Вы находитесь на странице: 1из 44

INDEX

Module Title 02 Instruction Sheet .. .. Questionary Sheet . 03 04

1.

2.

3.

4.

Table of Content . 05 List of Tables & Figures . 06

5.

6.

Answer to Question 1 . 07 - 19 Answer to Question 2 . 20 - 28 Answer to Question 3 . 29 - 35 References .. - 38 36

7.

8.

9.

Page 1 of 44

MSc in Engineering Business Management University of Warwick UK

MODULE TITLE MODULE DATES PARTICIPANTS NAME COMPANY

: Business Strategy & Strategic Management : 8 - 12 February 2010 : SURENDRA PATIL : Laxmi Oil Pumps & Systems Pvt. Ltd.

DUE DATE OF RECEIPT OF THIS PMA AT CII : 29 March 2010


MODULE TUTOR : Mr. Nigel Brennan

Total Marks Question 1 Question 2 Question 3 Question 4 Marks Awarded

Marks Awarded

Page 2 of 44

CII - WMG

INSTRUCTION SHEET FOR SUBMISSION OF POST MODULE ASSIGNMENT (Please read through this carefully)

1. The Post Module Assignment must be sent in DUPLICATE (2 hard copies)


to : Course Administrator Mr. S D Puranik Executive Director CII Naoroji Godrej Centre of Excellence Godrej Station-side Colony Opposite Vikhroli Railway Station Vikhroli (East) Mumbai 400 079 2. The PMA must be accompanied by PROOF OF POSTAL DESPATCH. Alternatively, the proof of postal despatch could also be faxed or sent by post. 3. Please include the Cover Sheet, the Instruction Sheets and the Question Sheet alongwith your Answers. 4. The PMA should be typed, printed or neatly written on A-4 sheets. 5. Please number / index the pages. SUBMISSION DATES:

6. The last date for receipt of PMA at CII Naoroji Godrej Centre of
Excellence for the module on Business Strategy & Strategic Management held during 8 12 February 2010 is 29 March 2010. LATE SUBMISSION

7. 3% per working day will be deducted for late submission, up to two weeks
(14 days) late, after which no credit will be awarded.

Page 3 of 44

MSc in Engineering Business Management


WMG, University of Warwick, UK

Business Strategy & Strategic Management Post Module Assignment

Answer 3 from the 4 questions below: Q1. Select a large company from an industry with which you are familiar, or alternatively a strategic business unit or functional department within the company. Write a brief introduction, describing the history, purpose and organisation of the company or business unit. Describe the products/services and markets with which it is involved. Using the Internal Factor Evaluation Matrix and External Factor Evaluation Matrix formulate a simple strategic audit of the company or business unit. Q2. How are the SWOT Matrix, SPACE Matrix, BCG Matrix, IE Matrix and Grand Strategy Matrix similar? How are they different? Q3. What are the major advantages and disadvantages of an integrative strategy? Q4. Analyse the business model of a company of your choice, describe the companys core competencies and threshold competencies.

Care should be taken with regard to structure, content, critical analysis and original comment. Relevant course material, strategic models and appropriate references (including websites) should be included.

Page 4 of 44

Table
No. Of Content

of
Contents

Content
Page No.

1.1 1.2 1.3 1.4 1.5 1.6 1.7 2.1 2.2 2.2.1 2.2.2 2.2.3 2.2.4 2.2.5 2.3 2.4 3.1 3.2 3.2.1 3.3 3.3.1 3.4

Introduction - Problem Defination History of Organisation Present Status of Organisation Vision statement of LOPSPL Mission statement Analysis based on Audit point Conclusin & Suggestin Introduction - Comprehensive Strategy Formulation Framework Theory of Different Analytical Tools SWOT Matriz BCG Matriz Internal External (IE) Matrix The Strategic Position and Action Evaluation (SPACE) Matrix Grand Strategy Matrix Analysis Conclusion Introduction of Integrative Strategies Vertical integration Disadvantages of vertical integration Horizontal Integration Disadvantages of Horizontal integration Conclusin

07 07 10 15 15 15 19 20 21 21 22 24 25 26 27 28 29 31 33 33 34 35

Page 5 of 44

List

of

Tables ures

&

Fig

[A] List of Tables :


Sr .N o. Table No. Title of Table Page No.

1. 2 3 4 5

1.1 1.2 1.3 2.1 3.1

Overview Matrix External Factor Evaluation Matrix for LOPSPL Internal Factor Evaluation Matrix for LOPSPL Example Factors That Make Up the SPACE Matrix Axis Alternate Strategies & Examples

16 17 18 25 30

[B] List of Figures :


Sr .N o. Fig. No. Title of Figure Page No.

1 2 3 4 5 6 7 8 9 1 0 1 1 1 2 1 3

1.1 1.2 1.3 1.4 1.5 1.6 1.7 1.8 1.9 2.1 2.2 2.3 2.4

Growth of Laxmi Group Growth of Individual Unite Integrated Business Model Business Model After De-Integration LOPSPLs Sales Growth LOPSPLs Customer wise business share Outsourcing : Relative Ranking For Countries, 2003 Outsourcing : Relative Ranking For Countries Snapshot Matrix, 2003 The Internal External (IE) Matrix Comprehensive Strategy Formulation Frame Work SWOT Analysis Matrix The BCG Matrix The Internal-External (IE) Matrix

08 08 09 09 11 11 13 14 19 20 22 23 24

Page 6 of 44

1 4 1 5 1 6

2.5 2.6 3.1

The SPACE Matrix The GRAND Strategy Matrix The Five Tasks of Strategic Management

26 27 29

Page 7 of 44

1.1 Introduction Problem Defination:Laxmi Oil Pumps & Systems Pvt Ltd (henceforth referred as LOPSPL) is selected for the study which is a medium scale industry located in private industrial estate. Group Company Laxmi foundry (manufacturer of graded cast iron casting) & LOPSPL located in the same campus having 15000 sq mt area within the Solapur city Municipal corporation limit. LOPSPL is presently manufacturing Lubricating Oil Pumps & assemblies required for Diesel engine and compressor for circulating of lubricating oil. Simple strategic audit of LOPSPL is conducted in this section. 1.2 History of Organisation:As LOPSPL is the pioneer unite of Laxmi Group [1], It is very interesting to go through the history of LOPSPL to study how the external & internal factors have affected growth strategy of Laxmi group. And also visionary leader of Laxmi group put his intuitions in work in establishing the growth pattern of much regarded industrial group, with use of alternate strategies at proper time. First chairman Late Mr. Kalgonda Patil had started small repair workshop in out skirt of Solapur city. He was true visionary leader. According to Carinne Mc Laughlin [2] Visionary leaders are the builders of new dawn, working with imagination, insight & boldness. They present a challenges that calls forth the best in people & bring them together around shared sense of purpose It was in mid 60s, when there was much boost for agricultural sector because of third 5th year plan of central govt (which was majorly based on agricultural development). Increasing demand of diesel engine driven pump sets for agricultural sector had given the opportunities to start the manufacturing unite, and Laxmi Engineering Works (former name of LOPSPL) was came in existence. Initially manufacturing of pump sets was started
Page 8 of 44

with limited resources. But soon it was realized the necessity for backward integration. The main raw material was Cast Iron casting for pump set was not readily available in near by places because of geographical location. Dependence on foundry supplier located outside the state, become hindrance for increasing the capacity. For captive consumption Cast Iron foundry named Laxmi Foundry was started in year 1969. After early sad demise of Mr Kalgonda Patil (1970) his son Mr. Jaykumar Patil was the chairman of the group. As a strategic leader he pursued the vision of his father & expanded the group further. During the wealth creation process he nurtured technical & managerial skill of his two young brothers who joined him after graduation study of engineering in mid seventies. According to W. Glenn Rowe[3] Strategic leadership enhances the wealth creation process in entrepreneurial & established organisation & leads to above average returns. This definition is perfectly suites to the personality of Mr. Jaykumar Patil.

Page 9 of 44

Fig 1.1 shows year wise growth of Laxmi group, which has started from one unite in year 1965 to multidivisional group of having turnover around 160 carores in year 2008-09.[4] During this growth process the resources of base unite were used effectively for development of different product. And once the product is established then separate facilities were created to facilitate the growth of individual unite. Fig 1.2 shows how different alternate strategies were used to cope up the growth model adopted. This model worked well up to 1990. During late nineties Indian economic structure had changed drastically. Because of adoption of partial open economic policies by Government their was lot of turbulence in industry. Protection for SME sector has removed. SME need to compete with new entrant of multi national. Trade union activities had increased. In year 1991, three months long strike had put the strategist on back foot. They had to think for the change in the business model itself for the survival.

R L a

a x

w m i

M F

a o

t e P r ri a o l c e s s i n u -L i -L n L d a r xy m n g i Wn e o e r r k i- L n s

s s e m m y m m m id is i p

l y

r k

e t i n

a xH a x ag x K o

r a u OL t i d l D r a o n e

l i cL s a .E C n og u k e n t s

xP .m L i t d S . a l e s r i pn oe r a t i o n n

L R a ax w m

Mi

G a t r e o r ui a p l

Fig. No. 1.3 Integrated Business Model

r o c e s s i L n ga & E n g A s s e m b Wl y o

m i L a x m i L a x m i n e e r Hi n u g d r a u l iE c ns g i n r k s P v t . L t d .

i OL x ai lm i e s K L ot d m

D p

r a u k e n n e n t s

Page 10 of 44
C u s t o m e r

Fig. No. 1.4 Business Model After De-Integration

Fig 1.3 & Fig 1.4 shows the two different models adopted by group. Earlier each unite was interdependent, marketing was centralised. But after 1990 the decision was taken to become self sufficient unite. External forces like Govt policies, Interest rate, trade union activities had compelled. Chairman, to take decision of making every division as a separate profit centre. There was lot of internal forces too for this reform like internal transfer pricing, debt recovery, leadership conflicts etc. This change in business model pushed LOPSPL to search for external market for existing product as well as to develop product for direct sale. Initially resource based strategy was adopted & to utilise the existing strength machined components for automobile industry were developed. In year 1990-91 automobile market in India was in top gear & hence the product development took very fast. But very soon the increased demand of quality casting was become bottleneck. The foundry unite from the group company was not in a position to supply the casting to automobile market because of technical limitations. The melting unite was of old design and not acceptable by customer. This lucrative and increasing market of automobile casting inducted the idea of putting foundry unite with modern melting furnace. This right strategy was unfortunately implemented at wrong time. Since from 1993 economic downturn had started, increasing inflation rate, high interest and labour cost and low market demand put this casting unite in bad shape. And ultimately in 1997 the LOPSPL had divest from this unite.

Page 11 of 44

With exploring the expertise in pump manufacturing and experience gained in automobile, new product Lube Oil pump was developed in year 1999. The unite gained acceleration in developing various models to supply as OE to engine manufacturer. In 2002 partnership firm (Laxmi Engineering Works) was converted into private limited company named Laxmi Oil Pumps & Systems Pvt Ltd.
1.3

Present status of organisation:-

Before entry of LOPSPL in lube oil pumps market, the requirement was catered by large scale players those who were not competitive in the price for the small batch quantity requirements. And engine manufacturers were looking for out sourcing the pump manufacturing activity which otherwise they were doing in house. This opportunity was fully utilised by LOPSPL and offered to give any small batch qty (in some cases 5 to 10 pumps per month) requirement. Presently LOPSPL is manufacturing, 1. Lubricating Oil Pumps for Diesel engines and compressors 2. Water pumps for Diesel engine applications 3. Assemblies of Diesel engines in cooling systems

Page 12 of 44

Fig 1.5 LOPSPLs Sales Growth


LOPSPL's Customer wise business share
L C BE L M K M C E LG I

K P

IL

CIL
O

KOEL WFO KPCL BEM L KM C ELGI


K O E L

W F

Fig. 1.6 LOPSPLs Customer wise business share

Page 13 of 44

Growth of LOPSPL s turnover is shown in fig 1.5 [4] And customer with its business share are shown in fig 1.6 [4]. Kirloskar Oil Engines Ltd. Pune and Cummins (I) Ltd are major customers located at Pune & Kolhapur. Solapur is being placed within vicinity of their production facilities it gives location advantage to set up vendor manage replenishment system with better logistics. For many models of pumps, LOPSPL is single source for these customers. In most of the cases the design of the pumps were given by customers, but the recently this trend is changing and customers are looking for complete solution for cooling systems which forces the need to develop in house design centre for LOPSPL. Considering the present plant capacities 80% capacities are already booked by present customer and for nearly 15% of capacities, contract are in hand for which product are in development stage. For further expansion LOPSPL needs to plan for infrastructure development like plant and machinery etc. The present unite located in local municipal corporation limit which attract 3.2% octroi tax on all raw material coming form out side limit and 10% for the imported goods. Industry associations are pressing hard to abolish this extra burden on the industry. State govt is likely to take the decision in coming assembly session. In the recent declaration of union budget Finance Minister Mr. Pranav Mukharjee made the announcement Total budgetary support of Rs 1200 crore is allotted for the development of road infrastructure across the country. [5] This will boost the construction equipment machinery & diesel engine manufacturing. Present power supply for industry is by state government owned company. Larg gap between demand and supply of power, made government to take the review and present white paper regarding the power supply situation in the white paper state [6]. Despite the efforts of MSEB, there is unmet demand for new connections as well as shortage of power to existing

Page 14 of 44

consumers mainly during peak hours. MSEB has estimated that the energy requirement will increase from 59295 MU in 2001-02 to 87262 MU in 2011-12 and peak demand from 9893 MW in 2001-02 to 14104 MW in 2011-12. This would necessitate further investments in generation sector estimated at Rs. 11,905 crores over the next 10 years. In addition, it is essential to modernize and expand the transmission and distribution system. The sector also needs to keep up with technological developments. The total requirement of funds for investments in generation, transmission and distribution is estimated to be Rs. 30,475 crores in the next 10 years. Government is planning to meet the demand by putting up generation but this will fully meet in 2012, & till the time shortage of power will result in increasing demand of private power generating sets driven by diesel engines. Indian tariff level has come down substantially to a average of 15%, which will leads to lowering the cost of imports, thus imported machinery from developed countries becoming very economical. LOPSPL is thinking to buy imported CNC machines for further expansions. LOPSPL has got 11% market share in lube oil pump domestic market which has increased from 2% in the year 2002. Though they have entered in global market the presence is negligible in the export market and left with good potential. Recent economic recession had put the cap on development of new market. Giant engine manufacturers are eager to enter in to Indian market. Some of them have already started manufacturing plants in India (MAN DIESEL ENGINES) and are looking local supplier for the components and assemblies. Manufacturers from US & Europe prefer China over India as preferred source for manufacturing. Fig 1.7 & Fig 1.8 gives the data showing competitive advantage of both the countries.

Page 15 of 44

Fig. No. 1.7 Outsourcing : Relative Ranking For Countries, 2003

Fig. No. 1.8 Outsourcing : Relative Ranking For Countries Snapshot Matrix, 2003

LOPSPL had adopted, Theory Of constraint [7] as a management tool to achieve breakthrough performance of bottom line. It also drives the cycle of continues improvements in all spheres of working. Implementation of TOC has given competitive advantage. It has paradigm shift from cost word
Page 16 of 44

to Through Put word which provides better decision rule for accepting smaller batch qty order. LOPSPL has setup separate cell for product development which is geared up to shorten the development lead period with using Project management tool in TOC All the managers and department heads are nurtured with training on 5 focusing steps . And their performance is measured with scale of global matrix of T, I & OE [8] in line with the objective. Apart from the ISO 9000-2008 system certification, unit has got Classification approval which is mandatory for the assemblies which goes in ship building equipments. Also many six sigma projects are identified to increase the internal efficiencies & effectiveness of the process. Though the trained and experience staff is the strength of the organisation, increasing salaries & pay package due to external factors putting lot of pressure on management to retain them. LOPSPL is trying to give not only the best pay package par with industry standard but also trying to increase their moral with involving them in participative management & creating best place to work. 1.4 Vision statement of LOPSPL:LOPSPL wants to become Global Supplier of Lubricating Oil Pumps with achieving highest standard in work culture and Quality and attain reliability at par with major Global players in this field. [9] 1.5 Mission statement:Our mission is to satisfy our, 1. customers by achieving their specified norms of QCDA, 2. stack holders by insuring highest ROI & 3. employees with providing them best place to work

Page 17 of 44

We will achieve this through continuous improvement in all spheres of our working. [10] 1.6 Analysis based on Audit point:Purpose of Business strategy audit Business strategy audit is a process of comparing the actual direction of business & actions required to meet the long term objectives in changing environments. It is also checking of how viable the strategy is to cope up with external factors & how best are the internal process to support the strategies. As per Andrew Carey [11] The purpose of a strategy audit is to arm managers with tools, information and commitment to evaluate the degree of advantage and focus provided by their current strategies, An audit produces the data needed to determine whether a change in strategy is necessary and exactly what should be made As enumerated in Table No. 1.1 Overview matrix, the SWOT analysis is done based on the information collected. Table No. 1.1 gives the best illustration of points considered in analysis [12].

Page 18 of 44

POSITIVE/ HELPFUL to achieving the goal Internal Source Strengths Things that are good now, maintain them, build on them and use as leverage

NEGATIVE/ HARMFUL to achieving the goal Weaknesses Things that are bad now, remedy, change or stop them.

facts/ factors of the organization External Source Opportunities Things that are good for the future, prioritize them, capture them, build on them and optimize Threats Things that are bad for the future, put in plans to manage them or counter them

facts/ factors of the environment in which the organization operates


Table 1.1 Overview Matrix

With evaluation of external factors like economic, social, legal etc. few important key factor are summarised in EFE Matrix illustrated in Table No. 1.2 which is developed with following five steps. 1) List of key external factor 2) Assigning each factor with weight ranging from 0.0 (not important) to 1.0 (very important) 3) Assigning rating between 1 to 4 to each factor with 1=Poor & 4=Response is superior. 4) Multiply each factors weight with its rating to determine weighted score.
Page 19 of 44

5) Sum the weighted score to result total EFE score. External & Internal of LOPSPL with considering the various factors is summarised in Table No. 1.2
External Factor Evaluation Matrix for LOPSPL
Opportunities Sr Key Factors N o 1 Major customers are increasing their product range & market penetration 2 European manufacturers are looking for low cost manufacturing base 3 Abolition of Octroi tax will reduce the cost 4 Manufacturer other than automobile are looking for supplier for low volumes 5 New international Air port at Solapur is announced by Govt 6 New reforms were announced in labour laws, boost the contract workers 7 Increased budget allocation for infrastructure will boost the construction machinery 8 Estimated power generation shortage leads to increase demand of gen sets in local market 9 Reduction in average tariff rate will reduce the import cost of raw material 10 Indian currency becoming strong against $ makes import viable for machinery 11 low cost technology transfers are available Threats Sr Key Factors N o 1 Withdrawal of stimulation package by Central government 2 Abolition of octroi will take long time to actual implementation 3 Difficulty in getting quality casting supplier for low qty and desired price 4 Difficulty in getting quality gear supplier for low qty and desired price 5 China has low cost alternative for oil pumps 6 Increase in overall package of middle managers due to IT sector 7 Overall global recession affected Indian economy 8 Increased in minimum wages because of inflation 9 Power shortage will increase the cost op operation 10 Strong Indian currency reduces the cash realization 11 High rate of octroi tax on imported goods Weig ht 0.06 0.08 0.02 0.04 0.02 0.02 0.06 0.06 0.02 0.02 0.08 Weig ht 0.02 0.04 0.1 0.08 0.06 0.04 0.04 0.06 0.04 0.02 0.02 Ratin g 3 4 2 1 1 1 4 2 2 2 4 Ratin g 2 1 4 4 2 3 4 2 2 1 2 Weighte d score 0.18 0.32 0.04 0.04 0.02 0.02 0.24 0.12 0.04 0.04 0.32 Weighte d score 0.04 0.04 0.4 0.32 0.12 0.12 0.16 0.12 0.08 0.02 0.04

Page 20 of 44

Total

1.00

2.84

Table No 1.2 External Factor Evaluation Matrix for LOPSPL

With evaluation of internal factors like strength & weakness of functional area of business. Key factors are listed in IFE Matrix given in Table No. 1.3. Complete matrix is developed with following steps. 1) List of key external factor 2) Assigning each factor with weight ranging from 0.0 (not important) to 1.0 (very important) 3) Assigning 1 for major weakness, 2 for minor weakness and 3 for minor strength while 4 for major strength. 4) Multiply each factors weight with its rating to determine weighted score. 5) Sum the weighted score to result total EFE score.
Internal Factor Evaluation Matrix for LOPSPL Strengths
Sr N o Key Factors Weig ht Ratin g Weighte d score

Organisation has got vast experience in manufacturing 2 Expertise in quick product development Have "TOC" based strong culture adaptable to 3 any change Skilled work force available at reasonable good 4 price 5 Facilities are "Marin classification" approved Modern management techniques (lean 6 manufacturing , Six sigma etc) are well practiced Good vendor base is available to support 7 subcontracting activity 8 Being OE supplier marketing cost is less Group company supports in case of 9 emergencies 10 Established ERP supports strong MIS Weakness 1
Sr N o Key Factors

0.1 0.08 0.08 0.04 0.03 0.04 0.04 0.06 0.02 0.04
Weig ht

4 4 4 3 3 4 3 4 3 3
Ratin g

0.4 0.32 0.32 0.12 0.09 0.16 0.12 0.24 0.06 0.12
Weighte d score

1 2

Dose not have internal design department Facilities are suitable for batch production & have limited capability to cope mass production

0.1 0.05

1 1

0.1 0.05

Page 21 of 44

Old infrastructure gives bad first impression Conservative management view of family 4 owned business 5 Internal fund generation is limited 6 Material to sale ratio is increasing 7 Product realisation cycle is very high 8 Less inventory turns increases inventory cost Old workers not having modern skills are not 9 easily replaceable Logistics is always problem due to low batch 10 qty.
Total

0.07 0.06 0.04 0.04 0.02 0.03 0.02 0.04


1.00

1 1 2 2 2 2 2 2

0.07 0.06 0.08 0.08 0.04 0.06 0.04 0.08


2.61

Table No. 1.3 Internal Factor Evaluation Matrix for LOPSPL

Fig. No. 1.9 The Internal External (IE) Matrix


1.7

Conclusion & Suggestion:-

The completed IE matrix worked out from the weighted score is given in the Fig No. 1.9 As indicated by the circle Hold & Maintain is the appropriate strategy for the LOPSPL. However once the situation improves with economic reform in domestic & international market it would be better to take the review and
Page 22 of 44

alternate strategy like back word integration for supply of gears /casting can be worked out.

2.1

Introduction (Comprehensive Strategy Formulation Framework):-

While planning strategy for any organisation there are infinite number of alternatives are available which can be pursued and implemented in several ways for the benefit of organisation. One need to give the attention to select few manageable of it with proper analysis. Consideration has to give for advantages and I n t e r n a l F a c t o r E v a l u a t r i x I F E disadvantages, cost and benefits. F R M David ( [13] ) provides comprehensive a strategic formulation framework. The whole S t g e 1 : E x t e r n a l F a c t o r E v a l u T h e I n p u t process can bet adivided in to three stages as r shown Ein Fig 2.1. M a t i x ( E F ) S g e Stage first which called as planning stage consist of EFE Matrix, C o m p e t i t e P o f i l e IFE Matrix & Competitive Profile Matrix (CPM). i ) vStage r second M ( C P M which is matching stage. Different tools are used to aligning best feasible alternative to key internal & external factors. These S W M a t r tools are discussed in length with its merits O Tdemeritsi xin this & section. The third stage consists of decision stage. In this S P A C E M a t r i x section while answering the question No. 2 we are discussing the S t a g e 2 : T h e M a t c h i n second stage of framework, g which is matching stage.
S t a g e B C G M a t r i x I E G r a n d M S a t r i x t r a t e g y M

a t i o

a t i o

a t r

a t r i x

S t a g e 3 : T h e D e c i s i o S t a g e

Q n P

u a n t i t a t i v e S t r a t e g i c l a n n i n g( Q M S aP t M i x) r

Page 23 of 44

2.2 Theory of Different analytical tools:According to Robert Grant [14] Strategy is sometimes defined as match an organisation makes between its internal resources and skill, and opportunities and risks created by its external factors In second stage of strategy formulation frame work which consist of total five tools. Any combination with any suitable sequence can be used depending up on the situation. Information generated during the first stage with key internal and external factors are used in this stage. Effective matching of key success factors in order to generate the most feasible alternative strategy is the crux of this stage. Many times these relationships are more complex and hence five analytical tools helps in this task. 2.2.1 SWOT Matrix:As its name implies Strength Weakness-OpportunitiesThreats provides a mechanism for establishing the linkage between companys strength and weakness and opportunities and threats of marketplace to formulate the alternative strategies.
Page 24 of 44

Fig. No. 2.1 Comprehensive strategy formulation frame work

Strengths are those resources or capabilities of organisation which can be utilised to built competitive advantage. Scare resources, technical knowhow, experienced work force, strong brand name are few examples. Weakness always referred to absence of certain strengths. Low technological base, high cost structure, low bargain power are referred as weakness. Change in the external environment may leads to new opportunities for growth or additional profits. Favourable changes in legislative structure, monopoly due to lack of competition, unfilled customer demand may result in to good opportunities. Unfavourable environmental changes always turn in to future threats to organisation. Rapid technological growth replaces current product very fast. Changing political situation may create hindrance. If one go with only intuition, may select more lucrative opportunity with overlooking the weakness of organisation. SWOT matrix gives the opportunity for developing the best fit between the companies best strengths available opportunities. Though there are several ways to represent this matrix graphically the most common form used is shown in Fig No. 2.2 Strengths Opportunit ies S-O strategies Weakness W-O Strategies

Threats

S-T strategies

W-T Strategies

Fig. No. 2.2 SWOT Analysis Matrix

The out come of this matrix may result in one or more strategy of four types. S-O strategy are those which can be built with
Page 25 of 44

using the organisations best strengths for utilizing the available opportunities. S-T strategy uses organisations strength in reducing the effect of external threats. W-O strategy focus on improving the internal weakness of organisation in order to meet the external opportunities. Some times opportunities are knocking the door but internal weaknesses prevent the organisation from grabbing it. W-T strategies are defensive actions to avoid the external threats and reducing internal weakness. 2.2.2 BCG Matrix:Boston Consulting Group (BCG) Matrix was created initially by Bruce Henderson for the Boston Consulting Group in 1964. It was used to analyse corporations with its different business unites or different product line. It is useful technique for analysing the strategy of organisation having multi division or multiproduct. The very first step is to identify the different Strategic Business Unites (SBUs) SBU can be separate company, division or even product line, which have separate mission and objectives. BCG matrix considers two variables namely Market growth rate and Relative market share. All the SBUs are then classified on these two variables. The horizontal axis (X) represents the relative market share. It is relatively compared with its largest competitor. On vertical axis (Y) market growth rate in percentage is shown. The BCG matrix is divided in to four quadrants. Each quadrant represents different state of business. Divisions or product are marked with the circle. The size of the circle is proportional to represent the contribution revenue generated by SBU. And pie slice indicate the proportion corporate profit. Fig No. 2.3 shows graphical representation of BCG Matrix.

Page 26 of 44

Fig No. 2.3 The BCG Matrix

According to position in which quadrant division or product fall is called with its name. For First quadrant Question mark, for second Stars , third Cash Cows and for fourth Dogs. Question mark- These are products or businesses, that compete in high growth markets but where the market share is relatively low. Market development, product development, are the alternative strategies suitable for these organisations. Stars- Successful question marks become stars. i.e. market leaders in high growth industries. But still further investments are needed at this stage to maintain the growth. Integrative strategies and or market penetration are better options. Cash Cow- Slow growth rate and largest market share make the organisation to fall in to this category. Cash generation and good profits may support the cash cow to other SBU in different quadrants. Dogs- are the SBUs with weak market share and low growth markets. Retrenchments, liquidation, divestments are alternate policies as a choice Over long time, organisation moves from question mark to stars to cash cow and then dog (success and disaster cycle anti clock wise). In turn around strategy some times dogs also converted in to cash cows and then stars. 2.2.3 Internal External (IE) Matrix:The IE matrix positions the companys businesses in a nine cell matrix. It is an improvement on the BCG. Here also two parameters are used, Internal strength (as measured by IFE) and Industry attractiveness (measured by EFE). The horizontal (X) axis represent the internal strength subdivided in three portions weak ( 1.00 to 1.90), average (2.00 to 2.99) and strong (3.00 to 4.00). Similarly vertical (Y) axis representing industry
Page 27 of 44

attractiveness also divided in low (1.00 to 1.90), medium (2.00 to 2.99), high (3.00 to 4.00). With those divisions total nine cells are formed. As illustrated in Fig No. 2.4. All the divisions are marked with circle with same understanding as in BCG matrix. Cell formed by 1, 2 & 4 are called as Build and Grow region. All Intensive and integrative strategies are guide line for this cells. Cell no. 3,5 & 7 forms the region called Hold & Maintain, Market penetration and product development may be the alternatives .And finally cell 6, 8 & 9 are called Harvest and Divest which indicate weak position in hostile environment.
T
G r o w a n 4 H i g h 3 . 0 t o d . 0 b u i l d S t r o n 3 . 0 t o g 4 . 0 3 . 0

I F

I G

A v e r a g e 2 . 0 t o 2 . 9 9 2 . 0

W 1 . 0

e a k t o 1 . 9 9 1 . 0

4 . 0

I I

I I I

T E T W S

H F O C

E E E A I G O R T

. 0

L M e d i u m H 2 . T0 Et o D 2 . 9 9 E S
2 L o w 1 . 0 t o 1 . 0

I V

V I

1 . 9 9 . 0 H o l d

V I I

V I I I

I X

a n

a i n

t a i n

a r v e s t

o r

i v e s

T h e

I n t e r n a l- E x t e r n a l ( I E )

a t r ix

f o r

H a r r a h s

( 2 0 0

Fig. No. 2.4 The Internal-External (IE) Matrix for Harrahs (2004) (Based on Region)

2.2.4 The Strategic Position and Action Evaluation (SPACE) Matrix:The Strategic Position and Action Matrix was developed by Rowe, Mason and Dickel [15]. In this technique two axes are used out of which vertical axis (Y) represent financial strength (FS) and environment stability (ES). While as horizontal (X) axis represent competitive advantage(CA) and industry strength (IS). The internal dimensions FS and CA are the major factors while deciding organisations strategy, while as the external factors ES and IS are influencing strategic position of entire industry. One
Page 28 of 44

can choose from various factors which make up the axis of SPACE Matrix, from Table No. 2.1

Table No. 2.1 Example Factors That Make Up the SPACE Matrix

The steps in the construction of the matrix are, 1. Select a set of variables that reflect the internal and external dimensions from Table no. 2.Assign a rating to each variable FS and IS will be between +1 and +6 where +1 is the worst situation and +6 the best. ES and CA will be between 1 and 6 where 1 is the best situation and 6 the worst. 3.Compute the average score for each dimension (ie FS, CA, IS, ES) 4. Plot the average scores for each dimension on the relevant axes. 5. Add the scores on the x axis and plot the result and add the scores on the y axis and plot the result. 6.Finally, draw a directional vector from the origin through the intersection point. Depending up on the penetration of vector in particular quadrant gives the choice for selection of alternate strategy shown in Fig. No. 2.5

Page 29 of 44

Fig. No. 2.5

2.2.5 Grand Strategy Matrix:Competitive Position and Market growth are two parameters considered while constructing this matrix. Competitive position can be measured by IFE. The matrix shows Fig No. 2.6 the appropriate for the organisation in the order of attractiveness. 1st Quadrant shows strong strategic position of the organisation with high market growth. Obliviously such organisation needs to concentrate on product / market development strategy. Integration, concentric diversification are also can be pursued. 2nd quadrant shows that opportunities are present for the growth but resources are ineffective. Horizontal integration is best alternative, but if organisation can not pursue to exploit the growing market then divestment or liquidation, retrenchment are the only solutions. Organisation placing in 3rd quadrant is weak in competitive position and compete in low growth industries. In 4th quadrant the organisation is having the competitive strength but operate in low growth industry Joint ventures, related diversification are the better alternative strategies.

Page 30 of 44

Fig. No. 2.6

2.3 Analysis:The strength of SWOT lies in its simplicity and experienced application. It is very quick, easy and intuitive. It is not the analysis but summary of the analysis done in previous step. This gives the understanding of organisation and situation. Once it is done properly it gives border picture of most important factor that affects the survival, growth and existence of an organization. Simultaneously it is very subjective and results may influenced by the ability and experience of the participant. External threat from ones perception may be is opportunity from others view, hence the outcome of all individuals may different and leaders must play a decisive role. The greatest advantage of BCG Matrix is that it focuses on the cash flow, investments characteristic and need of organisations various divisions. It helps to identify the organisations cash recourses which can be best utilised maximise future growth and profitability. It is relatively simple for understanding, quickly screen the opportunities open to you and how you can make most of them. However like other analytical techniques has got some limitations. It is always termed as oversimplified by putting all sorts of organisations in either of four quadrants. To express the market in relative term is some time found difficult. The assumption higher market share always mean higher profit is not true. Market share is one of the competitive aspects. Overall growth rate of organisation over a period is not reflected in this

Page 31 of 44

Matrix making it snap shot at a given time. Synergy between different organisations is neglected during this analysis. In BCG matrix and IE matrix the procedure is same as marking the organisation in graphical sketch; hence both are called Portfolio Matrix. But in both the axis on which the data is plotted are different. IE matrix requires more data than BCG. It uses the weighted scores of IFE & EFE matrix which gives robust analytical base than a relative grading in BCG Matrix. As per F R David [16] A common practice is to develop a BCG Matrix and an IE Matrix for the present, and then develop projected matrices to reflect expectations of the future. This Before and after analysis forecast the expected effect of strategic decision on an organisations portfolio of division Like SWOT analysis the SPACE Matrix is also a matching tool widely used. As per Laetitia Radder, and Lynette Louw [17] Competition is at the core of the success or failure of any organization, and determines the appropriateness of its activities. In developing a strategy, managers must examine the marketing opportunities in each business and product-market, as well as the organization's distinctive competencies or strengths relative to its competitors. The SPACE matrix is a valuable method for analysing the competitive position of an organization. The grand strategy matrix can be used by both, for the organisation as well as its SBUs. Grand strategy is a comprehensive approach that guides a companys key action and provide long range objective. 2.4 Conclusion:During the second stage of strategy formulation framework the focus is on generating feasible alternate strategy by aligning key external and internal factors. Five analytical tools like SWOT Matrix, BCG Matrix, IE Matrix, SPACE Matrix and Grand strategy Matrix are used either in combination or in isolation depending up on the situation. Though there are some similarities in these tools each tool has unique advantage for particular organisation in given situation. Various alternative strategies selected through these stage can be further evaluated in stage three i.e. The decision stage. 3.1 Introduction of Integrative Strategies:Page 32 of 44

While studying the various integrative strategies it is inevitable to study the total structure of strategic management model. According to Richard D. Irwin [18] there are five task of strategic management as shown in Fig. No. 3.1. First three tasks consist of the strategy formulation steps. Forth is implementation step and fifth consist of evaluation phase. Once the Vision & Mission statements are formed it will leads to formulation of long term objective. In the third task which is matching stage various alternatives are available. Various types of strategies and their examples are illustrated in Table No. 2.1, table content for types strategies and its definitions are taken form Strategic Management [19] Examples given are from the Laxmi group and its unite LOPSPL illustrated details while answering Q. No. 1. Though different alternatives are available it is not necessary to make only one choice at a time. Organisation may pursue multiple strategies. But the care has to be taken for prioritising it and allocating the available resources accordingly to avoid the danger of evacuations. Different integrative strategies with its merits & demerits, are discussed in this section

Fig. 3.1 The Five Tasks of Strategic Management


Page 33 of 44

Strategy Forward Integration

Definition Owning / gaining control of further process in the supply chain

Backward Integration

Owning / gaining control of upward process in the supply chain, like raw material supplier / transporter Horizontal Establishing the Integration control over competitor's unite Market Increasing market penetration share for existing product with extra efforts Market Developing new developme territory for exiting nt product Product Expansion of product developme range nt Related Developing/ adding of Diversificat new but related ion product. Unrelated Addition of new but diversificati unrelated product / on services Retrenchm Regrouping through ent cost & asset reduction.

Example "Laxmi" group had set up the marketing organisation to sale of product direct in to market with putting different branch offices and dealer network Manufacturing of casting was started which is raw material for pump unit (LOPSPL). Small company supplying shell core has taken over by "Laxmi" group "LOPSPL" offered quantity discount for increasing the market share "LOPSPL " had entered in to European market New N14 series pumps were developed for Cummins (I) Ltd. Manufacturing of Priming pump used in compressor industry. "Laxmi" group entered in to selling of two wheeler. Water pump unite and Electric motor units and merged in one single unite in order to reduce the cost. "Laxmi" group sale out the casting division in

Divestiture

Selling a Division or part of unite

Page 34 of 44

1997 Liquidation Selling all of Company's assets. Old machine shop unite of "Laxmi Group liquidated in 1992

Table No. 3.1 Alternate strategies & examples.

3.2 Vertical integration:Gaining the control over the supplier, distributor collectively referred as vertical integration. Vertical integration is a corporate strategy used by organisation to gain the competitive advantage of operating multiple businesses at a time. For a product or services to come in existence a series of events should happen. This chain of process referred as value chain, was first introduced by Micheal Porter in 1975. Owning of process in value chain upstream & establishing control over suppliers is called backward integration and owning downstream buyers are referred as forward integration. Number of Indian business group after seventies had adopted vertical integration strategy for faster growth. Reliance is one of the best examples. Backward vertical integration has been the cornerstone of the evolution and growth of Reliance. Starting with textiles in the late seventies, Reliance pursued a strategy of backward vertical integration - in polyester, fibre intermediates, plastics, petrochemicals, petroleum refining and oil and gas exploration and production - to be fully integrated along the materials and energy value chain. [20] If vertical integration of organisation is rare then it gives competitive advantage that some one can not copy easily. Bhilwara ( well know place in Rajstan state ) have unique climate and ancillary set up which have boosted the adoption of vertical integrative strategy for growth of textile industry. A survey
Page 35 of 44

concludes that textile industries will generate 12.02 million direct and 5.36 million indirect jobs by 2012. Various levels of vertical integration are present in a textile industry and thus require a variety of manufacturing processes and management requirements. Bhilwara possess cutting edge industrial solutions with special emphasis on textile ancillary [21] There are two aspects one has to consider while to take decision, whether to adopt the vertical integration or not. One is cost and second one is control. If one firm acquire other in vertical integration then, transaction cost can be controlled with transferring the goods from one division to another. Transport & logistics cost, negotiation cost, cost of control etc can be eliminated. The process of poultry integration helps reduce poultry production costs by increasing technical efficiency and eliminating the margins on feed. The impact of integration includes significantly faster expansion of production and consumption of poultry foods along with smaller increase in real costs and prices. [22] If firm is taking the semifinished components form the supplier then they need to establish the long term contract with, so as to avoid the interruption in supply or quality and technological issues may destroy the firms reputation. In such a case vertical integration if the best alternative with which better control can be established over material supply and if in such a case it gives advantage to use base resources for new product development and innovative solutions. Apples recent hiring spree of chip designers reveals the company may be about to exert even more control over the components that go into its products. The company may go so far as manufacturing computers processors in-house, according to The Wall Street Journal, which cites only anonymous sources to bolster its claim that the internally designed chips will appear in products no sooner than 2010. [23] Apart from the reduction in cost & better control over the logistics there are few more advantages like, expansion of core competencies, capture of upstream and down stream profits, facilitate the investments in highly sophisticated assets, which other wise earlier owner may reluctant to do so. This also
Page 36 of 44

increases the barriers to potentially new entrant. With vertical integration organisations can leverage the economics of scale. Prime view (Kindle Manufacturer) buys E INK is an example. Taiwan-based Prime View International has signed a definitive agreement to acquire E Ink Corporation for approximately US $215 million, the two companies said in a joint statement on Monday. Prime View and E Ink will become a dominant force in the growing electronic reader segment. Prime View manufacturers Amazon's Kindle and a number of other products, and E Ink has developed the digital-ink technology that makes electronic readers easier on the eyes compared to traditional computer screens. They support about 20 manufacturers worldwide, according to a statement. Prime View has been building a dominant position in the electronic reader segment since it acquired the e-Paper business of Philips Electronics in 2005 [24]

Page 37 of 44

3.2.1 Disadvantages of vertical integration:Though the few points of vertical integration are attractive one should not neglect the short comes of it other wise advantages may be negate with undesired effects. The biggest point is it boost the capital requirements. One need to build the upstream capacity enough to feed its down stream in variable market demand conditions. If supply production is more then the demand then either reduces the production or sale it competitor are the only options left. Balancing of capacities becomes the important issues. It needs to develop core competencies in the new filed and one can not become good in every field. Consultant and author Don Tapscott had given warning to India Inc. Corporations which have followed a vertically integrated business model for growth need to take caution. Mr Tapscott is particularly harsh on India. Indian companies, he said, are highly vertically integrated. They need to change. Many corporations in India have not moved to the web business model. If they remain that way, they will fail. The best way to growth is through partnership. Many big companies in India want to expand into all areas of business. But synergies do not help if the best in all those areas is not achieved, he said. Companies, need to focus on what they do best while allowing their partners to do what they are best at. Acquisitions that help build vertical integration can destroy shareholder value. [25] It also looses the competitive advantage of small batch qty of various varieties and only focus on large scale production to justify the cost. Long term explicit contracts, Joint ventures, Franchise arrangements may prove some times better options with loosing partial gain. 3.3 Horizontal Integration:This strategy is mostly used at corporate level . Sometimes it is also referred as horizontal merger. When firm merge with
Page 38 of 44

another one having the same type of product / services is called horizontal merger / integration. The main objective behind this is the economy of scale. This can be achieved by expanding internally or externally with avoiding duplication of production process, assets and service by acquiring or mergers. According to J.Fred Weston and Samual C. Weaver [26] set of factors that gave rise to these activities, relates to efficiency of operations. Economies of scale that reflects in cost reduction by avoiding duplicating works and operating efficiency, which is the result of combining complementary strength, are the other reasons. Different growth opportunity among different products, birth of new industries, and concept of value creation through specialization, under capacity utilization are the other In order to reduce the international trading cost, control is established with the unites in different geographical area. In recent times there have been a lot of announcements by Indian firms, including corporate giant Reliance Industries, software firm Wipro, IT major Infosys Technologies and Jindal Steel & Power, which are scouting for acquisitions abroad. Sometimes benefit comes from synergy of same brand name in promoting different product, LG, Samsung, Sony are the best examples of this. Synergy coming through common resources reduces the marketing cost. It also increases the bargaining power to be exercised in upstream & down stream of value chain. 3.3.1 Disadvantages of Horizontal integration:If organization gains monopolistic characteristic in particular area then it may leads to some legal issues with controlling authority in that region. It is very capital intensive based strategy hence needs strong financial structure. Post merger issues like diversity in culture of organisation etc if not handled effectively then every possibilities of merger left on paper only. This can be seen from the efforts the to management of

Page 39 of 44

ArcelorMittal have taken in post merger integration activity. The objectives set are ArcelorMittal top management set three driving objectives before undertaking the post merger integration effort. These included the following: (1) achieve rapid integration; (2) manage effectively daily operations; and (3) accelerate revenue and profit growth. The third objective was viewed as the primary motivation for the merger. The goal was to combine what were viewed as entities having highly complementary assets and skills. This goal was quite different from the way Mittal had grown historically, which was a result of acquisitions of turnaround targets focused on cost and productivity improvements. Donald M. DePamphilis [27] Sometimes there are issues in gaining the anticipated results after integration because of strategy management issues. The results will not materialize spontaneously in the absence of strong dedicated team in place to tackle the issues. Mahesh Kumar Tambil says in his research paper This study proves that Merges have failed to contribute positively in the performance of the company, especially for the sample under consideration. It neither provides Economies of scale nor synergy effect. When I calculate overall impact (i.e. ROCE), mergers were failed to provide any positive contribution here also. In fact, these results are not surprising. They are in line with what I was expecting on the basis of literature survey. [28] Horizontal integration may occur due to inevitable force of economic downtrends. Mergers are forced on weakened organisations by giant organization. It was at the World Economic Forum in Davos that Bharti's Sunil Mittal spoke of the near future of India's telecom sector. "Consolidation is a natural phenomenon. The bloodbath has started. Market caps are down to half. Companies are making losses. Their will be only few players six may be seven-certainly not twelve. Consolidation is inevitable. [29]

Page 40 of 44

3.4 Conclusion:Though there are merits and demerits of this strategy one can not overlook this great tool while doing the strategic management. For small organisations economy decide the fate but this strategy gives light in the dark. For the large organization to manage growth exponentially this strategy gives cutting edge solutions.

Page 41 of 44

Reference List
[1] LAXMI a group of companies, privately owned, located at Solapur & Kolhapur manufacturing various products under brand name LAXMI [2] Corinne Mc Laughlin, Visionary Leadership (2001) [3] W. Glenn Row, Creating Wealth In Organisation The Role Of Strategic Leadership (2001) [4] Business growth, Turnover details, Customer share are taken from the Current business plan of LOPSPL document no QR/MK/006 dt 30/05/2009 & Company literature. [5] Economics Times dt 26th Feb 2010. PTI [6] Government Of Maharashtra Maharashtra Power Sector Reform White Paper by Industries, Energy Labour Department Dt 28th August 2002. [7] Theory of Constraints (TOC) is an overall management philosophy introduced by Dr. Eliyahu M. Goldratt in his 1984 book titled The Goal, that is geared to help organizations continually achieve their goal [8] According to Dr. Eliyahu M Goldratt there are three key performance measurements to evaluate: throughput, inventory and operating expense. TOC emphasizes the use of these three global operational measures rather than local measures (e.g., efficiency and utilization). [9] & [10] Vision Statement and Mission Statement with kind courtesy taken from LOPSPLs quality Manual [11] Andrew Carey is a Director at Triarchy Press How to audit your business strategy Audit webpage: http://www.cambridgestrategy.com/content/business_strategy_a udit.php [12] Overview matrix (SWOT Analysis - History and methods http://rapidbi.com/created/SWOTanalysis.html#SWOTmodel )
Page 42 of 44

[13] F R David Strategic Management Concepts ( Eleventh Edition ) Chapter 6 page 218 [14] Grant, Robert M. "The Resource-Based Theory of Competitive Advantage: Implications for Strategy Formulation." [15] Rowe, A., Mason, R., Dickel, K., and Mann, R., (1994), Strategic Management: A Methodological Approach, Reading, MA, Addison Wesley. [16] R David Strategic Management Concepts ( Eleventh Edition ) Chapter 6 page 233 [17] Radder Laetitia. and Louw, Lynette., (1998), The SPACE Matrix: A Tool for Calibrating Competition, Long Range Planning, 31, 4, 549-559. [18] Richard D. Irwin http://www.csuchico.edu/mgmt/strategy/module1/slide 5 [19] R David Strategic Management Concepts ( Eleventh Edition ) Chapter 5 page 173. [20] Reliance Industries Ltd. Group web site http://www.ril.com/html/aboutus/aboutus.html [21] Bhilwara - budding hub for Textile Industries http://www.fibre2fashion.com/industry-article/8/711/bhilwarabudding-hub-for-textile-industries1.asp [22] Prospects for Indias poultry sector Monday, March 09, 2009: Food processing 360 [23] Web article http://www.wired.com/gadgetlab/2009/04/apple-quietly-recruitschip-designers-for-in-house-cpus/ [24] Prime View (Kindle Manufacturer) buys E INK http://www.itworld.com/business/68697/kindle-manufacturerbuy-e-ink

Page 43 of 44

[25] Don Tapscott Vertical Integration Spells Danger For Indian Companies The Financial Express. Posted Monday , Feb 17, 2003. [26] (J.Fred Weston and Samual C. Weaver, Page 3). J. Fred Weston & Samuel C. Weaver, Tata McGraw Hill Publishing Company Limited, New Delhi, 2002, Page 3 [27] Donald M. De Pamphilis Mergers, Acquisitions, and Other Restructuring Activities, 5th edition, 2009, [28] Mahesh Kumar Tambil IMPACT OF MERGERS AND AMALGAMATION ON THE PERFORMANCE OF INDIAN COMPANIES [29] Sunil Mittal Economic recovery: Spotlight back on mergers and acquisitions 19 Feb 2010, 0503 hrs IST, Priyanka Sangani, ET Bureau

Page 44 of 44