Strategic Management

Unit - 3

Strategy Formulation:- Strategy is the direction and scope of an organization in a

changing business environment through the configuration of its resources and
competence with a view to meeting stakeholder expectation.

Characteristics of Strategy:-

 Long term in nature: The plan can be made in a short time, but the effect or
impact it has on the organization is in the long term or in the foreseeable future.
 Strategy contains elements of uncertainty
 It is directed towards the goals of the organization
 Dynamic in nature
 Strategy are normally complex
 Strategy affects the whole organization

There are basically three different levels where strategy can be formulated, they are:-

1. Corporate level strategy

2. Business level strategy
3. Functional level strategy

Corporate level Strategy:- We can simply say that corporate level strategies are
concerned with questions about what business to compete in. Corporate Strategy
involves the careful analysis of the selection of businesses the company can successful
compete in. Corporate level strategies affect the entire organization and are considered
delicate in the strategic planning process.

Characteristics of Corporate Strategy

 Corporate level strategies are formulated by the top management with inputs
from middle level management and lower level management in the formulation
process and designing of sub strategies
 Decisions are complex and affects the entire organization
 It is concerned with the efficient allocation and utilization of scarce resources for
the benefit of the organization
 Corporate level strategies are mapped out around the goal and objectives of an
organization. They seek to translate these goals and objectives to reality
 Typical examples of decisions made are decisions on products and markets

Types of corporate Strategy:- The three main types of corporate strategies are
Growth strategies, stability strategies and retrenchment.

Growth Strategy:- Like the name implies, corporate strategies are those corporate
level strategies designed to achieve growth in key metrics such as sales / revenue, total
assets, profits etc. A growth strategy could be implemented by expanding operations
both globally and locally; this is a growth strategy based on internal factors which can be
achieved through internal economies of scale. Aside from the illustration of internal
growth strategies above, an organization can also grow externally through mergers,
acquisitions and strategic alliances.
The two basic growth strategies are concentration strategies and
diversification strategies.

Concentration strategy:- This is mostly utilized for company’s producing product

lines with real growth potentials. The company concentrates more resources on the
product line to increase its participation in the value chain of the product. The two main
types of concentration strategies are vertical growth strategy and horizontal
growth strategy.

 Vertical growth strategy: As mentioned above, by utilizing this strategy,

the company participates in the value chain of the product by either taking up the
job of the supplier or distributor. If the company assumes the function or the role
previously taken up by a supplier, we call it backward integration, while it is called
forward integration if a company assumes the function previously provided by a
distributor.
 Horizontal growth strategy: Horizontal growth is achieved by expanding
operations into other geographical locations or by expanding the range of
products or services offered in the existing market. Horizontal growth results into
horizontal integration which can be defined as the degree in which a company
increases production of goods or services at the same point on an industry’s value
chain.

Diversification Strategy:- Richard Rummelt, a strategy guru, is of the opinion

that companies think about diversification strategies when growth has reached its peak
and there is no opportunity for further growth in the original business of the company.
What then is this diversification strategy we speak of? A company is diversified when it is
in two or more lines of business operating in distinct and diverse market environments.
Two basic types of diversification strategies are concentric and conglomerate.

 Concentric Diversification: This is also called related diversification. It

involves the diversification of a company into a related industry. This strategy is
particularly useful to companies in leadership position as the firm attempts to
secure strategic fit in a new industry where the firm’s product knowledge,
manufacturing capability and marketing skills it used so effectively in the original
industry can be used just as well in the new industry it is diversifying into.
 Conglomerate Diversification: This is also called unrelated diversification; it
involves the diversification of a company into an industry unrelated to its current
industry. This type of diversification strategy is often utilized by companies in
saturated industries believed to be unattractive, and without the knowledge or
skill it could transfer to related products or services in other industries.

Stability Strategy:- Stability strategies are mostly utilized by successful

organizations operating in a reasonably predictable environment. It involves maintaining
the current strategy that brought it success with little or no change. There are three
basic types of stability strategies, they are:-

 No change Strategy: When a company adopts this strategy, it indicates that

the company is very much happy with the current operations, and would like to
continue with the present strategy. This strategy is utilized by companies who are
“comfortable” with their competitive position in its industry, and sees little or no
growth opportunities within the said industry.
  Profit Strategy:- In using this strategy, the company tries to sustain its
profitability through artificial means which may include aggressive cost cutting
and raising sales prices, selling of investments or assets, and removing non-core
businesses. The profit strategy is useful in two instances:-
1) To help a company through tough times or temporary difficulty; and
2) To artificially boost the value of a company in the case of an Initial Public
Offering (IPO)
 Pause/ Proceed with caution Strategy:- This strategy is used to test the
waters before continuing with a full fledged strategy. It could be an intermediate
strategy before proceeding with a growth strategy or retrenchment strategy. The
pause or proceed with caution strategy is seen as a temporary strategy to be
used until the environment becomes more hospitable or consolidate resources
after prolonged rapid growth.

Retrenchment Strategies:- Retrenchment strategies are pursued when a

company’s product lines are performing poorly as a result of finding itself in a weak
competitive position or a general decline in industry or markets. The strategy seeks to
improve the performance of the company by eliminating the weakness pulling the
company back. Examples of retrenchment strategies are:

 Turnaround Strategy:- This strategy is adopted for the purpose of reversing

the process of decline. This strategy emphasizes operational efficiency and is
most appropriate at the beginning of the decline rather than the critical stage of
the decline.
 Divestment Strategy:- Divestment also known as divestiture is the selling off
of assets for the different goals a company seeks to attain. This strategy involves
the cutting off of loss making units, divisions or Strategic Business Units (“SBU”).
 Liquidation Strategy:- Liquidation strategy is considered a last resort
strategy, it is adopted by company’s when all their efforts to bringing the
company to profitability is futile. The company chooses to abandon all activities
totally, sell off its assets and see to the final close and winding up of the business.

Porter Diamond Model:- The American strategy professor Michael Porter

developed an economic diamond model for (small-sized) businesses to help them
understand their competitive position in global markets. This Porter Diamond Model, also
known as the Porter Diamond theory of National Advantage or Porters double diamond
model, has been given this name because all factors that are important in global
business competition resemble the points of a diamond. Michael Porter assumes that the
competitiveness of businesses is related to the performance of other businesses.
Furthermore, other factors are tied together in the value-added chain in a long distance
relation or a local or regional context.
Porter Diamond Model clusters:- Michael Porter uses the concept of clusters of
identical product groups in which there is considerable competitive pressure. Businesses
within clusters usually stimulate each other to increase productivity, foster innovation
and improve business results. In addition, they have the advantage that they can move
very well on the international market and that they can maintain their presence and
handle international competition. Examples of large clusters are the Swiss watch industry
and the Hollywood film industry.

International advantage:- Organisations can use the Porter’s Diamond Model to

establish how they can translate national advantages into international advantages. The
Porter Diamond Model suggests that the national home base of an organization plays an
important role in the creation of advantages on a global scale. This home base provides
basic factors that support an organization, including government support but they can
also hinder it from building advantages in global competition. The determinants that
Michael Porter distinguishes are:-

1. Factor Conditions:- This is the situation in a country relating to production

factors like knowledge and infrastructure. These are relevant factors for
competitiveness in particular industries. These factors can be grouped into
material resources- human resources (labour costs, qualifications and
commitment) – knowledge resources and infrastructure. But they also include
factors like quality of research or liquidity on stock markets and natural resources
like climate, minerals, oil and these could be reasons for creating an international
competitive position.
2. Related and supporting Industries:- The success of a market also
depends on the presence of suppliers and related industries within a region.
Competitive suppliers reinforce innovation and internationalization. Besides
suppliers, related organizations are of importance too. If an organization is
successful this could be beneficial for related or supporting organizations. They
can benefit from each other’s know-how and encourage each other by producing
complementary products.
3. Home Demand Conditions:- In this determinant the key question is: What
reasons are there for a successful market? What is the nature of the market and
what is the market size? There always exists an interaction between economies of
scale, transportation costs and the size of the home market. If a producer can
 realize sufficient economies of scale, this will offer advantages to other companies
to service the market from a single location. In addition the question can be
asked: what impact does this have on the pace and direction of innovation and
product development?
4. Strategy, Structure and Rivalry:- This factor is related to the way in which
an organization is organized and managed, its corporate objectives and the
measure of rivalry within its own organizational culture. The Furthermore, it
focuses on the conditions in a country that determine where a company will be
established. Cultural aspects play an important role in this. Regions, provinces
and countries may differ greatly from one another and factors like management,
working morale and interactions between companies are shaped differently in
different cultures. This could provide both advantages and disadvantages for
companies in a certain situation when setting up a company in another country.
According to Michael Porter domestic rivalry and the continuous search for
competitive advantage within a nation can help organizations achieve advantages
on an international scale. In addition to the above-mentioned determinants
Michael Porter also mentions factors like Government and chance events that
influence competition between companies.
5. Government:- Governments can play a powerful role in encouraging the
development of industries and companies both at home and abroad.
Governments finance and construct infrastructure (roads, airports) and invest in
education and healthcare. Moreover, they can encourage companies to use
alternative energy or alternative environmental systems that affect production.
This can be effected by granting subsidies or other financial incentives.
6. Chance events:- Michael Porter also indicates that in most markets chance
plays an important role. This provides opportunities for innovative companies that
are not afraid to start up new operations. Entrepreneurs usually start their
companies in their homeland, without this having any economic advantages,
whereas a similar start abroad would provide more opportunities.

Porter Diamond Model example:- A few business analysts set-up a case about
Mobile telecommunication.

1) Demand conditions:-
 Evolving mobile possibilities in relation with Internet.
 Growing number of mobile owners. Mobile usage becomes cheaper and
cheaper so it accessible for everybody.
 Upcoming online businesses including App builders.
 Government of county x stimulates Mobile Market regulation.
2) Factors endowments:-
 Government of county x puts continuous efforts in IT policies.
 IT Workforce is developing and growing.
 Level of Education on mobile and Internet technology is high.
 County x has geographical IT advantages.
3) Related and supporting industry:-
 This country is leading in the microchip market.
 There are two countries that are trading partners.
 The government is planning to invest in Mobile R&D and IT development.
 County x is leading in all Mobile & IT related production.
4) Firm strategy and structure:-
 Venture firms with high IT technology.
 Firm and small and medium size IT business companies.
  Market competition in Mobile telecommunication.
 Target niche market by continuous development and improvement of
Mobile technology.

Advantages:- By using the Porter Diamond Model, an organization may identify what
factors can build advantages at a national level. The Porter Diamond Model is therefore
often used during internationalisation efforts. Michael Porter is of the opinion that all
factors are decisive for the competitiveness of a company with respect to their foreign
competitors. By considering these factors a company will be better able to formulate a
strategic goal.

Merger & Acquisition (M&A):- In an increasingly competitive and financially

constrained environment, corporate leadership must identify and pursue growth
opportunities that will strengthen their organizations’ market position and financial
performance. Growth strategies include developing new service lines or markets,
expanding existing service offerings and markets served, entering into joint ventures to
develop or expand services/markets, or merging with or acquiring existing operations
from competitors, or other providers.

Acquisition Benefits:- The advantages of mergers and acquisitions frequently

exceed those of other growth strategies. Acquisitions can quickly and dramatically shift
an organization’s position by offering the following:-

 Access advantages : improving accessibility to clients in new attractive

markets and/or enhancing access in existing markets.
 Enhanced competitive position : fundamentally changing the market
position, for example, by moving the organization from a subordinate position to a
more dominant position.
 Program/service expansion : gaining the critical mass, capability, or
position of strength in high impact or high margin services or “rounding
out”capabilities in areas of deficit.
 Fortified barriers to entry : creating barriers that preclude the competitive
entry into a market.
 Enhanced relationships with service providers : gaining access to or
improving relationships with important referral sources, including specific service
providers.
 Increased operational efficiencies : facilitating reorganized service
distribution and operations to significantly reduce the cost of delivering services
 Enhanced capacity and avoidance of capital expenditures : providing
operational capacity for services at a lower cost and/or in a better timeframe than
would be required to create such capacity without an acquisition or merger.
 Improved financial and credit position : enhancing the organization’s
financial performance and credit rating, thereby improving access to capital and
lowering the cost of capital.

To realize these strategic and financial benefits, leaders will need to assess their current
ability to pursue mergers and acquisitions, and commit the time and resources needed to
develop such capabilities, if currently limited or absent. Cultural willingness to integrate
planning and finance is vital, as described later.
The Seven-Step Process: Mergers & Acquisition:- A proven process for
evaluating and executing mergers and acquisitions includes seven essential activities
that occur as sequential steps. A description of each step is as follows:-

1. Determine Growth Markets/Services:- Leaders start the acquisition

evaluation process by identifying growth opportunities in business or service lines,
markets served, or any combination thereof. To determine growth markets and
services, leaders must collect and analyze extensive data, including the following:
client origin; demographics (population, age, employment/unemployment rates,
income); employers; other competitors; business, program, and service mix
(performance and profitability by service line); field staff; employees;
utilization/case mix (demand projections); competitive cost/charge position; and
consumer preferences/ opinions.
2. Identify Merger and Acquisition Candidates:- The second step of the
acquisition process involves the proactive identification of the universe of
potential merger or acquisition candidates that could meet strategic financial
growth objectives in identified markets or service lines. This involves methodically
identifying “likely suspects” as well as “outside the box” possibilities based on
management experience, research, the use of consultants, and other methods.
3. Assess Strategic Financial Position and Fit:- At this stage following
questions shall be answered:-
 What are the likely benefits of a transaction with this acquisition target?
 What are the risks?
 How does this target compare to other targeted opportunities?
Financial Position:- A comprehensive evaluation of the financial and credit
position of the target and the combined entities is based on solid utilization and
financial forecasts. The assessment focuses on volume, revenue, cost, and
balance sheet considerations.
4. Make a Go/No-Go Decision:- Corporate leadership must determine the likely
benefits and drawbacks of the proposed acquisition or merger according to the
questions discussed earlier and make a high-quality decision.During the decision-
making process, leaders identify whether the strategic value-added case for a
combined entity is compelling enough to proceed (or not).
5. Conduct Valuation:- The fifth step in the acquisition process involves
assessing the value of the target, identifying alternatives for structuring the
merger or acquisition transactions, evaluating these, and selecting the structure
that would best enable the organization to achieve its objectives, and developing
an offer. There are three key valuation methods: discounted cash flow analysis,
comparable transaction analysis, and comparable publicly traded company
analysis. To identify a realistic valuation range, corporate leadership should select
best suitable method. After the decision-making step, the ‘valuation’ is the most
important step, as it can ruin your deal if goes wrong.
6. Perform Due Diligence, Negotiate a Definitive Agreement, and
Execute Transaction:- Once an offer on the table is accepted, leaders of the
acquiring organization must ensure a complete and comprehensive due diligence
review of the target entity in order to fully understand the issues, opportunities,
and risks associated with the transaction. Due diligence involves a review of the
target’s financial, legal, and operational position to ensure an accuracy of
information obtained earlier in the acquisition process and full disclosure of all
information relevant to the transaction. After due diligence is completed, the
parties negotiate definitive agreements. Any regulatory approvals necessary for
 consummation of the transaction are obtained and the transaction is closed.
During transaction execution, the acquirer should monitor the acquisition or
merger to ensure that the negotiated transaction continues to meet the goals and
objectives established for the transaction at the end of the strategic assessment.
7. Implement Transaction and Monitor Ongoing Performance:- The
analysis seeks answers to such questions as:-
 Will management make the tough operational changes required to achieve
the financial benefits?
 What are the HR implications? Is there constituent support (management,
board, service providers, community, and employees)?
 What are the legal and regulatory challenges (Court approvals, SEBI
Regulations, Tax implications, etc)?
 What are the financial, organizational, and community-related risks of
failure?

A successful merger or acquisition involves combining two organizations in an expedient

manner to maximize strategic value while minimizing distraction or disruption to existing
operations. This includes having a ready mechanism to deal with any future problem in
the implementation of the deal

Conclusion:- We must acknowledge a hard fact that most of the deals are
underachieved and fell short of expectations in reality. The main reason for such poor
performance is a failure to monitor strict implementation of all these steps. The leaders
normally do well to plan ideally for all these steps but once the process is started they
fail to stick with it. Use of the seven-step process described in this article will certainly
ensure maximization of the merger or acquisition’s value and contribution to improved
market and financial performance.

Joint Venture:- Joint Venture can be described as a business arrangement,

wherein two or more independent firms come together to form a legally independent
undertaking, for a stipulated period, to fulfil a specific purpose such as accomplishing a
task, activity or project. In other words, it is a temporary partnership, established for a
definite purpose, which may or may not use a specific firm name. For example, Maruti
Ltd. of India and Suzuki Ltd. of Japan come together to set up Maruti Suzuki India Ltd.

The firms joining hands in a joint venture are called Co-venturers, which can be a private
company, government company or foreign company. The co-venturers come to a
contractual agreement for carrying out an economic activity, which has shared
ownership and control. They contribute capital, pooling the financial, physical,
intellectual and managerial resources, participating in the operations and sharing the
risks and returns in the predetermined ratio.

Salient Features of Joint Venture

 Agreement: Two or more firms come to an agreement, to undertake a

business, for a definite purpose and are bound by it.
 Joint Control: There exist a joint control of the co-venturers over business
assets, operations, administration and even the venture.
 Pooling of resources and expertise: Firms pool their resources like
capital, manpower, technical know-how, and expertise, which helps in large-scale
production.
 Sharing of profit and loss: The co-venturers agree to share the profits and
losses of the business in an agreed ratio. The computation of the profit and loss is
 usually done at the end of the venture, however, when it continues for the long
duration, the profit and loss is calculated annually.
 Access to advanced technology: By entering into joint venture firms get
access to various techniques of production, marketing and doing business, which
decreases the overall cost and also improves quality.
 Dissolution: Once the term or purpose of the joint venture is complete, the
agreement comes to an end, and the accounts of the coventurers, are settled, as
and when it is dissolved.

The co-venturers are free to carry on their own business, unless otherwise provided in
the joint venture agreement, during the life of the venture.

Objectives of Joint Venture:-

 To enter foreign market and even new or emerging market.

 To reduce the risk factor for heavy investment.
 To make optimum utilisation of resources.
 To gain economies of scale.
 To achieve synergy.

Joint ventures are primarily formed for construction of dams and roads, film
production, buying and selling of goods etc. The type of joint venture is based on the
various factors like, the purpose for which it is formed, number of firms involved and
the term for which it is formed.

Purpose of a Joint Venture:- Parties enter into joint venture contracts in order
to combine strengths and increase competitive advantage while minimizing risk. For
example, a tech firm may collaborate with a manufacturing company to bring a new
high-tech idea to the marketplace. One party provides the product expertise, the other
provides the means for production. Additionally, joint ventures provide a way for
companies to enter foreign markets. For example, a foreign company enters into a joint
venture with a U.S. company for sale of its product. The foreign company then benefits
from the domestic company’s governmental approval and business relationships in the
industry. This is referred as an “international joint venture.”

Joint Venture Agreement:- A joint venture (“JV”) begins when the parties enter
into a contract or “joint venture agreement,” the specifics of which are of crucial
importance for avoiding problems later on. In creating the agreement, the parties should
state specifically the purpose and goal of the venture, as well as the venture’s
limitations. The agreement should be very specific in outlining each party’s duties and
rights under the agreement, taking into account that all parties are entitled to share in
the profits as well as the losses incurred in the venture.

Each party to a JV has a responsibility to act in “good faith” in all matters regarding the
venture, taking care to uphold the interests of all parties involved. This amounts to a
legal fiduciary duty to the venture, even if it becomes necessary for a party to place
individual interests below those of the group.

The joint venture agreement should specify both the formation and termination dates, or
that the venture terminates when its purpose has been accomplished. Some JV
agreements specify that the venture will automatically terminate if one of the members
dies.

More specifically, a JV agreement should specifically detail the following:-

  Structure – whether the JV will be a separate business entity in its own right, or
simply a short term project
 Objective – the purpose and goals of the JV
 Confidentiality – an agreement for the parties to protect any trade and
commercial secrets disclosed during the venture
 Financial Contributions – how much money each party will contribute to the
venture
 Assets and Employees – whether each party will contribute assets, and
whether they will assign employees to, or hire new employees for the venture
 Intellectual Property Ownership – which party will have ownership of any
intellectual property created by the venture
 Management – specific responsibilities of each party, and the procedures to be
followed in operations of the venture
 Profits, Losses, and Liabilities – specifics of how any profits and losses are
to be distributed or shared among the parties, as well as the assignment of
liabilities
 Disputes – specific instructions for the resolution of disputes that may arise
between the parties
 Exit Strategy – specific details on when and how the JV will end, including the
final distribution of assets and debts

Benefits of a Joint Venture:- Creating a JV provides an opportunity for the

parties to benefit from one another’s expertise. Other benefits include:-

 Enables the parties to offer their customers new products and services
 Helps the parties to save money in operating, marketing, and advertising costs
 Helps the parties save time
 Helps the parties acquire new business associates and referrals
 Enables the parties to gain new technological know-how or new geographical
market territories
 Does not require a long-term commitment