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STRATEGIC MKTG RURAL MKTG

MBA 4TH SEM NOTES


05/03/2013 DIEMD ABAD ISHWAR RAJPUT

Strategic Management Process - Meaning, Steps and Components

The strategic management process means defining the organizations strategy. It is also defined as the process by which managers make a choice of a set of strategies for the organization that will enable it to achieve better performance. Strategic management is a continuous process that appraises the business and industries in which the organization is involved; appraises its competitors; and fixes goals to meet all the present and future competitors and then reassesses each strategy. Strategic management process has following four steps: 1. Environmental Scanning- Environmental scanning refers to a process of collecting, scrutinizing and providing information for strategic purposes. It helps in analyzing the internal and external factors influencing an organization. After executing the environmental analysis process, management should evaluate it on a continuous basis and strive to improve it. 2. Strategy Formulation- Strategy formulation is the process of deciding best course of action for accomplishing organizational objectives and hence achieving organizational purpose. After conducting environment scanning, managers formulate corporate, business and functional strategies. 3.Strategy Implementation- Strategy implementation implies making the strategy work as intended or putting the organizations chosen strategy into action. Strategy implementation includes designing the organizations structure, distributing resources, developing decision making process, and managing human resources. 4. Strategy Evaluation- Strategy evaluation is the final step of strategy management process. The key strategy evaluation activities are: appraising internal and external factors that are the root of present strategies, measuring performance, and taking remedial / corrective actions. Evaluation makes sure that the organizational strategy as well as its implementation meets the organizational objectives.

These components are steps that are carried, in chronological order, when creating a new strategic management plan. Present businesses that have already created a strategic management plan will revert to these steps as per the situations requirement, so as to make essential changes.

Components of Strategic Management Process Strategic management is an ongoing process. Therefore, it must be realized that each component interacts with the other components and that this interaction often happens in chorus. Characteristics of Strategic Management: 1. Strategy often makes the difference between success and failure of a firm. Strategic management is a branch of management that studies how to organize the structure of a firm, what products the firm should sell, how it should position itself in the marketplace, where it should get its supplies and whether it needs to differentiate or compete on costs. Strategic management also deals with other issues, such as human resources policies, employee compensation plans, competitiveness and productivity. A course in strategic management is a part of many MBA programs. 2. Long-Term Issues o Strategic management deals primarily with long-term issues that may or may not have an immediate effect. For example, investing in the education of the company's work force may yield no immediate effect in terms of higher productivity. Still, in the long run, their education will result in higher productivity, and therefore enhanced profits. Competitive Advantage Strategic management helps managers find new sources of sustainable competitive advantage. Executives that apply the principles of strategic management in their work continuously try to deliver products or services cheaper, produce greater customer satisfaction and make employees more satisfied with their jobs. Effect on Operations
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Good strategic management always has a sizable effect on operational issues. For example, a decision to link pay to performance will result in operational decisions being more effective as employees try harder at their jobs. Operational decisions include decisions that deal with questions such as how to sell to certain customers or whether to open a credit line to them. Operational decisions are made in the lower echelons of the organizational hierarchy.

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Managing the organization in a strategic fashion requires that the interests of shareholders be put at the heart of all issues. Whether the question at hand is expansion into a new market or negotiating mergers and acquisitions, shareholder value should be at the core at all times. Companys strategy and its business model: People will always stress that having a well researched business plan is key before you start your business. Although creating a business plan is often an important step in the evolution of a business, particularly if you need financing or you are not experienced at running a business, it is not necessarily the essential first step. There are two key elements that should be completed prior to the business plan:

The business model The strategy

What is a Business Model? While the word model often stirs up images of mathematical formulas, a business model is in fact a story of how a business works. In general terms, a business model is the method of doing business by which a company can generate revenue. Both start-up ventures and established companies take new products and services to the market through a venture shaped by a specific business model. In their paper, The Role of the Business Model in Capturing Value from Innovation, Henry Chesbrough and Richard S. Rosenbloom outlined the six basic elements of a business model: 1. Articulate the value proposition the value created to users by using the product 2. Identify the market segment to whom and for what purpose is the product useful; specify how revenue is generated by the firm. 3. Define the value chain the sequence of activities and information required to allow a company to design, produce, market, deliver and support its product or service. 4. Estimate the cost structure and profit potential using the value chain and value proposition identified. 5. Describe the position of the firm with the value network link suppliers, customers, complementors and competitors. 6. Formulate the competitive strategy how will you gain and hold your competitive advantage over competitors or potential new entrants. Joan Magretta in her article Why Business Models Matter took the concept of the business model a little further. Magretta suggests every business model needs to pass two critical tests, the narrative test and the numbers test. The narrative test must tell a good story and explain how the business works, who is the customer, what do they value and how a company can deliver value to the customer. The numbers test means your profit and loss assumptions must add up. At the most basic level, if your model doesnt work, then your model has failed one of the two tests.

To begin the modeling process you need to articulate a value proposition on the product or service being provided. The model must then describe the target market. The customer will then value the product on its ability to reduce costs, solve a problem or create new solutions. A market focus is needed to identify what product attributes need to be targeted and how to resolve product trade-offs such as quality versus cost. You also need to identify how much to charge and how the customer will pay. Think of business modeling as the managerial equivalent of the scientific method - you start with a hypothesis, which you then test in action and revise when necessary. The business model also plays a part of a planning tool by focusing managements on how all the elements and activities of the business work together as a whole. At the end of the day, the business model should be condensed onto one page consisting of: a diagram outlining how the business generates revenue, how cash flows through the business and how the product flows through the business and; a narrative describing the product/ service components, financial projections or other important elements not captured in the diagram. Business Models and Strategy It is important to note that completing a business model does not constitute strategic planning. Strategic planning factors in the one thing a business model doesnt; competition. What is strategy? According to the Collins English Dictionary, strategy is a particular long-term plan for success". For our purposes, we will consider the essence of strategy as a formula for coping with the competition. Competitive strategy is about being different and the goal for a corporate strategy is to find a position in the industry where the company is unique and can defend itself against market forces. To do this the company must choose a set of activities that can deliver a unique mix of value. Market Forces and Strategy The determination of a strategy is rooted in determining how a company stacks up against basic market forces, how it can defend itself against these forces and how it can influence these forces. Fortunately, Michael E. Porter in his article How Competitive Forces Shape Strategy defined these market forces for us. Known as Porters 5 forces they consist of: 1. The industry this is the jockeying for position among current competitors, this can consists of price competition, new product introduction or advertising slugfests. 2. The threat of new entrants - the seriousness of the threat of entry depends on the barriers to entry and reaction from existing companies. There are 6 major barriers to entry: 1) economies of scale 2) product differentiation 3) capital requirements 4) cost disadvantages independent of size 5) access to distribution channels 6) government policy. A new company will generally have second thoughts about entering an industry if the incumbent has substantial resources to fight back, the incumbent seems likely to cut prices or industry growth is slow.

3. The threat of substitute products/services - substitutes can place a ceiling on prices that are charged and limit the potential of an industry. 4. The bargaining power of suppliers - suppliers can squeeze profitability by increasing prices or lowering the quality of the goods. 5. The bargaining power of buyers (customers) - customers can force down prices, demand better quality, more service or play competitors off on each other. Once you assess how the market forces are affecting competition in your industry and their underlying causes, you can identify the underlying strength and weaknesses of your company, determine where it stands against each force and then determine a plan of action. Plans of action may include:

Positioning the company match your strengths and weaknesses to the companys industry, build defenses against competitive forces or find a position in the industry where forces are the weakest. You need to know your companys capabilities and the causes of the competitive forces Influencing the balance take the offensive, for example innovative marketing can raise brand identification or differentiate the product. Exploiting industry change an evolution of an industry can bring changes in competition. For example, in an industry life-cycle growth rates change and/or product differentiation declines; anticipate shifts in the factors underlying these forces and respond to them.

The framework for analyzing the industry and developing a strategy provides the road map for answering the question what is the potential of this business?" Reconciling the Business Model and Strategy I will use a short example to illustrate the difference between a business model and strategy. Although you may think that Wal-Mart pioneered a new business model on its road to success, the reality is that the model was really no different than the one Kmart was using at the time. But it was what Sam Walton chose to do differently than Kmart, such as focusing on small towns as opposed to large cities and everyday low prices, that was the real reason for his success. Although Sam Waltons model was the same as Kmart's, his unique strategy made him a success.

SWOT Analysis
SWOT analysis is a tool for auditing an organization and it environment. It is the first stage of planning and helps marketers to focus on key issues. SWOT stands for strengths, weaknesses, opportunities, and threats. Strengths and weaknesses are internal factors. Opportunities and threats are external factors.

SWOT Analysis
A scan of the internal and external environment is an important part of the strategic planning process. Environmental factors internal to the firm usually can be classified as strengths (S) or weaknesses (W), and those external to the firm can be classified as opportunities (O) or threats (T). Such an analysis of the strategic environment is referred to as a SWOT analysis. The SWOT analysis provides information that is helpful in matching the firm's resources and capabilities to the competitive environment in which it operates. As such, it is instrumental in strategy formulation and selection. The following diagram shows how a SWOT analysis fits into an environmental scan: SWOT Analysis Framework

Environmental Scan / \ Internal Analysis External Analysis /\ /\ Strengths Weaknesses Opportunities Threats | SWOT Matrix

Strengths A firm's strengths are its resources and capabilities that can be used as a basis for developing a competitive advantage. Examples of such strengths include:

patents strong brand names good reputation among customers cost advantages from proprietary know-how exclusive access to high grade natural resources favorable access to distribution networks

Weaknesses The absence of certain strengths may be viewed as a weakness. For example, each of the following may be considered weaknesses:

lack of patent protection a weak brand name poor reputation among customers high cost structure lack of access to the best natural resources lack of access to key distribution channels

In some cases, a weakness may be the flip side of a strength. Take the case in which a firm has a large amount of manufacturing capacity. While this capacity may be considered a strength that competitors do not share, it also may be a considered a weakness if the large investment in manufacturing capacity prevents the firm from reacting quickly to changes in the strategic environment. Opportunities The external environmental analysis may reveal certain new opportunities for profit and growth. Some examples of such opportunities include:

an unfulfilled customer need arrival of new technologies loosening of regulations removal of international trade barriers

Threats Changes in the external environmental also may present threats to the firm. Some examples of such threats include:

shifts in consumer tastes away from the firm's products emergence of substitute products new regulations increased trade barriers

The SWOT Matrix A firm should not necessarily pursue the more lucrative opportunities. Rather, it may have a better chance at developing a competitive advantage by identifying a fit between the firm's strengths and upcoming opportunities. In some cases, the firm can overcome a weakness in order to prepare itself to pursue a compelling opportunity.

To develop strategies that take into account the SWOT profile, a matrix of these factors can be constructed. The SWOT matrix (also known as a TOWS Matrix) is shown below: SWOT / TOWS Matrix Strengths Weaknesses

Opportunities S-O strategies W-O strategies

Threats

S-T strategies W-T strategies

S-O strategies pursue opportunities that are a good fit to the company's strengths. W-O strategies overcome weaknesses to pursue opportunities. S-T strategies identify ways that the firm can use its strengths to reduce its vulnerability to external threats. W-T strategies establish a defensive plan to prevent the firm's weaknesses from making it highly susceptible to external threats.

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Strategy Formulation: INTRODUCTION It is useful to consider strategy formulation as part of a strategic management process that comprises three phases: 1. Diagnosis, 2. formulation, and 3. Implementation. Strategic management is an ongoing process to develop and revise future-oriented strategies that allow an organization to achieve its objectives, considering its capabilities, constraints, and the environment in which it operates. Formulation, the second phase in the strategic management process, produces a clear set of recommendations, with supporting justification, that revise as necessary the mission and objectives of the organization, and supply the strategies for accomplishing them. In formulation, we are trying to modify the current objectives and strategies in ways to make the organization more successful. This includes trying to create "sustainable" competitive advantages -- although most competitive advantages are eroded steadily by the efforts of competitors. The remainder of this chapter focuses on strategy formulation, and is organized into six sections: Three Aspects of Strategy Formulation, Corporate-Level Strategy, Competitive Strategy, Functional Strategy, Choosing Strategies, and Troublesome Strategies. THREE ASPECTS OF STRATEGY FORMULATION: The following three aspects or levels of strategy formulation, each with a different focus, need to be dealt with in the formulation phase of strategic management. The three sets of recommendations must be internally consistent and fit together in a mutually supportive manner that forms an integrated hierarchy of strategy, in the order given. Corporate Level Strategy: In this aspect of strategy, we are concerned with broad decisions about the total organization's scope and direction. Basically, we consider what changes should be made in our growth objective and strategy for achieving it, the lines of business we are in, and how these lines of business fit together. It is useful to think of three components of corporate level strategy:

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(a) Growth or directional strategy (what should be our growth objective, ranging from retrenchment through stability to varying degrees of growth - and how do we accomplish this) (b) Portfolio strategy (what should be our portfolio of lines of business, which implicitly requires reconsidering how much concentration or diversification we should have), and (c) Parenting strategy (how we allocate resources and manage capabilities and activities across the portfolio -- where do we put special emphasis, and how much do we integrate our various lines of business). Competitive Strategy (often called Business Level Strategy): This involves deciding how the company will compete within each line of business (LOB) or strategic business unit (SBU). Functional Strategy: These more localized and shorter-horizon strategies deal with how each functional area and unit will carry out its functional activities to be effective and maximize resource productivity. CORPORATE LEVEL STRATEGY This comprises the overall strategy elements for the corporation as a whole, the grand strategy, if you please. Corporate strategy involves four kinds of initiatives: * Making the necessary moves to establish positions in different businesses and achieve an appropriate amount and kind of diversification. A key part of corporate strategy is making decisions on how many, what types, and which specific lines of business the company should be in. This may involve deciding to increase or decrease the amount and breadth of diversification. It may involve closing out some LOB's (lines of business), adding others, and/or changing emphasis among LOB's. * Initiating actions to boost the combined performance of the businesses the company has diversified into: This may involve vigorously pursuing rapid-growth strategies in the most promising LOB's, keeping the other core businesses healthy, initiating turnaround efforts in weak-performing LOB's with promise, and dropping LOB's that are no longer attractive or don't fit into the corporation's overall plans. It also may involve supplying financial, managerial, and other resources, or acquiring and/or merging other companies with an existing LOB. * Pursuing ways to capture valuable cross-business strategic fits and turn them into competitive advantages -- especially transferring and sharing related technology, procurement leverage, operating facilities, distribution channels, and/or customers.

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* Establishing investment priorities and moving more corporate resources into the most attractive LOB's. It is useful to organize the corporate level strategy considerations and initiatives into a framework with The following three main strategy components: growth, portfolio, and parenting. These are discussed in the next three sections. What Should be Our Growth Objective and Strategies? Growth objectives can range from drastic retrenchment through aggressive growth. Organizational leaders need to revisit and make decisions about the growth objectives and the fundamental strategies the organization will use to achieve them. There are forces that tend to push top decision-makers toward a growth stance even when a company is in trouble and should not be trying to grow, for example bonuses, stock options, fame, ego. Leaders need to resist such temptations and select a growth strategy stance that is appropriate for the organization and its situation. Stability and retrenchment strategies are underutilized. Some of the major strategic alternatives for each of the primary growth stances (retrenchment, stability, and growth) are summarized in the following three sub-sections. Growth Strategies All growth strategies can be classified into one of two fundamental categories: concentration within existing industries or diversification into other lines of business or industries. When a company's current industries are attractive, have good growth potential, and do not face serious threats, concentrating resources in the existing industries makes good sense. Diversification tends to have greater risks, but is an appropriate option when a company's current industries have little growth potential or are unattractive in other ways. When an industry consolidates and becomes mature, unless there are other markets to seek (for example other international markets), a company may have no choice for growth but diversification. There are two basic concentration strategies, vertical integration and horizontal growth. Diversification strategies can be divided into related (or concentric) and unrelated (conglomerate) diversification. Each of the resulting four core categories of strategy alternatives can be achieved internally through investment and development, or externally through mergers, acquisitions, and/or strategic alliances -- thus producing eight major growth strategy categories. Comments about each of the four core categories are outlined below, followed by some key points about mergers, acquisitions, and strategic alliances. 1. Vertical Integration: This type of strategy can be a good one if the company has a strong competitive position in a growing, attractive industry. A company can grow by taking over

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functions earlier in the value chain that were previously provided by suppliers or other organizations ("backward integration"). This strategy can have advantages, e.g., in cost, stability and quality of components, and making operations more difficult for competitors. However, it also reduces flexibility, raises exit barriers for the company to leave that industry, and prevents the company from seeking the best and latest components from suppliers competing for their business. A company also can grow by taking over functions forward in the value chain previously provided by final manufacturers, distributors, or retailers ("forward integration"). This strategy provides more control over such things as final products/services and distribution, but may involve new critical success factors that the parent company may not be able to master and deliver. For example, being a world-class manufacturer does not make a company an effective retailer. Some writers claim that backward integration is usually more profitable than forward integration, although this does not have general support. In any case, many companies have moved toward less vertical integration (especially backward, but also forward) during the last decade or so, replacing significant amounts of previous vertical integration with outsourcing and various forms of strategic alliances. 2. Horizontal Growth: This strategy alternative category involves expanding the company's existing products into other locations and/or market segments, or increasing the range of products/services offered to current markets, or a combination of both. It amounts to expanding sideways at the point(s) in the value chain that the company is currently engaged in. One of the primary advantages of this alternative is being able to choose from a fairly continuous range of choices, from modest extensions of present products/markets to major expansions -- each with corresponding amounts of cost and risk. 3. Related Diversification (aka Concentric Diversification): In this alternative, a company expands into a related industry, one having synergy with the company's existing lines of business, creating a situation in which the existing and new lines of business share and gain special advantages from commonalities such as technology, customers, distribution, location, product or manufacturing similarities, and government access. This is often an appropriate corporate strategy when a company has a strong competitive position and distinctive competencies, but its existing industry is not very attractive. 4. Unrelated Diversification (aka Conglomerate Diversification): This fourth major category of corporate strategy alternatives for growth involves diversifying into a line of business unrelated to the current ones. The reasons to consider this alternative are primarily seeking more attractive opportunities for growth in which to invest available funds (in contrast to rather unattractive opportunities in existing industries), risk reduction, and/or preparing to exit an existing line of business (for example, one in the decline stage of the product life cycle). Further,

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this may be an appropriate strategy when, not only the present industry is unattractive, but the company lacks outstanding competencies that it could transfer to related products or industries. However, because it is difficult to manage and excel in unrelated business units, it can be difficult to realize the hoped-for value added. Mergers, Acquisitions, and Strategic Alliances: Each of the four growth strategy categories just discussed can be carried out internally or externally, through mergers, acquisitions, and/or strategic alliances. Of course, there also can be a mixture of internal and external actions. Various forms of strategic alliances, mergers, and acquisitions have emerged and are used extensively in many industries today. They are used particularly to bridge resource and technology gaps, and to obtain expertise and market positions more quickly than could be done through internal development. They are particularly necessary and potentially useful when a company wishes to enter a new industry, new markets, and/or new parts of the world. Despite their extensive use, a large share of alliances, mergers, and acquisitions fall far short of expected benefits or are outright failures. For example, one study published in Business Week in 1999 found that 61 percent of alliances were either outright failures or "limping along." Research on mergers and acquisitions includes a Mercer Management Consulting study of all mergers from 1990 to 1996 which found that nearly half "destroyed" shareholder value; an A. T. Kearney study of 115 multibillion-dollar, global mergers between 1993 and 1996 where 58 percent failed to create "substantial returns for shareholders" in the form of dividends and stock price appreciation; and a Price-Waterhouse-Coopers study of 97 acquisitions over $500 million from 1994 to 1997 in which two-thirds of the buyer's stocks dropped on announcement of the transaction and a third of these were still lagging a year later. Many reasons for the problematic record have been cited, including paying too much, unrealistic expectations, inadequate due diligence, and conflicting corporate cultures; however, the most powerful contributor to success or failure is inadequate attention to the merger integration process. Although the lawyers and investment bankers may consider a deal done when the papers are signed and they receive their fees, this should be merely an incident in a multi-year process of integration that began before the signing and continues far beyond. Stability Strategies There are a number of circumstances in which the most appropriate growth stance for a company is stability, rather than growth. Often, this may be used for a relatively short period, after which further growth is planned. Such circumstances usually involve a reasonable successful company, combined with circumstances that either permit a period of comfortable coasting or suggest a pause or caution. Three alternatives are outlined below, in which the actual strategy actions are similar, but differing primarily in the circumstances motivating the choice of a stability strategy and in the intentions for future strategic actions.

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1. Pause and Then Proceed: This stability strategy alternative (essentially a timeout) may be appropriate in either of two situations: (a) the need for an opportunity to rest, digest, and consolidate after growth or some turbulent events - before continuing a growth strategy, or (b) an uncertain or hostile environment in which it is prudent to stay in a "holding pattern" until there is change in or more clarity about the future in the environment. 2. No Change: This alternative could be a cop-out, representing indecision or timidity in making a choice for change. Alternatively, it may be a comfortable, even long-term strategy in a mature, rather stable environment, e.g., a small business in a small town with few competitors. 3. Grab Profits While You Can: This is a non-recommended strategy to try to mask a deteriorating situation by artificially supporting profits or their appearance, or otherwise trying to act as though the problems will go away. It is an unstable, temporary strategy in a worsening situation, usually chosen either to try to delay letting stakeholders know how bad things are or to extract personal gain before things collapse. Recent terrible examples in the USA are Enron and WorldCom. Retrenchment Strategies Turnaround: This strategy, dealing with a company in serious trouble, attempts to resuscitate or revive the company through a combination of contraction (general, major cutbacks in size and costs) and consolidation (creating and stabilizing a smaller, leaner company). Although difficult, when done very effectively it can succeed in both retaining enough key employees and revitalizing the company. Captive Company Strategy: This strategy involves giving up independence in exchange for some security by becoming another company's sole supplier, distributor, or a dependent subsidiary. Sell Out: If a company in a weak position is unable or unlikely to succeed with a turnaround or captive company strategy, it has few choices other than to try to find a buyer and sell itself (or divest, if part of a diversified corporation). Liquidation: When a company has been unsuccessful in or has none of the previous three strategic alternatives available, the only remaining alternative is liquidation, often involving a bankruptcy. There is a modest advantage of a voluntary liquidation over bankruptcy in that the board and top management make the decisions rather than turning them over to a court, which often ignores stockholders' interests.

COMPETITIVE (BUSINESS LEVEL) STRATEGY

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In this second aspect of a company's strategy, the focus is on how to compete successfully in each of the lines of business the company has chosen to engage in. The central thrust is how to build and improve the company's competitive position for each of its lines of business. A company has competitive advantage whenever it can attract customers and defend against competitive forces better than its rivals. Companies want to develop competitive advantages that have some sustainability (although the typical term "sustainable competitive advantage" is usually only true dynamically, as a firm works to continue it). Successful competitive strategies usually involve building uniquely strong or distinctive competencies in one or several areas crucial to success and using them to maintain a competitive edge over rivals. Some examples of distinctive competencies are superior technology and/or product features, better manufacturing technology and skills, superior sales and distribution capabilities, and better customer service and convenience. Competitive strategy is about being different. It means deliberately choosing to perform activities differently or to perform different activities than rivals to deliver a unique mix of value. (Michael E. Porter) The essence of strategy lies in creating tomorrow's competitive advantages faster than competitors mimic the ones you possess today. (Gary Hamel & C. K. Prahalad) We will consider competitive strategy by using Porter's four generic strategies (Porter 1980, 1985) as the fundamental choices, and then adding various competitive tactics. Porter's Four Generic Competitive Strategies He argues that a business needs to make two fundamental decisions in establishing its competitive advantage: (a) whether to compete primarily on price (he says "cost," which is necessary to sustain competitive prices, but price is what the customer responds to) or to compete through providing some distinctive points of differentiation that justify higher prices, and (b) how broad a market target it will aim at (its competitive scope). These two choices define the following four generic competitive strategies. which he argues cover the fundamental range of choices. A fifth strategy alternative (best-cost provider) is added by some sources, although not by Porter, and is included below: 1. Overall Price (Cost) Leadership: appealing to a broad cross-section of the market by providing products or services at the lowest price. This requires being the overall low-cost provider of the products or services (e.g., Costco, among retail stores, and Hyundai, among automobile manufacturers). Implementing this strategy successfully requires continual, exceptional efforts to reduce costs -- without excluding product features and services that buyers consider essential. It also requires achieving cost advantages in ways that are hard for competitors to copy or match. Some conditions that tend to make this strategy an attractive choice are: * The industry's product is much the same from seller to seller

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* The marketplace is dominated by price competition, with highly price-sensitive buyers * There are few ways to achieve product differentiation that have much value to buyers * Most buyers use product in same ways -- common user requirements * Switching costs for buyers are low * Buyers are large and have significant bargaining power 2. Differentiation: appealing to a broad cross-section of the market through offering differentiating features that make customers willing to pay premium prices, e.g., superior technology, quality, prestige, special features, service, convenience (examples are Nordstrom and Lexus). Success with this type of strategy requires differentiation features that are hard or expensive for competitors to duplicate. Sustainable differentiation usually comes from advantages in core competencies, unique company resources or capabilities, and superior management of value chain activities. Some conditions that tend to favor differentiation strategies are: * There are multiple ways to differentiate the product/service that buyers think have substantial value * Buyers have different needs or uses of the product/service * Product innovations and technological change are rapid and competition emphasizes the latest product features * Not many rivals are following a similar differentiation strategy 3. Price (Cost) Focus: a market niche strategy, concentrating on a narrow customer segment and competing with lowest prices, which, again, requires having lower cost structure than competitors (e.g., a single, small shop on a side-street in a town, in which they will order electronic equipment at low prices, or the cheapest automobile made in the former Bulgaria). Some conditions that tend to favor focus (either price or differentiation focus) are: * The business is new and/or has modest resources * The company lacks the capability to go after a wider part of the total market * Buyers' needs or uses of the item are diverse; there are many different niches and segments in the industry * Buyer segments differ widely in size, growth rate, profitability, and intensity in the five competitive forces, making some segments more attractive than others * Industry leaders don't see the niche as crucial to their own success

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* Few or no other rivals are attempting to specialize in the same target segment 4. Differentiation Focus: a second market niche strategy, concentrating on a narrow customer segment and competing through differentiating features (e.g., a high-fashion women's clothing boutique in Paris, or Ferrari). Best-Cost Provider Strategy: (although not one of Porter's basic four strategies, this strategy is mentioned by a number of other writers.) This is a strategy of trying to give customers the best cost/value combination, by incorporating key good-or-better product characteristics at a lower cost than competitors. This strategy is a mixture or hybrid of low-price and differentiation, and targets a segment of value-conscious buyers that is usually larger than a market niche, but smaller than a broad market. Successful implementation of this strategy requires the company to have the resources, skills, capabilities (and possibly luck) to incorporate up-scale features at lower cost than competitors. This strategy could be attractive in markets that have both variety in buyer needs that make differentiation common and where large numbers of buyers are sensitive to both price and value. Porter might argue that this strategy is often temporary, and that a business should choose and achieve one of the four generic competitive strategies above. Otherwise, the business is stuck in the middle of the competitive marketplace and will be out-performed by competitors who choose and excel in one of the fundamental strategies. His argument is analogous to the threats to a tennis player who is standing at the service line, rather than near the baseline or getting to the net. However, others present examples of companies (e.g., Honda and Toyota) who seem to be able to pursue successfully a best-cost provider strategy, with stability. Competitive Tactics Although a choice of one of the generic competitive strategies discussed in the previous section provides the foundation for a business strategy, there are many variations and elaborations. Among these are various tactics that may be useful (in general, tactics are shorter in time horizon and narrower in scope than strategies). This section deals with competitive tactics, while the following section discusses cooperative tactics. Two categories of competitive tactics are those dealing with timing (when to enter a market) and market location (where and how to enter and/or defend). Timing Tactics: When to make a strategic move is often as important as what move to make. We often speak of first-movers (i.e., the first to provide a product or service), secondmovers or rapid followers, and late movers (wait-and-see). Each tactic can have advantages and disadvantages. Being a first-mover can have major strategic advantages when: (a) doing so builds an important image and reputation with buyers; (b) early adoption of new technologies, different

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components, exclusive distribution channels, etc. can produce cost and/or other advantages over rivals; (c) first-time customers remain strongly loyal in making repeat purchases; and (d) moving first makes entry and imitation by competitors hard or unlikely. However, being a second- or late-mover isn't necessarily a disadvantage. There are cases in which the first-mover's skills, technology, and strategies are easily copied or even surpassed by later-movers, allowing them to catch or pass the first-mover in a relatively short period, while having the advantage of minimizing risks by waiting until a new market is established. Sometimes, there are advantages to being a skillful follower rather than a first-mover, e.g., when: (a) being a first-mover is more costly than imitating and only modest experience curve benefits accrue to the leader (followers can end up with lower costs than the first-mover under some conditions); (b) the products of an innovator are somewhat primitive and do not live up to buyer expectations, thus allowing a clever follower to win buyers away from the leader with better performing products; (c) technology is advancing rapidly, giving fast followers the opening to leapfrog a first-mover's products with more attractive and full-featured second- and thirdgeneration products; and (d) the first-mover ignores market segments that can be picked up easily. Market Location Tactics: These fall conveniently into offensive and defensive tactics. Offensive tactics are designed to take market share from a competitor, while defensive tactics attempt to keep a competitor from taking away some of our present market share, under the onslaught of offensive tactics by the competitor. Some offensive tactics are: * Frontal Assault: going head-to-head with the competitor, matching each other in every way. To be successful, the attacker must have superior resources and be willing to continue longer than the company attacked. * Flanking Maneuver: attacking a part of the market where the competitor is weak. To be successful, the attacker must be patient and willing to carefully expand out of the relatively undefended market niche or else face retaliation by an established competitor. * Encirclement: usually evolving from the previous two, encirclement involves encircling and pushing over the competitor's position in terms of greater product variety and/or serving more markets. This requires a wide variety of abilities and resources necessary to attack multiple market segments. * Bypass Attack: attempting to cut the market out from under the established defender by offering a new, superior type of produce that makes the competitor's product unnecessary or undesirable. * Guerrilla Warfare: using a "hit and run" attack on a competitor, with small, intermittent assaults on different market segments. This offers the possibility for even a small firm

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to make some gains without seriously threatening a large, established competitor and evoking some form of retaliation. Some Defensive Tactics are: * Raise Structural Barriers: block avenues challengers can take in mounting an offensive * Increase Expected Retaliation: signal challengers that there is threat of strong retaliation if they attack * Reduce Inducement for Attacks: e.g., lower profits to make things less attractive (including use of accounting techniques to obscure true profitability). Keeping prices very low gives a new entrant little profit incentive to enter. The general experience is that any competitive advantage currently held will eventually be eroded by the actions of competent, resourceful competitors. Therefore, to sustain its initial advantage, a firm must use both defensive and offensive strategies, in elaborating on its basic competitive strategy. Cooperative Strategies Another group of "competitive" tactics involve cooperation among companies. These could be grouped under the heading of various types of strategic alliances, which have been discussed to some extent under Corporate Level growth strategies. These involve an agreement or alliance between two or more businesses formed to achieve strategically significant objectives that are mutually beneficial. Some are very short-term; others are longer-term and may be the first stage of an eventual merger between the companies. Some of the reasons for strategic alliances are to: obtain/share technology, share manufacturing capabilities and facilities, share access to specific markets, reduce financial/political/market risks, and achieve other competitive advantages not otherwise available. There could be considered a continuum of types of strategic alliances, ranging from: (a) mutual service consortiums (e.g., similar companies in similar industries pool their resources to develop something that is too expensive alone), (b) licensing arrangements, (c) joint ventures (an independent business entity formed by two or more companies to accomplish certain things, with allocated ownership, operational responsibilities, and financial risks and rewards), (d) value-chain partnerships (e.g., just-in-time supplier relationships, and out-sourcing of major value-chain functions). FUNCTIONAL STRATEGIES Functional strategies are relatively short-term activities that each functional area within a company will carry out to implement the broader, longer-term corporate level and business level

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strategies. Each functional area has a number of strategy choices, that interact with and must be consistent with the overall company strategies. Three basic characteristics distinguish functional strategies from corporate level and business level strategies: Shorter time horizon, greater specificity, and primary involvement of operating managers. A few examples follow of functional strategy topics for the major functional areas of marketing, finance, production/operations, research and development, and human resources management. Each area needs to deal with sourcing strategy, i.e., what should be done in-house and what should be outsourced? Marketing strategy deals with product/service choices and features, pricing strategy, markets to be targeted, distribution, and promotion considerations. Financial strategies include decisions about capital acquisition, capital allocation, dividend policy, and investment and working capital management. The production or operations functional strategies address choices about how and where the products or services will be manufactured or delivered, technology to be used, management of resources, plus purchasing and relationships with suppliers. For firms in hightech industries, R&D strategy may be so central that many of the decisions will be made at the business or even corporate level, for example the role of technology in the company's competitive strategy, including choices between being a technology leader or follower. However, there will remain more specific decisions that are part of R&D functional strategy, such as the relative emphasis between product and process R&D, how new technology will be obtained (internal development vs. external through purchasing, acquisition, licensing, alliances, etc.), and degree of centralization for R&D activities. Human resources functional strategy includes many topics, typically recommended by the human resources department, but many requiring top management approval. Examples are job categories and descriptions; pay and benefits; recruiting, selection, and orientation; career development and training; evaluation and incentive systems; policies and discipline; and management/executive selection processes. CHOOSING THE BEST STRATEGY ALTERNATIVES Decision making is a complex subject, worthy of a chapter or book of its own. This section can only offer a few suggestions. Among the many sources for additional information, I recommend Harrison (1999), McCall & Kaplan (1990), and Williams (2002). Here are some factors to consider when choosing among alternative strategies: * It is important to get as clear as possible about objectives and decision criteria (what makes a decision a "good" one?) * The primary answer to the previous question, and therefore a vital criterion, is that the chosen strategies must be effective in addressing the "critical issues" the company faces at this time

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* They must be consistent with the mission and other strategies of the organization * They need to be consistent with external environment factors, including realistic assessments of the competitive environment and trends * They fit the company's product life cycle position and market attractiveness/competitive strength situation * They must be capable of being implemented effectively and efficiently, including being realistic with respect to the company's resources * The risks must be acceptable and in line with the potential rewards * It is important to match strategy to the other aspects of the situation, including: (a) size, stage, and growth rate of industry; (b) industry characteristics, including fragmentation, importance of technology, commodity product orientation, international features; and (c) company position (dominant leader, leader, aggressive challenger, follower, weak, "stuck in the middle") * Consider stakeholder analysis and other people-related factors (e.g., internal and external pressures, risk propensity, and needs and desires of important decision-makers) * Sometimes it is helpful to do scenario construction, e.g., cases with optimistic, most likely, and pessimistic assumptions. Steps in Strategy Formulation Process Strategy formulation refers to the process of choosing the most appropriate course of action for the realization of organizational goals and objectives and thereby achieving the organizational vision. The process of strategy formulation basically involves six main steps. Though these steps do not follow a rigid chronological order, however they are very rational and can be easily followed in this order. 1. Setting Organizations objectives - The key component of any strategy statement is to set the long-term objectives of the organization. It is known that strategy is generally a medium for realization of organizational objectives. Objectives stress the state of being there whereas Strategy stresses upon the process of reaching there. Strategy includes both the fixation of objectives as well the medium to be used to realize those objectives. Thus, strategy is a wider term which believes in the manner of deployment of resources so as to achieve the objectives. While fixing the organizational objectives, it is essential that the factors which influence the selection of objectives must be analyzed before the selection of objectives. Once the

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objectives and the factors influencing strategic decisions have been determined, it is easy to take strategic decisions. 2. Evaluating the Organizational Environment - The next step is to evaluate the general economic and industrial environment in which the organization operates. This includes a review of the organizations competitive position. It is essential to conduct a qualitative and quantitative review of an organizations existing product line. The purpose of such a review is to make sure that the factors important for competitive success in the market can be discovered so that the management can identify their own strengths and weaknesses as well as their competitors strengths and weaknesses. After identifying its strengths and weaknesses, an organization must keep a track of competitors moves and actions so as to discover probable opportunities of threats to its market or supply sources. 3. Setting Quantitative Targets - In this step, an organization must practically fix the quantitative target values for some of the organizational objectives. The idea behind this is to compare with long term customers, so as to evaluate the contribution that might be made by various product zones or operating departments.

4. Aiming in context with the divisional plans - In this step, the contributions made by each department or division or product category within the organization is identified and accordingly strategic planning is done for each sub-unit. This requires a careful analysis of macroeconomic trends.

5. Performance Analysis - Performance analysis includes discovering and analyzing the gap between the planned or desired performance. A critical evaluation of the organizations past performance, present condition and the desired future conditions must be done by the organization. This critical evaluation identifies the degree of gap that persists between the actual reality and the long-term aspirations of the organization. An attempt is made by the organization to estimate its probable future condition if the current trends persist.

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6. Choice of Strategy - This is the ultimate step in Strategy Formulation. The best course of action is actually chosen after considering organizational goals, organizational strengths, potential and limitations as well as the external opportunities.

10 steps in strategy formulation: There are several ways a strategy can be designed for a company. However some methods are better than the others. Here are 10 steps which guide you in deciding the strategy of your company. Steps 1 to 5 mainly involve internal or external research as well as very long term strategy making (Strategies made in the first 5 steps affect the whole life cycle of the company) 1) Write a Vision Statement A vision statement (crisp and to the point) is a must for developing a strategy. Exploring and deciding on the vision of the company gives you clarity on the main objectives of the company. 2) Mission Statement - Decide a Mission statement for the company. This mission statement would actually determine the methodology of the company in reaching its vision, its purposes and its philosophy behind its goals. 3) Define the company profile - The company profile needs to be comprehensive which further clears the goals of the organization. What would be the strengths of the company, capabilities, management. In essence mention everything you can about the company. This helps in transparency while deciding the strategy. 4) Study the External environment No strategy can be complete without taking into consideration the effect that external environment has on businesses. Thus an in depth study on external environment is necessary and the same should be mentioned in the strategy report. 5) The 5th step involves matching all three Mission statement, Company profile and the external environment such that they are in sync to achieve the vision of the company. From here on, Step 6 to 10 involve decision making based on the research as well as the decisions taken for the company in the previous steps. The last steps are more inclined towards implementation. 6) Deciding the actions for accomplishing the mission of the organization 7) Selecting long term strategies which will be most effective

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8) Deciding on short term strategies arising from the long term ones such that these short term strategies too are in sync with the mission and vision statement 9) Deciding the budget and resource allocation according to the short term strategy 10) Implementation of the strategies along with pre decided review system along with measures to maintain control and a fallback short term plan.

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Why is Concise Communication Important for Developing Effective Strategic Leadership?


Concise communication is essential for the success of any organization and is especially important to develop effective strategic leadership. The focus of strategic leadership is to build and maintain a sustainable competitive advantage for the organization, according to Ralph Stacy, author of "Learning as an Activity of Interdependent People." Concise communication is significant in developing effective strategic leadership, as it is typically the responsibility of leaders to translate the desires of those at the upper echelons of the organization to those at the bottom. 1. Strategic Management
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The strategic planning process is a common method used to develop and maintain a sustainable competitive advantage for an organization. In the strategic planning process, organizational leaders develop a mission statement for the organization, explaining its reason for existence. Managers and leaders must then develop strategies to meet this purpose. The development of effective strategic leadership is vital to the success of the strategic planning process, and concise communication is an essential element of this development. Alignment

Strategic leadership typically involves the alignment of the day-to-day work activities with the organization's mission statement using strategic leadership. Concise communication is essential to the success of any strategic management plan. For operational activities to align with the mission statement, strategic leaders must ensure that workers maintain a clear understanding of that mission statement. Senior managers must encourage the clarification of expectations so workers' understanding of what is expected of them measures up to strategic leadership metrics. Sender/Receiver Communication Model

One of the most essential tasks of the strategic leader is to communicate organizational strategies to those who will implement them. Concise communication is a vital element in this process. The sender/receiver communication model is a useful tool for developing these core competencies within strategic leaders. Every communication involves a sender and a receiver. For strategic leaders to be truly effective, they must understand the importance of concise communications to ensure the messages they send to workers are received in the manner intended. Leaders vs. Managers

While not all leaders are necessarily managers, it is essential that all managers be properly developed to provide effective strategic leadership for the organization. Warren Bennis, author of "On Becoming a Leader," describes several differences between leaders and managers. For example, managers are administrators, while leaders are innovators. Managers focus on completing tasks, while leaders focus on people. Concise communication is an essential tool of the effective leader. Institutionalizing the strategic structure:

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Institutionalization of Strategy: The first basic action that is required for putting a strategy into operation is its institutionalization. Since strategy does not become either acceptable or effective by virtue of being well designed and clearly announced, the successful implementation of strategy requires that the strategy framer acts as its promoter and defender. Often strategy choice becomes a personal choice of the strategist because his personality variables become an influential factor in strategy formulation. Thus, it becomes a personal strategy of the strategist. Therefore, there is an urgent need for the institutionalization of strategy because without it, the strategy is subject to being undermined. Therefore, it is the role of the strategist to present the strategy to the members of the organization in a way that appeals to them and brings their support. This will put organizational people to feel that it is their own strategy rather than the strategy imposed on them. Such a feeling creates commitment so essential for making strategy successful. FORMUTING FUNCTIONAL STRATEGY Recall from Chapter 4 that functional strategy provides an action plan for strategy implementation at the level of the work group and individual. It puts corporate and business strategy into operation by defining the activities needed for implementation. Depending on the specific strategy to be implemented, functional strategy nay need to be formulated by a variety of work groups within the organization Consider, for example, the functional strategies that would be necessary if Coca-Cola decided to develop a new line of fruit juices. The research and development department would have to develop a formula; the marketing department would have to conduct taste tests, develop promotional campaigns, and identify the appropriate distribution channels; and the production department would have to purchase new equipment and perhaps build new facilities to produce the fruit juice line. Table 5.4 outlines just a few of the functional strategies necessary to introduce a new line of fruit juices. The most significant challenge lies in coordinating the activities of the various work groups that must work together to implement the strategy. The strategies must be consistent both within each functional area of the business (such as the marketing department) and between functional areas (such as the marketing department and the production department).48 For example, if CocaCola's new fruit juice line is to be priced at a premium level, it must be promoted to buyers who desire a premium product and distributed through channels that reach those buyers. These marketing decisions must be consistent. Further, the production department must purchase highquality raw materials and produce a product that is worthy of a premium price. Without consistency within and between the work groups of the organization, the implementation process is sure to fail.

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EVERY BUSINESS UNIT DEVELOPS FUNCTIONAL STRATEGIES FOR EACH MAJOR DEPARTMENT MARKETING STRATEGY FINANCIAL STRATEGY RESEARCH & DEVELOPMENT STRATEGY OPERATIONS STRATEGY PURCHASING STRATEGY LOGISTICS STRATEGY HUMAN RESOURCES STRATEGY INFORMATION TECHNOLOGY STRATEGY

BASIC MARKET-PRODUCT STRATEGIES: THE CUSTOMER-PRODUCT DECISION: MARKETING STRATEGIES: THE CUSTOMER-PRODUCT DECISION: MARKET PENETRATION STRATEGY (Stay in current markets with existing products) INCREASE RATE OF PURCHASE/CONSUMPTION ATTRACT RIVALS CUSTOMERS BUY OUT RIVALS CONVERT NON-USERS INTO CURRENT USERS MARKET DEVELOPMENT STRATEGY (Find new markets for current products) ENTER NEW GEOGRAPHICAL MARKETS FIND NEW USES FOR EXISTING PRODUCTS FIND NEW TARGET MARKETS PRODUCT DEVELOPMENT STRATEGY (Develop new products for existing markets)

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IMPROVE FEATURES IMPROVE QUALITY/RELIABILITY/DURABILITY ENHANCE AESTHETICS/STYLING ADD MODELS DIVERSIFICATION STRATEGY (Develop new products for new markets) THE 4 PS OF MARKETING: MARKETING MIX ISSUES

Product Strategy Specifying the exact product or service to be offered Promotion Strategy How the product or service is to be communicated to customers Channel or Place Strategy Selecting the method for distributing the product or service Price Strategy Establishing a price for the product or service Skim pricing (high) when you are a pioneer Penetration pricing (low) builds market shares Dynamic pricing (prices vary frequently) based on demand/availability Distribute through dealer networks or through mass merchandisers? Sell directly to consumers through own stores or through internet? Push - spend $$$ on promotions and discounts to push products Pull - spend $ to build brand awareness so consumers will ask for it by name New or existing product? for new or existing customers?

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FINANCIAL MANAGEMENT STRATEGIES: CAPITAL ACQUISITIONS Debt Leverage, Stock Sales, & Gains from Operations Equity financing is preferred for related diversification Debt financing is preferred for unrelated diversification Leveraged buyouts (LBOs) make the acquired firm pay off the debt

CAN WE GROW BY RELYING ON ONLY INTERNAL CASH FLOWS? DO STOCK SALES DILUTE OWNERSHIP CONTROL? DOES A LARGE DEBT RATIO CRIPPLE FUTURE GROWTH? DOES STRONG LEVERAGE BOOST EARNINGS PER SHARE? DOES HIGH DEBT DETER TAKEOVER ATTEMPTS? DO MOST LBOs UNDERPERFORM 3-4 YEARS AFTER THE BUYOUT? RESOURCE ALLOCATIONS Dividends, Stock Price, & Reinvestment Reinvest earnings in fast-growing companies Keeping the stockholders contented with consistent dividends Use of stock splits ( or reverses) to maintain high stock prices Tracking stock keeps interest in company, but doesnt allow takeover

RESEARCH & DEVELOPMENT STRATEGIES: LEVEL OF INNOVATION Pioneer (Leader) v. Copy Cat (Follower) Technological leadership fits well with differentiation A follower strategy makes sense with cost-leader strategies Are we better at finding applications and customer adaptations than actually inventing something really new? Different types of R & D (basic, product, process) Where is the firms historic expertise / advantage? How competent are the R & D Personnel? ACQUISITION OF TECHNOLOGY Internally developed v. acquired from outside

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Technology Scouts Strategic Technology Alliances Acquire minority stake in promising high-tech ventures

OPERATIONS STRATEGIES: MANUFACTURING LOCATION Internal Production v. Outsourcing Domestic Plants v. International Locations SYSTEM LAYOUT Product v. Process Layouts Job Shops v. Mass Production Job shop/small batch production fits well with a differentiation strategy Continuous production / dedicated transfer lines helps achieve cost leadership Use of robots and CAD/CAM v. Labor intense manufacturing Modular Manufacturing and just-in-time delivery of sub-assemblies Continuous improvement systems lower costs and increase quality

PURCHASING STRATEGIES: SOURCING COMPONENTS AND SUPPLIES WHERE CAN THE HIGHEST QUALITY COMPONENTS BE FOUND? Outsourcing (our firm buys everything) Buying on the Open Market (Spot) (prices fluctuate) Long-Term Contracts with Multiple Suppliers (low bid) Sole Sourcing (only one supplier) improves quality Parallel Sourcing (two suppliers) provides protection Backward Integration (our firm has an ownership stake in the suppliers we use) Quasi-integration (minority ownership position in a supplier) Tapered (produce some of what we need, but not all) Full (produce all of our own needs) Use of Component Inventories v. Just-in-time supply delivery

LOGISTICS STRATEGIES: DO WE HAVE GOODS THAT MUST BE TRANSPORTED OR DELIVERED? TYPE OF MATERIALS TRANSPORTED (Bulky or Compact?) Raw Materials, Supplies, & Components Finished Goods BEST MODE OF TRANSPORTATION AIR RAIL

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TRUCK BARGE

DO WE WANT DEPENDABILITY, LOW COST, OR HIGH QUALITY SERVICE? OUTSOURCE TRANSPORTATION OR DO IT YOURSELF? CONTRACT WITH OTHERS Use Multiple Shippers v. Just One (UPS)? Consider batch deliveries v. Just-in-time arrangements? OWNERSHIP IN DISTRIBUTION CHAIN Quasi Tapered Full

HUMAN RESOURCES STRATEGIES: TALENT ACQUISITION Recruit from Outside v. Internal Development Require experienced, highly-skilled workers v. we will train you Offer top dollar wages & benefits v. mentoring and a career WORK ARRANGEMENTS Individual Jobs v. Team Positions Narrowly-defined jobs v. Positions with discretion and autonomy On-premises Work v. Telecommuting Options MOTIVATION & APPRAISAL Extrinsic v. Intrinsic Reward Systems Assessment for development v. assessment for rewards Incentives for ideas & originality v. incentives for conformity?

INFORMATION SYSTEMS STRATEGIES: WORKER PRODUCTIVITY & CONNECTIVITY Employees can be networked together across the globe Instant translation software for global firms Follow the Sun Managementpass projects on to the next team

SALES & INVENTORY MANAGEMENT Internet sales and development of customer databases Instant sales reports allow immediate inventory reorders

SHIPPING & TRACKING GOODS

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FEDEX PowerShip softwarestores addresses, prints labels, etc. Tracking the progress of package shipmentFEDEX & UPS

WHICH FUNCTIONS CAN WE OUTSOURCE? GLOBAL OUTSOURCING INCREASES EFFICIENCY & QUALITY Averages 9% reduction in costs and 15% increase in capacity and quality Up to 70% of Boeing planes are outsourced..built in just 4 mos v. 1 year AMA SURVEY -- 94% OUTSOURCE AT LEAST ONE ACTIVITY 78% General & Administrative activities 77% Human Resources 66% Transportation & Distribution 63% Information Systems 56% Manufacturing 51% Marketing 18% Finance & Accounting 25% were disappointed in their outsourcing results 51% brought the outsourced activity back in-house MOST LIKELY ACTIVITIES TO OUTSOURCE Customer Service Bookkeeping/Financial/Clerical Sales/Telemarketing Software Programming Mailroom

OUTSOURCING DISADVANTAGES: CUSTOMER COMPLAINTS & UNEXPECTED DELAYS LOCKED INTO LONG-TERM CONTRACTS THAT ARENT COMPETITIVE THE FIRM DOESNT LEARN NEW SKILLS & DEVELOP CORE COMPETENCIES

A SURVEY OF 129 OUTSOURCING FIRMS Half of the projects undertaken failed to achieve the anticipated savings Software produced in India had 10% more bugs than comparable US projects SEVEN MAJOR OUTSOURCING ERRORS Outsourcing activities that shouldnt be outsourced Failed to keep core activities in-house

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Selecting the wrong vendor Picked a vendor that wasnt trustworthy, or who lacks state-of-the art processes Writing a poor contract Balance of power favors the vendorlocked in over a long period of time Overlooking personnel issuesmy area of expertise was outsourced! Losing Control over the Outsourced ActivityWere at their mercy! Overlooking the hidden costs of outsourcingTransaction fees? Failing to plan an exit strategyHow can we reverse out of this deal?

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MEANING AND DEFINITION OF RURAL MARKETING


The term rural marketing used to be an umbrella term for the people who dealt with rural people in one way or other. This term got a separate meaning and importance after the economic revaluation in Indian after 1990. So, before venturing into the other aspects of rural marketing let us discuss the development of this area in different parts which is briefly explained here. Part I (Before 1960): Rural marketing referred to selling of rural products in rural and urban areas and agricultural inputs in rural markets. It was treated as synonymous to agricultural marketing. Agricultural produces like food grains and industrial inputs like cotton, oil seeds, sugarcane etc. occupied the central place of discussion during this period. Part II (1960 to 1990): In this era, green revolution resulted from scientific farming and transferred many of the poor villages into prosperous business centers. As a result, the demand for agricultural inputs went up especially in terms of wheats and paddies. Better irrigation facilities, soil testing, use of high yield variety seeds, fertilizers, pesticides and deployment of machinery like powder tillers, harvesters, threshers etc. changed the rural scenario. In this context, marketing of agricultural inputs took the importance. Two separate areas of activities had emerged- during this period marketing of agricultural inputs and the conventional Agricultural Marketing. Part III (After Mid 1990s): The products which were not given attention so far during the two earlier phases were that of marketing of household consumables and durables to the rural markets due to obvious reasons. The economic conditions of the country were as such that the rural people were not in a position to buy these kinds of products. Secondly, our market was in a close shape and we newer allowed companies (foreign) to operate in Indian market. Rural marketing represented the emergent distinct activity of attracting and serving rural markets to fulfill the needs and wants of persons, households and occupations of rural people. As a result of the above analysis, we are in a position to define rural marketing Rural marketing can be seen as a function which manages all those activities involved in assessing, stimulating and converting the purchasing power into an effective demand for specific products and services, and moving them to the people in rural area to create satisfaction and a standard of living for them and thereby achieves the goals of the organization.

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NATURE AND CHARACTERISTICS OF RURAL MARKET


There goes a saying that the proof of the pudding lies in the eating. So also the proof of all production lies in consumption/marketing. With the rapid pace of technological improvement and increase in peoples buying capacity, more and better goods and services now are in continuous demand. The liberalization and globalization of the Indian economy have given an added advantage to sophisticated production, proliferation and mass distribution of goods and services. In terms of the number of people, the Indian rural market is almost twice as large as the entire market of the USA or that of the USSR. Agriculture is main source of income. The income is seasonal in nature. It is fluctuating also as it depends on crop production. Though large, the rural market is geographically scattered. It shows linguistic, religious and cultural diversities and economic disparities. The market is undeveloped, as the people who constitute it still lack adequate purchasing power. It is largely agricultural oriented, with poor standard of living, low-per capital income, and socio-cultural backwardness. It exhibits sharper and varied regional preferences with distinct predilections, habit patterns and behaviorual characteristics. Rural marketing process is both a catalyst as well as an outcome of the general rural development process. Initiation and management of social and economic change in the rural sector is the core of the rural marketing process. It becomes in this process both benefactor and beneficiary.

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SIGNIFICANCE OF THE RURAL MARKETS


If you meet a sales executive today and ask which market he would prefer to serve, the immediate answer would be, Rural Markets as they are still unexploited. A number of factors have been recognized as responsible for the rural market boom. Some of them are: 1. Increase in population, and hence increase in demand. The rural population in 1971 was 43.80 crores, which increased to 50.20 crores in 1981, 60.21 crores in 1991 and 66.0 crores in 2001. 2. A marked increase in the rural income due to agrarian prosperity. 3. Large inflow of investment for rural development programmes from government and other sources. 4. Increased contact of rural people with their urban counterparts due to development of transport and a wide communication network. 5. Increase in literacy and educational level among rural folks, and the resultant inclination to lead sophisticated lives. 6. Inflow of foreign remittances and foreign made goods in rural areas. 7. Changes in the land tenure system causing a structural change in the ownership pattern and consequent changes in the buying behaviour.

FACTORS CONTRIBUTING TO THE CHANGE IN THE RURAL MARKET Green revolution


The substantial attention accorded to agriculture during the successive five-year plans has helped in improving agricultural productivity. Adoption of new agronomic practices, selective mechanisation, multiple cropping, inclusion of cash crops and development of allied activities like dairy, fisheries and other commercial activities have helped in increasing disposable income of rural consumers. Over 75 percent villages in India have been electrified. There is also a shift from rain dependence to irrigation. Farmers are getting high return for their cash and food crops. In the whole process, the dependence on seasonality has reduced, and in return there has been increasing disposable income. By observing this scenario, Indias one of the biggest giant Hindustan Lever Ltd. has entered into rural market for more penetration through the operation Bharat. Since December 1999, HLL has reached out to 35,000 villages, 22 million households and spent Rs. 20 crore. This has been one of the largest sampling exercises in recent times conducted by a big business house.

Emerging Role of Bio-Tech. in Indian Agriculture Sector


It is evident from the facts that Indian agriculture is trailing in terms of yield when compared with leading countries of the world. Countries like USA, Canada, Israel and Germany have achieved high yield in agriculture production but countries like India, Brazil and Nigeria are having agriculture yield much lower than international average. The major difference created in this respect is the use of the applications of bio-technology.

Rural communication
Around 50 percent of the villages are today connected by all weather roads and can be accessed throughout the year. But there are states, which are almost 100 percent connected with the metal roads. Networking besides enhancing the mobility of rural consumers has increased their exposure to products and services.

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Development programmes
The five-year plans have witnessed massive investments in rural areas in terms of number of development programmes implemented by the central and state Government. These programmes have generated incomes to ruralites and helped them to change their life-styles. Some of these programmes are: Intensive Agricultural District Programme (IADP- Package Programme) Intensive Agricultural Area Programme (IAAP) High Yielding Varieties Programme (HYVP- Green Revolution) Drought Prone Areas Programme (DPAP) Small Farmers Development Agency (SFDA) Hill Area Development Programme Operation Flood I, II and III (White Revolution) Fisheries Development (Blue Revolution) Integrated Rural Development Programme (IRDP) Jawahar Rojgar Yojna (JRY).

PROBLEMS IN RURAL MARKETING


There are many problems to be tackled in rural marketing, despite rapid strides in the development of the rural sector. Some of the common problems are discussed below: Transportation: Transportation is an important aspect in the process of movement of products from urban production centers to remote villages. The transportation infrastructure is extremely poor in rural India. Due to this reason, most of the villages are not accessible to the marketing man. Communication: Marketing communication in rural markets suffers from a variety of constraints. The literacy rate among the rural consumers is very low. Print media, therefore, have limited scope in the rural context. Apart from low levels of literacy, the tradition-bound nature of rural people, their cultural barriers and their overall economic backwardness add to the difficulties of the communication task. Availability of appropriate media: It has been estimated that all organized media in the country put together can reach only 30 per cent of the rural population of India. The print media covers only 18 per cent of the rural population. The radio network, in theory, covers 90 per cent. But, actual listenership is much less. TV is popular, and is an ideal medium for communicating with the rural masses. Warehousing: A storage function is necessary because production and consumption cycles rarely match. Many agricultural commodities are produced seasonally, whereas demand for them is continuous. The storage function overcomes discrepancies in desired quantities and timing. In warehousing too, there are special problems in the rural context. Rural markets and sales management: Rural marketing involves a greater amount of personal selling effort compared to urban marketing.

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The rural salesman must also be able to guide the rural customers in the choice of the products. It has been observed that rural salesmen do not properly motivate rural consumers. Inadequate banking and credit facilities: In rural markets, distribution is also handicapped due to lack of adequate banking and credit facilities. The rural outlets require banking support to enable remittances, to get replenishment of stocks, to facilitate credit transactions in general, and to obtain credit support from the bank. Market segmentation in rural markets: Market segmentation is the process of dividing the total market into a number of sub-markets.The heterogeneous market is broken up into a number of relatively homogeneous units. Market segmentation is as important in rural marketing as it is in urban marketing. Most firms assume that rural markets are homogeneous. It is unwise on the part of these firms to assume that the rural market can be served with the same product, price and promotion combination. Branding: The brand is the surest means of conveying quality to rural consumers. Day by day, though national brands are getting popular, local brands are also playing a significant role in rural areas. This may be due to illiteracy, ignorance and low purchasing power of rural consumers. It has been observed that there is greater dissatisfaction among the rural consumers with regard to selling of low quality duplicate brands, particularly soaps, creams, clothes, etc. whose prices are often half of those of national brands, but sold at prices on par or slightly les than the prices of national brands. Local brands are becoming popular in rural markets in spite of their lower quality. Packaging: As far as packaging is concerned, as a general rule, smaller packages are more popular in the rural areas. At present, all essential products are not available in villages in smaller packaging. The lower income group consumers are not able to purchase large and medium size packaged goods. It is also found that the labeling on the package is not in the local language. This is a major constraint to rural consumers understanding the product characteristics.

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Strategies regarding product positioning: Product positioning plays a very crucial role. Marketer has to position their products after understanding the unique characteristics of the rural market environment in India. These are broadly as follows: Low per capita income Lack of formal retail and distribution network Relative cheapness of labour Positioning involves three tasks Identifying the differences of the offer vis--vis competitors offers. Selecting the differences that have greater competitive advantage. Communicating such advantages effectively to the target audience. Companies can reposition their existing products in rural markets. For example, refrigerator manufacturing companies can launch a refrigerator of bigger size because most of the families in rural areas are undivided big families and require big refrigerators having bigger storage capacity. Secondly in India most of the villages are facing acute shortage of water; here companies can reposition a washing machine, which require less water than any ordinary washing machine. Here are few examples endorsing the above view point Escort, which repositioned the old Rajdoot motorcycle as the rugged durable bike good for village road with actor Dharmendra endorsing the products in TV spots. Godrejs new toilet soap lime light was launched with an ad campaign design to appeal to dessi tastes complete with Hindi pop singer Alisha Chinai doing a gypsy acts. Maharaja Appliances launched Bonus, a range of appliances especially for the rural market in 1998. Colgates 10 gm sachets of toothpaste were designed keeping the rural consumer in mind.

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PRODUCT SEGMENTATION AND TARGETING


Right segmentation and targeting policies are key to success in rural market. Segmentation can be done with one or more variables viz., demographic, geographic, psychographic and behavioural. a) Geographic: As the rural market is spread over a large area companies can divided the market area into small sectors having some geographic similarity to consolidate their distribution network. b) Demographic: Market can be divided on the basis of income, education, lifestyle, gender, marital status, family size, occupation and religion. Due to unequal distribution of income, the Indian market for detergents is structurally shown like a pyramid (from base to top-laundry soap, low price detergent mid priced detergent and premium powders) HLL has wheel as laundry soap, blue wheel power and international wheel active power at the base, Rin Shakti powder and bar, Sunlight powder and Super 501 bar at midprice level and international surf excel at the top end. c) Psychographic: Market is divided into different segments like social class, life style and personality. E.g. in some parts of Gujarat it is reported that farmers are going in for big, 50 hp (horse power) tractors, when there need was for much smaller, typically 25 hp to 30 hp ones. The reason, on further investigation was the compulsion to keep up with the neighbours. d) Behavioural: Following factors play important role to segment the market; occasions, benefit sought, user status, usage rate, loyalty status, and place and product possession category.

INNOVATIVE MARKETING STRATEGIC DECISION (HOW TO DO?) 1. Product


Product plays an important role in strategic marketing decisions. Product innovation is in fact key to success in rural market, developing indigenous products that cater to the needs of rural consumers who demand quality products at an affordable cost. This requires substantial R & D and marketing research to better understand consumer behaviour and preference. Case of marketing of shampoo in rural areas Hair products were introduced to rural India in an attempt to capitalize on a culture where women take hair grooming extremely seriously. While rural women may wear faded saris and little jewelry, few step out without ensuring that their hair is in place. Consumer goods companies introduced transplanted product from developed markets, the 2-in-1 shampoo/conditioner. Companies thought that women would be attracted to this product because it was cost-effective; however, initial sales were dismal. What companies failed to recognize is that most rural consumers had previously never used shampoo and did not value or understand the full benefits of conditioner. Products that cater to local needs: Philips, which has operated in India since 1933, did well selling colour TV sets years ago, when competition was slim. Sales in rupee terms grew 22% a

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year on average between 1995 and 2001. Since then, that pace has slowed by more than half. With more competitors jumping in 18 brands available in India today, compared with just three in 1991- Philipss market share was withering, even in the countryside. So in early 2001, Philips decided to devise new products just for the rural markets, like the wind-up radio. They used one speaker, instead of two, in the TV sets sold outside cities to make them more affordable. The size of the TV cabinets, meanwhile, was bumped up by about 10% over units sold in the cities to make the sets look bigger. Rural consumers might be able to afford only a 14-inch or 20-inch screen TV set, but they want something that looks substantial to show off to their neighbours, says Suresh Sukumaran, marketing director for television sets at Philips.

Price
Income variability: Indias wide income distribution implies that there exist multiple segments with very different levels of purchasing power. The challenges for consumer goods companies are to develop products that capture the entire spectrum of potential consumers.

Focus on volume not margins


As we discussed the value equation in earlier part, the companies must concentrate on the lower segment which is quite sizeable in number. Therefore, the marketing strategies in rural India must be on large volumes over low margins and thus the overall profitability can be maintained. Lower prices: Many companies tend to bring their existing products at a much higher price and follow marketing strategies that are not in sync with what is required to sell to the consumer at the bottom of the pyramid. Hence, they end up serving the high-end niche players. This is what happened to Kelloggs in India, when they launched their breakfast cereals in the early 1990s. Only the high-end consumers with high disposable income were able to afford Kelloggs cereals. Kelloggs never succeeded in penetrating the Indian mass market because of its high price and the company is losing money. Creating buying power: For any product to sell, consumers need to have disposable income. The consumers in tier 4 segment have desire to buy products, but they do not have the purchasing capacity, as majority of the products are priced higher. To meet their desires, companies need to take steps so that these customers could have access to credit and have higher earning capacity.

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Place
Lack of formal sales and distribution network: Developing the distribution network in the rural market is not an easy task, due to low per capita income compounded by the need to maintain low operating costs. In a rural market formal sales and distribution networks are largely non-existent and difficult to obtain without substantial capital or local guidance unlike developed market where large retail distribution chains are commonplace. This poses a tremendous challenge to consumer goods companies, which have traditionally used large retailers as their primary channel of distribution. Retail chains have not flourished in rural areas of India because economies of scale do not exist. Rural consumers live in small homes with little storage space, lack refrigeration and do not own vehicles. As a result, daily purchases at the neighbourhood store are frequently preferred by consumers and may be the only avenue to buy goods in smaller rural towns. Retailer Power: While independent retailers are a fragmented group, they have a substantial amount of power in driving consumer purchases, particularly in rural areas. Most rural stores are cramped, providing little opportunity for consumers to browse. The consumer interacts directly with the retail salesperson (usually the owner) and services often include informal lines of credit and home delivery in addition to personal opinions on goods. In rural areas, retailers tend to carry only a single brand in a product category. In such a retailing environment, being first on the shelf and developing a privileged relationship with the retailer is extremely important and a competitive advantage to consumer goods companies.

Improving access
Many consumers in Tier 4 are in locations that make distribution extremely difficult. To make sure that the consumers in the tire 4 segment have access to the products, the distribution system followed by the companies should be different from that of their existing systems.lack of motor able roads in India makes the distribution costs high and reach low. HLL has realized that, for improving access of its products in rural areas, the traditional distribution channels would increase costs, which would ultimately increase the price of the products. The company has experimented with innovative methods to reach the rural consumer.

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Promotion
According to one source, only ten percent of Indian villages are connected by Cable and satellite (C & S)- the rest watch only Doordarshan. Also, in India, the retailers are highly fragmented, highly dispersed. Companies have to think for innovative ways of reaching the rural consumer (haats, melas etc.), because media as we perceive it is not covering as much as 43% of rural India. When it comes to the rural market, two out of five Indians are unreached by any mediaTV, Press, Radio and Cinema put together. So haats, mandis and melas are opportunities. Innovative advertising programs: Consumer good companies cannot rely on conventional advertising techniques; particularly in Indias rural areas where only one in every three households owns a television set and more than half of all villagers are illiterate. Instead, companies need to turn to more innovative methods of advertising to reach their potential customer base. In this kind of a scenario some companies are using consumer video vans, which carry infomercials to rural villages. A marketer invites people to the van to view the infomercial, which incorporates the new product into an aspect of daily life. These potential customers are subsequently given a demonstration of the product, for example, toothpaste and toothbrush, and then provided free samples. The van returns the following month to reinforce the sales pitch and to make sales.

Role of a leader (Mukhia)


The local or a group leader plays a crucial role in the promotion of a product because these leaders act as an opinion builder or act as a role model for them. Here we want to quote an interesting example: A team of Hyundai car salesmen takes his van into a tiny towns dusty primary school, and turns it into a temporary car dealership. While a group of village men dressed in turbans and loose kurta pajamas gathers around a big television set in the back of the van to watch Hyundai advertisements, the chief sales rep talks with village headman, the Hyundai folks were here the previous night, giving a local community head an exclusive test drive and arranging this village visit.

Shaping aspirations
As already mentioned, the consumers at the bottom of the pyramid are mostly uneducated and illiterate; the companies need to spend time and resources to educate the consumers. HLL, under its Project Bharat, visits villages where company sales representatives explain to the rural people the benefits of HLLs products with the help of video shows. This creates awareness of HLLs product categories and addresses the issues of attitude and habits of the rural people.

People: (Role of Youth)


It is a fact that unlike a few years ago, the rural youth today are playing a far more significant role in influencing the purchases of radios, television (black and white as well as colour). Penetration levels of consumer durables in the rural sector have risen dramatically in the last decade or so. It is observed that rural women are out of the closet completelybut unlike ten years ago (when she had probably an insignificant or no role to play) today, she is exercising her choice in select categories- the choice of brands may still be with the males of the household. But yes, in this context the youth have certainly begun to play a role in selecting a brand in certain product categories.