 In our previous classes on strategy, the purpose of those classes were to first give an understanding to the concept of strategy, why there is a need that organizations need to have a strategy in place so that they have a value proposition which is unique and continues to remain unique for a long period of time. And this in the strategic paradigm we call as a sustainable competitive advantage. And organizations would always want to have a long term sustainable competitive advantage. And for this from a very broad level we understood what sustainable advantage is, what is the meaning of creating a value proposition and some generic models to understand how these generic models are applicable across industries and hence all organizations need to understand some of the factors, the behavior of some of these factors in these generic models. And some of the generic models that we saw were the Porto's five forces that we use for industry analysis, the value chain analysis, the Porto's diamond, then the BCG matrix. So these are all some of the generic analysis framework that many organizations use. And in addition we also saw the SWAT and PEST analysis which was more environmental analysis. Now after having done all of this organizations definitely need to have some unique strategic direction. By strategic direction I mean a workable proposition, a framework which provides a sense of direction. And this framework is more or less aligned with the mission of the organization. And all these generic models will provide the underlying basis on which these strategic framework are being designed. So we need to understand that it is not just these generic models that are enough for an organization to put a strategic framework in place. There might be different strategies for different organizations for different points of time. But one thing that ties all of them together is that they would be using all or at least any one of these generic models when they make an attempt to put a strategy in place. And that is why we do all this study. For example an external analysis, an environmental scan. This gives an idea of what the firm might do considering the way in which the external factors behave. Then an internal analysis and for external analysis you do the PEST framework or you also do the industry study analysis or you might do the Porto's diamond to understand how a particular geography behaves. And more specifically an internal analysis like a SWAT will give directions that point to what the firm can do. So when all these external and internal analysis is done there might be some factors that shape the way in which organizations have to design their strategy. Such strategy shaping factors which emanate from such external or internal analysis, they combine together and stack up either to positively influence or also some factors that have some negative influence. A combination of these strategy shaping factors from an external and an internal perspective, these form an ideal input that is given to an organization using which organizations can identify various available strategic alternatives, strategic models. And then based on how these factors stack up against each other, organizations evaluate and choose a particular strategic alternative. And having chosen a particular strategy to be implemented then comes the implementation plan. And once it is implemented again this is a continuous process. We collect feedback and again evaluate whether things have happened in the way in which organizations wanted them to happen. And again do this analysis to see whether we need to choose an alternate strategy than the existing one and this iterative loop continues. So we need to understand that in addition to the external and internal analysis every organization will make an attempt to have a strategy per say for them which is unique to the organization considering the way in which these external and internal factors influence the operations of an organization. To put it short and simple, an environmental scanning both internal as well as external provides those critical inputs based on which a particular strategy is formulated chosen from amongst various strategic options that are available and after a careful evaluation a particular strategy is chosen and then implemented and the result of the implementation is evaluated and this feedback loop will either prune down or improve the strategy in place or probably bring in a new strategy from the available options. And one thing that the organization should not lose focus is that any strategy that it chooses to implement it should be in alignment with the mission of the organization and only then there will be a buy in there will be an organizational buy in to the entire strategic formulation and all of this will push the organization in the direction which the overall vision of the organization has set for itself. Now strategy is not something that necessarily has to exist just at the corporate level the corporate leadership level. There is strategy at all levels in any organization and typically a corporate strategy will be a strategy for corporations or conglomerates which have diversified businesses in place. So you might have a strategic model that uniquely is applicable for corporations and conglomerates. A business strategy for a strategic business unit within a corporation or you might also have a functional strategy which is applicable to some functional units within an organization like for example it can be a research and development unit or it could be a marketing strategy, it could be a finance strategy. So these are all strategies that are applicable for individual functions within an organization. You might also have operational strategies which could be based on the regions in which they are operating or the departments within a function. So these are all operational strategies but all of these strategies whether at the operational level or at the corporate level all of them will be reinforcing either from the corporate to the operational unit or from operational unit to the corporate level either from top to bottom or bottom to top all of them have to be positively reinforcing only if they are positively reinforcing will that be a perfect alignment with the organization's mission and vision. And as a result of which if you are able to identify strategy at different levels it is also easy to see how these strategies are implemented as a result of which we know we can measure the responsibility of implementation of these strategies at each of these levels. Now the very fundamental unit that ensures that a strategy is implemented comes from a resource perspective. We need to ensure that organizations or firms have resources that are adequately available to make sure that the strategy is implemented. And these resources are basically inputs to a firm's process and any resource that creates value in the process can be considered to be a firm's resources. So it could be either a tangible resource or an intangible resource a tangible resource in the form of finance or capital or physical or human resource or an organizational resource itself or could be an intangible resource which could be technological in nature or the innovation DNA of an organization or the brand itself could be a very strong intangible resource for the firm. But we must ensure that there is synergy a coherence synergy amongst all these resources tangible or intangible and these resources can also be internal as well as external resources of a supplier could also be critical to a firm. If you take the example of IKEA a world renowned furniture retailer there are a number of resources that are linked into the value chain of IKEA and this linkage of all these resources and the coherence synergy that exists amongst all these resources ensures that IKEA is known to be a low cost manufacturing of modular furniture with differentiation from a customer service point of view. I do not want to elaborate on the value proposition of IKEA but it is enough for you to understand for the purpose of this session that it is the synergy that exists amongst various resources, resources tangible or intangible within an organization, resources tangible or intangible outside the organization and the combined synergy of all these resources is primarily responsible for IKEA to put in place a value proposition as a result of which it feels that it provides the organization a long term sustainable competitive advantage. Now there are a number of strategic options available but I will be dealing with four popular options namely Michael Porter's generic strategies, core competency of Hamel and Prahlad. There is also another product market grid called the Ansoff's product market matrix and finally the blue ocean strategy. And these are the four broad strategic options, models that I will be elaborating for the purpose of this course. At the same time you must be aware that there are a number of other strategic options or we can also create a new strategic option if we feel that we are creating something new that is not existing. But I will be spending time on these four strategic models which I think is popular amongst management professionals. The first strategic model is the Ansoff's matrix and this gained popularity when it was published in the Harvard Business Review in 1957. The fundamental to this model is that it presents four options for an organization and these four options come from a matching of two variables namely the products and the markets. And any of these four options that are chosen sets the clear direction and goals for the organization to move forward. Now let us see how these four options present themselves. Now this is a match between products and markets, subdividing them, a match between existing products, new products and existing markets and new markets. So if the map is between existing products and existing markets then we call it a market penetration strategy or if it is between new products and existing markets it is a product development strategy. Likewise existing products and new markets it is a market development strategy and between new products and new markets a diversification strategy. And each of them can be chosen by organization based on what they think is critical for their long term future. Now the first thing is market penetration which is existing products and existing markets. Now firms would like to embark on this option and firms which use this will ensure that they have the resources in place that change a chance client or an incidental customer to a regular customer or an existing client or a regular customer to heavy user customer. And there are different ways of doing this so once you decide that I am going to just use my existing products for an existing market then it means that you have chosen the market penetration strategy. Now having chosen that how do I do that? So a firms resources must be tuned towards a market penetration strategy for example the firms resources must be towards having some promotional and marketing campaigns like volume discounts or loyalty cards or fake run flyer programs in the airline industry or improved customer relationship management. Now the reason that these are all the alternative options that are available is because I have chosen market penetration to be a strategic option. One fine example could be the Cadbury chocolates. Now you see recently that it is not just a chocolate that is consumed as a sweet drink. It is a good delicacy for internal domestic use. It is increasing its market share by changing the positioning itself as gifts. Now you see Cadbury chocolates in gift packs which could be used as festival gifts or birthday gifts or teachers day gifts whatever the case may be. So no longer it is been perceived only as a domestic or only as a sweet that is consumed by an individual. Now the market penetration strategy is ensuring that this new positioning is increasing the market share within the same market using the same product. The second option is the market development option. Market development is about existing products in new markets. Now we need to introduce an existing product in new markets which could be a foreign market or probably in a new brand in a new market segment that is also a market development. Some of the popular examples could be the oil in sachet, the sachet oil for a new market segment for a frequent traveler or a tetrapack or if it is going to be a new geography the export markets or Apple the same product in new markets. Apple launch in the US is available in India as well. New markets same products. So organizations that would like to use market development as a strategic option will ensure that their resources are optimally used to sell these existing products in new markets. The third option that is available is product development. Product development is new products in existing markets which means you can either on your own create new products or add new products from others, others new products to existing clients. It is sold through you. So it could be an accessory or add-ons or just completely new products. Popular examples could be the McDonald's salad. It is a fast food chain but then a new product in the form of a salad which is something new to the culture of McDonald's or you might see now bank selling complimentary services like insurance and credit cards. This again it is a new product but to the same market a salad to the same market in McDonald's and insurance policy to the existing customers of a bank, a credit card to the existing customers of a bank. So it is new products for the same market for which resources have to be aligned to and the last is diversification. And this diversification can happen in various directions in horizontal which could be a new product in a current market or a vertical integration, a vertical diversification either backwards or forward in the value chain. So it could either move forward towards the customer direction or backward towards the vendor's direction or it could be a concentric diversification which could be a new product which is related to a current product in a new market or it could be a conglomerate which is the classic diversification which is entirely a new product in a new market. An Apple, the Apple company is a very good example. It started with just laptops and you see the way in which it has diversified into different product ranges. So the choice of choosing a particular position in this product market grid determines the way in which the resources within an organization will be used and the way in which organizations will change their implementation part so that an identity is not lost. And the answer of business matrix can also be compared with an individuals, I call it the personal matrix because running a business is similar to taking personal career decisions, personal career choices. Businesses can choose to just maintain status quo just as individuals can stay wherever they are. That is the most, that is the least risky proposition, no risk. But when you need to grow you need to take a little risk and businesses need to grow so would individuals also need career growth. So business growth is synonymous with career growth and when you take for example a career growth it could be a new role in the same organization itself or a same role in a new organization or in a different industry altogether. You could be a marketing expert in an organization and then finally at one point of time decide to become an operational expert or a strategy expert in the same organization or you could be the same marketing expert in a different industry or you could be a strategy expert in a different industry altogether. So you will be able to appreciate this difference. So as you take different decisions there are different risks, different ways in which you would change your behavior because each of them will have different ways in which you as an individual will have to change yourself to meet the new needs of this new role. Just as businesses whether it is product development or market development or diversification or market penetration they have to use their resources effectively based on which position that they take in the grid. So each of this will definitely have differing risks at different levels and to understand this answer of matrix better I will also present a small video that gives you examples of four organizations, four products that fit in each one of this grid so that you understand this better. But the broad understanding that you have to have in this answer of business matrix is that organizations choose their strategy from this model either to be a market penetration one or a market development or product development or diversification based on what the vision of the organization is, what the vision of the organization is. So when you have some grid of this type in place it ensures that you do not lose direction when it comes to implementation of the strategy. Just a quick snapshot, market penetration as I said before it is selling more of the same things to the same market the same product to the same market and this you could either do by advertising aggressively to encourage more people within the existing market to buy more of your products, increase promotional activities like the loyalty schemes or very simply you can also buy a competitor company assuming that the industry becomes matured over a period of time. Product development selling more things to the same people which could be just done through product extension or through different packaging or develop related products or complimentary services and market development is selling more of the same thing to different people to different markets new market segments in different geographies. So you could target different geographical markets or target use different distribution channels to target different user segments online sales for those who are tech savvy that could be a new market segment itself because you are going to sell the same thing but through a new distribution channel and lastly is diversification this is a little risky not because it is going to consume a lot of resources because it does not use the existing expertise because diversification is about new product and new market for which very little of existing expertise comes handy because you are trying to sell something that is completely new to a set of completely new customers. But the main advantage is that corporations that have this diversification strategy in place will have a fall back option during adverse situations where one business unit fails there is likelihood that the other business unit does well so that as a corporate entity things are not that severe. So this just presents you a snapshot of the answer of product market grid the next strategic model is Michael Porter's generic strategies of this again is a very popular model that many of the organizations use we all know that the primary determinant of a firm's profitability as I said before depends on the structural attractiveness of the industry and this we measured by way of this Michael Porter's five forces industry that becomes the primary determinant how structurally attractive this industry is you also have a secondary determinant which is the firm's position within the industry. So a firm's position within an industry becomes a secondary determinant and assume that the industry is below average profitability industry we need to optimally position the firm so that you gain superior returns. So only if you are able to position a firm optimally will you be able to gain superior returns and this you can do following three different generic strategies that Michael Porter's suggest. Now every firm positions itself as much as possible by leveraging the strengths that the firm has and Porter's generic strategies relies on the fundamental fact that broadly there are two sources of strengths either it comes from cost or differentiation and these two sources of strength can extend over a narrow scope or a broad scope. So it is the strength plus scope that gives these three generic strategies which can be applied at each of the business unit level and these are generic because it is not specific to a particular industry or a particular firm or a particular business unit. You can have a corporate you can have a corporation where each business unit can have any one of these three generic strategies. So it is not specific to a particular corporation or within business units you will have different products that which will have three of these generic strategies amongst themselves but that must not be confused as a particular business unit having three different generic strategies about which I will be talking later. The three generic strategies that Michael Porter identifies is fundamentally from the two strengths namely cost and differentiation the ability to do something low cost the ability to provide a unique value proposition in the product or service that is being delivered and thirdly focus the ability to concentrate within a limited niche market segment and narrow market segment and by focusing within this narrow market segment you can either choose to be a low cost or you could also provide differentiation within that focused market. So the generic strategies boils down to cost differentiation and focus and in focus low cost or differentiation. So this is the Porter's generic strategies the first thing is the cost leadership strategy namely the low cost. It means that as an organization that would like to be that would like to have a cost leadership strategy will ensure that it is the low cost producer in that industry for that level of quality which means quality is not compromised but there is something inherent in the firm that ensures that it is the low cost producer which means that the firm is capable of selling its product either at average industry prices to earn a profit higher than that of rivals or it is capable of selling at below average industry prices to gain market share and this you can do only if you are a low cost producer and what is the advantage of that. During times of price war you can still maintain profitability when competition suffers losses because you are already the low cost producer or assume that there is no price war that the industry has matured or there is a price decline itself still low cost producers will remain profitable for a relatively longer period of time and usually a low cost strategy targets a broad market because it needs to be volume driven usually though in focus you still have low cost strategy by a large low cost strategy targets a broad market. So organizations can choose to take the low cost option as a strategic option and having chosen that how do they acquire those cost advantages they can do that by either improving the internal process efficiencies improve processes that is where I said the resources that are used within an organization are used optimally and effectively to ensure that there are process efficiencies which dry down cost or gain access to a large source of low cost materials strategic relationship with vendors to ensure that they are able to get raw material at competitive prices or a decision to simply optimally outsource or vertically integrate or avoiding some cost altogether like for example McDonald's it makes its menu very simple so that it does not have to hire some of the best chefs in its fast food chain so it avoids the cost altogether. Now as a result of all of this if competing firms are unable to lower cost then there is a competitive advantage which is based on cost leadership. So when firms decide to use cost leadership as a strategic option they tend to do any one of these to ensure that their cost of providing a comparable product or service is lower than competition. Now how do I build those strengths some of them that are inherent let say access to capital market is capital is definitely an important resource because you need investment to create assets and if you have favorable access to capital markets that by itself could be a barrier for entry that many firms will find it very difficult to overcome and access to capital at competitive price by itself will reduce cost that is why you can understand how important brand is especially when you are raising capital in the equity market or the debt market or organizations will have specific skills in designing products and this example you can see in the manufacturing the inventory control mechanisms in the manufacturing industry especially the Japanese auto manufacturing this has tremendously reduced the costs and the advantage of these Japanese firms lies in the specific skill that they have to ensure that the inventory that it maintains is very optimal as a result of the overall cost structure goes down or some organizations build cost leadership strategy by having high level of expertise in the process that they are providing you can see this in the low cost airlines or some drive down cost because of an efficient distribution channel del is an example coke or walmart so these are organizations which have a efficient distribution channel as a result of which they are able to drive down cost remember all of this is done with a view to reduce the cost of delivering a product or a service so it is this understanding this direction that we are a low cost and hence all our resources need to be utilized to ensure that whatever it does it is able to reduce some cost if it is was x it needs to provide some delta x so that by doing this the cost reduces to x minus delta x and you have number of examples of firms that are that are symbolic of cost leadership and classic example is in the airline industry the decan airlines here or the south west about which I talked in my introductory classes or mcdonalds walmart or tesco in their multi brand retail or research outsourcing itself is a cost leadership example firms like unilever or GE they outsource their research capabilities in india not only because of the intellectual strength that the country has but also because it is cost competitive and it is the same cost leadership example that explains the success of indian software companies because we are capable of software development at competitive price so these are some popular examples of how organizations use cost leadership as a strategic decision and build strengths within an organization that always tries to reduce cost having said that there is also some limitations for organizations that have cost leadership as their singular focus whether it is sustainable it may or it may not be other firms may also be able to lower their cost as well because best practices are always available and as long as those best practices those low cost strategies are easily are not imitable then it is sustainable over a long period of time but if it is not then other firms may be able to lower their cost as well or there might be a disruption in technology where there can be some leapfrogging activities that can bypass some of the activities which heatherto firms were doing cost effectively then it no longer can be a sustainable competitive advantage because you have a technology substitution that leapfrocks a set of activities or on the other hand some firms following a focus strategy and might be targeting various narrow markets may also have the capabilities of achieving lower cost within their segments and as a group within themselves they can gain significant market share so you can still be a cost leader you can be a cost leader but be aware of the fact that there are limitations and that one of the major things that you will have to look out for is that competition can also be able to lower their cost as long as it is imitable or doable so the first thing that we saw was the cost leadership strategy the second strategic option that is available is differentiation strategy as I said before differentiation strategy is again applicable for a broad scope just as low cost is also applicable for a broad market scope so the target scope is very broad they need to differentiate a product or a service arises from the fact that there is always a group of customers who would be willing to appreciate the differentiation that the product or service is capable of providing as long as there is a presence of a sizable share of such customers there is incentive for organizations to differentiate there is no point in differentiating a product or a service and there is only a handful of customers who appreciate this differentiation so next class I will be talking about the other two strategic options namely the differentiation and the focus cost leadership ensures that organizations inherently build a mechanism where the resources are optimally used to ensure that whatever they are doing either as a process or as a design or as a selling and distribution whatever value chain activity that happens in an organization the fundamental requirement is that it has to be cost effective and if we are able to provide that cost competitiveness across all the value chains the aggregate of all these delta x's will provide a unique competitive advantage from a cost perspective that will help organizations to either command a premium or at times of price war or stages where the industry is matured they can still be able to reduce the prices when competition cannot do that because they are not low cost so this low cost has this advantage and at the same time some limitations which organizations have to be aware of so next class we will talk about differentiation and focus thank you.