Unit III STRATEGIES

21. THE GENERIC STRATEGIC ALTERNATIVES

Environmental appraisal and organisational appraisal lead to the generation of strategic

alternatives. These are the possible strategies that an organisation can consider for adoption.
The choice of strategies is wide and much would depend on how an organizational perceives
its strengths and weakness the opportunities and threats the external environment presents.

These are done to continually adapt the organisation to the external environment. We saw
how the Mahindra group has manoeuvred (skilled movement) its strategies over time as it has
grown into one of the most professional business groups in India.

We saw the corporate SBU – or business –and functional –level strategies. Strategic
alternatives before a firm as to exercise to choice at the three levels for choosing alternatives
that it would implement. An organisation may first choose the corporate strategy and then the
SBU –or business –level strategy. Finally, it may work on the details of the functional –level
strategies in each of its businesses.

21.1 CORPORATE -LEVEL STRATEGIES

Corporate –level strategies (or simply, corporate strategies) are basically about decisions
related to:

• Allocating resources among the different businesses to a firm

• Transferring resources from one set of businesses to others and

• Managing and nurturing a portfolio of business

These decisions are taken so that the overall corporate objectives are achieved.

Corporate strategies help to exercise the choice of direction that an organisation adopts. There
could be a small business firm involved in a single business or a large conglomerate with
several different businesses. The corporate strategy in both these cases would be about the
basic direction of the firm as a whole. In the case of the small firm having a single business, it
could mean the adoption of courses of action that yield better profitability for the firm. In the
case of the large, multi – business firm, the corporate strategy would also be about managing
the various businesses for maximizing their contribution to the overall corporate objectives
and transferring resources from one set of businesses to others.

Abell has suggested defining a business along the three dimensions; result in a variety of
customer groups, customer functions and alternative technologies that a firm is involved with.
It is therefore common to find multi –business firms with interest in serving a diverse base of
customer groups, performing for them a variety of customer functions, and making use of a
range of several different technologies.
An analysis based on business a definition provides a set of strategic alternatives that an
organization can consider strategic alternatives revolve around the question of whether to
continue or change the business the enterprise is currently in or improve the efficiency and
effectiveness with which the firm achieve its corporate objectives in its chosen business
sector. According to Glueck, there are four strategic alternatives : Expansion , stability ,
retrenchment and any combination of these three.

22. STABILITY, EXPANSION, RETRENCHMENT AND COMBINATION

STRATEGIES.

22.1 STABILITY STRATEGIES

The corporate strategy of stability is adopted by an organisation when it attempts at

incremental improvement of its performance by marginally changing one or more of its
business in terms of their respective customer groups, customer functions and alternative
technologies –either singly or collectively.

In order to understand how stability strategies work, here are three examples to illustrate how
organisations could aim at stability in each of the three dimensions of customer groups,
customer functions and alternative technologies respectively.

• A packaged tea company provides special service to its institutional buyers, apart
from its consumer sales through market intermediaries, in order to encourage bulk
buying and improve its marketing efficiency.

• A copier machine company provides better after –sales service to its existing
customers to improve its company and product image and increase sales of
accessories and consumables.

• A steel company modernises its plant to improve efficiency and productivity.

Note that all three companies here, do not go beyond what they are doing presently; they
serve the same markets with the present products using the existing technology. The
strategies aim at stability by causing the companies to marginally improve their performance
or, at least, letting them remain where they are in case they face a volatile environment and a
highly competitive market. The essence of stability strategies is, therefore, not doing anything
but sustaining moderate growth in line with existing trends.

Sometimes, strategies, like army commanders, think it better to retreat than to

advance. It is in such situations that retrenchment is a feasible strategic alternative.

22.2 EXPANSION STRATEGIES

The corporate strategy of expansion is followed when an organisation aims at high

growth and substantially broadening the scope of one or more of its businesses in
terms of their respective customer groups, customer functions and alternative
technologies –singly and jointly –in order to improve its overall performance.
Expansion strategies are also often known as growth or intensification strategies.
 Given below are three examples to show how companies can aim at expansion either
in terms of customer groups, customer function or alternative technologies.

• A chocolate manufacturer expands its customer group to include middle aged

and old persons to its existing customers comprising children and adolescent.

• A stock broker’s firm offers personalised financial services to small investors

apart from its normal functions of dealing in shares and debentures, in order to
increase the scope of its business and spread its risks.

• A printing firm changes from the traditional letter press printing to desk –top
publishing in order to increase its production and efficiency.

In case of the above cases, the company moves in one or the other direction so as to
substantially alter its present business definition. Expansion strategies have a profound
(intense) impact on the company’s internal functioning.

22.3 RETRENCHMENT STRATEGIES

The corporate strategy of retrenchment is followed when an organisation aims at contraction

of its activities through a substantial reduction or elimination of the scope of one or more of
its businesses in terms of their respective customer group, customer function or alternative
technological either single or jointly –in order to improve its overall performance.

Retrenchment involves total or partial withdrawal from a customer group, customer function,
or of an alternative technology in one or more of a firm’s businesses, as can be seen from the
situations given below:

• A pharmaceutical firm pulls out from retail selling to concentrate on institutional

selling in order to reduce the size of its sales force and increase marketing efficiency.

• A corporate hospital decides to focus only on speciality treatment and realise higher
revenues by reducing its commitment to general cases with are typically less
profitability to deal with.

• A training institution attempts to serve a longer clientele through the distance learning
system and discard its face- to –face interaction methodology of training in order to
reduce its expenses and use the existing facilities and personal more efficiently.

In this manner, retrenchment attempts to ‘trim the fat’ and results in a ‘slimmer’ organisation,
bereft (deserted or lonely) or unprofitable, customer groups, customer functions or alternative
technologies. All the situations described above are, in fact, an over –simplification of the
complex reality that an organisation faces. In order to deal with the real –life situations,
organisations have evolved a combination of the three strategies.

COMBINATION STRATEGIES
The combination strategy is followed when an organisation adopts a mixture of stability,
expansion and retrenchment strategies, either at the same time in its different business or at
different times in one of its businesses, with the aim of improving its performance.

Any combination strategy is the result of a serious attempt on the part of strategies to take
into account the variety of environmental and organisational factors that affect the process of
strategy formulation.

Complicated situations generally require complex solutions. Combination strategies are the
complex solutions that strategies have to offer when faced with the challenges of real –life
business.

Observe how the two companies below deals with the complex situation they face.

• A paints company augments (add or increase) it’s offering of decorative paint to

provide a wider variety to its customers (stability) and expands its product range to
include industrial and automotive paints (expansion). Simultaneously, it decides to
close down the division which undertakes large – scale painting contract jobs
(retrenchment).

• Over the years, strategic changes at a large business group indicate that it has been
strengthening its manufacturing base and divesting its trading activities. Stability has
been aimed at in some of its divisions, by retrenching the unprofitable products and
services. While major expansions have taken place in the case of its industrial
products and construction business. A variety of strategies have thus been followed,
both sequent and sequentially and simultaneously, waiting a complex web of
strategies, in line with nature of the conglomerate (corporation) that the company
actually is.

BUSINESS LEVEL STRATEGY

What is business –level strategy?

At the heart of business –level strategy is the objective of developing a firm-specific business
model that will allow a company to gain a competitive advantage over its rivals in a market
or industry.

Strategic (management) mangers define their company’s business in the first step in crafting
business –level strategy. According to Abell , the process of business definition entails
decisions about (1) customer’s needs , or what is to be satisfied, (2) customer groups, or who
is to be satisfied , and (3) distinctive competencies , or how customer needs are to be
satisfied.

These three dimensions are the basis of the choice of a business –level strategy because they
determine where and how a company seeks to compete in a business or industry –essentially,
how a company proposes to create value for customers.
23.1 CUSTOMERS NEEDS & PRODUCT DIFFERNTIATION

Customer needs are desires, wants, or cravings (longings) that can be satisfied by means of
attributes or characteristics of a product – a good or service. For example, a person’s carving
for something sweet can be satisfied by a box of Godiva chocolates (Godiva chocolates was
founded 80 years ago in Brussels, Belgium when master chocolatier Joseph draps founded a
chocolate company that was named in honour of the legend of lady Godiva), a box of Ben &
Jerry ‘s ice cream (It was started in the year 1978, at a gas station in, Burlington , Vermont ,
north eastern of the United States. With a $12000 investment ($ 4000 of it borrowed) Ben &
Jerry opened their Ben & jerry ‘s home made ice cream scoop shop in a renovated gas station
at the corner of St. Paul’s and college streets in downtown Burlington , Vermont on May 5 ),
a snickers bar (originally introduced in 1929 by frank & Ethel Mars, the snickers bar was
named after their family horse. The snickers bar consisted primary of chocolate, peanuts and
caramel and milk. In the UK and Ireland , it was originally sold under the name marathon.
Mars standardized many of its global brand names and the name was changed to snickers in
1990), or a spoonful of sugar.

Two factors determine which product a customer chooses to satisfy these needs: (I) the price
of the product (2) the way a product is differentiated from other product of its type.

Product differentiation is the process of designing product to satisfy customer needs. A

company obtains a competitive advantage when it creates designs and supplies a product in a
way that better satisfies customer needs than its rivals do and choose the correct pricing
option the one that results in level of demand that optimizes profitability. Consider the luxury
segment of the car market, where customers pay more than $35,000 to satisfy their needs, for
personal transportation. In this segment, Cadillac, Mercedes – Benz, infinity, BMW, Jaguar ,
Lexus , Audi, Volvo and others are engaged in a continuing battle to design the ‘perfect’
luxury vehicle the one that best needs the needs of those who have decided to purchase a
personal luxury vehicle.

23.2 CUSTOMER GROUPS & MARKET SEGMENTATION

Market segmentation is the way a company decided to group customers, based on important
differences in their needs or preferences, in order to gain a competitive advantage. One
principal way of grouping customers and segmenting the market is by what customers are
able to willing to pay for a particular product.

Manage, such as designers and engineers , have to think strategically about which segments
they are going to compete in and then how they will differentiate their products for each
segment. The result of this choice process determines a particular company’s product range.

Market segmentation is an evolving, ongoing process that presents considerable opportunities

for strategic managers. For example, in the car industry , savvy (intelligence) strategies often
recognize opportunities to create a product for a new market segment that will attract a
specific group of car buyers who before has to ‘specific ‘ (decide on and pursue a course of
action satisfying the minimum requirements to achieve a goal),and buy a model that did not
meet their needs exactly but was reasonable compromise. This was the origin of sports utility
market segment.

In general , accompany can adopt three alternative strategies toward market segmentation.

First , it can choose not to recognize that different groups of customers have different needs
and instead adopt the approach of serving the average customer (e.g., coke, Pepsi,
pharmaceutical companies).

Second, it can choose to segment its market into different constituencies and develop a
product to suit the needs of each. For e.g., Sony offers different colour television sets, each
targeted at a different market segment.

Third, a company can choose to recognize that market is segmented but concentrate on
serving only one of a few market segments or niches (A niche market is the subset of the
market on which a specific product is focusing on; therefore the market niche defines the
specific product features aimed at satisfying specific market needs, as well as the price,
range, production quality and the demographics that is intended to impact)

23.3 DISTINCTIVE COMPETENCIES

The third issue in business –level strategy is to decide which distinctive competencies to
create and build to achieve a competitive advantage in satisfying particular customer needs
and customer groups. There are 4 main easy companies can pursue a competitive advantage :
superior efficiency, quality , innovation and responsiveness to customers.

24. STRATEGY IN THE GLOBAL ENVIRONMENT

IMPLEMENTING STRATEGY ACROSS COUNTRIES

Global strategy can play a crucial role in strengthening the business model of both single –
business and multi business companies. Indeed, few large companies that have expanded into
new industries have not already expanded globally into new countries. Companies can use
four basic strategies as they begin to market their products and establish production facilities
abroad.

• A multi domestic strategy is oriented toward local responsiveness, and a company

decentralizes control to subsidiaries and divisions in each country in which it operates
to produce and customize products to local markets.

• An international strategy is based on R&D being centralized at home and all the other
value creation functions being decentralized to national units.

Companies that pursue an international strategy try to create value by transferring

valuable competencies and products to foreign markets where indigenous (native)
competitors lack those competencies and products.
 Most international companies have created value by transferring differentiated
product offerings developed at home to foreign markets.

They tend to centralize R&D functions.

They also tend to establish manufacturing functions and marketing functions in each
major country in which they do business. Although they may undertake some local
customization of product offering and marketing strategy, this tends to be rather
limited in scope.

Eg: McDonald, Wal-Mart, Kellogg

• A global strategy is oriented toward cost reduction, with all the principal value
creation function centralized at the optimal global location.

• A transnational strategy is focussed so that it can achieve local responsiveness and

cost reduction.

A transnational strategy allows for the attainment of benefits inherent in both global
and multi domestic strategies. It is a management approach in which an organization
integrates its global business activities through close cooperation and interdependence
among its headquarters operations, and international subsidiaries, and its use of
appropriate global information technologies.

The key philosophy of a transnational organization is adaption to all environmental

situations and achieving flexibility by capitalizing on knowledge flows and two-way
communication throughout the organization. A joint innovation by headquarters and
by some of the overseas units leads to the development of relatively standardized and
yet flexible products and services that can capture several local markets.

24.1 IMPLEMENTING A MULTI STRATEGY

When a company pursues a multi domestic strategy, it generally operates with a global – area
structure. When using this structure, a company duplicates all value creation activities and
establishes an overseas division in every country to managers in each overseas division, who
devise the appropriate strategy for responding to the needs of the local environment.
Managers at global headquarters use market and output controls, such as ROIC, growth in
market share, and operation costs, to evaluate the performance of overseas divisions on the
basis of such global comparisons; they can make decisions about capital allocation and
orchestrate the transfer of new knowledge among divisions.

A company that makes and sells the same products in many different countries often groups
its overseas divisions into worlds regions to simplify the coordination of product across
countries. Europe might be one region, the pacific Rim another, and the middle east a third.
Grouping allows the same set of output and behaviour controls to be applied across all
divisions inside a region. Thus, global companies can reduce communications and transfer
 problems because information can be transmitted more easily across countries with broadly
similar cultures. For example, consumer’s preferences regarding product design and
marketing are likely to be more similar among countries in one worlds region than among
countries in different world regions.

CORPORATE
HEADQUATERS

NORTH AMERICAN SOUTH AMERICAN EUROPEAN PACIFIC

REGION REGION REGION REGION

Because the overseas divisions themselves have little or no contact with others in different
regions, no integrating mechanisms are needed. Nor does a global organisational culture
develop because there are no transfers of skills or resources or transfer of personnel among
managers from the various world regions. Historically, car companies such as Daimler
Chrysler , GM , and ford used global area structure to manage their overseas operations. Ford
of Europe, for example, has little or no contact with its US parent; capital was the principal
resource exchanged. One problem with a global –area structure and a multi domestic strategy
is that the duplication of specialist.

25. CORPORATE STRATEGY

Corporate strategies are basically about decisions related to:

Allowing resources among the different businesses of a firm

Transferring resources from one set of businesses to others and

Managing and mustering a portfolio of businesses

25.1 STRUCTURES FOR CORPORATE STRATEGIES

Corporate strategies of integration, diversification, internationalization, cooperation,

digitalization and retrenchment (substantial reduction or elimination of the scope of one or
more of its businesses in terms of their respective customers groups, customer function or
 alternative technologies – either singly or jointly – in order to improve its overall
performance) generate differing requirement to be satisfied by different organisation designs
and structures under the corporate strategy of concentration, the organisation does not plan
anything different from what it is already doing and so does not require structural changes.
The only change in the organization design may be an added emphasis on marketing for
marketing for market penetration and development and on R&D and operations for product
development strategies.

25.2. STRUCTURES FOR INTEGRATION STRATEGIES

Horizontal and vertical integration extent the value chain horizontally and vertically
respectively. Horizontal integration generates commitment to adjacent businesses.
Organisation design and structure may have to be charged to accommodate those adjacent
businesses. Addition to the existing structure may lead the organization to create a
geographical or product structure to cater to the requirements of horizontal integration. Under
vertical integration, the organisation extends itself either backward to raw materials or
forward to the customers. These strategies would create requirements for the structure to be
extended accordingly. Frequently, divisional structures satisfy those requirements as they do
in the case of diversification strategies.

25.3 STRUCTURES FOR DIVERSIFICATION STRATEGIES

Diversification strategies are implemented through multidivisional and SBU structures.

Depending on whether the diversification is related or unrelated, the structures would also
reflect the differences. Observe that the corporate headquarter may retain some of the
functions and decentralise some others, depending on the nature of diversification. Related
diversification would create the requirement of retaining linkages among functions and
departments within the organisation so that synergies can play a role in creating economies of
scope. Unrelated diversification implemented mainly through the multidivisional structure,
could ignore such linkages on favour of divisional autonomy to pursue a different line of
business.

CEO

LEGAL PR

STRATEGIC STRATEGIC STRATEGIC STRATEGI

BUSINESS BUSINESS BUSINESS
COPORATE C
CORPORATE
CORPORATE CORPORATE
UNIT A UNIT UNIT C
MARKETING BUSINESS
OPERATION
FINANCE HRMB
UNIT D
 (STRUCTURES FOR IMPLEMENTING DIVERSIFICATION STRATEGIES
SUGGESTED FOR RELATED DIVERSIFICATION)

(SUGGESTED STRUCTURE FOR UNRELATED DIVERSIFICATION)

CEO

CORPORATE CORPORATE CORPORATE CORPORATE PR

FINANCE HRM LEGAL DIVISION C DIVISION D
DIVISION A DIVISION B
25.4 STRUCTURES

STRUCTURES FOR INTERNATIONALIZATION STRATEGIES

You would need to recall internationalization strategies. We learn that there are four types of
internationalization strategies: International, Multi Domestic, global and transnational. Each
of these internationalisation strategies creates its own requirements for organisation design
and structure. A model that shows the appropriate structures for each of these
internationalisation strategies is presented.

STRUCTURES FOR INTERNATIONALISATION STRATEGIES

Global strategy Transnational

strategy, global
Global product matrix structure
Pressure for cost structure
Reduction

International Multi domestic

strategy strategy

International Global
division structure geographic
structure

Pressures for local responsiveness

International strategy that creates value by transferring products and services to foreign
markets where these products and services are not available could be implemented by setting
up an international division as part of a hybrid structure. Multi domestic strategies try to
match the products and services to the conditions of the markets being served. Global
geographic structure could serve the needs of a multi domestic strategy. By using global
strategies, organisations adopt a low - cost approach to offer standardised products and
services globally. A global product structure could serve the need of a global strategy. Finally
, transnational strategies being the most complex and challenging international strategies that
seek to combine local responsiveness and low-cost approaches, may have rely on the global
matrix structure.

STRUCTURES FOR COOPERATIVE STRATEGIES

Cooperative strategies are used in the cases of friendly mergers and acquisitions, joint
ventures, and strategic alliances. The appropriate organization design and structure for
implementing cooperative strategies are the network organization structure within, with a
combination of network of organizations outside.

STRUCTURES FOR DIGITALIZATION STRATEGIES

The digitalization strategies are based on digital coding of information and the resulting
efficiency of processing and transmission. The digitalization of information has profound
(intense) implications for strategy as well as for the organization design. Structures for
implementing digitalization strategies may not be very different from those used for
implementing other types of corporate strategies. Digitalization may impact process design in
an organization, resulting in structural changes. Or digitalization may help create a flexible
organization structure and opening up the organization to enter into a greater number of inter
organizational relationships. The impact of information technology on organization design is
seen in terms of several factors such as these: emergence of smaller-sized organization’s,
decentralized organization structures, improved horizontal coordination and improved
organizational structures.
VERTICAL INTEGRATION

Vertical Integration means that a company is expanding its operations either

backwards into an industry that produces inputs for the company’s products or forward into
an industry that is output or distributes the company products. A steel company that supplies
its iron are needs from company-owned iron are mines exemplifies backward integration. A
personal computer maker that sells its PCs through computer-owned retail out lets illustrates
forward integration. For example in 2001 apple computer entered the retail industry when it
decided to let up a chain of apple stores to sell its computer. For a company based in the
assembly stage, backward integration means moving in to components parts manufacturing
and raw material production. Forward integration means moves into distribution. At each
stage in the chain, value is added to the product. At each stage, the product produced in the
previous stage will transform in some way that it is worth more to a company at the next
stage in the chain, and ultimately, to the end user.

It is important to note that each stage is in a separates industry, and either each
industry there is also a value chain that encompasses (include) the basic value creation
activities like R &D production, marketing and customer service.

Retail (OFFICE
Forward integration (Upward MAX, COMP USA)

Stream industries)

Final assembly

(APPLE / dell)
 Component part
manufacturing
(INTEL)

Backward integration
Raw materials
(Downstream industries)
(KYOCERA)

Here the raw ;materials companies include the manufacture of speciality ceramics,
chemicals, and metal, such as Kyocera of Japan, which manufactures the ceramic substrate
(Natural stone ) for semiconductors (a substance the conducts electricity in certain
conditions). These companies will sell their output to the manufacturers of component
products, such as Intel and Micron technology, which transforms the ceramics, chemicals,
and metals they purchase into computer components such as microprocessors, disk drives and
memory chips. In this process, they add value to the same materials they purchases. These
components are then sold to assembly companies such as Apple, Dell, Hp, which take these
components and transform them into personal computer that is, add value to the components
they purchase. These components are then sold to assembly companies such as Apple, Dell,
HP, which take these components and transform them into personal computers- that is, add
value to the components they purchase. Many of the completed P.C’s are then sold to
distributors such as Office Max and Comp USA or value-added resellers that sell them to
final customers (Dell sells direct, Apple have established retail stores to sell their products).
The distributors also add value to the product by making it accessible to customers by
providing service and support. Thus companies add value at each stage in the raw-materials-
to-consumer chain.

DIVERSIFICATION

The two main types of diversification are related diversification and unrelated
diversification. Related diversification is diversification into a new business activity in a
different industry that is related to a company’s existing business activity, or activities, by
commonalities between one or more components of each activity’s value chain. Normally,
theses linkages are based on manufacturing, marketing, or technological commonalities. The
diversification of Philip Morris into the brewing industry with the acquisition of Miller
Brewing in an example of related diversification because there are marketing commonalities
between the brewing and tobacco businesses: both are mass market consumer product
businesses in which competitive success depends on brand positioning skills. 3M is another
example of a company that has long pursued a strategy of related diversification. In 3M’s
case, the commonality is in the development of core technology, which is then applied to a
wide range of business areas.

Companies that pursue a strategy of related diversification can increase profitability in all of
the ways we have just discussed. In contrast, unrelated diversification is based on entry into
industries that have no obvious connection to any of company’s value chain activities in its
present industry or industries. Companies pursuing a strategy of unrelated diversification lack
the ability to transfer or leverage competencies and to realize economies of scope. Indeed,
most companies that pursue a strategy of unrelated diversification focus on increasing
profitability by exploiting general organizational competencies. This was certainly the prime
rationale for Tyco’s diversification strategy during the 1990s, much of which was unrelated
diversification. Kozlowski’s focus was on increasing Tyco’s profitability by establishing an
effective organization structure and set of controls at Tyco, and then acquiring and
restructuring businesses that he thought were not performing to their full potential. These
acquired business were in a wide range of industries with no obvious value chain connection,
for example, plastics, security systems, and telecommunications, and medical supplies.

In short, Kozlowski’s multi business model for Tyco, like that of all other companies that
pursue an unrelated diversification strategy, was founded on exploiting the gains from
general organizational competencies in order to increase the profitability of the constituent
businesses of the corporation. By contrast, the multi business model for companies pursuing a
strategy of related diversification is first and foremost to achieve the gains from transferring
and leveraging competencies and from sharing resources. In addition, although both related
and unrelated diversification might be associated in theory with managing rivalry through
multipoint competition, as a practical matter, related diversified companies are far more
likely to encounter each other in different industries than unrelated companies are. So this
benefit too is more likely to be attained by companies pursuing a related diversification
strategy than those pursuing an unrelated diversification strategy.

THE LIMITS OF DIVERSIFICATION

One issue a company must confront is whether to pursue related or unrelated diversification.
Because related diversification can boost profitability in more ways than unrelated
diversification can, this might lead one to believe that related diversification is sometimes
perceived as involving fewer risks because the company is moving into industries about
which top management usually has some knowledge. Probably because of these
considerations, most diversified companies display a preference for related diversification.
However, research suggests that the average related company is at best only marginally more
profitable than the average unrelated company.

A large number of academic studies support the conclusion that extensive diversification
tends to depress rather than improve company profitability. For example, in a study that
looked at the diversification of thirty-three major U.S. Corporations over thirty-five years,
Michael Porter observed that the track record of corporate diversification has been poor.
Porter found that most of the companies had divested many more diversified acquisitions
than they had kept. He and others have concluded that the corporate diversification strategies
pursued by most companies can dissipate value instead of creating it.

Why is related diversification only marginally more profitable than unrelated, and why and
how can diversification dissipate rather than create value? On the other hand, why are there
many companies that have performed spectacularly well using a strategy of related
diversification?

STRATEGIC ALLIANCES

Global strategic alliances are cooperative agreements between companies from different
countries that are actual or potential competitors. Strategic alliances run the range from
formal joint ventures, in which two or more companies have an equity stake, to short-term
contractual agreements, in which two companies may agree to cooperate on a particular
problem (such as developing a new product).

ADVANTAGES OF STRATEGIC ALLIANCES

Companies enter into strategic alliances with competitors to achieve a number of strategic
objectives. First, strategic alliances may be a way of facilitating entry into a foreign market.
For example, Motorola initially found it very difficult to gain access to formal and informal
Japanese trade barriers. The turning point for Motorola came in 1987, when it formed its
alliance with Toshiba to build microprocessors. As part of the deal, Toshiba provided
Motorola with marketing help, including some of its best managers. This aided Motorola in
the political game of winning government approval to enter the Japanese market and
obtaining allocations of radio frequencies for its mobile communication systems. Since then,
Motorola has played down the importance of Japan’s informal trade barriers. Although
privately the company still admits they exist, with Toshiba’s help Motorola has become
skilled at getting round them.

Second, many companies enter into strategic alliances to share the fixed costs and associated
risks that arise from the development of new products or processes. Motorola’s alliance with
Toshiba was partly motivated by a desire to share the high fixed costs associated with setting
up an operation to manufacture (it cost Motorola and Toshiba close to $1 billion to set up
their facility) that a few companies can afford the costs and risks of going it alone.

Companies enter into an alliance if it helps the company set technological standards for its
industry and if those standards benefit the company. For example, in 1992, the Dutch
electronics company Philips entered into an alliance with its global competitor, Matsushita, to
manufacture and market the digital compact cassette (DDC) system pioneered by Philips.
Linking up with Matsushita would help Philips establish the DCC system as a new
technological standard in the recording and customer electronics industries. The issue is an
important one because Sony was developing a competing technology that it hoped to
establish as the new technical standard. Thus, Philips saw the alliance with Matsushita as a
tactic for winning the standard race, for it ties a potential major competitor into its standard.

ORGANISATION CAPABILITY PROFILE

The organisational capability profile (OCP) is drawn in the form of a chart as depicted in
exhibit, which shows a summarised OCP. The strategies are required to systematically assess
the various functional areas and subjectively assign values to the different functional
capability factors and sub –factors, along a scale ranging from values of -5 to +5. A detailed
OCP may run into several pages where each of the sub –factors constituting the different
functional capability factors can be assessed. In this manner, a summarised OCP, as shown in
exhibit may be prepared.

Summarised from of organisational capability profile

Capability factors Weakness Normal

Strength

-5 0 +5

1. Financial capability factors

Sources of funds

Usages of funds

Management of funds

2. Marketing capability factors

Product –related

Price –related

Promotion –related

Integrative and systematic

3. Operations capability factors

Production system

Operations and control system

R&D system

4. Personal capability factors

Personal system

Organisational and employee characteristics

Industrial relations

5. Information management capability factors

Acquisition and retention of information

Retrieval and usage of information

Processing and usage of information

Transmission and dissemination of information

Integrative, systemic and supportive

6. General management capability factors

General management system

External relations

Organisation climate

After completion of the chart, the strategies are in a position to assess the relative strength
and weakness of an organisation in each of the six functional areas and identify the gaps that
need to be corrected or opportunities that could be used. The preparation of an OCP provides
a convenient method to determine the relative priorities of an organisation vis a vis that of its
competitors, its vulnerability to outside influenced, the factors that support or pose a threat to
its overall capability to compete in a given industry.

STRATEGIC ADVANTAGE PROFILE

Based on the detailed information presented in the OCP, it is possible to prepare a concise
chart of strategic advantage profile. An SAP can also be prepared directly when students
analyse cases during classroom learning, without making a detailed OCP. An SAP provides
‘a picture of the more critical areas which can have a relationship with the strategic posture of
the firm in the future.

In exhibit, we provide an illustration of an SAP drawn for a hypothetical company in the

bicycle industry. The main business of the company is in the sports cycle manufacturing for
domestic and exports markets. This example related to a hypothetical company, but the
illustrate is realistic (recall that we used the same example to prepare an ETOP in chapter 3;
for details refer to exhibit.
The SAP presented in exhibit clearly shows the strength and weakness in different functional
areas. For instance, the company has to use its strengths in the areas of operations and general
management areas. A gap is also indicated in the finance area, which has to be overcome is
the company ahs to survive and prosper in a competitive industry like the bicycle industry. In
marketing, though the competitive position is secure at present, it cannot be said that it will
remain so in future. The SAP indicated that strategists initiate action to cover the gaps and
use the company’s strength in the light of the environmental threats and opportunities.

The probable line action to be adopted for covering the gaps and using the company’s
strengths in the light of environmental threats and opportunities is found through considering
strategic alternatives at the corporate –level and business –level and exercising a strategic
choice.

STRATEGIC ADVANTAGE PROFILE

CAPABILITY NATURE OF COMPETITIVE

FACTOR IMPACT STRENGTHS AND
WEAKNESSES

1. Finance High cost of capital;

reserves and surplus
position
unsatisfactory.

2. Marketi Fierce competition in

ng industry; company’s
position secure at
present.

3. Operati Plant and machinery

ons in excellent
condition; captive
sources for parts and
components
available.

4. Personn Quality of managers

el and workers
comparable with that
in competitor
 companies.

5. Informa Advanced
tion management
information system in
place; most
traditional functions
such as payroll and
accounting
computerised;
company websites
has limited scope for
e-commerce.

6. General High quality and

management experienced top
management
generally adopts a
proactive stance with
regards to decision
making

Note: Up arrow indicates strength, down arrow indicates weakness while horizontal arrow
indicates a neutral position.

Corporate Portfolio analysis

Corporate portfolio analysis (or simply, portfolio analysis) could be defined as a set of
techniques that help strategists in taking strategic decisions with regards to individual
products to businesses in a firm’s portfolio. It is primarily used for competitive analysis and
strategic planning in multi –product and multi business firms. They may also be used in less
diversified firms, if these consist of a main business and other minor complementary interest.
The main advantages in adopting a portfolio approach in a multi –product, multi –business
firm is that resources could be targeted at the corporate level to those businesses that possess
the greatest potential for creating competitive advantage. For instance, a diversified company
may decide to divert resources from its cash –rich businesses to more prospective ones that
hold promise of a faster growth, so that the company achieves its corporate level objectives in
optimal manner.
Corporate portfolio techniques evolved during the mid -1960’s and several of these soon
became quite popular. During the 1970s, there arose a tendency to discredit the techniques
when it was realised that the assumptions underlying them did not always hold good.
Currently , however, it is accepted that these techniques are useful, not as being purely
perspective, but as an important and decisive part of set of criteria –normative as well as
descriptive –that assist strategies in exercising a strategic choice.

There are a number of techniques that could be considered as corporate portfolio analysis
techniques. Among them we have the Boston consulting group (BCG) or product portfolio,
General Electric’s Nine-cell, Hofer’s product –market evolution, directional policy and the
strategic position and action evaluation matrices. Not all of these techniques have retained
their popularity and importance though. We will describe the General Electric’s Nine –cell
matrix as an illustration of the corporate portfolio matrices.

SWOT ANALYSIS

SOWT analysis, evolved during the 1960’s at Stanford Research Institute, is vey popular
strategic planning techniques having application in many areas including management.
Organisations perform a SWOT analysis to understand their internal and external
environment. SWOT, which is the acronym for strengths, weaknesses, opportunities and
threats, is also known as WOTS-UP or TOWS analysis. Through such an analysis, the
strengths and weaknesses existing within an organisation can be matched with the
opportunities and threats operating in the environment effective strategy can be formulated.
An effective organisational strategy, therefore, is one that capitalizes on the opportunities
through the use of strengths and neutralises the threats by minimizing the impact of
weakness, to achieve pre –determined objectives.

A simply application of the SWOT analysis technique involves these steps:

1. Setting the objectives of the organisation

2. Identifying its strengths, weaknesses, opportunities and threats

3. Asking four questions

• How do we maximize our strengths?

• How do we minimize our weaknesses?

• How do we capitalize on the opportunities in our external

environment?

• How do we protect ourselves from these threats in our external

environment?
 4. Recommending strategies that will optimise the answers from the four
questions.

The SWOT analysis is usually done with the help of a template in the form of a four-cell
matrix, each cell of the matrix representing the strengths, weaknesses, opportunities and
threats. The analysis for preparing the SWOT matrix could be done by a group of manager in
a workshop session. The session could use the brainstorming technique for generating ideas
about SWOT factors. A typical SWOT analysis matrix for a hypothetical organisation is
shown in exhibit.

A typical SWOT matrix

STRENGTHS WEAKNESSES

• Favourable location. • Uncertain cash flow.

• Excellent distribution • Weak management

network. information system.

• ISO 9000 quality • Absence of strong USP

certification. for major product lines.

• Established R&D • Low worker

centre. commitment.

• Good management
reputation.

OPPORTUNITIES THREATS

• Favourable industry • Unfavourable political

trends. environment.

• Low technology • Obstacles in licensing

options available. new business.

• Possibility of niche • Uncertain competitors

target market. ‘intentions.

• Availability of reliable • Lack of sustainable

business partners. financial backing.

SWOT analysis has several benefits, among the major being:

• Simple to use

• Low cost
 • Flexible and can be adapted to varying situation

• Leads to clarification of issues

• Development of goal – oriented alternatives

• Useful as starting point of strategic management.

The following could be the pitfalls of using the SWOT analysis indiscriminately.

• Simplicity of use may turn to be simplistic by trivialising the reality

that may be more complex than represented in SWOT.

• May result in just compiling lists rather than think about what is rally
important for achieving

Objectives

• Usually reflects an evaluator’s position and viewpoint that can be

misinterpreted to justify a previously decided course of action, rather than be
used as a means to open new possibilities

• Changes exist where strengths may be confused with opportunities or

weakness with threats.

• May encourage organisation to take a lazy course of action of looking

for strength that match opportunities rather than developing new strength that
could match the emerging opportunities.

The process of strategy formulation starts with and critically depends on, the appraisal of the
internal and external environment of an organisation.

STRATEGIC ANALYSIS AND CHOICE and ETOP

The McKinsey 7S Framework

Ensuring that all parts of your organization work in harmony

How do you go about analyzing how well your organization is positioned to achieve its
intended objective? This is a question that has been asked for many years, and there are many
different answers. Some approaches look at internal factors, others look at external ones,
some combine these perspectives, and others look for congruence between various aspects of
the organization being studied. Ultimately, the issue comes down to which factors to study.

While some models of organizational effectiveness go in and out of fashion, one that has
persisted is the McKinsey 7S framework. Developed in the early 1980s by Tom Peters and
Robert Waterman, two consultants working at the McKinsey & Company consulting firm, the
basic premise of the model is that there are seven internal aspects of an organization that need
to be aligned if it is to be successful.

The 7S model can be used in a wide variety of situations where an alignment perspective is
useful, for example to help you:

• Improve the performance of a company.

• Examine the likely effects of future changes within a company.
• Align departments and processes during a merger or acquisition.
• Determine how best to implement a proposed strategy.

The McKinsey 7S model can be applied to elements of a team or a

project as well. The alignment issues apply, regardless of how you
decide to define the scope of the areas you study.

The Seven Elements

The McKinsey 7S model involves seven interdependent factors which are categorized as
either "hard" or "soft" elements:

Hard Elements Soft Elements

Strategy Shared Values
Structure Skills

Systems Style

Staff

"Hard" elements are easier to define or identify and management can directly influence them:
These are strategy statements; organization charts and reporting lines; and formal processes
and IT systems.

"Soft" elements, on the other hand, can be more difficult to describe, and are less tangible and
more influenced by culture. However, these soft elements are as important as the hard
elements if the organization is going to be successful.

The way the model is presented in Figure 1 below depicts the interdependency of the
elements and indicates how a change in one affects all the others.

Let's look at each of the elements specifically:

• Strategy: the plan devised to maintain and build competitive advantage over the
competition.
• Structure: the way the organization is structured and who reports to whom.
• Systems: the daily activities and procedures that staff members engage in to get the
job done.
• Shared Values: called "superordinate goals" when the model was first developed,
these are the core values of the company that are evidenced in the corporate culture
and the general work ethic.
 • Style: the style of leadership adopted.
• Staff: the employees and their general capabilities.
• Skills: the actual skills and competencies of the employees working for the company.

Placing Shared Values in the middle of the model emphasizes that

these values are central to the development of all the other critical
elements. The company's structure, strategy, systems, style, staff and
skills all stem from why the organization was originally created, and
what it stands for. The original vision of the company was formed
from the values of the creators. As the values change, so do all the
other elements.

How to Use the Model

Now you know what the model covers, how can you use it?

The model is based on the theory that, for an organization to perform well, these seven
elements need to be aligned and mutually reinforcing. So, the model can be used to help
identify what needs to be realigned to improve performance, or to maintain alignment (and
performance) during other types of change.

Whatever the type of change - restructuring, new processes, organizational merger, new
systems, change of leadership, and so on - the model can be used to understand how the
organizational elements are interrelated, and so ensure that the wider impact of changes made
in one area is taken into consideration.

You can use the 7S model to help analyze the current situation (Point A), a proposed future
situation (Point B) and to identify gaps and inconsistencies between them. It's then a question
of adjusting and tuning the elements of the 7S model to ensure that your organization works
effectively and well once you reach the desired endpoint.

Sounds simple? Well, of course not: Changing your organization probably will not be simple
at all! Whole books and methodologies are dedicated to analyzing organizational strategy,
improving performance and managing change. The 7S model is a good framework to help
you ask the right questions - but it won't give you all the answers. For that you'll need to
bring together the right knowledge, skills and experience.

When it comes to asking the right questions, we've developed a Mind Tools checklist and a
matrix to keep track of how the seven elements align with each other. Supplement these with
your own questions, based on your organization's specific circumstances and accumulated
wisdom.

7S Checklist Questions
Here are some of the questions that you'll need to explore to help you understand your
situation in terms of the 7S framework. Use them to analyze your current (Point A) situation
first, and then repeat the exercise for your proposed situation (Point B).

Strategy:

• What is our strategy?

• How do we intend to achieve our objectives?
• How do we deal with competitive pressure?
• How are changes in customer demands dealt with?
• How is strategy adjusted for environmental issues?

Structure:

• How is the company/team divided?

• What is the hierarchy?
• How do the various departments coordinate activities?
• How do the team members organize and align themselves?
• Is decision making and controlling centralized or decentralized? Is this as it should be,
given what we're doing?
• Where are the lines of communication? Explicit and implicit?

Systems:

• What are the main systems that run the organization? Consider financial and HR
systems as well as communications and document storage.
• Where are the controls and how are they monitored and evaluated?
• What internal rules and processes does the team use to keep on track?

Shared Values:

• What are the core values?

• What is the corporate/team culture?
• How strong are the values?
• What are the fundamental values that the company/team was built on?

Style:

• How participative is the management/leadership style?

• How effective is that leadership?
• Do employees/team members tend to be competitive or cooperative?
• Are there real teams functioning within the organization or are they just nominal
groups?

Staff:
 • What positions or specializations are represented within the team?
• What positions need to be filled?
• Are there gaps in required competencies?

Skills:

• What are the strongest skills represented within the company/team?

• Are there any skills gaps?
• What is the company/team known for doing well?
• Do the current employees/team members have the ability to do the job?
• How are skills monitored and assessed?

7S matrix questions

Using the information you have gathered, now examine where there are gaps and
inconsistencies between elements. Remember you can use this to look at either your current
or your desired organization.

Click here to download our McKinsey 7S Worksheet, which contains a matrix that you can
use to check off alignment between each of the elements as you go through the following
steps:

• Start with your Shared Values: Are they consistent with your structure, strategy, and
systems? If not, what needs to change?

• Then look at the hard elements. How well does each one support the others? Identify
where changes need to be made.

• Next look at the other soft elements. Do they support the desired hard elements? Do
they support one another? If not, what needs to change?

• As you adjust and align the elements, you'll need to use an iterative (and often time
consuming) process of making adjustments, and then re-analyzing how that impacts
other elements and their alignment. The end result of better performance will be worth
it.

Key Points

The McKinsey 7Ss model is one that can be applied to almost any organizational or team
effectiveness issue. If something within your organization or team isn't working, chances are
there is inconsistency between some of the elements identified by this classic model. Once
these inconsistencies are revealed, you can work to align the internal elements to make sure
they are all contributing to the shared goals and values.

The process of analyzing where you are right now in terms of these elements is worthwhile in
and of itself. But by taking this analysis to the next level and determining the ultimate state
for each of the factors, you can really move your organization or team forward.

GE NINE CELL MATRIX

In consulting engagements with General Electric in the 1970's, McKinsey & Company
developed a nine-cell portfolio matrix as a tool for screening GE's large portfolio of strategic
business units (SBU). This business screen became known as theGE/McKinsey Matrix and
is shown below:

GE / McKinsey Matrix

Business Unit Strength

High Medium Low

High

Medium

Low
The GE / McKinsey matrix is similar to the BCG growth-share matrix in that it maps
strategic business units on a grid of the industry and the SBU's position in the industry. The
GE matrix however, attempts to improve upon the BCG matrix in the following two ways:

• The GE matrix generalizes the axes as "Industry Attractiveness" and "Business Unit
Strength" whereas the BCG matrix uses the market growth rate as a proxy for industry
attractiveness and relative market share as a proxy for the strength of the business
unit.
• The GE matrix has nine cells vs. four cells in the BCG matrix.

Industry attractiveness and business unit strength are calculated by first identifying criteria
for each, determining the value of each parameter in the criteria, and multiplying that value
by a weighting factor. The result is a quantitative measure of industry attractiveness and the
business unit's relative performance in that industry.

Industry Attractiveness

The vertical axis of the GE / McKinsey matrix is industry attractiveness, which is determined
by factors such as the following:

• Market growth rate

• Market size
• Demand variability
• Industry profitability
• Industry rivalry
• Global opportunities
• Macro environmental factors (PEST)

Business Unit Strength

The horizontal axis of the GE / McKinsey matrix is the strength of the business unit. Some
factors that can be used to determine business unit strength include:

• Market share
• Growth in market share
• Brand equity
• Distribution channel access
• Production capacity
• Profit margins relative to competitors

The business unit strength index can be calculated by multiplying the estimated value of each
factor by the factor's weighting, as done for industry attractiveness.
Plotting the Information

Each business unit can be portrayed as a circle plotted on the matrix, with the information
conveyed as follows:

• Market size is represented by the size of the circle.

• Market share is shown by using the circle as a pie chart.
• The expected future position of the circle is portrayed by means of an arrow.

The following is an example of such a representation:

The shading of the above circle indicates a 38% market share for the strategic business unit.
The arrow in the upward left direction indicates that the business unit is projected to gain
strength relative to competitors, and that the business unit is in an industry that is projected to
become more attractive. The tip of the arrow indicates the future position of the center point
of the circle.

Strategic Implications

Resource allocation recommendations can be made to grow, hold, or harvest a strategic

business unit based on its position on the matrix as follows:

• Grow strong business units in attractive industries, average business units in attractive
industries, and strong business units in average industries.
• Hold average businesses in average industries, strong businesses in weak industries,
and weak business in attractive industies.
• Harvest weak business units in unattractive industries, average business units in
unattractive industries, and weak business units in average industries.

There are strategy variations within these three groups. For example, within the harvest group
the firm would be inclined to quickly divest itself of a weak business in an unattractive
industry, whereas it might perform a phased harvest of an average business unit in the same
industry.

While the GE business screen represents an improvement over the more simple BCG growth-
share matrix, it still presents a somewhat limited view by not considering interactions among
the business units and by neglecting to address the core competencies leading to value
creation. Rather than serving as the primary tool for resource allocation, portfolio matrices
are better suited to displaying a quick synopsis of the strategic business units.

 McKinsey 7S Framework
 While some models of organizational effectiveness go in and out of fashion, one that
has persisted is the McKinsey 7S framework.
 Developed in the early 1980s by Tom Peters and Robert Waterman, two consultants
working at the McKinsey & Company consulting firm,
 the basic premise of the model is that there are seven internal aspects of an
organization that need to be aligned if it is to be successful.
 The 7S model can be used in a wide variety of situations where an alignment
perspective is useful, for example to help you:
 Improve the performance of a company.
 Examine the likely effects of future changes within a company.
 Align departments and processes during a merger or acquisition.
 Determine how best to implement a proposed strategy.
 The McKinsey 7S model can be applied to elements of a team or a project as well.
 The alignment issues apply, regardless of how you decide to define the scope of the
areas you study.
 The Seven Elements
 The McKinsey 7S model involves seven interdependent factors which are categorized
as either "hard" or "soft" elements:
 "Hard" elements are easier to define or identify and management can directly
influence them: These are strategy statements;
 organization charts and reporting lines; and
 formal processes and IT systems.
 "Soft" elements, on the other hand, can be more difficult to describe, and are less
tangible and more influenced by culture.
 However, these soft elements are as important as the hard elements if the organization
is going to be successful.
 The way the model is presented in Figure below depicts the interdependency of the
elements and indicates how a change in one affects all the others.

 Let's look at each of the elements specifically:
 Strategy: the plan devised to maintain and build competitive advantage over the
competition.
 Structure: the way the organization is structured and who reports to whom.
 Systems: the daily activities and procedures that staff members engage in to get the
job done.
 Shared Values: called "superordinate goals“(Superordinate goals, in psychology,
are goals that are achieved by the contribution and co-operation of two or more
people, with individual goals that are normally in opposition to each other, working
together)
 when the model was first developed, these are the core values of the company that
are evidenced in the corporate culture and the general work ethic.
 Style: the style of leadership adopted.
 Staff: the employees and their general capabilities.
 Skills: the actual skills and competencies of the employees working for the company.
 How to Use the Model
 Now you know what the model covers, how can you use it?
 The model is based on the theory that, for an organization to perform well, these
seven elements need to be aligned and mutually reinforcing.
 So, the model can be used to help identify what needs to be realigned to improve
performance, or to maintain alignment (and performance) during other types of
change.
 Whatever the type of change –
 restructuring,
 new processes,
 organizational merger,
 new systems,
 change of leadership, and so on
 the model can be used to understand how the organizational elements are interrelated,
and so ensure that the wider impact of changes made in one area is taken into
consideration.
 You can use the 7S model to help analyze the current situation (Point A), a
proposed future situation (Point B) and to identify gaps and inconsistencies between
them.
 It's then a question of adjusting and tuning the elements of the 7S model to ensure
that your organization works effectively and well once you reach the desired endpoint.
 Sounds simple? Well, of course not: Changing your organization probably will not
be simple at all! Whole books and methodologies are dedicated to analyzing
organizational strategy, improving performance and managing change.
 The 7S model is a good framework to help you ask the right questions - but it won't
give you all the answers.
 For that you'll need to bring together the right knowledge, skills and experience.
 When it comes to asking the right questions, we've developed a Mind Tools checklist
and a matrix to keep track of how the seven elements align with each other.
 Supplement these with your own questions, based on your organization's specific
circumstances and accumulated wisdom.
 7S Checklist Questions
Here are some of the questions that you'll need to explore to help you understand your
situation in terms of the 7S framework.
 Use them to analyze your current (Point A) situation first, and then repeat the exercise
for your proposed situation (Point B).
 Strategy:
 What is our strategy?
 How do we intend (design) to achieve our objectives?
 How do we deal with competitive pressure?
 How are changes in customer demands dealt with?
 How is strategy adjusted for environmental issues?
 Structure:
 How is the company/team divided?
 What is the hierarchy?
 How do the various departments coordinate activities?
 How do the team members organize and align themselves?