Strategic Management and Business Policy

Q.1 Write Short notes on the following: (a) Value Chain Analysis (b) Corporate Restructuring a) Value Chain Analysis Various competences and resources of an organization can be integrated into a chain of activities which an organization performs to meet customer demand. Since each of these activities is expected to create value when it is performed, the chain can appropriately be called a value chain. Michael Porter (1985) introduced the concept of value chain analysis. Now, it has become common for professional companies to do this analysis. Value chain analysis helps in understanding how value is created in organizations through various activities. These activities can be divided into two broad categories: primary activities and support activities. Primary activities are directly concerned with the creation or delivery of a product or service or customer value. Support activities, as the name indicates, support the primary activities, or, more, correctly, help to improve the effectiveness or efficiency of primary activities. Primary activities can be divided into five major areas: inbound logistics, operations, outbound logistics, marketing and sales and service. Inbound logistics: These are activities concerned with receiving, storing and distributing raw materials and inputs to the production or service division. Inbound logistics also include materials handling, stock control, transportation of inputs, etc. Operations: These are activities involved in transforming various inputs into final product or service. Operations also include machinery, packaging, assembly, testing, etc. Outbound logistics: These include collecting, storing and distributing or delivering final products to customers. For tangible products (industrial or consumer goods), this would include warehousing, materials handling, transportation, etc. In the case of service, these may be more concerned with arrangements for bringing customers close to the service location. (e.g., sports events, entertainment events, etc.). Marketing and sales: These comprise activities such as advertising, sales promotion, selling, sales force management, pricing, channel selection, channel management, etc. Marketing and sales provide the most important link between the company and the customer. Service: These include activities which maintain or enhance value of a product or service such as installation, repair, training, supply of spares and prompt after-sales service, etc. Support activities can be divided into four categories: procurement, technology development, human resource management and organizational infrastructure. Procurement: This relates to the processes for acquiring or purchasing various resource inputs like raw materials, intermediate inputs, equipment, machinery, etc. Procurement primarily supports inbound logistics and operations. Technology development: Technology is involved in all value creations. Key technologies are concerned directly with the product, (e.g., R&D, product design, quality control, etc.,) or with processes, (e.g.,process development). Technology development is fundamental to the innovative capacity of an organization. Organizations can effectively use value chain analysis to identify the weak links (and also the strong links) in the chain for further analysis, review and necessary action. In using the value chain, an organization should concentrate on two aspects. First, it should ascertain how different activities, both primary and support, are being performed so that contribution of each activity to organizational objectives or goals can be measured. If a particular activity is not contributing 1

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satisfactorily, required changes can be made in that. This is the job of strategic management. The second aspect is the coordination or integration of various activities into a cohesive value chain. b) Corporate Restructuring Corporate restructuring means organizational change to create a more efficient or profitable enterprise. Similar terms which are used for restructuring are revamping, regrouping, rationalization or consolidation. Corporate restructuring has three meanings or connotations: organizational restructuring, businesslevel restructuring and financial restructuring. Organizational restructuring means changes in the structure of the organization changing or reducing hierarchies or delayering, down sizing, i.e., reducing the number of employees, redesigning positions, reallocation of jobs or portfolios or changing the reporting system. Business-level restructuring (applies to multi- business organizations) deals with changes in the composition of a companys businesses or product portfolios. The changes are done on the basis of movements in market share or performance of different businesses or products to improve efficiency or profitability at the corporate level. Financial restructuring is concerned with changes in financial management in terms of equity pattern or equity holdings, debt-equity ratio, borrowing pattern, debt servicing schedule, etc. More common forms of restructuring are organizational restructuring and business-level restructuring. Sometimes, when major crisis develops, restructuring may be comprehensive, which may simultaneously involve, rather combine, business-level restructuring, organizational restructuring and even financial restructuring. This may happen more during a turnaround situation (discussed later). Restructuring is essentially an adaptation strategy. It is about adaptation to change and is mostly incremental in nature. In contemporary business, most companies are in the process of constant change. Often older companies require more restructuring than the newer ones. This may happen for a number of reasons. First, those companies might have over-diversified including diversification into unrelated areas; second, the organizational structure might be very hierarchical not fitting into a dynamic market environment; third, there might be a conservative financial management system in relation to funds flow and investments The main objective of restructuring in the Indian companies was to gain customer focus. 1 Another research study on corporate restructuring revealed that most of the restructuring exercises carried out by the Indian companies after 1991 were at business portfolio level followed by changes in ownership or shareholding structure. The instruments of restructuring in these companies were primarily joint ventures, mergers and acquisitions and diversification into newly opened sectors like power and telecom.

2 Differentiate between mission and vision of a company? Explain with examples. A business is not defined by its name, statutes or articles of incorporation. It is defined by the business mission. Only a clear definition of the mission and the purpose of the organization makes possible clear and realistic business objectives. Peter Drucker

Strategic Management and Business Policy

But ... business mission is so rarely given adequate thought is perhaps the most important single cause of business frustration. Peter Drucker This emphasizes the need for organizations to take their mission statement seriously and formulate it properly. The mission statement of a company is variously called a statement of philosophy, a statement of beliefs, a statement of purpose and, a statement of business principles. A mission statement is many in one. It embodies the business philosophy of a companys decision makers, implies the image the company wishes to project for itself, reflects the companys self-concept; indicates the companys principal product or service areas and, the customer needs the company seeks to satisfy. In short, it describes the companys product, market and technological focus; and it does so in a way that reflects the values and priorities of the companys strategic decision makers. The mission statement should be as explicit or comprehensive as possible. Some feel that the mission statement should have seven dimensions or serve seven different purposes or objectives. These are: To ensure unanimity of purposes within the organization To develop a basis or standard for allocating organizational resources To provide a basis for motivating the use of the organizations resources To establish a general culture or organizational climate; for example, to suggest a businesslike approach To facilitate the translation of objectives and goals into jobs and responsibilities and assignment of tasks to responsible segments within the organization To serve as a focal point for those who can identify themselves with the organizations purpose and business To specify organizational purposes and inspire translation of these purposes into goals in such a way that cost, time and performance parameters can be assessed and controlled.

Mission and Vision Sometimes, mission and vision of a company are used synonymously or interchangeably. This is not correct. A clear distinction exists between the two. Mission is concerned more with the present; the vision more with the future. The mission statement answers the question: What is our business? The vision statement answers the question: What do we want to become or, which way should we be going? The mission statement focusses on the present strategic thrust, while the vision statement outlines the strategic path. All visionary companies have a vision statement. The vision of Microsoft (since 1999) has been to broad base its outlook to empower people through great software anytime, anywhere and on any device including the PC and an incredibly rich variety of digital devices accessing the power of the Internet. Most progressive companies develop both a mission statement and a vision statement. Indian Oil Corporation (IOC) is a good example. Vision and mission statements of IOC 4 are: Vision: Indian Oil aims to achieve international standards of excellence in all aspects of energy and diversified business with focus on customer delight through quality products and services. Mission: Maintaining national leadership in oil refining, marketing and pipeline transportation. Vision and mission statements can be generally found in the beginning of annual reports of 3

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companies. These statements are also seen in the corporate or long-term strategic plans of companies. These also appear in many company reports or documents like customer service agreements, loan requests, labour relations contracts, etc. Many companies also display them at prominent points or locations in company premises. Mission statements of individual companies vary widely. We give below, as examples, mission statements of two Indian companiesTata Steel and Hero Honda Motorsand, two US companiesPepsico and Dell computer. All these companies are in different kinds of business. Tata Iron and Steel Company (TISCO) The fundamental mission of TISCO (Tata Iron and Steel Company Limited; now Tata Steel) is to strengthen Indias industrial base through increased productivity, effective utilization of manpower and material resources, and continued application of modern scientific managerial methods as well as through systematic growth in keeping with the national aspirations. The company recognizes that while honesty and integrity are the essential ingredients of a strong and stable enterprise, profitability provides the main spark for economic activity. It affirms its faith in democratic values and in the importance of success of individuals, collective and corporate enterprise for the emancipation and prosperity of the country. Guided by its basic philosophy, the company believes in discharging its responsibility towards shareholders, employees, customers and the community. Hero Honda Motors It is our mission to strive for synergy between technology, systems and human resources to produce products and services that meet the quality, performance and price aspirations of our customers. While doing so, we maintain the highest standards of ethics and societal responsibilities. This mission is what drives us to new heights in excellence and helps us to forge a unique and mutually beneficial relationship with all our stakeholders. We are committed to moving ahead resolutely on this path. Pepsico Pepsicos mission is to increase the value of our shareholders investment. We do this through sales growth, cost controls and wise investment resources. We believe our commercial success depends upon offering quality and value to our consumers and customers; providing products that are safe, wholesome, economically efficient and environmentally sound and, providing a fair return to our investors while adhering to the highest standards of integrity.

Q.3 Explain in detail Porters four generic strategies.

Porter (1985) evolved the theory that there are four generic strategic options available to companies. These are: Cost leadership Focused cost leadership 4

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Differentiation Focused differentiation Porters theory is based on the concepts of niche marketing and mass marketing and product proposition to be offered by different companies. Two dimensions of the strategy analysis are market coverage and basis of product performance. Porters theory or the strategy option matrix.

Cost leadership strategy is based on exploiting some aspects of the production process, which can be executed at a cost significantly lower than that of competitors. There can be various sources of this cost advantage: i. lower input costs, (e.g., the price paid by New Zealand timber mills for the logs produced by the countrys highly efficient forestry industry or cheap source of high quality bauxite for National Aluminium Company (NALCO) in India from its mines); ii. in-plant production costs, (e.g., lower labour costs enjoyed by Japanese companies locating their video assembly operations in Thailand); iii. lower delivery cost because of proximity of key markets, (e.g., the practice of major beer producers in Europe to locate micro-breweries in or around major metropolitan cities). Focused cost leadership exploits the same advantages as in cost leadership strategy, but the company occupies a specific niche or niches serving only a part of the total market. For example horticulture enterprise, which operates an onsite farm shop, offers low-priced fresh vegetables to the inhabitants in the immediate neighborhood area. Porter has mentioned that cost leadership and focused cost leadership represent a low scale advantage because it is quite likely that eventually a companys capabilities will be eroded by rising costs (labour cost in particular) or its market position will be challenged by an even lower cost producer of goods, (e.g., Russias post-Perestroika entry in the world arms market offering extremely competitive prices). Differentiation strategy is based on offering superior performance, and Porter argues that this is a high scale advantage because, first, the producer can usually command a premium price for its product and, second, competitors are less of a threat, because to be successful, they must be able to offer an even higher performance product. Focused differentiation, which is typically a strategy of smaller and most specialist companies, is also based on superior performance. The only difference is that in this strategy, a company specializes in serving the needs of a specific market or markets. For, e.g., the Cray Corporation supplies super computers to the aerospace and defence industries.

Strategic Management and Business Policy

Q.4 Differentiate between core competence and distinctive competence Competence is the ability to perform a task or achieve some objectives. Competence levels vary across organizations, and, also, within an organization from time to time. Core competence of a company is one of its special or unique internal competence. Core competence is not just a single strength or skill or capability of a company; it is interwoven resources, technology and skill or synergy culminating into a special or core competence. Core competence gives a company a clear competitive advantage over its competitors. Sony has a core competence in miniaturization; Xeroxs core competence is in photocopying; Canons core competence lies in optics, imaging and laser control; Hondas core competence is in engine s (for cars and motorcycles); 3Ms core competence is in sticky tape technology; JVCs in video tape technology; ITCs in tobacco and cigarettes and Godrejs in locks and storewels. Hamel and Prahalad defined core competence as the combination of individual technologies and production skills that underlie a companys product lines. According to them, Sonys core competence in manufacturing allows the company to make everything from the Sony walkman to video cameras to notebook computer. Canons core competence in optics, imaging and microprocessor controls have enabled it to enter markets as seemingly diverse as copiers, laser printers, cameras and image scanners. To achieve core competence, a particular competence level of a company should satisfy three criteria: (a) It should relate to an activity or process that inherently underlies the value in the product or service as perceived by the customer. This is important because managers often take an internal view of value and either miss or deliberately overlook the customer perspective. (b) It should lead to a level of performance in a product or process which is significantly better than those of competitors. Benchmarking is a good way and is generally recommended for undertaking performance standard and also for differentiating between good and bad performance. (c) It should be robust, i.e., difficult for competitors to imitate. In a fast changing world, many advantages gained in different ways (like a superior product feature, a new marketing campaign or an innovative price policy/strategy) are not robust and are likely to be short lived. Core competence is not about such incremental changes or improvements, but, about the whole process through which continuous change and improvement take place which lead to or sustain clearly differentiated advantage.

Distinctive Competence Core competence may not be enough, because it focuses predominantly on the product or process and technology, or, as Hamel and Prahalad put it; The combination of individual technologi es and production skills. There are two problems with this. First, strong and aggressive competitors may develop, either through parallel innovations or imitations, similar products or processes which are highly competitive. This is what Japanese companies have done in the fields of electronics and automobiles, and now South Korea is doing to Japanese electronics; IBMs core computer technology is also facing the same problem. Second, to secure competitive advantage, only product, process or technology or technological innovation may not be enough; this has to be amply supported by special capabilities in the related vital areas like resource or financial management, cost management, marketing, logistics, etc. Hamel and Prahalad themselves have said later (1994): 6

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Distinctive competences may provide an answer to some of these points. Distinctive competence is based on the assumption that there are different alternative ways to secure competitive advantage and not only special technical and production expertise as emphasized by core competence. Distinctive competence includes core competence as one of the alternatives. But, there are other alternatives that are also based on organizational capabilities. So, distinctive competence is more broad based. Thompson and Strickland (1992) have defined distinctive competence as: Distinctive competence is the unique capability that helps an organization in capitalizing upon a particular opportunity; the competitive edge it may give a firm in the marketplace. 3 So, the focus in distinctive competence is on exploiting a market opportunity. And, depending on the market or competitive situation, one or some of the alternative competences may work ; for example, product or process superiority (core competence), product differentiation (situational or adaptability), cost effectiveness or cost efficiency to support a price strategy, special capability in marketing or distribution, etc. Under given circumstances, one of these, or a combination of some of these, will produce a distinctive competence which would be appropriate or best suited to exploit the opportunity and produce desired results. Since resources are limited, identification of distinctive competence may also help efficient allocation of resources. Reliance Industries, for example, has developed its distinctive competence in conceiving, implementing and managing large scale projects and mobilizing requisite resources for that. Q.5 Define the term industry. List the types of industries. How do you conduct an indust ry analysis? An industry can be broadly defined as the group of firms producing products that are close substitutes for each other. There is, however, a great deal of controversy over an appropriate definition of industry. The debate or controversy mostly centers around how close substitutability needs to be in terms of product, process or geographic market boundaries. For example, if we take computers, desktop computers may be an industry; similarly laptop computers may be another industry. But, because there is a good deal of substitutability between desktop and laptop computers, an appropriate industry definition may be personal computer which includes both. Industries can be of various typeseach major product group constitutes an industry (subject to the definition above). Industries can also be classified in terms of size of the constituent units or companies, state or pace of development of the industry, spread of the market, etc. These are important ways of looking at the structure of an industry. Based on such factors, various industries can be broadly classified into five categories according to Porter: 1. Fragmented industry 2. Emerging industry 3. Mature industry 4. Declining industry 5. Global industry Fragmented industry As fragmented industry is characterized by the existence of a large number of small and medium units, and, no single company has any significant market share, and, none of these units can individually affect the market or industry outcome. The uniqueness of a fragmented industry is the absence of any market leader, and, typically, the market share of the largest unit does not exceed 10 per cent. Emerging industry Emerging Industry 7

Strategic Management and Business Policy

An emerging industry is a developing or newly formed industry in which market for products initially exists in latent form, and, becomes visible later. An emerging industry may be created by technological innovations, new consumers or industrial needs for economic or sociological changes which create the environment or potential market for a new product or service. Mature industry A mature industry is one which has passed through transition from period of fast growth to more modest or stable growth. Maturity is an important or critical phase in the industry life cycle. During this period, fundamental changes often take place in the competitive environment, and, companies are usually faced with difficult strategic decisions for survival and growth because competition becomes very intense. Industry maturity, in some cases, may be delayed or postponed because of innovations or other events or developments including environmental changes. This would mean prolonging the industry growth cycle or the transition to maturity. Declining industry A declining industry is one with negative growth, that is, an industry which has registered absolute decline in sales over a sustained period of time. Such decline in sales is not because of business cycles or any other short-term factors like strike, lockouts or material shortages. Therefore, a declining industry does not represent a short-term discontinuity, but, a trend expressed in falling industry output, sales, profitability and dwindling number of competitors. In industry life cycle, decline follows maturity. Decline sets in generally because of product obsolescence or emergence of a strong substitute product. Global industry In global industry , the strategic position of companies in different countries or national markets are governed by their overall global positions. For example, IBMs strategic position in competing for computer sales in France and Germany has improved significantly because of technology and marketing skills developed in other countries, and a worldwide manufacturing system which is well coordinated. To be called a global industry, an industrys economics and competitors in different national markets should be considered jointly rather than individually. Distinction should be made between an international industry and a global industry. An industry in a country may be international if it comprises a number of multinational companies. But, industries with multinational competitors are not necessarily global industries. To be a global industry, as explained above about IBM, an industry should have multi-locational manufacturing facilities, and, compete worldwide to secure global synergy or competitive advantage. How to Conduct Industry Analysis Understanding industry structure and formulating competitive strategies imply industry analysis. But, conducting a proper industry analysis is a very big task. To conduct such an analysis, the industry analyst has to find answers to many important questions: What should be the starting point? Which types of data one looks for? 8

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Should one look for only published or secondary data? Or, should one also generate primary data from industry observers (participants)? What are the analytical techniques to be used for data processing and analysis? Porter (1980) has suggested some detailed guidelines for conducting industry analysis. These are contained in How to Conduct an Industry Analysis in Competitive Strategy (1980). Porter discusses sources of published or secondary data, generation or collection of primary data, various categories of data, scheme of data processing and strategy for industry analysis. He has also suggested a broad framework for industry analysis in terms of categories of data and competition. Industry analysis should follow a number of logical or strategic steps. These are shown below: Step 1: Determine or specify the objective or objectives so that there is no lack of focus. Step 2 : Collect and scan through available published or secondary data. Step 3: Identify data or information gaps for generation of primary data. Step 4: Generate primary data (through survey, interviews, meetings, etc.,) to fill the data information gap. Step 5 : Process/tabulate various data Step 6 : Prepare a general overview of the industry using the processed/ tabulated data/information. Step 7 : Prepare specific sectoral analysistechnology, product, marketing pattern, competition analysis . Step 8 : Draw inferences or conclusions to complete the analysis. Q-6 Describe the different approaches to business ethics. Different Approaches to Business Ethics In practice, different companies have different approaches to business ethics. It depends on their prioritization of ethical practices in conducting business. Some companies accord highest priority to the achievement of organizational objectives and business targets; ethical practices may have to be compromised. Some companies give almost equal priorities to both. Some companies give very high priorities to ethics and values; management and strategic functions are governed or dictated by this. According to Rossouw and Vuuren (2003), approaches adopted by various companies to deal with business ethics may take one of the four forms. These are shown below in terms of increasing order of ethical concern: (a) Unconcerned or ethical non-issue approach (b) Ethical damage control approach (c) Ethics compliance approach (d) Ethical culture approach 9

Strategic Management and Business Policy

Unconcerned or ethical non-issue approach: This approach is adopted by companies whose managers are either immoral or amoral. Such companies believe that organizational objectives and business targets are the foremost. Business must grow; profit should be generated and maximized. These companies plan and adopt strategies which may follow general legal and business principles, but may be ethically unsound. They are not really concerned with the ethical issues in the conventional sense. Ethical damage control approach: In companies in this category, managers are generally amoral, but, they fear adverse publicity or scandal. The objective in this approach is to protect the company from adverse publicity which may be made by unhappy stakeholders, external investigation agencies, threats of litigation, punitive government action, etc. To avoid such a contingent situation, there is a need for rejecting unethical behaviour and introducing corporate governance safeguards through window-dressing ethics. A company may generally ignore or condone questionable methods or actions which may help to achieve business targets or improve its market position so long as it does not publicly tarnish the image of the company. Ethics compliance approach: In this approach, companies are conscious that they should comply with ethical standards and requirements. The managers are either moral and view strong compliance to prescribed norms or methods as the best way to enforce ethical practices; or, are unintentionally amoral but are highly concerned about their ethical reputation. Companies which adopt a compliance approach adhere to certain practices to demonstrate their commitment to ethical conduct: make the code of ethics visible and a regular part of communication with employees, form ethics committees to give guidance on ethical matters, introduce ethics training programmes, lay down formal procedures for investigating alleged ethical violations, conduct ethics audit to measure and monitor compliance and institute ethics awards for employees for outstanding efforts for creating an ethical environment and improving ethical performance. Ethical culture approach : In companies with this approach, ethical business practices are rooted in the organizational culture itself. The top management/ CEO believes that high ethical principles embedded in the corporate culture should guide the managers and staff. The ethical principles contained in the companys code of ethics and/or corporate values are seen as integral to the companys identity and image. The prevalence and success of the ethical culture approach depends heavily on the personal integrity of the individual managers who create and nurture the culture. It is clearly understood in such companies that corporate strategy should be ethical in all respects and ethical behaviour should also be reflected in strategy implementation. Why Unethical Business Behaviour In todays volatile business environment, it is an established fact that business ethics and values are under severe test. Companies are too busy chasing targets and managers are under enormous pressure to perform. If the targets or results are achieved, the end justifies the means, i.e., certain amount of dubious or unethical business behaviour may be permissible if this helps in the achievement of physical or financial targets. Sometimes, managers themselves may be of questionable personal integrity and may adopt unethical practices for personal motives or interests.

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