what is industry and competitive analysisreliable.redik.in/uploads/documents/chap_2_dynamics… ·...

Prof. Bhambwani’sRELIABLE /CA INTERMEDIATE / S.M./ CHAP- 2 DYNAMICS OF COMPETITIVE STRATEGY.

What is Competitive landscape?Competitive landscape is a business analysis which identifies competitors, either direct or indirect. Competitive landscape is about identifying and understanding the competitors and at the same time, it permits the comprehension of their vision, mission, core values, niche market, strengths and weaknesses.

- Steps to understand the Competitive Landscape

i. Identify the competitor: The first step to understand the competitive landscapeis to identify the competitors in the firm’s industry and have actual data abouttheir respective market share. This answers the question:

- Who are the competitors?ii. Understand the competitors: Once the competitors have been identified, the

strategist can use market research report, internet, newspapers, social media, industry reports, and various other sources to understand the products and services offered by them in different markets.This answers the question:- What are their product and services?

iii. Determine the strengths of the competitors: What are the strength of the competitors? What do they do well? Do they offer great products? Do they utilize marketing in a way that comparatively reaches out to more consumers. Why do customers give them their business?This answers the questions:- What are their financial positions?- What gives them cost and price advantage?- What are they likely to do next?- How strong is their distribution network?- What are their human resource strengths?

iv. Determine the weaknesses of the competitors: Weaknesses (and strengths) can be identified by going through consumer reports and reviews appearing in various media. After all, consumers are often willing to give their opinions, especially when the products or services are either great or very poor.This answers the question- Where are they lacking?

v. Put all of the information together: At this stage, the strategist should put together all information about competitors and draw inference about what they are not offering and what the firm can do to fill in the gaps. The strategist can also know the areas which need to be strengthen by the firm.This answers the questions:- What will the business do with this information?

- What improvements does the firm need to make?- How can the firm exploit the weaknesses of competitors?

2 Explain the term “Strategic analysis” and discuss the issues to be considered in strategic analysisThe first step in strategic management is strategy formulation.Strategic formulation is not based on intuitions, opinions , instincts and judgment of mangersStrategic formulation flows directly from analysis of firm`s environment and its internal resources and capabilitiesIn other words while formulating a strategy we have to consider

1. Industry and competitive conditions2. An organization’s own competitive capabilities, resources, internal strength , weakness

and market positionStrategic analysis involves analytical sequence from strategic appraisal of internal and external situation to evaluation of alternatives and choice of strategy

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Accurate understanding of company`s situation is necessary for decidingSound long term directionSetting appropriate objectives And crafting a winning strategyWithout understating of company`s external and environment there are high chances that the strategy finalized will not fit the situation.

STRATEGIC MANAGEMENT

Figure: Strategy and Environment

Issued to be considered in strategic analysisStrategy evolves over a period of timeIn any strategy formulation there are forces which drive or constrain (restrict) the strategy.Such forces should be balanced in any strategic formulation.Strategic analysis also considers the possible implications of routine decisions.In some cases strategy evolves from a series of small decisions taken over a extended period of time.There are forces which may drive us to make a particular choice (example existence of a wide market) and the same time there are constraints that limit our choice (say existence of big competitor). All such factors are to be balanced. Some of the constrictions can be managed to an extent, however there will be several factors that are beyond the control of managers.

Balance of external and internal factorsThe process of strategy formulation is often described as on matching of internal potential of the organisation with the environmental opportunities.A perfect synchronization of internal potentials and external environment may not be possible or feasible. However strategic analysis involves creating a workable balance between external and internal environment. Opportunities thrown by external environments are to be acted upon keeping in view the strength and weakness of the organization. Also threats possessed by external environments are to be dealt with taking in to consideration strength and weakness of the organization..

Risk It is important for an organization to maintain strategic balanceHowever, the complexity and intermingling of variable in the environments reduces the strategic balance in the organisation. Due to ever changing variables, strategy has to be reworkedEver changing variable in external environment such as competitive markets, liberalization, globalizations, booms recession all affect businesses and pose risk at varying degrees. An important aspect of strategic analysis is to identify the potential imbalances or risks and assesses their consequences.A broad classification of strategic risk that requires reconsideration in strategic analysis is given below.

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Resources

EnvironmentStrategy

Management

2.6

Time

Short-term Long-term


Errors in interpreting the environment cause strategicfailure

Changes in the environment lead to obsolescence of strategy.

Organizational capacity is unable to cope up

with strategic demands.

Inconsistencies with the strategy are developed on account of changes

in internal capacities and preferences

Figure: Strategic Risk

External risks are on account of inconsistencies between strategies and forces in the environment. Non synchronization of strategy and external environment.Internal risk occurs on account of forces that are either within the organisation or are directly interacting with the organization on routine basis.

3 Discuss the areas in which Industry differ Industry widely differ in the following three areasA) economic characteristics B) competitive situations c) future profit prospects For example economic and competitive characteristics of a fast food business and that of a internet service providers will have huge differencesEconomic characteristicsEconomic factors consists of factors such asSize of the marketMarket growth ratePace of technological changeGeographical boundaries of the marketNumber of buyersSize of buyers expenditureWhether products are identical or highly differentiated

Competitive situationsCompetitive situations may be moderate in one industry, fierce in another industry and may be cut throat in some industriesIn some industries competition is based on price. example two wheeler IndustryIn some industries competition is based on quality and reliability or product features and performance – example car IndustryIn some industries competition is based on quick service and convenience

Economic traits and competitive traits of an Industry and expected changes in such situations. determine profit prospects which may be poor, average or excellentProfit prospects in industry may be so varied that leading companies in unattractive industry may find it difficult to earn respectable profits where as weak companies in attractive industries may achieve good performances

Since industries differ widely in economic and competitive characteristics, it becomes necessary to make an Industry and competitive analysis of industry before forming any strategy.

4 What is Industry and competitive analysis? What are the factors to be considered in Industry and competitive analysis.

Ans Industry and competitive analysis is a study of forces operating in the industry and competitive market.

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isks

Inte

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Industry and competitive analysis can be done using a set of concepts and techniques together a clear idea onIndustrial TraitsIntensity of competitionDrivers of Industry changeMarket position and strategies of rival companies,Key factors for competitive successAnd Industry profit outlook.

Industry and competitive analysis enhances the understanding of the firm about the surrounding environment and forms a basis for Matching the strategy to changing Industry conditions and competitive realities.

Factors to be considered in Industry and competitive analysis1 Overview of Dominant Economic features of the Industry2 Nature and strength of competition3 Triggers of change4 Identifying the companies that are the strongest/weakest 5 Likely Strategy of the rivals6 Key factors for competitive success7 Industry profit outlook.

Q5 What are the key dominant economic features of the Industry?Ans Industry is a group of firms whose product have same and similar attributes.

These firms compete for the same buyers.Industries differ significantly in their basic character and structure.Overview of Dominant economic features of an Industry is the first step in Industry analysis.The factors considered to be dominant in Industry are fairly standard and are given below.Market size and nature of marketScope of competitionMarket growth rate and position in the business lifeTypes of distribution channels used to access consumerThe pace of technological change in both production process and new product introductionThe extent to which products and services of rival firm are differentiatedWhether key industry participants are clustered in a particular location for example lock industry in Aligarh, Saris and diamonds in Surat.Whether certain Industry activities are characterized by strong learning and experience effects.Capital requirement and the ease of entry and exitWhether profitability if above. Below par.

Q5 Analyzing the nature and Strength of competition is Important component of Industry and competitive analysis.-Discuss

Ans Identifying the nature and strength of competition is an Important step in Industrial and competitive analysis.It involves Looking into competitive process operating in the industry.Identifying the main sources of competitive pressuresAssessing the strength of each competitive force.This analytical step is essential because, managers cannot devise a successful strategy without in-depth understanding of the Industry’s competitive character.Even though the competitive process in various industry are never same, the competitive forces works similarly In this regard we may mention that porter’s five forces model may be used in Understanding competition.

Q6 Explain the importance of Driving forces in Industry and competitive analysis. Ans Economic features and competitive structure say a lot about fundamental character of an

Industry and competitive situation.However it is important to understand the process of change taking place in the environment. We have to identify the forces which cause changesAll Industries are characterized by trends and new development that gradually produce changes which are important enough. Participating firm have to respond to these changesLife cycle stage of an industry explains the change process but only to a limited extent While it is important to judge the stage of growth in which an industry is, there are other dominant factors which influence and cause changes in the Industry.

These forces are called as Driving forces or Triggers of change

Analyzing these forces involve two steps

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1. Identifying what the driving forces are2 Assessing the impact these forces will have on the industry. Many events affect the industry, which are powerful enough to qualify as driving forcesThe forces vary from industry to IndustryBut many drivers of change fall in to general category affecting different Industry simultaneously

Item Example(a) Internet, new e – commerce opportunities and threats

Introduction of e- ticket facilities and their effect on travel booking agents.

(b) Increasing globalization Emerging BPO opportunities (c) Changes in the long – term industry growth rate.

Growth rates in software Industry

(d) Product innovation New product versions and utilities in mobile phones, Pocket computers etc.

(e) Marketing innovation New marketing strategies, bundling of two or more products.

(f) Entry or exit of major Firms Reliance’s entry into retail business(g) Diffusion of technical know – how across more Companies / countries

Patents for turmeric, paddy seeds, etc.

(h) Changes in cost structure and efficiency Newer production processes, technologies, reduction in manual efforts, etc.

Q7 Explain the concept of strategic Group and Strategic Group mapping.

Ans A strategic groups consists of those rival firms with similar competitive approaches and positions in the market.Companies in the same strategic groups resemble one any other in several ways .They have a comparable product line, sell in the same price rangeThe quality of products supplied by them is more or less ,same, the use the same distribution channels. They have similar buyers. The depend on identical technical approaches.Strategic groups mapping is a useful analytical tool for comparing the market position of each firm separately or for grouping them in to like positions where an industry has many competitors such that it is not possible to examine each one in depth.An Industry contains only one strategic group when all sellers pursue identical strategiesAt the other extreme, there are as many strategic groups as there are competitors when each rival pursues a distinctively different competitive strategy.The process of constructing a strategic groups map and deciding which firm belong In which strategic groups is given below.

Identity the competitive characteristics of different firm in the industry. The typical characteristic arePrice range ( high medium low)Quality range( high medium low)Geographic coverage( (local, regional national Global)Degree of vertical integration(non , partial full)Product line breadth (Wide narrow)use of Distribution channels((one, some , all)Degree of service offered.(non, limited full)From the abovementioned variables two variables are selected and plotted on a map Each firm gets a particular position on the map

Firm falling in or around the same space are grouped as a strategic group.Draw circles around each strategic group, making the circles proportional to the size of groups share in the total industry sales/revenues.

Strategic groups mapping is a useful tool in understand Industry and competitive environment.

Q7 Explain the term “competitive Intelligence”Ans Competitive intelligence is an important step in Industry and competitive analysis.

Competitive intelligence involves monitoring the

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Strategies deployed by the rivals, Their latest moves,Strength and weakness of competitorsAnticipating the likely actions of the competitorsA company has to pay attention to what the competitors are doing.It if does not monitor the actions of the competitors, the company will enter blindly in the competitive battle.Monitoring the actions of rival is a necessary condition to out perform its rivalsCompetitive intelligence can help a company to determine whether it needs to defend against a specific move taken by rivals or whether those moves provide an opening for a new opportunity to the company.

Q8 Write short notes on “Key success factors for competitive success “Ans Key success factors as the name suggest are those factors that affect the ability of a

firm/Industry to prosper in the market place. In other words KSF are factors which make the firm/Industry successful. Needless to say that a company cannot ignore these factors in an Industry and competitive analysis.Key success factors by their very nature are very important for all firms in the industry. All competitors have to pay close attention to them.Key success factors are prerequisites for Industry success or failure.For identifying key factors, three questions are to be answeredOn what basis do customers choose between the competing brands of sellers, in other words what attributes are crucialWhat resources and competitive capabilities does a seller need to have to be competitively successful?What does it takes for sellers to achieve a sustainable competitive advantage?

These factors make the difference between profit and loss of a company, survival and death, and growth and stagnation.Some of the key success factors are

1 Strategies in production, marketing etc2 Product attributes and strengths3 Resources, Internal and External4 Core competencies5 Competitive capabilities

Activity KSFs PurposeApparel/Garment manufacturing

1. Appealing designs & colour Combinations.2. Low – cost manufacturing efficiency.

* Increased Buyer interest,* Competitive pricing and profit margin

Publishing of books for CA Students

1. Coverage of syllabus topics, including past exam questions.2. Pleasing Presentation and simple language.

* Exam preparation requirement.* Easy to remember and understand

Key success factors vary from Industry to Industry and from time to time within the same IndustryIn most of the cases there are 3 to 4 key success factors in the industryEven amongst 3 or 4 factors, one or two usually outrank the others in importanceThe purpose of identifying key factors is to make judgments about what things are more important to competitive success and what things are less important.

Q9 Write a Note on Profit outlook of an Industry.In an industrial and competitive analysis we have to analyze

1 Overview of Dominant Economic features of the Industry2 Nature and strength of competition3 Triggers of change4 Identifying the companies that are the strongest/weakest 5 Likely Strategy of the rivals6 Key factors for competitive success

The results of analysis of the above factors helps us to draw conclusion about the relative attractiveness or unattractiveness of the industry.Strategy formulators have to assess the industry outlook before deciding whether industry and competitive conditions present an attractive business opportunity for

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the organization or whether its growth and profit prospects is gloomyAs a general proposition, if an Industry’s overall profits prospects are above average, the Industry can be considered attractive. It its profits prospects are below average it is considered as unattractive.

10 What are core competenciesCore competencies are capabilities that serve as a sources of competitive advantage to a firm over its rivals.C.K Prahlad and Gary Hamel have advocated a concept of or competency which is widely used in management theories.Competency is defined as a combination of skills and techniques rather than individual skill or separate technique.Core competency is combined utilization of several separate individual capabilities, skills and techniques which gives competitive advantage to a firm over it rivals. Thus core competencies cannot be build on one capability of single technological know-how, it a result of integrating many skills and techniques.

Accordant to C.K. Prahalad and Gary Hamel, there are three conditions for making r core competencies are identified in three areas.

1. Competitor differentiation2. Customer value

3. application to other markets

1 Competitor differentiation.A company is said to have a core competency if the competence is unique and it is difficult for competitors to imitate, This can provide a company an edge competed to competitors.It allows company to provide better products or services to market with no feat that competitors can copy it. Company has to keep on improving these skills in order to sustain its competitive position.Even if all companies are operating in the same market have equal skills and resources, of one company can perform it significantly better, the company has obtained a core competence.

2 Customer value.The second conditions to be met is customer value. A core competency should make a impact on the perceived customer benefits The produce or service should deliver fundamental benefit for the end customer in order to be a core competence. The service or the produce has to have real impact on the customer as the reason to choose to purchase them. If the competence does not create impact on the customer it is not a core competence

3 Application of competencies to other marketsCore competency must be applicable to the whole organization. Core competency cannot be only one particular skill or specified area of expertise. Therefore although some special capability would be essential or crucial for the success of business activity it will not be considered as core competence if it is not fundamental from the whole organizations point of view.Thus a core competence is a unique set of skills and expertise, which will be used throughout the organization to open up potential markets to be exploited.Core competencies are often visible in the form of organizational functionFor example Hindustan Level limited has core competence in marketing and SalesThis means that HUL has used its resources to form marketing related capabilities which in turn allows it to market it produces in ways which are superior than those of others.

Similarly Wal-Mart focuses on lowering operating costs. This core competence has enable Wal-Mart to sell to prices goods lower than most competitors resulting in to increase in profit margin.

Core competencies distinguish c company competitively and relief its personality. These competencies emerge over a period of time thorough organizational process of accumulating and learning how to deploy different resources and capabilities.

ExampleSmall retails shop have core competencies and gain competitive advantage in the area of

i) Personal services to customer ii) extended working hoursiii) Easy credit iv) proximity

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Big retail stores and super markets have special core competence in the areas of i) Merchandising ii) securing supplies at lower cost ii) iii) computerized stock ordering, billing system .

Q11 Discuss the methods to identify and build core competencies Capabilities which are valuable , rare ,costly to imitate and non substitutable are core competenciesValuable . Core competencies should allow the firm to exploit opportunities or avert the threats in its external environment. Capabilities should enable firm to exploit opportunities and thereby create value for the customers.

Rare : Core competencies are very rare capabilities and very few of the competitors possess this. Capabilities possessed by many rivals are unlikely to be sources of competitive advantage for any of them. Competitive advantage arises only when firms develop and exploit valuable capabilities that differ from those of competitors

Costly to imitateCostly to imitate means other firms are unable to develop easily such capabilities For example Intel has a rare fast Research and development cycle time. The produces of Intel are imitated but it is difficult to imitate R and D cycle time capability of Intel.

Non substitutable. Capabilities will become core competencies if capabilities are non substitutable. The competitors should not be able to imitate the capability and also should not be able to make a capability which is a substitute of core competency.

2 Value chain?

A value chain is the full range of activities – including design, production, marketing and distribution – businesses conduct to bring a product or service from conception to delivery. For companies that produce goods, the value chain starts with the raw materials used to make their products, and consists of everything added before the product is sold to consumers.

Value chain management is the process of organizing these activities in order to properly analyze them. The goal is to establish communication between the leaders of each stage to ensure the product is placed in the customers' hands as seamlessly as possible.

Value chain represents the internal activities a firm engages in when transforming inputs into outputs

Value chain analysis (VCA) is a process where a firm identifies its primary and support activities that add value to its final product and then analyze these activities to reduce costs or increase differentiation.

A value chain analysis helps you recognize ways you can reduce cost, optimize effort, eliminate waste and increase profitability. A business begins by identifying each part of its production process, noting steps that can be eliminated and other possible improvements.

In doing so, businesses can determine where the best value lies with customers, and expand or improve said value, resulting in either cost savings or enhanced production. At the end of the process, customers can enjoy high-quality products at lower costs.

Value chain analysis helps an organisation to identify and builds its core competencies.

Porter's value chainHarvard Business School's Michael E. Porter was the first to introduce the concept of a value chain. Porter, who also developed the Five Forces Model to show businesses where they rank in competition in the current marketplace. Porte discussed the value chain concept in his book "Competitive Advantage: Creating and Sustaining Superior Performance"."Competitive advantage cannot be understood by looking at a firm as a whole," Porter wrote. "It stems from the many discrete activities a firm performs in designing, producing, marketing, delivering and supporting its product. Each of these activities can contribute to a firm's relative cost position and create a basis for differentiation."

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http://www.businessnewsdaily.com/5446-porters-five-forces.html


In his book, Porter splits a business's activities into two categories: primary and support.

Primary activities include the following: Inbound logistics are the receiving, storing and distributing of raw materials used in the

production process. It also includes material handling, stock control, transport etc. Operations is the stage at which the raw materials are turned into the final product.

Matching, packaging assembly and testing activities etc are operational activities Outbound logistics is the distribution of the final product to consumers.

It includes storing, and distributing the product to customer. For tangible products this would be warehousing, finished goods handling transport etc. In case of services , it may be more concerned with arrangements for bringing customers to the service.

Marketing and sales involves advertising, promotions, sales-force organization, distribution channels, pricing and managing the final product to ensure it is targeted to the appropriate consumer groups.

Service refers to the activities needed to maintain and enhance the product's performance after it has been produced, and includes things like installation, training, maintenance, repair, warranty and after-sale services.Each of theses groups of primary activities is linked to to support activities, Theses can be divided in to four areas.

Procurement is refers to the process for acquiring the various resources inputs to the primary activities.

Technology development can be used in the research and development stage, in how new products are developed and designed, and in process automation.

Human resource management includes the activities involved in hiring and retaining the proper employees to help design, build and market the product.

Firm infrastructure refers to an organization's structure and its management, planning, accounting, finance, and quality-control mechanisms.The relation between primary and support activities is shown by means of diagram given below.

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Primary activities

margin

Inbound Operations Outbond Marketing &Service logistics logistics Sales

marginHuman Resource Management

Technology Development Procurement

Support Activities

Firm Infrastructure


Q12 Value chain Analysis is useful in identifying and building core competencies-discussValue chain represents the internal activities a firm engages in when transforming inputs into outputsValue chain analysis (VCA) is a process where a firm identifies its primary and support activities that add value to its final product and then analyze these activities to reduce costs or increase differentiation.Since value chain analysis is concerned with identifying and analyzing activities in value chain, it helps us to separate activities which are important for strategy of organization and which link together both inside and outside the organization.

Although a threshold competence (minimum competence) is necessary in all activities for successful operation of an organization, it is important to identify those competences which are very critical for strategy of the organization. These activities are called as core competences and will differ from organization to organization.For example in Automobile sector US giants like ford and General markets had core competences of established dealer network s and overseas production plants. Mean while Japanese manufacturers were developing competences in defect free manufacture.Value chain analysis is a reminder that the long term competitive position of an organization is concerned with it s ability to sustain value for money products. Value chain analysis helps in identifying those activities which the organization must undertake at a thresh hold level of competence and also identify these which represent core competences of the organization.

Q13 What is competitive advantage and what is role of resources in competitive advantageDiscuss the characteristics of resources which help an organization to sustain competitive advantageSome companies outperform other companies. Some companies keep to sustain growth which is much higher than that achieved by othersIf a company`s strategy results in super performance, the company is said to have competitive advantageCompetitive advantage is a position which allows firm to gain an eduge over rivals when competing.Competitive advantage is a unique features of a company and its products which customers perceive as superior to those of others.Competitive advantage is achieved when a firm formulates and successfully implements the value creation strategy and other firms are unable to duplicate it or find it too costly to imitate it.

Role of resources ,capabilities and value creation in achieving competitive advantageResources held by the firm create difference in firms performances and competetitive advantage to the firm. If the firm possesses resources and capabilities which are superior to those of competitors than if the firm utilizes these resources and capabilities effectively, it should be possible for it to establish a competitive advantage .Firms have to uses resources efficiently and think constantly about how to mange them to increase the value for customers.Resources and capabilities are not inherently valuable but they create value when the firm can use them to perform certain activities that result in a competitive advantage

Four characteristics of resources determining sustainability of competitive advantageDurability : of Resources: .The period over which competitive advantage is sustained depends upon durability of resourcesIn Industries where rate of innovations is fast, produce patents are quite likely to become obsolete it become difficult to sustain competitive advantage for a long period.Similarly capabilities which result from management expertise of CEO are vulnerable on his or her retirement.

TransferabilityThe easier it is to transfer resources and capabilities between companies, the less is the sustainability of competitive advantage.If competitors can quickly access the capabilities and resources which gives competitive advantage, the lesser will be the duration of competitive advantage.LimitabilityIf the resources and capabilities cannot be purchased by a would be imitator than they will have to built it from scratch. For example in financial services, innovations lack legal protection and can be easily copied

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therefore competitive advantage cannot be sustained for a longer period

Appropriation of returns. Even where resources and capabilities are capable of offering sustainable advantages, there is an issue as to who receives he return on these resources.If the firm is able to properly distribute such returns competitive advantage will sustain for a longer period

Q14 Write a note on value creation ?The concept of value creation was introduced primarily for providing products and services to the customers with more worth. Value here means value in use ( utility).Values is measured in terms of features of product , quality, availability, durability , ease in performing and using, for which customers are willing to pay.Thus we can say that the value creation is an activity or performances by the firm to create value that increases worth of goods.

The organizations who create values get a competitive advantage in industry.The concept of value creation was extended when value creation was used for shareholders in terms of better returns of their investments and increase in share prices.Many businesses now focus on value variation both in the context of better vale for pursomers as well as stake holders in the business.Value creation leads to competitive advantage which leads to superior profits. At the most basic level, how profitable company becomes depends upon three factors 1 value customers place on the products of the company

2. The price that a company charges for its products3. The cost of creating these products.

The value customers place on a produce reflects the utility from the produceUtility determined value which the customer is ready to payPrice indicates the amount which customer actually paysValue – price = consumer surplusPrice – cost - profit gained by firmThis is exhibited in diagram given below.

Miechal porter argues that a company can generate competitive advantage in two different ways either through produce differentiation or cost advantage.According to porter differentiation means capability to proceed customers superior and special value in the form of products.A company may even demand higher price for such differentiated special features products.If the company enjoys cost advantage, it can sell products at lower cost as compared to others.

Q10 What is portfolio analysis?Ans A business portfolio is a collection of business and products that make up the company.

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A company must conduct portfolio analysis Portfolio analysis is a tool by which management identifies and evaluates various businesses that make up the company.Portfolio analysis is primarily used for competitive analysis and corporate strategic planning in multi product and multi business firms.

The main advantage in adopting portfolio approach in a multi product or multi business firm is that resources could be channelised at the corporate level to those business segments that possess the greatest potential.In order to re design the business portfolio, the business must analyze its current business portfolio and decide which s business should receive more , less or no Investment. Business portfolio analysis, helps a company to develop growth strategies by adding new products or business to the portfolio.Three important concepts should be understood as a pre requisite to understand different models of portfolio analysisThese three important concepts are

1 Strategic business unit2 Experience curve3 Product life cycle.

Q11 Write short notes on1 Strategic business unit2 Experience curve3 Product life cycle.

1 Strategic Business unit.A strategic business unit represent key businesses A strategic business unit is a unit of the company that has a separate mission and objective and which can be planned independently from other businesses of the company.The S.B.U can be a division of the company, a product line, or even a single product or a brand.An S.B.U has the following characteristicsIt is a single business collection of related businesses that can be planned separately. It has its own set of competitorsIt has a manager who is responsible for strategic planning and profit.

Portfolio analysis beings with identifying key businesses which are called as strategic business units.After identifying Strategic business units, the company has to assess their respective attractiveness and decide how much support each SBU deservesThere are number of techniques for corporate portfolio analysisThe most popular is Boston consulting group matrix or product portfolio matrix.

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Experience CurveExplain the concept of Experience Curve and highlight its relevance in strategic management.

Experience curve is based on the commonly observed phenomenon that units cost decline as a firm accumulates experience in terms of a cumulative volume of production.This implies that larger firm or older firms in an Industry tend to have lower unit cost of production as compared to New firms.Experience curve results from a variety of factors such as learning effects, economies of scale, product redesign and technological improvements in production.The concept of experience curve is relevant for a number of areas in strategic management.

For instance, experience curve is considered as a barrier for new forms contemplating entry in an Industry.It can be used to build market share and discourage competition as is done by Bajaj Auto in two wheeler market, against the other players such as Gujrat Narmada and LML Vespa limited.The likely strategic choice for underdog competitors should be to concentrate on a particular market statement based on demography or geography.

3 Product life cycle. Product life cycle refers to the stages through which a product passes in the market These stages areIntroduction (slow growth of sales)Growth(rapid market acceptance)

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Maturity(slow down in growth)Decline.( sharp downward drift)If we take sales of a product on Y axis and time period on /X axisWe get a horizontal shaped curve indicating various stages of product in the market.The same stages thorough which a product passes can be applied to business.In other words any business unit also goes through theses four stages.The concept of PLC is useful in portfolio analysis.The concept as already said applies to Strategic business unit.It helps us to identify the stage through which each business unit is passing Based on the stage of Business unit, one can formulate an appropriate strategyFor example expansion may be feasible alternative for business in the introductory and growth stageMature business may be used as source of cash for investment in other business which need resourcesA combination of strategies like selective harvesting, retrenchments etc may be adopted for declining businesses.This Product life cycle helps us to adopt the policy of “Horses for courses “

Intro Growth maturity decline

TimeFigure: Product Life Cycle

Q12 What are the techniques for corporate portfolio analysis?Techniques for Corporate Portfolio analysis.

1 Boston consulting groups growth-share matrix2 Ansoff`s Product market growth matrix3 ADL Matrix4 General Electric model.

1 Boston Consulting groups growth share matrix,BCG growth share matrix is a technique for analyzing corporate portfolio.Autonomous divisions of an organization make up what is called a business portfolio.When a firms division is a strategic business unit, a separate strategy is to be developed for each such strategic business unitThe Boston consulting groups growth-share matrix helps us to formulate a strategy for various business unit based on the category in which the strategic unit falls. The categories are based on market growth rate and relative share in the marketThe market growth rte may be high or lowAnd share of Business unit in the market may also be high or low.This approach uses various metaphors to describe Business units based on combination of Growth rate of market and share in the market.High market growth rate and high share of the business unit in the market – Star

High market growth rate and low share of the business unit in the market – question mark

Low market growth rate and high share of the business unit in the market – cash cows

Low market growth rate and Low share of the business unit in the market – Dogs.

1 Stars Business unitsThere business unite represents best long run opportunities for growth and profitability.Division with high share in the market and high industry growth should receive substantial investment to maintain or strengthen their dominant positions.

2 Question marksThese business units have relative low share in market in an Industry with high growth rate.

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Sale

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The cash need of such business units are high so as to hold their market share. The need heavy investments with low potential to generate cash.These business units are called as question marks as the organization has to decide whether to strengthen them by pursing intensive strategy or sell them.An intensive strategy can turn such units in to stars by utilizing the opportunity of high growth rate in the Industry.

3 Cash cowsThese business units a high share in the market in an Industry with low growth rateThese units need less investment to maintain their market share.These units generate cash in excess of their needsCash cow divisions should be managed to maintain their strong position for as long as possible.Product development or concentric diversification may be attractive strategies for strong cash cows.

4 DogsThese business units have low market share in an Industry in which growth rate is low.These units may generate cash which is enough to maintain themselves. However these units do not have a future. Some times cash cows are used for survival of dogs.Dogs should be minimized by means of disinvestment or liquidation.

Once the organisation has classified its SBU as above m it must determine which role each will play in future. The four strategies to be pursued are discussed below.

1 Build here the objective is to increase market share even by forgoing short term earnings in favour of building a strong future with a large market share. This strategy may be appropriate for business units falling question mark category.

2 Hold. Here the objective is to preserve the market share. This stragy is useful for cash cows category

3 Harvest. Here the objective is to increase short term cash flow regardless of long term effects.

4 Divest. Here the objects is to sell or liquidate the business because resources can be better used elsewhere.

Limitation of BCG growth matrix.1 Viewing every business unit as either star, cash cow dogs etc is oversimplification2 Manu strategic business units fall right in the middle of BCG matrix a d thus

cannot be easily classified3 Management may find it difficult to define SBU and measure market share and

growth rate in the Industry4 It focuses only on classifying current businesses but does not provide advice for future

planning.5 It places to much emphasis on market –share growth or growth through entry in to attractive

markets. This can cause unwise expansion in to hot, new and risky ventures or giving up established units too quickly.

PM

An industry comprises of only two firms-Soorya Ltd. and Chandra Ltd. From the following information relating to Soorya Ltd., prepare BCG Matrix:

Product Revenues Percent Profits Percent Percentage Percentage(in ` ) Revenues (in ` ) Profits Market Industry

Share Growth rateA 6 crore 48 120 lakh 48 80 + 15B 4 crore 32 50 lakh 20 40 + 10C 2 crore 16 75lakh 30 60 -20D 50 lakh 4 5 lakh 2 5 -10

Total 12.5 crore 100 250 lakh 100

AnswerUsing the BCG approach, a company classifies its different businesses on a two dimensional growth-share matrix. In the matrix, the vertical axis represents market growth rate and

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provides a measure of market attractiveness. The horizontal axis represents relative market share and serves as a measure of company strength in the market. With the given data on market share and industry growth rate of Soorya Ltd, its four products are placed in the BCG matrix as follows:

Relative Market Share

High Low

Product A Product B

Rate H i g h [80% Market Share [40%Market Share

+15% Growth Rate] +10%Growth Rate]

Grow

th

Stars Question Marks

M ar ke Product C Product D-20% Growth Rate] -10% Growth Rate][60% Market Share [05% Market Share

Cash Cows Dogs

Product A is in best position as it has a high relative market share and a high industry growth rate. On the other hand, product B has a low relative market share, yet competes in a high growth industry. Product C has a high relative market share, but competes in an industry with negative growth rate. The company should take advantage of its present position that may be difficult to sustain in long run. Product D is in the worst position as it has a low relative market share, and competes in an industry with negative growth rate.

Ansoff’s Product market growth Matrix.The Ansoff’s product market growth matrix is useful tool that helps business to decide their product and market growth strategy.It gives an Idea about strategy to be adopted in existing and new markets and for existing products or new productsThe strategy to be adopted is shown in the table given below.

Existing Products New ProductsExisting Markets

Market Penetration Product Development

New Markets Market Development DiversificationFigure : Ansoff’s Product Market Growth Matrix

Market penetration. Market penetration refers to a growth strategy where the business focuses on selling existing product in existing market.Market penetration is achieved by increased sale to present customers This might require great spending on advertising or personal selling.Penetration is also done by increasing usage by existing customer.The idea of market penetration is to increase Market share of the product.

Market development.This growth strategy is adopted when business seeks to sell its existing product in new markets.It involves identifying and developing new markets for the current products of the company.

This strategy can be achieved thorough identifying new distribution channels, different pricing policies to attract different customers and create new market segments.

Product development. Product development referst to a growth strategy where business aims to Introduce new products in to existing markets.It is a strategy for company’s growth by offering modified or new product to current market.

This strategy may require the development of new competencies and requires the business to develop modified products which can appeal to existing markets.

Diversification. Diversification refers to a growth strategy where a business markers new products in new market.

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It is a strategy by starting up or acquiring business outside the company’s current product and market.This strategy is risky because it does not rely on either the company’s successful product or its position in established market.Typically the business is moving in to markets in which is has little or no experience.

In the context of Ansoff’s Product-Market Growth Matrix, identify with reasons, the type of growth strategies followed in the following cases:(i) A leading producer of tooth paste, advises its customers to brush teeth twice a day to

keep breath fresh.(ii) A business giant in hotel industry decides to enter into dairy business.(iii) One of India's premier utility vehicles manufacturing company ventures to foray into

foreign markets.(iv) A renowned auto manufacturing company launches ungeared scooters in the market.AnswerThe Ansoff’s product market growth matrix (proposed by Igor Ansoff) is an useful tool that helps businesses decide their product and market growth strategy. This matrix further helps to analyze different strategic directions. According to An off there are four strategies that organisation might follow.(i) Market Penetration: A leading producer of toothpaste, advises its customers to brush

teeth twice a day to keep breath fresh. It refers to a growth strategy where the business focuses on selling existing products into existing markets.

(ii) Diversification: A business giant in hotel industry decides to enter into dairy business. It refers to a growth strategy where a business markets new products in new markets.

(iii) Market Development: One of India’s premier utility vehicles manufacturing company ventures to foray into foreign markets. It refers to a growth strategy where the business seeks to sell its existing products into new markets.

(iv) Product Development: A renowned auto manufacturing company launches ungeared scooters in the market. It refers to a growth strategy where business aims to introduce new products into existing markets.

ADL MatrixThe ADL Matrix has derived its name from Arthur D. Little.It is a technique of portfolio analysis based on product life cycle.

This approach forms a two dimensional matrix based on stage of Industry maturity (environmental assessment) and the firms competitive position.(business strength assessment)Stage of Industry maturity is an environmental measures that represent a stage in Life cycle of the IndustryCompetitive position is a measure of business strength that helps in categorization of products of SBU in to one of five competitive positions. (dominant, strong , favourable , tenable, weak)Strategy is to be determined based on combination of Stage of the Industry in its life cycle and Competitive position of the product or SBU.

Stage of industry maturityCompetitive position

Embryonic Growth Mature Ageing

Dominant Fast growBuild barriers

Act offensively

Fast growAttend costLeadership

RenewDefend position

Act offensively

Defend positionAttend costLeadership

RenewDefend positionAct offensively

DefendpositionRenewFocus

ConsiderWithdrawal

Strong DifferentiateFast grow

DifferentiateLower cost

Attack small firms

Lower costFocus

DifferentiateGrow with industry

Find nicheHold niche

Harvest

Favourable DifferentiateFocus

FocusDifferentiate

FocusDifferentiate

HarvestTurnaround

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Fast grow Defend HarvestFind nicheHold nicheTurnaroundGrow with industry

Hit smaller firmsTenable Grow with

industryFocus

Hold nicheTurnaround

FocusGrow withIndustry

Withdraw

TurnaroundHold nicheRetrench

DivestRetrench

Weak Find nicheCatch – upGrow with industry

TurnaroundRetrenchNiche or withdraw

WithdrawDivest

Withdraw

Figure : Arthur D. Little Strategic Condition Matrix

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The General Electric ModelThe General Electric Model (developed by GE with the assistance of the consulting firm McKinsey & Company) is similar to the BCG growth-share matrix.However, there are differences. Firstly, market attractiveness replaces market growth as the dimension of industry attractiveness, and includes a broader range of factors other than just the market growth rate. Secondly, competitive strength replaces market share as the dimension by which the competitive position of each SBU is assessed. This also uses two factors in a matrix/ grid situation as shown below:

General Electric Model.

Business position High Medium Low

High Medium Low

The GE Matrix

Each of the above two factors is ratted according to criteria such as the following:

Evaluating the ability to compete:Business position

Evaluating the Market Attractiveness

Size SizeGrowth Growth

Share by segment Customer satisfaction levelsCustomer loyalty Competition: quality, types,

Margins Effectiveness, commitmentDistribution Price levels

Technology skills ProfitabilityPatents Technology

Marketing Government regulationsFlexibility Sensitivity to economic trends

OrganizationCriteria for rating Business Position and Market Attractiveness.

Q14 What are the various methods of Generating strategiesMethod of generating strategies

A SWOT analysisB TOWS Matrix

SWOT AnalysisFor generation of a series of strategic alternatives or choices, it is necessary to analyse firms internal strengths and weakness and its external opportunities and threats.Identification and analysis of strengths, weakness, opportunities and threats is normally referred as SWOT analysis.

Strategic thinking requires generation of a series of strategic choices or alternatives Keeping in view of company’s internal Strength and weakness and External opportunities and treats.Strength is an inherent capability of the organization which it can use to gain strategic advantage over its competitorsWeakness is an inherent limitation or constraint of the organization which creates strategic disadvantage

Opportunity is a favourable condition in the organization environment which enables it to strengthen its positionThreat is an unfavorable condition in the organizations environment which causes a risk for or damage to the organization’s position.

The object of SWOT analysis is to identify the strategies which will create a firm specific business model.The business model will align or match resources and capabilities of the company to the demands of the environment in which it operates.Thinking strategically requires managers to identify the set of strategies that will create and

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Mar

ket A

ttra

ctiv

e

Invest Invest Protect

Invest Protect Harvest

Protect Harvest Divest


sustain a competitive advantage.

Significance of SWOT analysis.Logical framework for analysisSWOT analysis provides a logical framework for systematic generation of alternative strategies and choice of a strategy. Swot analysis provides a frame work for systematic and sound understanding of issues bearing on the business situation.

Matching internal environment and external environmentSwot analysis presents the information about internal and external environment in a structured form where it is possible to compare external opportunities and threats with internal strengths and weakness.It helps in matching external and internal environment so that a strategists can come out with a suitable strategy by developing certain patterns of relationshipsThe patterns are combinations.For examples high opportunities and high strengthsHigh opportunities and low strengthsHigh threats and high strengths High threats and low strengthsIn each case a different strategy is needed as the situation varies.

It guides the strategist in strategy identification. It is natural that a strategist faces a problem when his organization cannot be matched in four patterns. It is possible that the organization may have several opportunities and some serious threats. It is also possible that a organization may have powerful strengths coupled with major weakness.In such a situation SWOT analysis guides the strategist to think of overall position of the organization that helps to identify the strategy

Swot analysis helps managers to craft a business model or models that allows a company to gain a competitive advantage in its industry.Competitive advantage leads to increased profitability and this will maximize company’s changes of surviving in the fast changing global competitive environment that characterizes most industries today.

PM To which industries the following developments offer opportunities and threats?"Increasing trend in India to organize IPL (Cricket) type of tournaments in other sports also."An opportunity is a favourable condition in the organization’s environment which enables it to strengthen its position. On the other hand a threat is an unfavorable condition in the organization’s environment which causes a risk for, or damage to, the organization’s position. An opportunity is also a threat in case internal weaknesses do not allow organization to take their advantage in a manner rivals can.The IPL (Cricket) tournament is highly profit and entertainment driven. A number of entities and process are involved in this IPL type tournament. IPL (Cricket) type of tournament would offer opportunities/threats to the following industries:Opportunities:

• Stadiums.• Sports Industry.• Manufactures of sports items.• Media Industry – Sports channels / television, advertisers.Threats:• Entertainment industry like TV serials, cinema theatres, Entertainment theme parks

as competitors will be fighting for the same viewers/target customers.• Tourism and hotel Industry.• Event Management.

` TOWS MATRIXPM Discuss the relevance of Tows Matrix in strategic planning process.

Heinz Weihrich has developed a matrix called TOWS matrix.The object of TOWS matrix is to identify a proper strategy to be pursued The strategy to be pursed is based on combination of Strength and weakness and threats and opportunitiesTOWS matrix helps us to identify Strategies using same inputs (Strengths, weakness, threats and opportunities) which were used in SWOT analysis.

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How is TOWS Matrix an improvement over the SWOT Analysis? Describe the construction of TOWS Matrix.Through SWOT analysis organisations identify their strengths, weaknesses, opportunities and threats. While conducting the SWOT Analysis managers are often not able to come to terms with the strategic choices that the outcomes demand. Heinz Weihrich developed a matrix called TOWS matrix by matching strengths and weaknesses of an organization with the external opportunities and threats. The incremental benefit of the TOWS matrix lies in systematically identifying relationships between these factors and selecting strategies on their basis. The matrix is outlined below:

The TOWS Matrix is a relatively simple tool for generating strategic options. Through TOWS matrix four distinct alternative kinds of strategic choices can be identified.SO (Maxi-Maxi): SO is a position that any firm would like to achieve. The strengths can be used to capitalize or build upon existing or emerging opportunities.ST (Maxi-Mini): ST is a position in which a firm strives to minimize existing or emerging threats through its strengths.WO (Mini- Maxi): The strategies developed need to overcome organizational weaknesses if existing or emerging opportunities are to be exploited to maximum.WT (Mini-Mini): WT is a position that any firm will try to avoid. An organization facing external threats and internal weaknesses may have to struggle for its survival.

The matrix is outlined below InternalExternalElements

Organizational strengths

OrganizationalWeaknesses

Strategic optionsEnvironmental opportunities (and risks)

SO : strengths can be used to capitalize or build upon existing or emerging opportunities

WO : the strategies developed need to overcome organizational weaknesses if existing or emerging opportunities are to be exploited

Environmental threats

ST : strengths in the organization can be used to minimize existing or emerging threats

WT : the strategies pursued must minimize or overcome weaknesses and asfar as possible, cope with threats existing or emerging threats.

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By using TOWS matrix, a strategist can look intelligently as to how he can be take advantage of the opportunities open to him , at the same time , he can minimize the impact of weaknesses and protect himself against threats. TOWS analysis helps a strategist to consider how to use external environment to his strategic advantage.Thus TOWS matrix has a wider scope when compared to SWOT analysis, TOWS analysis is an action tool whereas SWOT analysis is a planning tool.

Q.15 What is Globalization “ In what ways can Globalization ManifestsAns. Meaning of Globalization

Globalization means several things for several people.For same it is a new paradigm – a set of fresh beliefs, working methods, and economic, political and socio-cultural realities in which the previous assumptions are no longer valid. For developing countries, it means integration with the world economy.In simple economic terms, globalization refers to the process of integration of the world into one huge market. At the company level, globalization means two things.

(a) The company commits itself heavily with several manufacturing locations around the world and offers products in several diversified industries.

(b) It also means ability to compete in domestic markets with foreign competitors. A company which has gone global is called a multinational (MNC) or a transnational (TNC)An MNC is, therefore, one that, by operating in more than one country. The global company views the world as one market, minimizes the importance of national boundaries, sources, raises capital and markets wherever it can do the job best.To be specific, a global company has three characteristics: It is a conglomerate of multiple units (located in different parts of the globe) but all linked by common ownership. Multiple units draw on a common pool of resources, such as money, credit, information, patents, trade names and control systems. The units respond to some common strategy. Nestle International is an example of an enterprise that has become multinational. It sells its products in most countries and manufactures in many. Besides, it manages and shareholders are also based in different nations. Why do companies go global?There are several reasons why companies go global. These are discussed as follows: One reason could be the rapid shrinking of time and distance across the globe thanks to faster communication speedier transportation, growing financial flows and rapid technological changes.It is being realized that the domestic markets are no longer adequate and rich. Japanese have flooded the U.S. market with automobiles and electronics because the home market was not large enough to absorb whatever was produced. According to Raymond Vernon companies that develop attractive new products sell them first in their home markets. Sooner or later, foreigners may learn about these products. At this stage, most companies would export the product or service rather than produce it abroad. Another reason for going overseas may also vary by industry. Petroleum and mining companies often go global to secure a reliable or cheaper source of raw-materials. Companies often set up overseas plants to reduce high transportation costs.The higher the ratio of the unit cost to the selling price per unit, the more significant the transportation factor becomes.Companies in electronics and telecommunications must spend large sums on research and development for new products.They may be compelled to seek ways to improve sales volume to support high overhead expenses. If domestic sales and exports do not generate sufficient cash flow, the companies naturally might look to overseas manufacturing plants and sales branches to generate higher sales and better cash flow. Manifestation of Globalization.Globalization manifests in many ways, some of these ways are discussed below.MultinationalsMultinationals locate their operations in different countries on the basis of raw material availability , markets and labourThis leads to interconnection of different regions of the world and thus promotes globalization.

Lowering of Trade and tariff barriersReduction of Trade barriers and tariffs have promoted Trade and commerce between different regions of the worldDue to this goods produced in one part of the world are consumed in another part of the world.

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This is reduced interference of Governments in Trade and commerce and Enhanced globalization

Interlinking of EconomicsIn today’s world Economy of each country is inter linked with the rest of the world.No country can function in isolation in which only domestic industries operateGlobalization exists in the form of interdependence of EconomiesThis interlinking of economies leads to globalization

Infrastructural resources and inputs at International priceIf infrastructural Inputs are available at reasonable prices companies can compete globally.Interrupted supply of infrastructural inputs such a power, transport and communication promotes globalization.

PrivatizationIn the last two decades there is growth of private sector. In all economies of the world private entrepreneurs are given great access and freedom to run business units. The role of Government is reduced to provided of infrastructure This has promoted Globalization as private entrepreneur will try to explore foreign markets.

Mobility of skilled resourcesAvailability of skilled labour was once considered to be a deciding factor in location of plant.However it is not so now a days.Skilled labour along with capital and entrepreneurs are highly mobileA developing country which has surplus labour and scarcity of capital invites foreign investments and makes good of deficiency.

Entrepreneur and his unit have a central economic roleIn the emerging world the entrepreneur and his unit have become central figures in the process of economic growth and development.Businesses are able to innovate and bring in new products and contribute to Nations development. Since entrepreneur operate with an profit motive, the may extend their operations beyond the boundaries of their countries.

Market side EfficiencyIn today’s world business operates on the principal of “ Survival of the fittest “Customers want Choice and best at the lowest possible pricesCustomers are not longer satisfied with shoddy produces and services provided by the state monopoliesNo producer can be assured of any market shareThe producers have to constantly search for new technology, new products and new markets for their products.Such an search for new markets leads to Globalization.

Formation of Regional Blocks.Many countries form Regional blocks and promote trade amongst member countriesExample of such blocks are NAFTA (North American free trade Area) Such blocks try to create an integrated markets which encompass many countriesSimilar blocks have been formed by European countries and Asian countriesSuch a block promotes trade amongst member countries making the economies of countries dependent upon each other.

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