.

Ninth, the Great Depression of the thirties and the severe economic crisis in later years, when business was subject to severe criticism/attacks and was blamed for the economic ills in society (such as the supply of fake and spurious goods, poor quality, failure to give fair measure, lack of services and courtesy to customers, misleading and immoral advertisements, illegal practices like rack renting, hoarding, cornering, black marketing, profiteering, breach of trust, malpractices and unfair trade practices, and other sins of omission and commission, etc.,) it wanted to get its image improved in the minds of the public. Hence, business began to undertake activities of social benevolence of its own accord.

Tenth, the principle of trusteeship, as propounded by Andrew Carniger and Mahatma Gandhi, emphasised the fact that "A business must be held in trust legally and morally for the benefit of the people whom the business wants to serve.

In addition to making a fair and adequate return on capital, business must be just and humane, as well as efficient and dynamic. The modern business has manifold responsibilities:

(a) to itself,

(b) to its customers;

(d) owners, shareholders and partners, (e) community, and (f) the state. The task of management is to reconcile and harmonise these separate and sometimes conflicting responsibilities.

We discuss, in the paragraphs that follow, the S.R. of business towards these different groups. Figure 5.1 presents business's social responsibilities towards different groups. Fig. 5.1: Business's Social Responsibilities Towards Different Groups.

Fig. 5.1: Business's Social Responsibilities Towards Different Groups

Business Firm’s Responsibilities

Towards Owners/Shareholders Towards Employees Towards Customers

 Fair Dividend  Meaningful work  Fair Price

 Solvent and Efficient Business  Jobsatisfaction  Siperior Quality

 Optimum uUse of Resources  Fair salaries & Benefits  Superior Service

 Planned Growth  Best Quality of Work Life  Superior Product Design

 Effective Communication  Wuccession Planning and

Develoment  Quick and Complete Information

Towards Government Towards Society Towards Inter-Business

 Payment of Taxes, custom Duties, Etc.  Employment Without Discrimination  Fair Competition

 Abide by the Laws  Employment to Disadvantaged

Persons

 Cooperation for Sharing of Scarce

Resources and Facilities

 Observe the Policies  Community Welfare Services  Collaboration of maximisation of

Business Efficiency

 Maintain Law and Security  Business Morality

 Maintaining Pollution-free

Environment

 Maintaining Ecological Balance

Towards Consumers/Customers

Consumers satisfaction is the ultimate aim of all economic activity. This includes that:

(a) the goods must meet the needs of the consumers of different classes, tastes, and purchasing power;

(b) the goods must be reasonably priced, be of a dependable quality and of sufficient variety;

(d) there should be a fair and widespread distribution of goods and services among all the sections of consumers and community; and

(e) that there should be prevention of concentration of goods in the hands of a limited number of producers or purchasers or groups.

Towards Employees

It is the basic responsibility of the enterprise to produce wealth and also to provide opportunities for meaningful work. The management should develop its administration in such a way as to promote a spirit of cooperative endeavor between employers and employees. There should be a sense of participation between capital, on the one hand, and labour and skill, on the other, in their objective toward prosperity and progress. The cooperation of workers can be won by creating conditions in which workers are enabled to put forward their best efforts in the common task as free men. This means recognition;

(i) of the workers' right to a fair wage; (ii) of the right to participate in decisions affecting their working life; (iii) to membership of trade union; (iv) to collective bargaining; and (iv) of the right to strike.

Towards Owners, Shareholders or Stockholders

Management's first duty is to see that enterprise is stable, enterprising and actively engaged in accomplishing its objectives. It would then be capable of providing those who commit their capital to it with such a fair and adequate reward for risk taken as permits the company to attract the necessary capital from the market. This capital is raised by the owners (proprietors, retailer’s wholesalers, sole traders) owning business, its property and looking after its management; the share of stockholders who contribute to the shares and debentures of the company or the partners (if there are any).

The expectations of these three types of owners are:

(i) A fair and reasonable return on the capital invested by them;

(ii) A part in profit, if the Memorandum so specifies, in the shape of profit-sharing or bonus payment schemes;

(iii) Political and economic security for investment through stable government,

(iv) Knowledge about the working of the enterprise, its periodical progress report, so that they may be satisfied that their capital has been faithfully and usefully employed;

(v) A fair amount of dividend or retained earnings; and

(vi) Profiteering, black marketing, cornering of supplies, unfair trade practices are curbed and legally prohibited

Towards Inter-Business

The social responsibilities of business include a healthy co-operative business relationship between different business. Businessmen must resist unfair and unethical competition and avoid unfair interference in their rival's business such as price-rigging, undercutting, patronage, unfair canvassing, supply of substandard goods, application of undue financial, legal and political pressure; spreading false rumours/statements about the rival's products, creating labour troubles for the competitors' industry or launching a boycott campaign of their products, employing unethical advertisements, and controlling the supply of particular goods/services produced by them only so that an artificial scarcity is created in the market, giving rise to monopolistic conditions, artificial high prices as per quality of goods, etc.

Destructive competition is always harmful, or it destroys confidence in business and introduces chaos instead of order and discipline. Therefore, the correct solution is not retaliation but the development of true ideas among the business community and to secure such legal regulation as is necessary to protect businessmen. A good businessman should adopt fair means to meet his rival's competition. This may be by adopting better designs, good advertisements, quick and safe delivery with after-sales service, reasonable price, etc.

It is needless to say that unfair competition enters with extortion, bribery, . kickbacks and granting of discriminatory advertising allowances or 'brokerage fees, and these should be avoided at all costs.

Towards The State

The social responsibilities of business towards the state (government) demands that:

(i) he will be a law-abiding citizen;

(ii) he will pay his dues and taxes to the state fully and honestly;

(iii) he will not corrupt public servants and the democratic process for his selfish ends;

(iv) he will not purchase political support by unfair means;

(v) he will strive fairly and honestly to stimulate economic growth even by making reasonable sacrifices on occasions of national need;

(vi) he will participate in the public life of the country in helping to make policies, fair legislation and working on advisory bodies

(vii) he will sell his goods, commodities and services without adulteration at fair and reasonable prices; and

(viii)he will maintain fair trade practices and refrain from activities like restraint of trade and will not take recourse to hoarding, cornering, and profiteering and other such unfair practices.

The government has also some obligations towards business, such as to provide:

(i) a clean, prompt and efficient administration;

(ii) intelligent, practical laws, easily understood and easily applied;

(iii) reasonable political and social stability without frequent changes legislative, administrative and fiscal policies;

(iv) law and order ensuring safety of life, property and continuing business;

(v) a dynamic framework for rapid economic growth (infrastructure, legal aid);

(vi) rule of law;

(vii) holding of scales evenly between groups and sections in society;

(viii)political and social stability where business can grow and develop;

(ix) reasonable legislation for protecting units of business against monopoly; and

(x) healthy atmosphere to industrial peace.

SOCIAL RESPONSIBILITIES FOR ECONOMIC GROWTH

The business owes a great irresponsibility for economic growth in various directions. Some of the major areas where business can and does contribute towards community welfare as a part of its social responsibility are:

1. In the field of Industry: Industry/business can help rural areas by introducing "self- help' and 'earn-while-you-learn" programmes.

2. In the field of Agriculture: As a social responsibility, a large business house can play an important role in agricultural development, to provide full-time employment to the vast unemployed rural labour force.

3. Housing Facilities: The social responsibility of business in this sphere is great, especially because a major proportion of the rural population is doomed to diseases, squalid existence in hopelessly ill-planned and filthy houses.

4. Transportation: Business and other agencies can help the government by undertaking studies and programmes of technical and financial assistance for the development of cheap public transport

5. Health and Education: Business organisations have their responsibility towards improvement of the quality of the people of the community. They can and should be engaged in works like providing water sources for drinking and bathing, improving sewage disposal system, cleaning dirty areas of the solid waste, reducing pollution, disposal of waste water and other residues; noise, etc.), improving sanitary facilities (through construction of underground drains, cleaning of existing foul water and waste-carrying open drains, improving roads by filling pits and maintaining their cleanliness).

6. Industrial Aid to Education in Urban Areas: Progressive individual businessmen and individual business houses are running or supporting schools, colleges and technical/professional educational institutions.

7. Social Audit On Factual Assessment: This should be done by trained and professional personnel to show the social performance of business. The term "social audit" generally means a comprehensive evaluation of the way a company discharges all its responsibilities to shareholders, customers, employees, community and the government.

A social audit should generally adopt a four-step process, viz;

(a) firm must itemise all the activities that have a potential social impact;

(b) the circumstances leading to these actions or activities must be explained;

(d) the company must examine the relationship between the goals of the firm and those of society to see how the programme relate to one another.

The term "social audit" has been interpreted differently by different people. To some it means the public disclosure of a company's social performance, to others, it means internal evaluation of a company's social responsibility performance and to some others social audit is a comprehensive evaluation of the way a company discharges all its responsibilities to shareholders, customers, employees, and to the wider community.

OBJECTIVES OF SOCIAL AUDIT

Because of the differing views about social audits, they have multiplied motives, which include satisfying the corporate conscience, increasing the wisdom of social programmes, improving public relations and enhancing the credibility of the business. The particular issues are:

(i) minority employment, (ii) pollution/environment, (iii) working conditions, (iv) community relations, (v) philanthropic contributions, and (vi) consumerism issues.

Special Features of Social Audit

Thus it will be noted that social audit includes any activity which has a significant social impact, such as activities affecting environmental quality, equal employment opportunity, consumerism, community needs, labour relations, shareholder relations, economic activities, and fixing responsibility within the firm for social performance.

Social audit can determine only what an organisation is doing in social areas, but not the "amount of social good that results from these activities." It is a process of audit rather than an audit of results. Social audits are so nebulous that they are difficult to measure, and generally accepted social norms are almost not-existent. Raymond Bener observes.

"If there is single technical flaw in the audits that have been attempted, it is the relative absence of norms whereby to judge performance. Granted, many norms are hard to come by: What, for example, would be a good norm against which to judge a company's performance with minority suppliers or community relations? Circumstances vary so much from company to company that it may be a long time before we can come up with any criteria for judgement beyond honest efforts."

Social results are difficult to audit because most of them occur outside an organisation and so a firm has no way to secure data from these outside sources. Even when data are available, cases are so complex that a firm has no way to know how much of the results its actions have caused. However, though results cannot be proved, an audit of what is being done can be considered desirable because it shows how much effort has been made by the business in areas deemed beneficial to community.

Social audit can be made by internal auditors, outside consultants or a combination of the two. Bowen has suggested whoever is selected for doing social audit should be:

(a) oriented toward the social point of view,

(b) conversant with business practices and problems, and

Benefits of Social Audit

Some of the major benefits that accrue from social audit are:

1. It supplies data for comparison with policies and standards so that a management determines how well the organisation is living up to its objectives. "Just as a spaceship in flight must know where it is in order to correct its flight and reach its objective, a business must know where it is in relations to its objectives."

2. It encourages greater concern for social performance throughout the organisation. In the process of audit, preparation of reports and responding to evaluations, employees become more aware of social implications of their actions, and corporate social objectives are more strongly reinforced in all the areas of the organisation.

3. It provides data for comparing effectiveness of different types of programmes, which will give management useful inputs for establishing better programmes.

4. It provides cost data on social programmes so that management can relate the data to budgets, available resources, company objectives, and projected benefits of programmes.

5. It provides information for effective response to external claimants that make demands on the organisation. The press, the public and others want to know what a business is doing areas of their special interest, and a business needs to respond as effectively as possible. The social audit shows a business where it is vulnerable to public pressures and where its strengths lie.

CHAPTER SIX - CONTEMPORARY DEVELOPMENTS

OUTCOME 6

Explain the impact upon business of contemporary developments such as globalization and technological advances.

STRATEGY IN GLOBAL ENVIRONMENT Global Expansion In international business operations, business enterprises pursue global expansion to support generic business level strategies such as cost leadership and differentiation. Companies expand their operations globally in order to increase their profitability. They perform the following activities towards this end.

• Transferring their distinctive competencies

• Dispersing various value creation activities to favourable locations and

• Exploiting experience curve effects

Transferring Distinctive Competencies It refers to a set of unique strengths, which enable a company to attain superior quality, efficiency, innovation and customer responsiveness in the overseas market. The distinctive competencies constitute the basis of competitive advantage. The product offerings reflect those distinctive competencies, which are difficult to be imitated by rivals. Those distinctive competencies enable a company to lower the costs of production or to attain differentiation and go for premium pricing. Usually companies, which go for global market, realize enormous returns by applying those competencies where local competitors do not have such competencies. The phenomenal success of McDonald in China, Brazil, Japan, Russia and France are due to McDonald's unique fast foods and unique skills. When U.S. companies such as Kellogg, Coco-Cola and Procter and Gamble entered into European market, with their branded products, the local competitors were not comparable to them in their marketing skills and products and the American companies proved to be successful in European market. Japanese automobile giants expanded their global operations through their distinctive competencies transferred to production, materials management, marketing, new product development and are successful in their overseas business. Realizing Location Economies Location economies refer to economies that arise from performing a value creation activity in the optimal location for that activity whichever be the place in the world. Thus location economies contribute to low cost production or differentiation of products. Sundaram Fasteners has recently expanded its manufacturing operations to China to take advantage of low labour costs and other concessions to be a low cost leader to compete in the global market. The optimal location will enable business firms to go for value creation at low cost or maximize value creation.

Moving Down the Experience Curve The learning curve and economy of scale are the underlying factors with respect to the experience curve, which enable the company to lower the costs of value creation. The experience curve results in systematic decrease in production costs that could be observed over a period of time. Companies which operate in global market from a single, optimal location will accumulate more volume and achieve cost economies and location economies compared to business units which serve local market or serve multiple market from multiple locations. The underlying basis of learning curve effects and economies of scale arise from spreading the fixed cost of building production capacity over a large output. If the business unit increases the accumulated volume as quickly as possible it can go down the experience curve quickly. So multinational corporations prefer to serve global market from single location to achieve low cost position. Their aggressive marketing practices and pricing pattern help them to go down the experience curve rapidly. Matsushita excelled in this strategy compared to its rivals Philips and Sony. Matsushita was successful to develop a VCR with VHS formatted as the world standard. It reaped enormous experience curve benefits based on cost economies in the process and cost advantage proved to be an entry barrier for other players. To take advantage of experience curve effects, it increased its volume of production. Matsushita served the world market from one production location from Japan and achieved learning curve effects and economies of scale. Competitive Pressures Companies, which perform global business operations, are exposed to two types of competitive pressures. • Pressure for cost reduction and

• Pressure for local responsiveness.

Pressure for Cost Reduction The competitive forces exert conflicting pressures on the business unit. The pressure for cost reduction in global business results in setting up of manufacturing facilities in optimal low cost location with standardized products so as to ride down experience curve. (e.g.) McDonald's hamburgers, Coca-Cola, Levi Strauss blue jeans and Sony television sets. Pressure for Local Responsiveness The pressure for local responsiveness forces companies to come out with differentiated products reflecting the buyer's tastes and preferences and different marketing strategy for different countries to suit the business practices, distribution channels, competitive forces and government policies. So differentiation across countries results in absence of product standardization and it raises costs.

Differences in Consumer Tastes and Preferences International companies respond to pressures for cost reduction by mass-produced, standardized products at the optimal location in the world, in order to realize location economies and experience curve effect. It is commonly found in commodity type products like bulk chemicals, petroleum, sugar, steel, tyres and consumer products like mobile phone, calculators and personal computer. A situation is created to delegate production and marketing functions to subsidiaries. The fast growth of Amstrad, a British electronic company is because of its local responsiveness.

The pressure for local responsiveness is due to differences in consumer tastes and preferences, differences in infrastructure and traditional practices, differences in distribution channels and foreign government demands. Differences in Infrastructure and Traditional Practices The differences in infrastructure and traditional practices force companies to customize products accordingly. Automobiles are designed and customized for left hand driving and right hand driving practices of customers in France and Britain respectively. The traditional driving practices are considered while designing automobiles. Consumer electrical systems are based on 240-volt system in Europe whereas 110 volts’ system is popular in America. So domestic electrical equipment is customized accordingly taking into account the infrastructure facilities in market places. Differences in Distribution Channel The differences in distribution channels and the national character and style of marketing should be considered while designing a product or service. The pharmaceutical companies adopt soft sell vs. hard sell approach in Britain and Japan because the medical practitioners in Britain and Japan do not respond to high-pressure tactics whereas they adopt aggressive marketing practices in U.S. The aggressive marketing practices are suitable for U.S. Host Government Demands The host country governments make economic and political demands to impose a degree of local responsiveness in global corporations. To quote a few illustrations, threats of protectionism, economic nationalism and local content rules (certain portion of a product should be produced locally) dictate international business manufacturers to respond to local needs. Honda, Ford and Toyota have established production facilities in several countries to serve local demands better. Pharmaceutical companies manufacture in multiple locations since clinical testing, registration procedures, pricing restrictions and marketing practices vary from one country to another. Japanese auto companies set up production facilities in U.S. to escape from the threat of protectionism raised by U.S. administration. Automobile manufacturers and pharmacy companies opt for customization of products to respond to local needs, which limits the organization's ability to realize experience curve effects and location economies and cost economies. Strategic Choice In international business, companies pursue four strategies such as international strategy, multi domestic strategy, global strategy and transnational strategy. Each strategy has its benefits and limitations. The suitability of the strategy is determined by the extent of pressures on cost reduction and local responsiveness.

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Fig. 6.1: Four Strategies for International Competition

Image Source: https://i0.wp.com/www.business-to-you.com/wp-content/uploads/2017/01/Global-Transnational- Multidomestic-International-Strategy.png

International Strategy Companies, which follow international strategy, create value by transferring valuable skills and products to foreign markets where local competitors lack such skills, products and competencies. Many international companies offer differentiated product to new overseas market and they tend to centralize R&D functions in their home country. Though they incorporate local customization of products, it will be limited in scope. They usually build production facility and marketing functions in all major markets and the Head office exercises tight control over marketing and product strategy. Procter and Gamble has production facilities in Britain, Germany and Japan apart from its home country U.S. It manufactures differentiated product as it does in U.S. An international strategy is sensible if the company is in possession of valuable distinctive competencies and the pressure for local responsiveness and cost reduction is weak. If pressure for local responsiveness is more it will incur high operating cost and ultimately it will not succeed.

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Fig. 6.2: International Division Structure Image Source: https://image.slidesharecdn.com/organizationstructureininternationalbusiness-120409052743- phpapp02/95/organization-structure-in-international-business-11-728.jpg?cb=1333949349

Multinational Strategy Companies, which adopt multi-national strategy, pay attention to achieving maximum local responsiveness. They transfer skills and products developed at home to overseas markets. They customize the product and marketing strategy to suit different national conditions. Exclusive production and R&D activities are established for each national market. They will incur high operating cost, as they cannot utilize experience curve effects and location economies. A multi-national strategy is appropriate when the pressures for local responsiveness is high and pressures for cost reduction is low. Duplication of production facilities contributes to high cost structure. Many multi-national companies function like decentralized units in an autonomous manner. So the ability to transfer skills, products and distinctive competencies are slowly lost among these autonomous national subsidiaries. The operation in each host country are managed separately as if each is a domestic company.

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Fig. 6.3: Multi-Domestic Strategy Image Source: https://www.tutorialspoint.com/international_business_management/images/initial_division_structur es.jpg

Global Strategy Companies, which adopt global strategy, follow a low cost strategy. The cost reduction is mainly derived from experience curve effects and location economies. For companies, which pursue global strategy, the production, marketing and R&D activities are confined to a few favourable locations; They market a standardized product worldwide to achieve the benefit of experience curve effects and location economies. They do not customize the product. This strategy is suitable in markets where the pressure for cost reduction is high and the pressure for local responsiveness is low. These conditions prevail in semi- conductor industry where global standards have emerged. Intel, Motorola and Texas Instruments pursue this strategy and they create demand for standardized global products.

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Fig. 6.4: Global Product Group Structure Image Source: https://slideplayer.com/slide/681571/2/images/9/Global+Product-Group+Structure.jpg

Transnational Strategy Companies, which follow transnational strategy face high pressure for cost reduction and high pressures for local responsiveness and they try to achieve low cost and differentiation advantages. The competitive forces are so intense that in order to survive in the marketplace, global companies are forced to exploit experience curve effects, pay attention to local responsiveness and transfer distinctive competencies within the country. Distinctive competencies are found in home country and host country. The flow of skill and product should be from home country to foreign subsidiary from subsidiary to home country. This process is known as global learning. All these objectives constitute transnational strategy. Companies, which adopt transnational strategy are trying to simultaneously achieve low cost and differentiation advantages. For example, Caterpillar was forced to look for greater cost economies. In 1980, Unilever had seventeen production units in Europe, which necessitated duplication of assets and marketing network. Now Unilever has considered Europe as a single entity with detergents being manufactured in a few cost efficient plants and used standard packaging and advertising over Europe. In spite of national differences in distribution channels and brand awareness, it still remains locally responsive.

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.Fig. 6.5: Global Matrix Structure Image Source: https://slideplayer.com/slide/4966168/16/images/7/Global+Matrix+Structure.jpg

Global companies pursue global, multi-domestic or transnational strategies depending on the intensity of competitive forces, pressure for local responsiveness and pressure for low cost production in the global environment. MNCs face dilemma in maintaining operating control at the centre and providing decentralised authority for local managers to respond to local demands promptly. They combine a matrix structure with product group or geographic area. 3M in its matrix structure includes product division along with host country subsidiaries. Nestle has adopted product group structure and American Cyanamide has gone for geographic area structure.

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QUESTIONS PART A 1) What are the entry options available to firms in international business? 2) What are the national characteristics, which are required for global competition? 3) Narrate the motives for internationalization of Indian business? 4) Explain the activities carried out by global firms. PART B 1) Discuss some of the international strategies. 2) Explain some of the entry modes available for firms to enter global business. 3) What are the advantages of international strategies? 4) Discuss suitable structures for international operations. Jeyarathmm, M.. Strategic Management, Global Media, 2007. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/momp/detail.action?docID=3011305. Created from momp on 2019-05-07 01:46:32. Copyright © 2007. Global Media. All rights reserved.