MS-11 Strategic Management

Read the following case and answer the questions given at the end.

2009-06-12T23:04:00.000-07:00

Read the following case and answer the questions given at the end.

PEPSI’S FAST-FOOD TROIKA

The mid-1990’s were not particularly kind to Pepsi Co. Its flagship Pepsi product was losing ground to Coke in the United States and abroad, and Diet Pepsi had slipped to fourth among soft drinks (behind Coca-Cola’s Sprite citrus soda). Even the fast-food chains that had provided Pepsi with substantial revenue growth over the prior two decades – Pizza Hut, Taco Bell, and Kentucky Fried Chicken – were experiencing declining revenues. Only the Frito-Lay snack division continued to outperform its rivals. In 1997 Pepsi spun off its fast-food operations into an independent company called Tricon.

When it acquired Pizza Hut and Taco Bell in the 1970s, Pepsi seemed intent on becoming the world’s largest fast-food vendor. After it successfully digested the pizza and taco chains, it was widely expected to further expand its fast-food empire. By the mid-1980s, Pepsi’s next target was rumored to be Wendy’s (Pepsi and Wendy’s executives were seen sharing meals at numerous golf clubhouses.) But RJR Nabisco was eager to leave retailing, and it set an appetizing price for its Kentucky Fried Chicken unit. Pepsi eagerly gobbled it up.

Business analysts praised the deal – Pepsi Co’s stock price rose 5 percent when the deal was announced –citing the potential for numerous synergies. Pepsi would bring its vaunted expertise in marketing and new product development to Kentucky Fried Chicken. It would have the potential to create one-stop shopping for fast food. Finally, the deal would enhance Pepsi’s share of fountain beverage sales as Kentucky Fried Chicken franchisees switched from Coke to Pepsi.

Pepsi failed to deliver on many of the promised benefits of the acquisition. Kentucky Fried Chicken trailed the market when competitors, including Boston Market and grocery stores, successfully introduced healthier roasted chicken. At the same time, Pizza Hut struggled during the decade-long “Pizza war” that its principal rivals – Domino’s and Little Caesar’s-seemed more intent on winning. (Some analysts question whether Pizza Hut has the stomach to win the pizza war). Pizza on the temporary success of new-product launches (such as the stuffed-crust pizza). Taco Bell’s new-product launches have also met with mixed success, and its attempt to attract price-conscious customers with 59-cent tacos failed when McDonald’s and Burger King engaged in a bitter price war of their own. Overall, the profitability of Pepsi restaurant division has trailed that of its soft drink and snack food divisions.

To make matters worse, the acquisition of Kentucky Fried Chicken not only failed to enhance Pepsi’s fountain beverage sales but also drove potential customers to choose Coke. Wendy’s switched its fountain purchases from Pepsi to Coke only months after the Kentucky Fried Chicken acquisition, and for the past decade, wherever a consumer has bought fast-food hamburgers and a cola, that cola has almost surely been a Coke,. At the time of the Tricon spin-off, Pepsi’s share of the fountain beverage market – just on-third that of Coke-was at its lowest since the Kentucky Fried Chicken acquisition.

As its woes mounted, PepsiCo CEO Roger Enrico decide to focus the company’s efforts on its core business of soft drinks and snacks. Enrico also believed that Pepsi’s fast-food businesses needed an injection of entrepreneurial spirit, even though Pepsi had allowed them to operate with near total autonomy. Ironically, the market responded to the spin-off with the same enthusiasm that it showed when Pepsi made the acquisitions: Pepsis stock shot up 11 percent when it was announced. Tricon’s first boss, David Novak, now faces many challenges in the fiercely competitive fast-food market, including helping the firm realize the synergies that eluded its parent.

Q1. Why did Pepsi not succeed even after diversifying into the fast- food sector? Discuss.

Below I have described the main reasons due to which pepsi did not successed even after diversifying into the fast-food sector.
1983: The soft drink market grows more competitive, but for Pepsi drinkers, the battle is won. The time is right and so is their soft drink. It's got to be "Pepsi Now!"
1982: With all the evidence showing that more people prefer the taste of Pepsi, the only question remaining is how to add that message to Pepsi Generation advertising. The answer? "Pepsi's Got Your Taste for Life!" – a celebration of great times and great taste.
1979: With the end of the '70s comes the end of a national malaise. Patriotism has been restored by an exuberant celebration of the U.S. bicentennial, and Americans are looking forward to the future with renewed optimism. "Catch that Pepsi Spirit!" catches the mood, and the Pepsi Generation carries it forward into the '80s.
1976: "Have a Pepsi Day" is the Pepsi Generation's upbeat reflection of an improving national mood. "Puppies," a 30-second snapshot of an encounter between a very small boy and some even smaller dogs, becomes an instant commercial classic.
1975: The Pepsi Challenge, a landmark marketing strategy, convinces millions of consumers that more people prefer the taste of Pepsi.
1973: Pepsi Generation advertising continues to evolve. "Join the Pepsi People, Feelin' Free" captures the mood of a nation involved in massive social and political change. It pictures us the way we are – one people, but with many personalities.
1969: "You've Got a Lot to Live. Pepsi's Got a Lot to Give" marks a shift in Pepsi Generation advertising strategy. Youth and lifestyle are still the campaign's driving forces, but with "Life/Give," a new awareness and a reflection of contemporary events and mood become integral parts of the advertising's texture.
1967: When research indicates that consumers place a premium on the superior taste of Pepsi when chilled, "Taste That Beats the Others Cold. Pepsi Pours It On," emphasizes the brand's product superiority. The campaign, while product-oriented, adheres closely to the energetic, youthful lifestyle imagery established in the initial Pepsi Generation campaign.
1966: The first independent Diet Pepsi campaign, "Girlwatchers," focuses on the cosmetic benefits of the low-calorie cola. The ad's musical theme becomes a Top 40 hit. Advertising for another new product, Mountain Dew, a regional brand acquired in 1964, airs for the first time, built around the instantly recognizable tag line, "Ya-Hoo, Mountain Dew!"
1964: A new product, Diet Pepsi, is introduced into Pepsi-Cola advertising.
1963: In one of the most significant demographic events in commercial history, the post-war baby boom emerges as a social and marketplace phenomenon. Pepsi recognizes the change and positions Pepsi as the brand belonging to the new generation – The Pepsi Generation. "Come Alive! You're in the Pepsi Generation" makes advertising history. It is the first time a product is identified, not so much by its attributes, as by its consumers' lifestyles and attitudes.
1961: Pepsi further refines its target audiences, recognizing the increasing importance of the younger, post-war generation. "Now It's Pepsi, For Those Who Think Young" defines youth as a state of mind as much as a chronological age, maintaining the brand's appeal to all market segments.
1959: Soviet Premier Nikita Krushchev and U.S. Vice President Richard Nixon meet in the soon-to-be-famous "kitchen debate" at an international trade fair in Moscow. The meeting, over cups of Pepsi, is photo-captioned in the U.S. as "Krushchev Gets Sociable."
1958: Pepsi struggles to enhance its brand image. Sometimes referred to as "the kitchen cola," as a consequence of its long-time positioning as a bargain brand, Pepsi now identifies itself with young, fashionable consumers with the "Be Sociable, Have a Pepsi" theme. A distinctive "swirl" bottle replaces the earlier straight-sided bottle.
1956: 149 Pepsi-Cola bottling plants are operating in 61 countries outside the U.S.
1954: "The Light Refreshment" evolves to incorporate "Refreshing Without Filling."
1953: Americans become more weight-conscious, and a new strategy based on lower caloric content of Pepsi is implemented with "The Light Refreshment" campaign.
1950: "More Bounce to the Ounce" becomes the new Pepsi theme as changing soft drink economics force Pepsi to raise prices to competitive levels. Alfred N. Steele becomes President and CEO of Pepsi-Cola. His wife, Hollywood movie star Joan Crawford, is instrumental in promoting the company's product line.
1949: "Why Take Less When Pepsi's Best?" is added to "Twice as Much" advertising.
1948: The Pepsi-Cola corporate headquarters moves from Long Island City, New York, to Midtown Manhattan. Pepsi is produced in cans for the first time.
1947: International profits reach $6,769,000. Pepsi moves into the Philippines and Middle East.
1943: The "Twice as Much" advertising strategy expands to includes the theme, "Bigger Drink, Better Taste." Sugar is again rationed during World War II. To counter the effects of rationing, Mack purchases a sugar plantation in Cuba, which proves to be a highly profitable venture.
1941: In support of America's war effort, Pepsi changes the color of its bottle crowns to red, white and blue. A Pepsi canteen in Times Square, New York, operates throughout the war, enabling more than a million families to record messages for armed services personnel overseas. Pepsi-Cola Company, until now a subsidiary of Loft Incorporate, is merged with Loft. Since the Pepsi brand name has become more famous than that of its owner, the parent company's name is changed to Pepsi-Cola Company. Pepsi-Cola stock is traded on the New York Stock Exchange for the first time.
1940: Pepsi makes advertising history with the first advertising jingle ever broadcast nationwide. "Nickel, Nickel," will eventually become a hit record and will be translated into 55 languages. A new, more modern logo is adapted.
1939: Having survived the Great Depression and a handful of ownership changes, Pepsi is still being sold in a 12-ounce bottle for just a nickel – twice as much refreshment as other soft drinks for the same price. A newspaper cartoon strip, "Pepsi & Pete," introduces the theme, "Twice as Much for a Nickel," to increase consumer awareness of the Pepsi value advantage. Walter S. Mack Jr. is elected President of Pepsi-Cola Company.
1938: The trademark is registered in the Soviet Union. There are 85 Pepsi-Cola bottlers operating under franchise agreements across Canada.
1936: Pepsi-Cola Limited of London is established. 94 new U.S. franchises are granted. Year-end profits reach $2,100,000.
1935: Pepsi-Cola operations are moved to Long Island City, New York. The company sets up national territorial boundaries for the Pepsi bottler franchise system. Compania Pepsi-Cola de Cuba is formed.
1934: A landmark year for Pepsi-Cola. The drink is a hit, and to attract even more sales, Pepsi begins selling a 12-ounce bottle for five cents – the same price charged by its competitors for six ounces. The 12-ounce bottle debuts in Baltimore, where it is an instant success. The cost savings prove irresistible to depression-worn Americans, and sales skyrocket nationally. Pepsi-Cola Company of Canada Limited is formed. Caleb Bradham, the founder of Pepsi-Cola and "Brad's Drink," dies.
1932: The trademark is registered in Argentina.
1931: U.S. District Court for Eastern District Virginia declares the National Pepsi-Cola Company bankrupt. Loft, Inc., the giant candy company, buys Pepsi-Cola Company.
1928: After five continuous losing years, the company is reorganized as the National Pepsi-Cola Company.
1923: Pepsi-Cola Company is declared bankrupt and its assets are sold to a North Carolina concern, Craven Holding Corporation, for $30,000.
1922: An attempt at reorganization fails as few shares of stock are sold and investor interest in the new company wanes.
1921: The collapse of the sugar market results in enormous financial losses for Pepsi-Cola Company. Bradham attempts to put the company back on its feet by borrowing cash and selling assets and additional shares of stock. But by the end of the year, the company is insolvent and the bottling network collapses. Only two plants remain open.
1920: Pepsi appeals to consumers: "Drink Pepsi-Cola. It Will Satisfy You." The price of sugar on the New York Exchange reaches 26 cents per pound. Bradham gambles on the price going higher and buys large stocks of sugar. By the end of the year, sugar demand slows on the open market and the price drops to a catastrophic low of two cents per pound.
1917-18: Price controls hold sugar at 5-1/2 cents per pound during WWI. When the war ends, so do the price controls. The price of sugar begins an upward spiral.
1910: The first Pepsi-Cola bottlers' convention is held in New Bern, North Carolina.
1909: Automobile racing pioneer Barney Oldfield becomes the first celebrity to endorse Pepsi when he appears in newspaper ads describing Pepsi: "A bully drink…refreshing, invigorating, a fine bracer before a race." The theme "Delicious and Healthful" appears and will be used intermittently over the next two decades.
1908: Pepsi-Cola becomes one of the first companies to modernize delivery from horse-drawn carts to motor vehicles. A total of 250 bottlers are now under contract in 24 states.
1907: Pepsi-Cola Company continues to expand. The bottling network reaches 40 franchises. The trademark is registered in Mexico, and syrup sales top 100,000 gallons.
1906: The logo is redesigned and a new slogan is added: "The Original Pure Food Drink." The Pepsi-Cola trademark is registered in Canada. There are 15 Pepsi bottling plants in the U.S., and syrup sales reach 38,605 gallons.
1905: A new logo appears, the first change from the original created in 1898. First Pepsi-Cola bottling franchises are established in Charlotte and Durham, North Carolina.
1904: Bradham purchases a building in New Bern known as the Bishop factory for $5,000 and moves all bottling and syrup operations to this location. Sales increase to 19,848 gallons.
1903: "Doc" Bradham moves the bottling of Pepsi-Cola from his drugstore to a rented warehouse. In keeping with its origin as a pharmacist's concoction, Bradham's advertising praises his drink: "Exhilarating, Invigorating, Aids Digestion." And he sells 7,968 gallons of syrup in his first year of operation.
1902: The instant popularity of this new drink leads Bradham to devote all of his energy to developing Pepsi-Cola into a full-fledged business, and he applies for a trademark with the U.S. Patent Office in Washington, D.C. The first Pepsi-Cola Company is formed.
1898: One of Bradham's formulations, known as "Brad's Drink," a combination of carbonated water, sugar, vanilla, rare oils and kola nuts, is renamed "Pepsi-Cola" on Aug. 28.
1893: Caleb Bradham, a young pharmacist from New Bern, North Carolina, begins experimenting with many different soft drink concoctions; patrons and friends sample them at his drug store fountain

Q2. When Pepsi decided to focus on its core business of soft drinks, it showed signs of recovery with stocks rising. What can be the reason(s) to this effect?

When Pepsi Co CEO Roger Enrico decide to focus the company’s efforts on its core business of soft drinks and snacks. Enrico also believed that Pepsi’s fast-food businesses needed on injection of entrepreneurial spirit, even though Pepsi had allowed them to operate with near total autonomy. Ironically, the market responded to the spin-off with the same enthusiasm that it showed when Pepsi made the acquisitions: Pepsis stock shot up 11 percent when it was announced.
The following are the main reasons for the asked effects.
1. Neck to neck market competition.
2. Focused concentration of management.
3. Focused concentration of workers.
4. Focused concentration of financiers, agents, suppliers and retail seller.
5. Pre reputation in soft drink sector from last many years.
6. Already well established links around the globe.

Comment on different types of turnaround management? Illustrate your answer with examples.

2009-06-12T23:01:00.000-07:00

Comment on different types of turnaround management? Illustrate your answer with examples.

Ans. Hoffer has classified the turnaround strategies in two broad categories. These are strategic turnarounds and operating turnaround. Whether a sick business needs strategic or operating turnaround choice can be ascertained by analysing the current strategic and operating health of the business. The operating turnarounds are easier to carry out and can be applied only when there are average to strong strategic strengths in the business.

The strategic turnaround choices may involve either a new way to compete in the existing business or entering an altogether new business. Entering a new business as a turnaround strategy can be approached through the process of product portfolio management. The strategic turnarounds around existing business focus either on increasing the market share in a given product—market framework or by shifting the product—market relationship in a new direction by repositioning. The increases in market share can be achieved by improving product quality perception through dealer push or even by consumer pull. However strategic turnarounds seeking no change in the market share almost always involve a change in the product market segment focus.

The operating turnaround strategies are of four types. These are:

• Revenue—increasing strategies
• Cost—cutting strategies
• Asset—reduction strategies
• Combination Strategies

The choice of operating turnarounds with reference to the firm’s capacity utilisation. The focus of all these choices is on short term profit effect. Thus if a sick firm is operating much below its break-even, it must take steps to reduce its assets. This will reduce the level of fixed cost and help in reducing the total costs of the firm. In real life it is always a difficult choice to identify the assets which can be sold without affecting the productivity of the business. To identify saleable assets, the firm may have to keep in mind its strategic move in the next 2 to 3 years.

If the sick firm is operating substantially but not extremely below its break even point, then the most appropriate turnaround strategy is the one which generates extra revenues. These may be in the form of price reduction to increase sales, stimulating product demand through promotional efforts or sometimes by introducing scaled down versions of the main products of the firm. The increased quantities of product sales not only result in higher sales but also reduce the per unit cost, this leading to higher operating profits.

Operating closer but below break-even point calls for application of combination strategies. Under combination strategies cost-reducing, revenue generating and asset-reduction actions are pursued simultaneously in an integrated and balanced manner. The combination strategies have a direct favourable impact on cashflows as well as on profits.

Operating around break-even point a sick business usually needs cost-reduction strategies, since cost reduction actions are easily carried out as compared to revenue generating actions, the former is usually preferred for quick short term profit increases.

Slatter, has, however linked the choice of turnaround strategies to the causes of decline. Presents the causes of decline and the appropriate turnaround strategies. The recommended choice of strategies include change in management and organisational processes, improved financial controls, growth via acquisition and new financial strategies in addition to four choices suggested by Hoffer.

Take an example of a recent merger and try to analyze the aspects, which led to the merger.

2009-06-12T22:50:00.000-07:00

Take an example of a recent merger and try to analyze the aspects, which led to the merger.

L&T D.H. Ambani worth Rs 80 crores in 1988 where the recent mergers. The reasons, which lead to mergers, are as under:
*Improving Economics of scale
On of the most frequent reasons given for mergers is to improve the economics of scale.
• Gaining Managerial Expertise
Sometimes acquisition routes ifs followed because of the unique managerial expertise available with the target company, which when acquired will also help to improve the profitability of the acquirer. This expertise may be embodied in the team of managers and staff, as well as systems in operation in the target company. In order to ensure managerial effectiveness, a friendly atmosphere of a merger is created.
A short – cut to acquisition of managerial expertise is to lure and hire the key managers only but this will have some obvious limitations because the atmosphere and the systems in operation would be difficult for them to be fully effective as before.

• Market Supremacy
Some of the mergers and acquisitions take place with a view to seek additional power in the market. With the additional combined market share, the company can afford to control the price in a better manner. This will hopefully lead to a better profitability. With Ceat and Dunlop, Goenka has a control on over 40 % market share of automotive tyres in India.
We must be aware that in most of the societies, formation of monopolicies is restricted by state policies because it reduces competition . As result long delays may take place on account of regulatory bodies of the government screening the intentions behind market dominance.

• Acquiring a new product or Brand Name
A company, for strategic reasons, may wish to produce or market a particular product, but may not have the required production, marketing or managerial facilities for completing a product line or for meeting all the needs of a customer segment . Getting the required knowledge how from other sources installing and commissioning a plant and then launching the new product may take much time and result in loss of advantages for getting into the associated business. Instead, a acquisition of the ready – made facilities would provide a quicker entry for encashing the comparative advantage of the new product before the new entrants make the market much more competitive , and much less profitable.
While doing so, the acquire can give its established brand mane to the little known new product or small company so that a much higher price can be obtained from the market . In the absence of this the little known new product with no brand image has to be introduced at low price to facilitate customers change their consumption preference.
Similarly, if the acquirer has a new product , but no reputed brand image in a particular market segments, then it may seek a company which is the market leader in the desired segment.

Diversifying the portfolio

Another popular reason for companies to merge or acquire is to diversify their dependence on a number of segments of the economy. All business go through cycles and if the fortunes of a company are linked to only one or few products then in the decline stage of their product life cycles, the company would find it difficult to sustain it self. The company there fore looks for either related or unrelated diversifications, and may decide to do so not internally by setting up new projects, but externally by merging or acquiring companies with desired product profile. Such diversification helps to widen the growth opportunities for the company and smoothen the ups and down of their life cycles.

Reducing the Risk and Borrowing Cost
Due to diversification of portfolio, the risk of the combined operations and the earnings resulting from the same reduces. This is particularly so if the earnings fro different businesses are not correlated . In other words, when one segment is running deficit, the other segment is likely to be surplus or vice- versa with co-insurance effect. Due to this inbuilt safety, the costs associated with the borrowings would reduce.
Sometimes, the companies merge or acquire to utilize unused debt capacity of another company, especially I they have already borrowed in excess, and need to borrow more. However, this need may not justify the payment of excessive premium generally involved in mergers and acquisitions .

Taxation or investment Incentives

A company, which has incurred losses in the past, can carry such losses forward and offset them against future taxable profits and reduce tax liabilities. Such a company when merged them against future with large taxable profits, would help to absorb the tax liability of the latter.
A similar advantage exists when a company is modernized or investing heavily in plant and machinery, which entitles it to substantial investment incentives, but has not much taxable profits to offset them with. Acquiring or merging such a company with a highly profitable company would help make full of the investment incentives for the latter.

Will a firm seek to create value across a broad scope of market segments?

2009-05-31T11:24:00.000-07:00

Will a firm seek to create value across a broad scope of market segments, or will it focus on a narrow set of segments? Explain.

No, in my opinion it should focus on the broad outlook of market segments but in the long run it cannot ensure success if the operating decisions are not effectively made or implemented. Despite the fact that management experts have been trying to emphasis the need for such long term approaches in Organisational management, they are among the least developed and understood concept in management. The empirical evidence to suggest that top managements of organisation recognise the significance of strategic planning, but, paradoxically, they devote little time and effort to it. In the emerging world of business, which is likely, to be characterized by an increasing pace of change and complexity, top managers would be required to devote greater time and energy to the long- term and strategic issues confronting their organisations. The strategic planning choice that must be made by an organisation is that of its purposes and mission. An organization’s statement of purpose and mission is its raison d’etre, it tells what it is, why it exists, and the unique contribution it can make. The definition of Organisational purposes and missions is one of the most important and difficult tasks of top management. The strategic planning process begins with the delineation of tentative organizational purpose, essentially a mission statement describing the “ business” that the organisation might pursue in the future. This statement, preliminary in nature, is intended to put boundaries on future opportunities and to provide a point of departure from which the informational requirements for assessing future opportunities can be assembled and evaluated. The socio-economic purpose refers to those underlying ends which society experts of its business institutions if they are to survive. The basic purpose or missions of the firm are those fundamental ends and lines of business, which it wishes to pursue. Basic missions are found in corporate charters, but they are often so numerous and permit such a wide diversity of activity that they provide little or non-direction for planning.
The mission of an organisation , according to Steiner it expresses its underlying thrust , which may be stated at different levels of abstractions , in operational terms the mission statements identifies the market an enterprise wishes to serve, the products and services it wishes to supply and the manner in which it would like to complete. On the nature of missions, King and Cleland aver that broad statements are not useful as guides to management. They suggest that the mission should be clear to outsiders as well as to the key internal stakeholders.

OBJECTIVES AND GOALS
Objectives and goal provides the foundation for all managerial activity; they are the ends or aims toward which all activities are directed.
• Goals aid in legitimizing an organisation and creating a place for its in the environment.
• Goals help mangers identify interorganisational relationships.
• Goals have public relations value; they might help in attracting support from various groups in the environment, and also in attracting the right people to join the organisation.
• Organizational goals can help in image building with suppliers, customers, public policy makers and the government
• Goals can help in coordinating the multiplicity of tasks in organisations; conflicts can be more easily resolved if relevant stated goals are available.
• Goals provide the fundamental standard for measuring performance
• Goals act as motivators. They provide a challenge to many Organisational members. They generate commitments.

Types of Organisations Goals
Organisational goals may be classified into three types:
The official Goals are the general aims of the organisation as described in a memorandum of association, charter or annual report. They may also found in public statements by top executives. As mentioned previously goals have a public relations value, and the official goals are the ones which serve this function. The official goals or the stated goals also perform the function of legitimizing the organisation in its environment.
The operative Goals indicate what the organisation is really attempting to do. They may be inferred from the actual operating policies of the organisation. They help Organisational managers to focus attention, reduce uncertainty and choose among Organisational design alternatives.
The operational goals are used by supervisory personnel or mangers in organisations to influence the behavior of subordinates and to measure their performance.

POLICIES
Policy is a guide to action. A policy is a definition of common purposes for organisation components of the company as a whole in matters where, in the interest of achieving both component and overall company objectives, it is desire able that those responsible for implementation exercise discretion and good judgments in appraising and deciding among alternative courses of action. Though the above definitions connote broadly the same meaning of the term policy, in the business world there is a lack of consensus about it. The confusion about the nature of policies arises from a number of factors . Policies are not always clearly demarcated from the other elements of planning and plans . the process of strategic planning, which sometimes encompasses the formulation of important policies, is not publicized; hence it is shrouded in some kind of mystery; and in some organisations some policies are considered to be confidential. Policies procedures, standard operating plans and rules are all guides to action but differ in the degree of guidance provided or the freedom given.

A programme strategy
A programme strategy is a collection of activities that are designed to achieve a certain end or a specific purpose. Programmes and projects have a finite life and have very clearly defined goals.

‘A firm’s profitability depends on ....

2009-05-31T11:21:00.000-07:00

‘A firm’s profitability depends jointly on the economics of its market and its success in creating more value than its competitors’. Discuss.

Gaining strategic competitive advantage requires thorough understanding of the forces and the circumstances under which they combine and operate. The economic theory provides useful insights into the nature of industry structure .In a monopolistic competitive situation there are many sellers, many customers and a differentiated product. An oligopoly situation lies between monopolistic competition and monopoly situation. An emerging trend the world over is that of consolidation and merger of competing firms leading to oligopolistic situations. In the U.S.A, Auto industry, beer industry, Telecommunication industry and Airlines industries are a few such examples. Even in India the two- wheeler industry seems to be restructuring into oligopolistic situation. Here, competition is visualized through a buyer’s viewpoint. In his drive to satisfy his or her need, a buyer may have many alternatives or choices. For example, if the need is ‘ entertainment’, a buyer may consider choices like visit to park, a social call on friends, a visit to a restaurant, listening to music, going to a theater, seeing a movie, playing cards, going for a picnic, watching T.V. and so on, In this sense, even though ‘physical products’ may belong to different industries or technologies, they become competitors o each other to satisfy a specific need or desire.

Discuss the concept of ‘strategy’

2009-05-31T11:10:00.000-07:00

Discuss the concept of ‘strategy’ and its importance in the modern era. Illustrate with examples.

The key concept in this field is that of “strategy” which is an aid to the top manager in dealing with the problems and dilemmas posed by an increasingly complex and competitive environment.
The strategic decision making process may be viewed to comprise seven distinct but inter-related steps as shown in Figure. It would be desirable for the top management to make a strategic decision after going through the process outlined in this Figure.
At stage, 1, the strategist must determine corporate mission in terms of what do we intend (not just desire) to accomplish and for whom.
Stage 2, of the strategic decision making process would involve appraisal of current and likely future external environment of a business; its market opportunities and threats. The opportunities for the business may include new market areas into which existing products could be sold or new markets or new demands which would match with unique strengths of the company. Threats might be posed by the decline of markets upon which the business has been dependent in the past, e.g., upward movement in raw material costs or demographic changes likely to have an adverse impact on the organisation.

By contrast, stage 3 of the decision making process involves an organisation’s thorough analysis of its own internal capabilities, its unique strengths and weaknesses. Such an analysis will enable the business to identify the key factors upon which its success in exploiting markets and surviving against competitors depends. Such an analysis would also reveal weaknesses that should be remedied if the business is to continue to operate in its markets and survive against competitors. For example, firm may have particular strengths arising from its positive image in the community which it has built assiduously over the years by supplying high quality products and prompt and efficient after-sales service, or it may have considerable financial resources accumulated over the years as a result of past successful performance.
At stage 4, the management of the organisation must identify its objectives and goals in terms of its basic mission or purpose, e.g., what would be the nature of the business in the light of the environmental and organizational analysis? It must broadly determine its corporate objectives in quantifiable terms over the next 5 or 10 years. In the case of a business firm, its basic mission or purpose should be expressed in terms of the market in which the business sees itself operating e.g., chemicals industry, banking services, transportation services, information processes, travel and tourism, etc.

Implementation of strategy is concerned with the preparation of plans for putting the strategy into action. The necessary mechanisms and support systems will have to be established or the needed reshuffling will have to be undertaken. For this purpose, the design of the organisation may have to be restructured, a distinctive competence may have to built up, resources may have to be reallocated, people may have to be motivated and a result-oriented climate may have to be created, or a culture supporting to the strategy may have to be created.
The last stage involves monitoring and evaluating the strategy in order to ensure the achievement or organisational objectives defined at stage 1. In the light of the feedback obtained at the implementation stage, the basic mission or purpose of the organisation may have to be redefined, objectives may have to be revised, strategy may have to be reformulated, and implementation itself may have to be reworked.
CONSIDERATION CASE OF ORGANISATION
“The strategic planning process begins with the delineation of tentative organisational purposes, essentially a mission statement describing the “business” that the organisation might pursue in the future. This statement, preliminary in nature, is intended to put boundaries on future opportunities and to provide a point of departure from which the informational requirements for assessing future opportunities can be assembled and evaluated.”
The socio-economic purpose refers to those underlying ends which society experts of its business institutions if they are to survive. At rock bottom this means that society demands that businesses utilize the resources at their disposal to satisfy the wants of society. A business will make no profits and will die unless society wishes to subsidize it to assure its survival.
The basic purpose or missions or the firm are those fundamental ends and lines of business that it wishes to pursue. Basic missions are found in corporate charters, but they are often so numerous and permit such a wide diversity of activity that they provide little or no direction for planning. Managers must choose among them those activities to which the firm is to be committed….
The mission of an organisation, according to Sterner, et al. express its underlying thrust, which may be stated at different levels of abstraction. In operational terms the mission statement identifies the market an enterprise wishes to serve, thee products and services it wishes to supply and the manner in which it would like to compete. The fundamental thrust of American Telephone and Telegraph Company for over fifty years was “our business is service”. An example of a more operational mission is, “produce fabricated steel shapes and forms for the construction market”. Kelvinator Limited, one of the large Indian private sector companies, defined its purpose or mission as “profit, growth and excellence.”
A sample of such attitudes it: “We are in the business of supplying components to a worldwide non-residential air-conditioning market.” According to them the mission may be built around technology, product characteristics or needs. Missions built around customers are likely to have short lives as the customers might change as a result of environmental changes. Nearer home, the Goggle Pharmaceuticals and Chemicals Works, a small pharmaceutical company in Andhra pradesh expressed its mission as: “ To be a small honest company putting out dependable, standard drugs at low prices”. Another example of a mission statement is that of the Oil and Natural Gas Commission (ONGC) of India: “To stimulate, continue, and accelerate efforts to develop and maximise the contribution of the energy sector to the economy of the country.”