1. UNDERSTANDING
STRATEGIES

2. Goals
• Profitability:
 measured as product of 2 ratios:
Revenues – Expenses * Revenues
Revenues
Investment
 investment refers to ‘shareholders investment’
 ‘profitability’ refers to long run profits
 Focus of CEOs may differ
e.g. Jack Welch stressed on sales revenue as
important component for profitability

3. Goals
• Maximising shareholder value:
 here, ‘maximising’ implies that there is a way
of finding maximum amount that company earns,
which is not the case
 ‘profit maximisation’ requires calculation of
marginal costs and demand curve and generally
managers do not know about it clearly
course of action adopted in any case has to be
ethical and consistent with corporation’s other
goals

4. Goals
• Risk:
 degree of risk-taking varies with personalities
of different managers
 management’s primary responsibility is to
preserve company assets with profitability as a
second goal
• Multiple Stakeholder Approach:
 organisations participate in 3 markets: capital,
product and factor markets
 management should identify goals for each of
these stakeholders and track their performance

5. Concept of Strategy
• Strategy describes general direction in which an
organisation plans to move to attain its goals
• A firm develops strategies by matching its core
competencies with industry opportunities
• Strategies can be found at:
 corporate level and business-unit level
• Corporate level strategies plan right mix of
industries in present and future for the company
• Business-unit Strategy talks about mission and
the methodology involved behind achieving it

6. Corporate Level Strategy
• Corporate strategic analysis results in decisions
like businesses to add or retain, businesses to
emphasize or de-emphasize etc.
• Single Industry Firms:
 e.g. Infosys in Softwares, Wrigley Chewing
Gum, Nucor Steel etc.
• Unrelated Diversified Firms:
 operating synergies across businesses based on
common core competencies and on sharing of
common resources are very low e.g. Tata Empire

7. Corporate Level Strategy
• Related Diversified Firms:
 common resources like sales force,
manufacturing facilities, procurement function can
be shared e.g. Procter and Gamble
 firms grow by leveraging core competencies
developed in one business when they diversify
 such firms grow internally through R & D
 In such firms, Chief Executive must make
resource allocation decisions across business units
and also identify, deepen & leverage corporate
core competencies to benefit multiple units

8. Corporate Level Strategy
• Core Competency and Corporate
Diversification:
 research has shown that on average, related
diversified firms perform the best, single industry
firms next best and unrelated diversified firms do
not perform well over the long term
 business units of a related diversified firm
might be worse if they were split into separate
companies
• Implications of control system design:
 how does structure & form of control differ

9. Business Unit Strategies
• Strategy here depends on two interrelated
aspects: mission and competitive advantage for
every company
• Business unit mission:
BCG Matrix
“Star”
Hold
“Question mark”
Build
“Cash Cow”
Harvest
“Dog”
Divest

10. Business Unit Strategies
• Components of BCG Matrix:
 Build: increase market share at expense of
short-term earnings and cash flow
 Hold: protect business-unit’s market share and
competitive position
 Harvest: maximise short-term earnings and
cash-flow, even at expense of market share
 Divest: withdraw from the business either
through process of slow liquidation or outright
sale

11. Business Unit Strategies
• BCG matrix mainly takes market share as
primary strategy variable due to importance
placed on experience curve
• According to BCG matrix, cost per unit
decreases predictably with number of units over
time
• Association between market share and
profitability has also been empirically supported
by Profit Impact of Market Strategy Database
• Control system designers need to know what is
mission of particular business unit

12. Business Unit Strategies
• Although experience curve is a powerful
analytical tool, it has limitations like:
 concept applies to undifferentiated products
 in certain situations improvements in process
technology may have greater impact on per-unit
cost reduction than cumulative volume
 Aggressive pursuit of reducing cost can lead to
loss of flexibility in the marketplace
 not suitable for new technologies in industry
 along with experience, other cost drivers are
scale, scope, technology and complexity

13. Business Unit Strategies
• General Electric Company/Mckinsey & Co. grid
differs in methodology from BCG matrix:
 industry attractiveness in GE grid is based on
weighted judgements about factors like market
size, market growth, entry barriers, etc.
 GE grid uses multiple factors like market share,
distribution strengths and engineering strengths to
assess competitive position of business unit
 BCG uses industry growth rate as a proxy for
industry attractiveness and relative market share
as proxy for current competitive position

14. Business Unit Competitive Advantage
• Michael Porter has described two analytical
approaches – industry analysis and value chain
analysis to develop a superior and sustainable
competitive advantage
• Industry analysis:
 intensity of rivalry among existing competitors
 bargaining power of customers
 bargaining power of suppliers
 threat from substitutes
 threat of new entrants

15. Business Unit Competitive Advantage
• Observations with regard to industry analysis:
 more powerful five forces, less profitable an
industry is likely to be
 depending on relative strength of five forces,
key strategic issues facing business unit will differ
from one industry to another
 understanding nature of each force helps the
firm to formulate effective strategies
• Generic competitive advantage:
 low cost
 differentiation

16. Business Unit Competitive Advantage
• Industry analysis:
New
entrants
Suppliers
Industry
competitors
Substitutes
Customers

17. Business Unit Competitive Advantage
• Value chain analysis:
 competitive advantage in market place derives
from providing better customer value for an
equivalent cost or equivalent customer value for a
lower cost
 value chain is complete set of activities
involved in a product, from extraction of raw
material and ending with post delivery support to
customers
 firms within same industry vary in proportion
of activities that they carry with own resources

18. Business Unit Competitive Advantage
for each value-added activity, key questions are:
1. can we reduce costs, holding revenues constant
2. can we increase revenue, holding costs constant
3. can we reduce assets, holding costs and
revenue constant
4. Most importantly, can we do (1), (2) and (3)
simultaneously
 Value chain framework breaks down the chain
from basic raw materials to end-use customers
into specific activities to understand cost
behaviour and sources of differentiation

19. Business Unit Competitive Advantage
• Value chain helps the firm to understand the
entire value delivery system
• Supplier/customer actions can significantly
influence firm’s cost/differentiation position
Cost-CumDifferentiation
Advantage
Differentiation
Advantage
Low-Cost
Advantage
Stuck-In-themiddle