ASSIGNMENT ON STRATEGIC MANAGEMENT

By

KINI JAISWAL

IIBS BAGALORE

Business Growth Strategy

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Survival of the Fittest--- Innovation as a Strategy

What do you do when your most profitable market segment is fast becoming saturated by a number of smaller competitors-- and a 500-pound gorilla with deep pockets suddenly appears to grab what they can?

a. Directly attack the smaller competitors and try to put them out of businessb. Directly attack the gorilla and put yourself out of businessc. All of the aboved. None of the above

If you answered d, you're correct! At least partially-- The answer is not to do "nothing", but to do something innovative.

This is exactly the situation a client of mine found themselves in a couple of years ago. By developing an innovation centered solution, they not only saved their business but went on to enjoy increased profitability over the next two years.

Waging WarAttacking the competition is not only a poor substitute for good marketing-- it's war. And in war, the superior force almost always wins. Direct assaults often produce significant losses, especially when a well-capitalized foe fights back. In the 1980's a restaurant chain I'm familiar with was fighting for a bigger market share in the Midwestern U.S. They decided to attack a well positioned another chain by attempting to short circuit the competitor's highly successful free drink cup promotion. The attacking restaurant communicated to the competitor's customers that they were willing to offer a free food incentive to customers who would turn in their "free drink" cups. The victim responded by flooding the market with hundreds of the free cups, forcing the attacker to spend thousands of dollars to fulfill their advertised promise. Not smart.

Conquering New GroundRather than go to war with competitors, my client decided to establish a new position on a nearby, unoccupied hill. In other words, they opted to establish themselves in a new category that held the promise of higher gross margins. They did not invent a new product or service, they simply changed what they had, combined it with some additional features, and offered it to another market segment. By virtue of this planned innovation tactic, they established a new category. They did not have to beat the competition, they left it behind!

Prior to the competitive intrusion by the 500-pound gorilla, my client had offered seminars, books and videos targeted to beginning and advanced accounting software users. When the segment became so saturated as to become almost unprofitable, all of the expertise gained in producing the original programs was channeled into different seminar and expert level materials that appealed to consultants who installed and supported the very same software application. This new market was hungry for this highly specialized information and was willing to pay far more for it than the previous customers.

True innovation requires someone who can visualize the possibilities of an idea and who has the ability and tenacity to successfully implement it. That does not always mean that the innovator always has to create or invent something new, they can innovate by applying or implementing the inventions of others. There are many creative people who have new ideas, but never implement them.

A Viable StrategyInnovators go beyond simply solving the problem immediately before them. Instead of

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countering a competitor's every move, they try to distance themselves from the competition by moving into an area where the competitor may be weak, lacking in expertise, or unable to follow without significant investment of time and effort. The larger the competitor, usually the slower they are to react to a smaller, more innovative challenger. Distancing yourself and creating barriers to entry through innovation can help create a sustainable competitive advantage for your company.

Marketing can be a bit tricky after you've established yourself alone (at least for a while!) in a new category. You probably have been used to aggressively promoting your "brand" while fighting it out with competitors. A shift in emphasis may be necessary for a while in terms of educating buyers as to the benefits associated with your new category/offering. As new competitors follow you into the new category, you will need to go back toward brand building again. When Sony first created the category of small, portable, self-contained audio tape players by introducing the Walkman, they first needed to educate potential buyers as to what a "Walkman" was and why you should have one. As others entered the market (category) they needed to change their approach to a "Why you should buy ours instead of theirs" message.

As far as my client goes, their old competitors may eventually catch up with them someday, but by then they'll innovate again!

 WHAT IS THE BCG GROWTH-SHARE MATRIX? To begin with, BCG is the acronym for Boston Consulting Group—a general management consulting firm highly respected in business strategy consulting. BCG Growth-Share Matrix (see figure 1) happens to be one of many of BCG's strategic concepts the organisation developed in the late 1970s, and is being taught at leading business schools and executive education programmes around the world. It is a management tool that serves four distinct purposes (McDonald 2003; Kotler 2003; Cipher 2006): it can be used to classify product portfolio in four business types based on four graphic labels including Stars, Cash Cows, Question Marks and Dogs; it can be used to determine what priorities should be given in the product portfolio of a company; to classify an organisation’s product portfolio according to their cash usage and generation; and offers management available strategies to tackle various product lines. Consider companies like Apple Computer, General Electric, Unilever, Siemens, Centrica and many more, engaging in diversified product lines. The BCG model therefore becomes an invaluable analytical tool to evaluate an organisation’s diversified product lines as later seen in the ensuing sections.  WHAT ARE THE MAIN ASPECTS OF THE BCG GROWTH-SHARE MATRIX? The BCG Growth-Share Matrix is based on two dimensional variables: relative market share and market growth. They often are pointers to healthiness of a business (Kotler 2003; McDonald 2003). In other words, products with greater market share or within a fast growing market are expected to wield relatively greater profit margins. The reverse is also true. Let’s look at the following components of the model: Fig. 1: Source: 12manage.com 2006

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 Relative Market ShareAccording to the proponents of the BCG (Herndemson 1972), It captures the relative market share of a business unit or product. But that is not all! It allows the analysed business unit be pitted against its competitors. As earlier emphasized above, this is due to the sometime correlation between relative market share and the product’s cash generation. This phenomenon is often likened to the experience curve paradigm that when an organisation enjoys lower costs, improved efficiency from conducting business operations overtime. The basic tenet of this postulation is that the more an organisation performs a task often; it tends to develop new ways in performing those tasks better which results in lower operating cost (Cipher 2006). What that suggests is that the experience curve effect requires that market share is increased to be able to drive down costs in the long run and at the same time a company with a dominant market share will inevitably have a cost advantage over competitor companies because they have the greater share of the market. Hence, market share is correlated with experience. A case in point is Apple Computer’s flagship product called the iPod, which occupies a dominant 73% share the portable music player market (Cantrell 2006). Analysts believe it is the impetus for Apple's financial rebirth 40% of Apple's sales is attributed to the iPod product line (Cantrell 2006). Similarly, Dell’s PC line shares the same market dominance theory as the iPod. The PC manufacture giant occupies a worldwide market share of 18.1%, which is commensurate to its large market revenue above its competitors (see figure 2). Figure 2: Source: Reuters 2006

 Market GrowthMarket growth axis, correlates with the product life cycle paradigm, and predicates the cash requirement a product needs relative to the growth of that market. A fast growing market is generally considered attractive, and pulls a lot of organisation’s resources in an effort to increase gains. A case in point is the technological market widely consider by experts as a fast growing market, and tends to attract a lot of competition. Therefore, a product life cycle and its associated market play a key role in decision-making.  Cash CowsThese products are said to have high profitability, and require low investment for the fact that they are market leaders in a low-growth market. This viewpoint is captured by the founders themselves thus: The cash cows fund their own growth. They pay the corporate dividend. They pay the corporate overhead. They pay the corporate interest charges. They supply the funds for R&D. They supply the investment resource for other products. They justify the debt capacity for the whole company. Protect them (Henderson 1976).

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According to experts (Drummond & Ensor 2004; Kotler 2003; McDonald 2003), surplus cash from cash cow products should be channelled into Stars and Questions in order to create the future Cash Cows.  StarsStars are leaders in high growth markets. They tend to/should generate large amounts of cash but also use a lot of cash because of growth market conditions. For example, Apple Computer has a large share in the rapidly growing market for portable digital music players (Cantrell 2006).  Question Marks Question Marks have not achieved a dominant market position, and hence do not generate much cash. They tend to use a lot of cash because of growth market conditions. Consider Hewlett-Packard’s small share of the digital camera market, behind industry leader Canon’s 21% (Canon 2006). However, this is a rapidly growing market.  DogsDogs often have little future and are big cash drainers on the company as they generate very little cash by virtue of their low market share in a highly low growth market. Consider Pfizer’s Inspra (Gibson 2006): “Pfizer launched this drug in Q4 2003 and continues to pump money into this problem child, despite anaemic sales of roughly $40 million in the $2.7 billion heart-failure market dominated by Toprol-XL (metoprolol). It was thought to gain market share and become a star, and eventually a cash cow when the market growth slowed. But, according to industry’s experts, Inspra is likely to remain a dog, despite any amount of promotion, given its perceived safety issues and a cheaper, more effective spironolactone in the same Pfizer portfolio. Because Pfizer invested heavily in promotion early on with Inspra, the drug's earnings potential and positive cash flow is elusive at best. A portfolio analysis of Pfizer's cardiovascular franchise would suggest redeploying promotional spend on Inspra to up-and-coming stars like Caduet (amlodipine/atorvastatin) or torcetrapib to ensure those drugs reach their sales potential.” 

The International Market Entry Evaluation Process

How to Enter a Foreign Market.This lesson gives an outline of the way in which an organization should select which foreign to enter. The International Marketing Entry Evaluation Process is a five stage process, and its purpose is to gauge which international market or markets offer the best opportunities for our products or services to succeed. The five steps are Country Identification, Preliminary

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Screening, In-Depth Screening, Final Selection and Direct Experience. Let's take a look at each step in turn.

Step One - Country IdentificationThe World is your oyster. You can choose any country to go into. So you conduct country identification - which means that you undertake a general overview of potential new markets. There might be a simple match - for example two countries might share a similar heritage e.g. the United Kingdom and Australia, a similar language e.g. the United States and Australia, or even a similar culture, political ideology or religion e.g. China and Cuba. Often selection at this stage is more straightforward. For example a country is nearby e.g. Canada and the United States. Alternatively your export market is in the same trading zone e.g. the European Union. Again at this point it is very early days and potential export markets could be included or discarded for any number of reasons.

Step Two - Preliminary ScreeningAt this second stage one takes a more serious look at those countries remaining after undergoing preliminary screening. Now you begin to score, weight and rank nations based upon macro-economic factors such as currency stability, exchange rates, level of domestiv consumption and so on. Now you have the basis to start calculating the nature of market entry costs. Some countries such as China require that some fraction of the company entering the market is owned domestically - this would need to be taken into account. There are some nations that are experiencing political instability and any company entering such a market would need to be rewarded for the risk that they would take. At this point the marketing manager could decide

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upon a shorter list of countries that he or she would wish to enter. Now in-depth screening can begin.

Step Three - In-Depth ScreeningThe countries that make it to stage three would all be considered feasible for market entry. So it is vital that detailed information on the target market is obtained so that marketing decision-making can be accurate. Now one can deal with not only micro-economic factors but also local conditions such as marketing research in relation to the marketing mix i.e. what prices can be charged in the nation? - How does one distribute a product or service such as ours in the nation? How should we communicate with are target segments in the nation? How does our product or service need to be adapted for the nation? All of this will information will for the basis of segmentation, targeting and positioning. One could also take into account the value of the nation's market, any tariffs or quotas in operation, and similar opportunities or threats to new entrants.

Step Four - Final SelectionNow a final shortlist of potential nations is decided upon. Managers would reflect upon strategic goals and look for a match in the nations at hand. The company could look at close competitors or similar domestic companies that have already entered the market to get firmer costs in relation to market entry. Managers could also look at other nations that it has entered to see if there are any similarities, or learning that can be used to assist with decision-making in this instance. A final scoring, ranking and weighting can be undertaken based upon more focused criteria. After this exercise the marketing manager should probably try to visit the final handful of nations remaining on the short, shortlist.

Step Five - Direct ExperiencePersonal experience is important. Marketing manager or their representatives should travel to a particular nation to experience firsthand the nation's culture and business practices. On a first impressions basis at least one can ascertain in what ways the nation is similar or dissimilar to your own domestic market or the others in which your company already trades. Now you will need to be careful in respect of self-referencing. Remember that your experience to date is based upon your life mainly in your own nation and your expectations will be based upon what your already know. Try to be flexible and experimental in new nations, and don't be judgemental - it's about what's best for your company - happy hunting.

The Five Forces

Porter's Five Forces

A MODEL FOR INDUSTRY ANALYSIS

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The model of pure competition implies that risk-adjusted rates of return should be constant across firms and industries. However, numerous economic studies have affirmed that different industries can sustain different levels of profitability; part of this difference is explained by industry structure.

Michael Porter provided a framework that models an industry as being influenced by five forces. The strategic business manager seeking to develop an edge over rival firms can use this model to better understand the industry context in which the firm operates.

Diagram of Porter's 5 Forces

 

SUPPLIER POWER Supplier concentration

Importance of volume to supplier Differentiation of inputs

Impact of inputs on cost or differentiation Switching costs of firms in the industry

Presence of substitute inputs Threat of forward integration

Cost relative to total purchases in industry

 

BARRIERSTO ENTRY 

Absolute cost advantages Proprietary learning curve

Access to inputs Government policy

Economies of scale Capital requirements

Brand identity Switching costs

Access to distribution Expected retaliation Proprietary products

THREAT OFSUBSTITUTES -Switching costs -Buyer inclination to substitute -Price-performance trade-off of substitutes

 

BUYER POWER Bargaining leverage

Buyer volume Buyer information

Brand identity Price sensitivity

Threat of backward integration Product differentiation

Buyer concentration vs. industry Substitutes available

Buyers' incentives

DEGREE OF RIVALRY -Exit barriers -Industry concentration -Fixed costs/Value added -Industry growth -Intermittent overcapacity -Product differences -Switching costs -Brand identity -Diversity of rivals -Corporate stakes

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 I. Rivalry

In the traditional economic model, competition among rival firms drives profits to zero. But competition is not perfect and firms are not unsophisticated passive price takers. Rather, firms strive for a competitive advantage over their rivals. The intensity of rivalry among firms varies across industries, and strategic analysts are interested in these differences.

Economists measure rivalry by indicators of  industry concentration. The Concentration Ratio (CR) is one such measure. The Bureau of Census periodically reports the CR for major Standard Industrial Classifications (SIC's). The CR indicates the percent of market share held by the four largest firms (CR's for the largest 8, 25, and 50 firms in an industry also are available). A high concentration ratio indicates that a high concentration of market share is held by the largest firms - the industry is concentrated. With only a few firms holding a large market share, the competitive landscape is less competitive (closer to a monopoly). A low concentration ratio indicates that the industry is characterized by many rivals, none of which has a significant market share. These fragmented markets are said to be competitive. The concentration ratio is not the only available measure; the trend is to define industries in terms that convey more information than distribution of market share.

If rivalry among firms in an industry is low, the industry is considered to be disciplined. This discipline may result from the industry's history of competition, the role of a leading firm, or informal compliance with a generally understood code of conduct. Explicit collusion generally is illegal and not an option; in low-rivalry industries competitive moves must be constrained informally. However, a maverick firm seeking a competitive advantage can displace the otherwise disciplined market.

When a rival acts in a way that elicits a counter-response by other firms, rivalry intensifies. The intensity of rivalry commonly is referred to as being cutthroat, intense, moderate, or weak, based on the firms' aggressiveness in attempting to gain an advantage.

In pursuing an advantage over its rivals, a firm can choose from several competitive moves:

Changing prices - raising or lowering prices to gain a temporary advantage. Improving product differentiation - improving features, implementing innovations

in the manufacturing process and in the product itself. Creatively using channels of distribution - using vertical integration or using a

distribution channel that is novel to the industry. For example, with high-end jewelry stores reluctant to carry its watches, Timex moved into drugstores and other non-traditional outlets and cornered the low to mid-price watch market.

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Exploiting relationships with suppliers - for example, from the 1950's to the 1970's Sears, Roebuck and Co. dominated the retail household appliance market. Sears set high quality standards and required suppliers to meet its demands for product specifications and price.

The intensity of rivalry is influenced by the following industry characteristics:

1. A larger number of firms increases rivalry because more firms must compete for the same customers and resources. The rivalry intensifies if the firms have similar market share, leading to a struggle for market leadership.

2. Slow market growth causes firms to fight for market share. In a growing market, firms are able to improve revenues simply because of the expanding market.

3. High fixed costs result in an economy of scale effect that increases rivalry. When total costs are mostly fixed costs, the firm must produce near capacity to attain the lowest unit costs. Since the firm must sell this large quantity of product, high levels of production lead to a fight for market share and results in increased rivalry.

4. High storage costs or highly perishable products cause a producer to sell goods as soon as possible. If other producers are attempting to unload at the same time, competition for customers intensifies.

5. Low switching costs increases rivalry. When a customer can freely switch from one product to another there is a greater struggle to capture customers.

6. Low levels of product differentiation is associated with higher levels of rivalry. Brand identification, on the other hand, tends to constrain rivalry.

7. Strategic stakes are high when a firm is losing market position or has potential for great gains. This intensifies rivalry.

8. High exit barriers place a high cost on abandoning the product. The firm must compete. High exit barriers cause a firm to remain in an industry, even when the venture is not profitable. A common exit barrier is asset specificity. When the plant and equipment required for manufacturing a product is highly specialized, these assets cannot easily be sold to other buyers in another industry. Litton Industries' acquisition of Ingalls Shipbuilding facilities illustrates this concept. Litton was successful in the 1960's with its contracts to build Navy ships. But when the Vietnam war ended, defense spending declined and Litton saw a sudden decline in its earnings. As the firm restructured, divesting from the shipbuilding plant was not feasible since such a large and highly specialized investment could not be sold easily, and Litton was forced to stay in a declining shipbuilding market.

9. A diversity of rivals with different cultures, histories, and philosophies make an industry unstable. There is greater possibility for mavericks and for misjudging rival's moves. Rivalry is volatile and can be intense. The hospital industry, for example, is populated by hospitals that historically are community or charitable institutions, by hospitals that are associated with religious organizations or universities, and by hospitals that are for-profit enterprises. This mix of philosophies about mission has lead occasionally to fierce local struggles by hospitals over who will get expensive diagnostic and therapeutic services. At

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other times, local hospitals are highly cooperative with one another on issues such as community disaster planning.

10. Industry Shakeout. A growing market and the potential for high profits induces new firms to enter a market and incumbent firms to increase production. A point is reached where the industry becomes crowded with competitors, and demand cannot support the new entrants and the resulting increased supply. The industry may become crowded if its growth rate slows and the market becomes saturated, creating a situation of excess capacity with too many goods chasing too few buyers. A shakeout ensues, with intense competition, price wars, and company failures.

BCG founder Bruce Henderson generalized this observation as the Rule of Three and Four: a stable market will not have more than three significant competitors, and the largest competitor will have no more than four times the market share of the smallest. If this rule is true, it implies that:

o If there is a larger number of competitors, a shakeout is inevitableo Surviving rivals will have to grow faster than the marketo Eventual losers will have a negative cash flow if they attempt to growo All except the two largest rivals will be loserso The definition of what constitutes the "market" is strategically important.

Whatever the merits of this rule for stable markets, it is clear that market stability and changes in supply and demand affect rivalry. Cyclical demand tends to create cutthroat competition. This is true in the disposable diaper industry in which demand fluctuates with birth rates, and in the greeting card industry in which there are more predictable business cycles.

II. Threat Of Substitutes

In Porter's model, substitute products refer to products in other industries. To the economist, a threat of substitutes exists when a product's demand is affected by the price change of a substitute product. A product's price elasticity is affected by substitute products - as more substitutes become available, the demand becomes more elastic since customers have more alternatives. A close substitute product constrains the ability of firms in an industry to raise prices.

The competition engendered by a Threat of Substitute comes from products outside the industry. The price of aluminum beverage cans is constrained by the price of glass bottles, steel cans, and plastic containers. These containers are substitutes, yet they are not rivals in the aluminum can industry. To the manufacturer of automobile tires, tire retreads are a substitute. Today, new tires are not so expensive that car owners give much consideration to retreading old tires. But in the trucking industry new tires are expensive and tires must be replaced often. In the truck tire market, retreading remains

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a viable substitute industry. In the disposable diaper industry, cloth diapers are a substitute and their prices constrain the price of disposables.

While the threat of substitutes typically impacts an industry through price competition, there can be other concerns in assessing the threat of substitutes. Consider the substitutability of different types of TV transmission: local station transmission to home TV antennas via the airways versus transmission via cable, satellite, and telephone lines. The new technologies available and the changing structure of the entertainment media are contributing to competition among these substitute means of connecting the home to entertainment. Except in remote areas it is unlikely that cable TV could compete with free TV from an aerial without the greater diversity of entertainment that it affords the customer.

III. Buyer Power

The power of buyers is the impact that customers have on a producing industry. In general, when buyer power is strong, the relationship to the producing industry is near to what an economist terms a monopsony - a market in which there are many suppliers and one buyer. Under such market conditions, the buyer sets the price. In reality few pure monopsonies exist, but frequently there is some asymmetry between a producing industry and buyers. The following tables outline some factors that determine buyer power.

Buyers are Powerful if: Example

Buyers are concentrated - there are a few buyers with significant market share

DOD purchases from defense contractors

Buyers purchase a significant proportion of output - distribution of purchases or if the product is standardized

Circuit City and Sears' large retail market provides power over appliance manufacturers

Buyers possess a credible backward integration threat - can threaten to buy producing firm or rival

Large auto manufacturers' purchases of tires

 

Buyers are Weak if: Example

Producers threaten forward integration - producer can take over own distribution/retailing

Movie-producing companies have integrated forward to acquire theaters

Significant buyer switching costs - products not  IBM's 360 system strategy in the 1960's

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standardized and buyer cannot easily switch to another product

Buyers are fragmented (many, different) - no buyer has any particular influence on product or price

Most consumer products

Producers supply critical portions of buyers' input - distribution of purchases

Intel's relationship with PC manufacturers

IV. Supplier Power

A producing industry requires raw materials - labor, components, and other supplies. This requirement leads to buyer-supplier relationships between the industry and the firms that provide it the raw materials used to create products. Suppliers, if powerful, can exert an influence on the producing industry, such as selling raw materials at a high price to capture some of the industry's profits. The following tables outline some factors that determine supplier power.

Suppliers are Powerful if: Example

Credible forward integration threat by suppliersBaxter International, manufacturer of hospital supplies, acquired American Hospital Supply, a distributor

Suppliers concentrated Drug industry's relationship to hospitals

Significant cost to switch suppliers Microsoft's relationship with PC manufacturers

Customers Powerful  Boycott of grocery stores selling non-union picked grapes

 

Suppliers are Weak if: Example

Many competitive suppliers - product is standardized Tire industry relationship to automobile manufacturers

Purchase commodity products Grocery store brand label products

Credible backward integration threat by purchasers Timber producers relationship to paper companies

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Concentrated purchasersGarment industry relationship to major department stores

Customers Weak Travel agents' relationship to airlines

V. Barriers to Entry / Threat of Entry

It is not only incumbent rivals that pose a threat to firms in an industry; the possibility that new firms may enter the industry also affects competition. In theory, any firm should be able to enter and exit a market, and if free entry and exit exists, then profits always should be nominal. In reality, however, industries possess characteristics that protect the high profit levels of firms in the market and inhibit additional rivals from entering the market. These are barriers to entry.

Barriers to entry are more than the normal equilibrium adjustments that markets typically make. For example, when industry profits increase, we would expect additional firms to enter the market to take advantage of the high profit levels, over time driving down profits for all firms in the industry. When profits decrease, we would expect some firms to exit the market thus restoring a market equilibrium. Falling prices, or the expectation that future prices will fall, deters rivals from entering a market. Firms also may be reluctant to enter markets that are extremely uncertain, especially if entering involves expensive start-up costs. These are normal accommodations to market conditions. But if firms individually (collective action would be illegal collusion) keep prices artificially low as a strategy to prevent potential entrants from entering the market, such entry-deterring pricing establishes a barrier.

GENERIC STRATEGIES TO COUNTER THE FIVE FORCES

Strategy can be formulated on three levels:

corporate level business unit level functional or departmental level.

The business unit level is the primary context of industry rivalry. Michael Porter identified three generic strategies (cost leadership, differentiation, and focus) that can be implemented at the business unit level to create a competitive advantage. The proper generic strategy will position the firm to leverage its strengths and defend against the adverse effects of the five forces

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Mintzberg Operating core

Those who perform the basic work related directly to the production of products and services

Strategic apex

Charged with ensuring that the organisation serve its mission in an effective way, and also that it serve the needs of those people who control or otherwise have power over the organisation

Middle-line managers

Form a chain joining the strategic apex to the operating core by the use of delegated formal authority

Technostructure

The analysts who serve the organisation by affecting the work of others. They may design it, plan it, change it, or train the people who do it, but they do not do it themselves

Support staff

Composed of specialised units that exist to provide support to the organisation outside the operating work flow

Henry Mintzberg suggests that the traditional way of thinking about strategy implementation focuses only on deliberate strategies. Minztberg claims that some organizations begin implementing strategies before they clearly articulate mission, goals, or objectives. In this case strategy implementation actually precedes strategy formulation.

Minztberg calls strategies that unfold in this way emergent strategies. Implementation of emergent strategies involves the allocation of resources even though an organization has not explicitly chosen its strategies.

BenchmarkingBenchmarking is the process of comparing one's business processes and performance metrics to industry bests and/or best practices from other industries. Dimensions typically measured are quality, time, and cost. Improvements from learning mean doing things better, faster, and cheaper.

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Benchmarking involves management identifying the best firms in their industry, or any other industry where similar processes exist, and comparing the results and processes of those studied (the "targets") to one's own results and processes to learn how well the targets perform and, more importantly, how they do it.

The term benchmarking was first used by cobblers to measure people's feet for shoes. They would place someone's foot on a "bench" and mark it out to make the pattern for the shoes. Benchmarking is most used to measure performance using a specific indicator (cost per unit of measure, productivity per unit of measure, cycle time of x per unit of measure or defects per unit of measure) resulting in a metric of performance that is then compared to others.

Popularity and benefits from benchmarkingIn 2008, a comprehensive survey on benchmarking was commissioned by The Global Benchmarking Network, a network of benchmarking centers representing 22 countries. Over 450 organizations responded from over 40 countries. The results showed that:

1. Mission and Vision Statements and Customer (Client) Surveys are the most used (by 77% of organisations) of 20 improvement tools, followed by SWOT analysis(72%), and Informal Benchmarking (68%). Performance Benchmarking was used by (49%) and Best Practice Benchmarking by (39%).

2. The tools that are likely to increase in popularity the most over the next three years are Performance Benchmarking, Informal Benchmarking, SWOT, and Best Practice Benchmarking. Over 60% of organizations that are not currently using these tools indicated they are likely to use them in the next three years

3. Collaborative benchmarkingBenchmarking, was originally invented as a formal process by Rank Xerox, is usually carried out by individual companies. Sometimes it may be carried out collaboratively by groups of companies (e.g. subsidiaries of a multinational in different countries). One example is that of the Dutch municipally-owned water supply companies, which have carried out a voluntary collaborative benchmarking process since 1997 through their industry association. Another example is the UK construction industry which has carried out benchmarking since the late 1990s again through its industry association and with financial support from the UK Government.

ProcedureThere is no single benchmarking process that has been universally adopted. The wide appeal and acceptance of benchmarking has led to various benchmarking methodologies emerging. The seminal book on benchmarking is Boxwell's Benchmarking for Competitive Advantage published by McGraw-Hill in 1994.[1] It has withstood the test of time and is still a relevant read. The first book on benchmarking, written and published by Kaiser Associates,[2] is a practical guide and offers a 7-step approach. Robert Camp (who wrote one of the earliest books on benchmarking in 1989)[3] developed a 12-stage approach to benchmarking.

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The 12 stage methodology consisted of 1. Select subject ahead 2. Define the process 3. Identify potential partners 4. Identify data sources 5. Collect data and select partners 6. Determine the gap 7. Establish process differences 8. Target future performance 9. Communicate 10. Adjust goal 11. Implement 12. Review/recalibrate.

The following is an example of a typical benchmarking methodology:

1. Identify your problem areas - Because benchmarking can be applied to any business process or function, a range of research techniques may be required. They include: informal conversations with customers, employees, or suppliers; exploratory research techniques such as focus groups; or in-depth marketing research, quantitative research, surveys, questionnaires, re-engineering analysis, process mapping, quality control variance reports, or financial ratio analysis. Before embarking on comparison with other organizations it is essential that you know your own organization's function, processes; base lining performance provides a point against which improvement effort can be measured.

2. Identify other industries that have similar processes - For instance if one were interested in improving hand offs in addiction treatment he/she would try to identify other fields that also have hand off challenges. These could include air traffic control, cell phone switching between towers, transfer of patients from surgery to recovery rooms.

3. Identify organizations that are leaders in these areas - Look for the very best in any industry and in any country. Consult customers, suppliers, financial analysts, trade associations, and magazines to determine which companies are worthy of study.

4. Survey companies for measures and practices - Companies target specific business processes using detailed surveys of measures and practices used to identify business process alternatives and leading companies. Surveys are typically masked to protect confidential data by neutral associations and consultants.

5. Visit the "best practice" companies to identify leading edge practices - Companies typically agree to mutually exchange information beneficial to all parties in a benchmarking group and share the results within the group.

6. Implement new and improved business practices - Take the leading edge practices and develop implementation plans which include identification of specific opportunities, funding the project and selling the ideas to the organization for the purpose of gaining demonstrated value from the process.

Cost of benchmarkingThe three main types of costs in benchmarking are:

Visit Costs - This includes hotel rooms, travel costs, meals, a token gift, and lost labor time.

Time Costs - Members of the benchmarking team will be investing time in researching problems, finding exceptional companies to study, visits, and implementation. This will take them away from their regular tasks for part of each day so additional staff might be required.

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Benchmarking Database Costs - Organizations that institutionalize benchmarking into their daily procedures find it is useful to create and maintain a database of best practices and the companies associated with each best practice now.

The cost of benchmarking can substantially be reduced through utilizing the many internet resources that have sprung up over the last few years. These aim to capture benchmarks and best practices from organizations, business sectors and countries to make the benchmarking process much quicker and cheaper.

Technical Benchmarking/Product BenchmarkingThe technique initially used to compare existing corporate strategies with a view to achieving the best possible performance in new situations (see above), has recently been extended to the comparison of technical products. This process is usually referred to as "Technical Benchmarking" or "Product Benchmarking". Its use is particularly well developed within the automotive industry ("Automotive Benchmarking"), where it is vital to design products that match precise user expectations, at minimum possible cost, by applying the best technologies available worldwide. Many data are obtained by fully disassembling existing cars and their systems. Such analyses were initially carried out in-house by car makers and their suppliers. However, as they are expensive, they are increasingly outsourced to companies specialized in this area. Indeed, outsourcing has enabled a drastic decrease in costs for each company (by cost sharing) and the development of very efficient tools (standards, software).

Types of benchmarking Process benchmarking - the initiating firm focuses its observation and investigation of

business processes with a goal of identifying and observing the best practices from one or more benchmark firms. Activity analysis will be required where the objective is to benchmark cost and efficiency; increasingly applied to back-office processes where outsourcing may be a consideration.

Financial benchmarking - performing a financial analysis and comparing the results in an effort to assess your overall competitiveness and productivity.

Benchmarking from an investor perspective- extending the benchmarking universe to also compare to peer companies that can be considered alternative investment opportunities from the perspective of an investor.

Performance benchmarking - allows the initiator firm to assess their competitive position by comparing products and services with those of target firms.

Product benchmarking - the process of designing new products or upgrades to current ones. This process can sometimes involve reverse engineering which is taking apart competitors products to find strengths and weaknesses.

Strategic benchmarking - involves observing how others compete. This type is usually not industry specific, meaning it is best to look at other industries.

Functional benchmarking - a company will focus its benchmarking on a single function to improve the operation of that particular function. Complex functions such as Human Resources, Finance and Accounting and Information and Communication Technology are

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unlikely to be directly comparable in cost and efficiency terms and may need to be disaggregated into processes to make valid comparison.

Best-in-class benchmarking - involves studying the leading competitor or the company that best carries out a specific function.

Operational benchmarking - embraces everything from staffing and productivity to office flow and analysis of procedures performed.[4]

Metric BenchmarkingAnother approach to making comparisons involves using more aggregative cost or production information to identify strong and weak performing units. The two most common forms of quantitative analysis used in metric benchmarking are data envelope analysis (DEA) and regression analysis. DEA estimates the cost level an efficient firm should be able to achieve in a particular market. In infrastructure regulation, DEA can be used to reward companies/operators whose costs are near the efficient frontier with additional profits. Regression analysis estimates what the average firm should be able to achieve. With regression analysis firms that performed better than average can be rewarded while firms that performed worse than average can be penalized. Such benchmarking studies are used to create yardstick comparisons, allowing outsiders to evaluate the performance of operators in an industry. A variety of advanced statistical techniques, including stochastic frontier analysis, have been utilized to identify high performers and weak performers in a number of industries, including applications to schools, hospitals, water utilities, and electric utilities.[5]

One of the biggest challenges for Metric Benchmarking is the variety of metric definitions used by different companies and/or divisions. Metrics definitions may also change over time within the same organization due to changes in leadership and priorities. The most useful comparisons can be made when metrics definitions are common between compared units and do not change over time so improvements can be verified.

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Description of the ModelThe General Electric Company, with the aid of the Boston Consulting Group and McKinsey and Company, pioneered the nine cell strategic business screen illustrated here. The circle on the matrix represents your enterprise. Both axes are divided into three segments, yielding nine cells. The nine cells are grouped into three zones:

The Green Zone consists of the three cells in the upper left corner. If your enterprise falls in this zone you are in a favorable position with relatively attractive growth opportunities. This indicates a "green light" to invest in this product/service.

The Yellow Zone consists of the three diagonal cells from the lower left to the upper right. A position in the yellow zone is viewed as having medium attractiveness. Management must therefore exercise caution when making additional investments in this product/service. The suggested strategy is to seek to maintain share rather than growing or reducing share.

  Characterize Your EnterpriseThe vertical axis represents the industry attractiveness. The expert system will position your enterprise on the chart based upon your description of:

bargaining power of the buyers bargaining power of the suppliers internal rivalry the threat of new entrants the threat of substitutes

The horizontal axis represents the firm's competitive strength or ability to compete in the industry. It includes an analysis of:

the value and quality of the offering market share staying power experience

You can trace through the supporting analysis and its conclusions, adjusting your input until you are satisfied your description accurately characterizes your enterprise.

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The Red Zone consists of the three cells in the lower right corner. A position in the red zone is not attractive. The suggested strategy is that management should begin to make plans to exit the industry.

Analysis of Your Enterprise Position

High AttractivenessStrong Competitive PositionThe strategy advice for this cell is to invest for growth. Consider the following strategies:

provide maximum investment

diversify consolidate your

position to focus your resources

accept moderate near-term profits to build share

High AttractivenessAverage Competitive PositionThe strategy advice for this cell is to invest for growth. Consider the following strategies:

build selectively on strength

define the implications of challenging for market leadership

fill weaknesses to avoid vulnerability

High AttractivenessWeak Competitive PositionThe strategy advice for this cell is to opportunistically invest for earnings. However, if you can't strengthen your enterprise you should exit the market. Consider the following strategies:

ride with the market growth

seek niches or specialization

seek an opportunity to increase strength through acquisition

Medium AttractivenessStrong Competitive PositionThe strategy advice for this cell is to selectively invest for growth. Consider the following strategies:

invest heavily in selected segments,

establish a ceiling for the market share you wish to achieve

Medium AttractivenessAverage Competitive PositionThe strategy advice for this cell is to selectively invest for earnings. Consider the following strategies:

segment the market to find a more attractive position

make contingency plans to protect your vulnerable

Medium AttractivenessWeak Competitive PositionThe strategy advice for this cell is to preserve for harvest. Consider the following strategies:

act to preserve or boost cash flow as you exit the business

seek an opportunistic sale

seek a way to increase your strengths

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seek attractive new segments to apply strengths

position

Low AttractivenessStrong Competitive PositionThe strategy advice for this cell is to selectively invest for earnings. Consider the following strategies:

defend strengths shift resources

to attractive segments

examine ways to revitalize the industry

time your exit by monitoring for harvest or divestment timing

Low AttractivenessAverage Competitive PositionThe strategy advice for this cell is to restructure, harvest or divest. Consider the following strategies:

make only essential commitments

prepare to divest shift resources

to a more attractive segment

Low AttractivenessWeak Competitive PositionThe advice for this cell is to harvest or divest. You should exit the market or prune the product line.

2. Identify major difficulties encountered in strategy implementation

'Strategy is defined as the determination of the basic long-term goals and objectives of an enterprise, and the adoption of courses of action and the allocation of resources necessary for carrying out those goals'' Chandler(1962)

Implementing a strategy or strategy implementation is defined as "the translation of strategy into organisational action through organisational structure and design, resource planning and the management of strategic change".

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To identify significant problems encountered in implementing a new strategy in a business, a critical look at the components to be applied in implementing the strategy would be a good pointer. These are considered below:

1. Organisational structure and design; and strategy implementation;

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translating the strategy into organisational action by using the structure of the organization will also be dependant on the type of structure in use in the organization. This is so because the needs of a multinational organization are different from those of a small business. It is also possible that the extent of devolution or centralisation can influence strategy implementation.

2. Another problem encountered here is the way and manner information is passed down or up the ranks. If there is a blockage which impedes the flow of information processes it means that decisions would be made based on outdated or obsolete information. This can be solved by devolving the central command for easy flow of information among all rank and files especially in implementing a new strategy in a business. Recognition must be given to organisational structure and design's set up where operational and strategic decisions are made, there should be compromise if implementing a new strategy will succeed in any business.

3. The next aspect in strategy implementation - resource planning sets out resources and competences need to be created. It deals with the identification of resources needed and how those resources will be deployed and controlled to create the competences needed to implement the strategies successfully. This resource configuration is dependent on: protecting unique resources i.e. where a strategy depends on the uniqueness of a particular resource such as patent; and it must be protected; by legal means;

4. One of the major problems of strategy implementation as a result of resource planning is a failure to translate statements of strategic purpose, such as gaining market share into critical factors that will make the purpose achievable and ultimately achieved. This a critical success factor analysis can be pursue as a start in resource planning.. The problem here is that due to the non-uniformity in the times needed for the various activities, it is difficult to know where to start.

5. The next component in the implementation stage of the strategy is the management of strategic change. It is widely accepted that strategic change builds on four underlying premises:

a. There is a clear view within an organization of the strategy to be followed. b. Change will not occur unless there is a commitment to change c. The approach to managing strategic change is likely to be context dependent. d. Change must address the powerful influence of the paradigm and cultural web on, the

strategy being followed by the organization.

There are two types of change - incremental change-which merely builds on the skills, routines and beliefs of those in the organization, so that change is efficient and likely to win their commitment, and transformational change - which requires the organization to change its paradigm over time. It could be a change in routine (''the way of doing things around here''. It could also be a change in strategy that will necessitate the change. Although the implementation of strategy concerns the changing aspect of organization structure, control systems and resource planning which does affect the day-to-day operations of members of the organization; people's behaviours and perceptions may not have changed.

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6. To effect a successful strategy implementation, management must also adopt appropriate styles to manage the change processes. For example, it there is a problem in managing change based on misinformation, or lack of information, education and communication style will be used. This involves the explanation of the reasons for and means of strategic change. Collaboration or participation involving those who will be affected by strategic change in the identification of strategic issues; intervention, direction and coercion styles.

) Explain the concept of value chain analysis.

The value chain was a concept initially proposed by McKinsey (the management consultants) and later developed and made public by Harvard strategy guru Michael Porter. The value chain is basically the set of activities that an organisation performs. The activities can be categorised as being either primary or secondary. Primary activities are directly involved in serving the customer while secondary support the primary ones. Examples of primary activities would be sales, operations, distribution, while secondary activities would be accounts, HR etc.

The value chain allows an organisation to understand what activities it performs, classify them into primary and secondary activities and most importantly of all, understand which ones add value to the customer..Value Chain Analysis helped identify a firm's core competencies and distinguish those activities that drive competitive advantage. The cost structure of an organisation can be subdivided into separate processes or functions assuming that the cost drivers for each of these activities behave differently. Porter's strength was to condense this activity based cost analysis into a generic template consisting of five primary activities and four support activities. The nine activity groups are:

 

Primary activities:

1. inbound logistics: materials handling, warehousing, inventory control, transportation;

2. operations: machine operating, assembly, packaging, testing and maintenance;

3. outbound logistics: order processing, warehousing, transportation and distribution;

4. marketing and sales: advertising, promotion, selling, pricing, channel management;

5. service: installation, servicing, spare part management;

 

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Support activities:

6. firm infrastructure: general management, planning, finance, legal, investor relations;

7. human resource management: recruitment, education, promotion, reward systems;

8. technology development: research & development, IT, product and

    process development;

9. procurement: purchasing raw materials, lease properties, supplier contract negotiations.

 

By subdividing an organisation into its key processes or functions, Porter was able to link classical accounting to strategic capabilities by using value as a core concept, i.e. the ways a firm can best position itself against its competitors given its relative cost structure, how the composition of the value chain allows the firm to compete on price, or how this composition allows the firm to differentiate its products to specific customer segments.

Q) Technique of strategic controls

Premise control

Implementation control

Strategic surveillance

Special alert control

5.  role of top management in strategic control and implementation

ROLE OF TOP MANAGEMENT Top management is essential to the effective implementation of strategic change. Top management provides a role model for other managers to use in assessing the salient environmental variables, their relationship to the organization, and the appropriateness of the organization's response to these variables. Top management also shapes the perceived relationships among organization components.

Top management is largely responsible for the determination of organization structure (e.g., information flow, decision-making processes, and job assignments). Management must also

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recognize the existing organization culture and learn to work within or change its parameters. Top management is also responsible for the design and control of the organization's reward and incentive systems.

Finally, top management are involved in the design of information systems for the organization. In this role, managers influence the environmental variables most likely to receive attention in the organization. They must also make certain that information concerning these key variables is available to affected managers. Top-level managers must also provide accurate and timely feedback concerning the organization's performance and the performance of individual business units within the organization. Organization members need information to maintain a realistic view of their performance, the performance of the organization, and the organization's relationship to the environment.

A key role of a CEO's is to communicate a vision and to guide strategic planning. Those who have successfully implemented strategic plans have often reported that involving teams at all levels in strategic planning helps to build a shared vision, and increases each individual's motivation to see plans succeed.

Implementing strategic plans may require leaders who lead through inspiration and coaching rather than command and control. Recognizing and rewarding success, inspiring, and modeling behaviors is more likely to result in true commitment than use of authority, which can lead to passive resistance and hidden rebellion.

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