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Dilemma of Internationalisation

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On the basis of the above context, it can be said that the enterprises know considerably well, which type of strategy of internationalisation they should select. However, after they have decided the effective strategy it is be implemented. But it is commonly found that the implementation of the said strategy is not very easy. Further, it is rather difficult to obtain the anticipated results and effects from the said strategy. These are related to the problems regarding method of management and the organisation of multinational companies and is an important topic of discussion for the Japanese enterprises also. Finally, let us try to consider the dilemma which has originated from the exercise of internationalisation. There are basically two dilemmas which originate as a result of internationalisation progress. These are:

1. The dilemma of economic logic and political logic;

2.The dilemma of management of organisation and management strategy.
In the first dilemma, the enterprise gets sandwitched between economic and political logic. This is an absolutely unavoidable phenomenon which occurs in every case of internationalisation. Many enterprises move and cross the national borders with ease, looking for places with low cost. If the cost is low, any country would like to import and anyone would like to place its production facilities in that country. This is the logic of economy.

In contrast, the human beings do not move from one border to another very easily (in combination with the logic of economy). He lays emphasis on the interest of loss or gain, on the basis of nation as a unit. This forms the logic of the politics and also clashes with the logic of the economy. For example, the trade friction in the automobile industry, which is the prime cause behind the present day economic trade friction between America and Japan, besides the problems of import of rice into Japan, is a typical example of this type.

The second dilemma originates between the management strategy with main focus of economy, and the management of internal organisation. For example, it can be said that the internationalisation of the enterprise activity is inevitable. However, as the enterprise activity expands beyond the borders, it interacts with the geographical problems or the problem of difference in culture or language between the constituting members of the organisation. Therefore, there is a very probability of facing difficulties in communication within the organisation to that extent. As a result, the joint working by all the constituting members of the organisation may not yield the necessary and anticipated effect.

The strategy of internationalisation does exist in the present day enterprises, but is not sufficient. Rather, it is more important to bring about a feeling of commonness among the members of the organisation, which supports the activities and provide the necessary infra-structure in the organisation, solving the problem of contradiction which develops as a consequence of internationalisation. The building of a management concept where the local people as well as the Japanese people can participate with a feeling of belongingness, shall form the key for finding solutions to such problems.

Strategy for Internationalisation types

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Multi-national enterprises are in a position to decide the basic pattern of how the countries in which they are present should compete with each other by having international portfolio.

Let us try to understand the patterns which one followed in the actual management strategy adopted by the multi-national countries.

Berthrette & Gosharu have classified the international strategy into three types on the basis of case studies of 9 enterprises. These three types are given below.

1. Global type strategy
2. Multi-national type strategy
3. International type strategy

1. Global type strategy
In the case of global strategy the intensive development and production by present company in the country of origin forms the basis and in this strategy, the efficacy at global scales is given importance.

2. Multi-national type strategy
In this strategy, the overseas subsidiary with higher degree of autonomy carries out the operations, while matching the diversified environment of the respective country.

3. International type strategy
Basically, importance is given to the transfer of technology and knowledge from the parent company in the country of the origin or the overseas subsidiaries.

International Portfolio

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The enterprises which are moving into multiple number of countries will have international portfolio (overall combination). The selection of pattern also requires strategic decision.

Let us try to learn in brief regarding the theory concerning the selection here. The first selection concerns the relationship between the individual operations which constitute the portfolio and the making of overall characteristic. The second selection deals with the distribution of roles for respective country. These two selections, of course are not independent of each other.

The first selection deals with the selection of basic policy regarding the way the countrywise competition should be, and the basic selection branches are multi-domestic, global and glocal.

· Multi domestic
This is a policy of adopting the strategy of product, production and marketing, maching the requirements of the respective countries, where the individual country considers it as a diversified existence. The strategy of internationalisation of overall enterprise is the simple composite of the respective countrywise strategies. The degree of cooperation of operations carried out countrywise is not very strong.

· Global
The world is seen as one entity and common products are provided to as many countries as possible if there is common demand trend. The global policy concerns building up a world level system for the product and supply of such goods in the most efficient manner. The respective countrywise strategies form part of global strategy.

· Glocal
The term glocal has been derived by combining glocal and local. This is an intermediate policy between multi domestic and global. In the case of glocal, the policy, which forms the core fore for the global strategy is retained while an autonomous strategy to deal with the requirements of each country is also formulated. For doing so the respective countrywise strategies do not form a part of global strategy and the global strategy also does not work for simplification and harmonisation of the respective country strategies.

The second selection deals with the problems of distribution of roles of the respective countries in the portfolio. For example, there can be a case where the plant responsible for research and development is located in Japan, the production base is located in America and Europe is targeted as sales market.
Various type of patterns can be considered for the selection of such types of distribution of roles.

Various Issues related with Internationalisation

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1. Environmental factors
Internationalisation gives birth to problems peculiar to internationalisation. This is because of change in various environmental factors for any enterprise due to crossing of borders with regard to market and activity zones. There are basically three factors, namely the market environment (types of domain, the market structure, business transaction. customs etc.), political system and military system and the culture and language of the nation’s concerned.

The internationalisation involves a situation where the enterprise activity is to carried out under these three environmental factors where these factors from a complex state (two or more than two environments including that of one’s own company).

2. Three movements and the related topics
Let us now see what type of effect internationalisation has on the enterprise activity?

The effect of internationalisation which is visible to the eyes is the working of man, material and money beyond the borders of the nation. However, in the background, there are three movements, namely information resources (technology, knowhow, brand and management control capability etc), added value (the value generated by the organisation; this is almost the total of the manpower cost and the profits) and the culture (life, customs, behavioral pattern and value or standards etc.) These three movements are considered to have big effect on the enterprise activity.

The internationalisation progresses smoothly provided these three movements do not fluctuate beyond a limit with the internationalisation of enterprise.

For example, the fountainhead of international competitive strength cannot be obtained, if the resources like knowhow and brand etc. do not move. The sources of direct investment in overseas production cannot be materialised unless the added value is transferred locally to some extent. The products or the services cannot become acceptable unless the transfer of culture is permitted to some extent. In the event of lack of such flexibilities, there is possibility, of repercussion also.

Considering from the viewpoint of such relationship two issues can be thought of concerning the internationalisation of enterprise activity. One is “strategy of transfer”, in the other words, how to move the three factors which have impact and the second is “how to deal with the problems arising due to the movement”, in another words, how to move these three factors in more effective manner. The enterprise has to select which country it should move to for internationalisation while considering these two issues.

Strategy for Internationalisation

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The Motivation for Internationalisation

1. Essential reasons
The internationalisation of an enterprise widens the horizons for activities on various fronts like sales, procurement, production, developments and other operation activities across the country barriers. It provides a wider market and activity areas for any enterprise. For example, in the case of an automobile plant of Honda, which has been operating in America, it can be called as the internationalisation of the plant, which forms the base for the production activities.

Here, we shall try to see how the border crossing by any enterprise with regard to the market and activity zone differs from the regional expansion within the country. Further, let us try to study various topics of management which evolve as a consequence of internationalisation. The internationalisation of sales market has been carried out for quite sometime in the form of export of exports. Further, even the internationalisation of procurement market has also been in practice since Meiji era in Japan.

The essential reasons for carrying out type of internationalisation have opening of new market and acquiring the resources. The market opening here basically refers to the sales market and the internationalisation for acquiring resources refers to tapping of overseas procurement market for the management resources including the raw material, capital investment which are required to carry out production.

2. Secondary reasons
The above mentioned two reasons can be called as the factors responsible for initiating the internationalisation of the enterprise. However, the internationalisation of this sort gives birth to the following mentioned internationalisation resources.

The reasons responsible for the birth of internationalisation are the harmonisation with international political system, harmonisation with international economic system and the improvement of the efficiency of international management.

· Harmonisation with the international political system
Location of an enterprise in a foreign country for the sake of evading trade friction is a typical example of this reason. The location of an enterprise in a foreign country aims at avoiding the possibility of bad effect on the enterprise activity arising out of confrontation between the two nations due to the political interest.

· Harmonisation with the international economy system
This reason refers to setting up of production of procurement facilities overseas to checkmate the variations in profits due to foreign currency rates fluctuation, especially for those enterprises which have their major sales on dollar payment. In other words, this is a mechanism of providing defensive rules to avoid any negative influence of one’s activity arising out of the characteristics of international economy system. It also aime at turning this chartacteristic to one’s own advantage. The internationalisation of financial activity is an example where characteristics of international economy are being properly used.

· Improving the efficiency of international management
The production of goods like a television and stereo system etc. in a country having low labour cost, as seen in the case of Japanese electrical home appliances industry’s entry into South-East Asia, is a typical example of improving the efficiency of international management. However, the local production of automobiles in America and Europe by the Japanese automobile industry may also be called as the examples of improving the efficiency of management, in ultimate sense.

The local production of automobiles in the foreign nations, in most of the cases, was initiated for evading the trade friction originally. In other words, for the sake of Harmonisation with the international economy system. However, as a consequence of such an exercise, the efficiency of activity in American and European market increased and it became possible to provide the products matching the needs of time.

In this way, the improvement of efficiency in international management called for further developments of activity in the direction of further internationalisation so that the enterprise activities, which has undergone internationalisation for the sake of development of new market and acquiring the resources can be managed more effectively.

The above mentioned three reasons explain how the internationalisation differs essentially from the expansion of activities on regional basis within the country. Furthermore, the extension from essential reasons to secondary reasons shows the tendency of internationalisation of enterprises giving birth to further internationalization.

Problems of Strategic Alliance and its Management

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Problems of strategic alliance is accompanied by a problem which is different from that of a single organisation. The probability of occurring of such a problem becomes inevitable when two different and independent organisations work together.

The difference of opinion occurs very often due to various reasons like difference in cognizance, difference of values, difference in aims and difference in alliance resources. These types of differences become important factors for the triggering of innovation. However, the strong motivation for promoting such transactions that are beneficial to one part alone may end up in damaging the relationship of trust. It is possible that the fruits of alliance cannot be materialised in the event of lack of strong relationship and it is also possible that the strategic alliance partners may turn rivals in future.

The strategic alliance which has such types of problems requires relationship, trust and devotion, in particular. The following nine pints can be listed as the conditions for the strategic alliance.

· To have a clear understanding about the present and future capability requirement for one’s company (there are many cases when company’s jump over to grab any opportunity to meet the immediate needs, in actual practice).
· To study the alliance which has the possibility of covering a very wide scope.
· To seriously study the capability, zeal and values of the other party before entering into alliance relationship. It is necessary to understand the actual state of affairs of the other party.
· To consider beforehand, the risk of knowledge getting stereo typed, disclosure of knowledge and optimism etc. The two partners will have to harmonise and cooperate with each other, while they complete with each other at the same time.
· To avoid over dependence. It must be kept in mind that the alliance is not an alternative method to the development from inside. It should act to supplement the information resources of one’s company or improving upon them.
· The alliance of enterprise must be constructed managed in the form of an independent enterprise.
· The partners should have complete mutual trust. Trust and liberal communication are indispensable for the success of any alliance.
· The core type activity and the traditional organisation of one’s company must be modified so that the results achieved as a consequence of alliance are received with flexible mind.
· It is the responsibility of the leader to clearly communicate the purpose, importance and reasonability of the alliance through his or her speech and conduct. It is necessary that the leader must set a model example concerning the devotion, patience and flexibility.

As the enterprises adopt strategic alliance more frequently with an aim of acquiring and learning the knowledge, the management of overall alliance patter will gain importance over the individual alliance management. And with the progress in the process of forming alliance the significance of contribution of individual alliances to the strategy and basic purpose of enterprise will become less important. Rather, it will become necessary to study how various alliances affect the growth of the enterprises.

In this world of knowledge leadership based competition, the pre-dominance on the basis of the product is no longer a continuous possession. The knowledge which is difficult to transfer alone has become the real and basic asset for an enterprise.

However, the information resources which have higher degree of independence and are difficult to transfer also have some peculiar problems attached to them. The typical characteristic features like non-general purpose utility and fixed types etc of such information resources normally lead to loss of sensitivity, flexibility in behaviour and maneuverability towards the changes in the environment of the organization.

Strategic Alliance of Knowledge Chain

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In the strategic alliance of product chain, the cost reduction, limiting the risk, accelerating the sales speed, expansion of competition opportunities, building flexibility and weakening of strengths of rival enterprises etc. can be carried out part-by-part.

However, this type of alliance is insufficient for assuring the pre-dominance of the competitive strength on a continuous basis. This is because of the fact that the pre-dominance is acquired on the basis of easily transferable information resources. Therefore, the pre-dominance of competitive strength which is gained through this type of alliance is gained through this type of alliance is of fragile nature and it can be lost very soon.

On the other hand, the competitive pre-dominance which is generated on the basis of difficult to transfer information resources through strategic alliance of knowledge chain is of a very strong nature. It is not very easy for any rival company to acquire the same pre-dominance state continuously.

The information resources which are difficult to transfer are different from the information resources which are easy to transfer and these can be obtained only through a cordial and cooperative working between the two organisations. The degree of originality is very high. Therefore, it forms the basis which generate continuous competitive pre-dominance as against the other companies or groups.

Two types of Strategic Alliance

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The strategic alliance can broadly be classified into two different types. One is known as “strategic alliance of product chain” which aims at assuring mainly the transferable knowledge which can be easily transferred or acquired. The other type is called as “strategic alliance of knowledge chain” which aims at acquiring the knowledge through close relationship and is namely concerned with acquiring knowledge which is difficult to transfer.

1. Strategic alliance of product chain
This is the link on the basis of product or the parts, with alliance among the enterprise as the center of focus. The initial stage of alliance between G.M. and Suzuki which began in 1981 is an example of strategic alliance of product chain. G.M. required small car on immediate basis and Suzuki wanted an access to the transportation system in America as well as the capital investment for its self-designed sub compact car, without incurring the cost and risk of constructing its own dealer network.

The strategic alliance of product chain like this had played only a very small role in acquiring knowledge.

2. Strategic alliance of knowledge chain
In this type of strategic alliance, focus is laid on knowledge and it aims at learning the knowledge as well as creativity. This type of alliance is not restricted to similar enterprises only and is carried out even among the wide range of different organizations also. A typical example of this type of alliance was the tie up between I.B.M. and Seimens, which was made public in 1990. The two companies aimed at acquiring new technology for design and manufacturing of computer chip for developing the second generation chip which would have an accuracy higher than the most advanced chip, through this alliance.

Reasons for Selecting the Strategy Alliance

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The present day competition is called the intelligence intensive competition and knowledge leadership competition. Why is it that the strategic alliance is being selected, while the other methods are found not suitable?

Let us try to understand the reasons for selecting the strategic alliance over other methods through a comparison with M & A or the other means like accomplishing by acquiring the resources from the market or by working on the basis of in-house resources only.

1. Meeting the requirement from in-house resource only
The building of knowledge and information apt to become inactive when the efforts are limited to in-house activity only. The speed of change in environment is so fast that it is difficult to catch up with the changes through in-house activity alone. However, the risk of competition is also very high and it may be more risky to go ahead independently.

2. Sourcing from the market
Large number of important management resources can be acquired from the market. However, any easily transferable information resource, which can be procured from the market (packaged knowledge as available in the design, drawing and manuals, the knowledge accumulated in the human beings or the knowledge fed into the machines) is a package which is extremely easily available and transferable with same ease for anybody. Therefore, this results more often in the “information paradox”, in other words, the information which can be obtained easily does not have much value.
The information resources which are difficult to transfer like the knowledge and information possessed by the skilled persons, teams and organisation etc. And the accumulated knowledge which cannot be transmitted completely to other persons have their own importance. Such type of resources cannot be obtained in the form of simple packages from the market or elsewhere, on payment basis.

3. M & A
As seen from the earlier text, it cannot be denied that the importance of M & A will increase from now onwards. However, the M & A is accompanied by various problems also, such as limitations with regard to objects, restriction to financial management resources and legal hindrances. Besides these problems also, the capability which is specific to a company also depends upon very fine factors like the job customs, feeling of trust, independence and entrepreneurship spirit. There is a fear of losing on these aspects also. Further, the flexibility in enterprise may also be lost.
These are the resources for which enterprises have resorted to strategic alliance.

Resources of Competition Strength

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The reasons for carrying out strategic alliance mentioned so far include the harmonisation of competition, sharing of risk, combining of resources that can be supplemented mutually and to overcome the hindrances against the entry into the new market.

However, the explanation given through the above points, is not sufficient to understand the role of present day strategic alliance. The significance of strategic alliance which are being carried out more frequently today, can be understand clearly by focusing on the information management resources which are very difficult to shift and which can be obtained through co-operative working only.

Even among the management resources, the information management resources that are peculiar to the enterprise forms the basic resource for competitive strength, as explained earlier also. These resources have typical characteristics and these cannot be bought in the market and at the same time it is not very to generate these resources as well. The information resources are generated through the operation activities. These are the invisible assets possessed by the human beings.

The information resources which are generated through strategic alliance form the basis for the pre-dominance of important competitive strength. The joint activity of those who have different values and recognition systems as well as the combination and creation of bond among different sets of knowledge, are the conditions for promotion of innovative activity also. Any enterprise can sustain its competitive strength continuously, if it can generate its pre-dominance in competitive strength vis-a-vis the other company on the basis of such conditions. The other companies cannot easily acquire similar competitive strength. In this way, acquiring of information and knowledge as a management resource that form the origin of competitive strength is very important issue of determining the future development and expansion of any enterprise.

The strategic alliance is being understood by all the enterprises with such background and implications.

Strategic Alliance

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Strategic Alliance getting more Activated

One more typical enterprise activity which is prevalent now a days is the strategic alliance like merger and capital participation, besides M & A. This type of strategic alliance among multiple number of independent organisations is very widely prevalent among diversified organisations and in diversified form.

· Form of strategic alliance : …… providing licence, joint development, collaborating operations etc.

· Partner of strategic alliances: ……competitive enterprise, suppliers, Govt instructions, universities, workers’ unions etc.

The competition among the enterprises has become more severe and there have been speedy changes in the view point of the customers as well as in the technological reforms. Further, the technological reforms have progressed day-by-day and have become composite. The scale of capital investment has also expanded and risks have also become larger.

In contrast, the accomplishment of all management resources from within, as required to meet the diversification and reform requirements from the existing operations has become extremely difficult in the present management environment for all the companies, howsoever, big or rich the company may be in management resources.

Even in Europe and America until the middle of 1950’s the companies used to depend mainly on the in-house management resources for the development of products or services. This is how the companies posted growth. However, from 1960’s onwards, the M & A became a strong tool for the growth of enterprises and in 1980’s the strategic alliance among the enterprises, like joint ventures were seen more frequently along with M & A. Today, it is well known that various big houses like G.M. and I.B.M are engaged in making positives efforts in strategic alliances.

The concept of strategic alliance has grown in Japan also. According to the survey conducted by the Head Office of Kansai Seiansei in 1990, the total number of strategic alliances by the enterprises with overseas enterprises till 1984 (collaboration and equity participation etc) were about 27% and this percentage increased to 38% in a period of 5 years after 1984. This survey was conducted for some enterprises listed on Tokyo and Osaka stock exchanges and some which are not listed, but are similar “Keiei jittai chosa” (Survey of actual state of management).

Further, the percentage of enterprises that had strategic alliances with other domestic enterprises was also 23% till 1984 and it increased to about 30% in 5 years since then. These figures are substantially high when compared to the percentage of those enterprises which have executed M & A. In addition, the percentage of enterprises that have undergone strategic alliances, has also shown the increasing tendency.

In this way, the traditional image of the enterprise has changed. Even in the large business houses, which had so far tried and achieved the development using the necessary management resources from within, there is a major change in the strategy.

Economics Consideration of M and A

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1. Purpose of M & A
Why does any enterprise resort to M & A? The theories which explain the reason for M & A can broadly be classified into two types.

One theory is based on the financial consideration. In this case, M & A takes place aiming at financial profits. This type of M & A explains the act from view point of owners and stock holders of the enterprise. Through this type of M & A higher efficiency of management is sought.

According to another theory, the M & A takes place in accordance with the management aims. This is a theory as seen from the view point of management. The management finds the expansion and growth very necessary for their own position and earnings, and they carry out the M & A.

2.Effect of M & A
One serious question which must come to everybody’s mind is why at all the enterprise should resort to growth from outside rather than the growth from inside, may it be the financial aim or management aim. What are the conditions under which the enterprise selects growth from outside rather than growth from inside.

In the case of internal growth, an enterprise has to bear all the expenses on various heads by its own. This includes the investment on equipment, research and development and human resource development. On the other hand, the growth from outside is the merger and acquisition of enterprise.
Let us try to understand the effect of M & A as compared to the growth from inside.

· Economy of scale
The first effect of the M & A which can be considered here is the economics of scale which is obtained through the expansion of enterprise. This is the remarkable characteristic in the case of horizontal integration. As a result of M & A, the cost such as sales cost and general management expenses reduce. Of course, this type of effect can be obtained by expanding the scales on the basis of growth from inside also. It is important to note that in the case of M & A, this effect can be achieved in a shorter period.

· Saving on investment cost
Normally, large amount of capital investment is required for starting any new operation. While comparing the capital requirement, in the case of growth from inside with that in the case of M & A, any enterprise shall resort to M & A, if the investment requirement in the case of latter is low.

This comparison can be explained properly through the theory of Tobin’s Q. The Q is a ratio of procurement cost in the existing enterprise to the cost of establishing new enterprise and it can be computed as given below : -
Q = Cost of procuring existing enterprise / Cost of establishing new enterprise
The growth from inside is selected when Q is more than one whereas M & A becomes the obvious choice if Q is less than one. In many case, Q becomes less than one and becomes possible to save the investment cost on the basis of M & A.

· Evading the friction due to entry into the market
Severe friction with the existing enterprises can always be expected in the case of entry into a new market irrespective of M & A of existing enterprise. Further, there are many cases when entry itself is not very easy because of restriction and loss against entry which requires permission or approval. Therefore, in the case of M & A of an enterprise, which is actively engaged in the said already, the entry into the market becomes very easy.

· Immediate raising of management resources
In the case of M & A, the management resources like information as well as the brand name, excellent manpower and technology required for expansion into new operations etc can be obtained in one go and in short duration without much efforts. It becomes possible to enter into the market in a short duration through M & A and there is no operation opportunity lost.

The development and accumulation of management resources require considerable amount of time and efforts in the case of growth from inside and one cannot avoid the loss of operation opportunity to some extent.

These were the major effects of M & A. Among these, the most significant effect of M & A is the “buying of time”. This factor gains particular importance in this age where prompt action is most important to meet the rapid changes in the environment.

3. Problems of M & A
The M & A has one big merit of possibility of buying the time, however, there are many problems also. Even in America, where M & A is very popular and is practiced very frequently, it is said that about half of the M & A cases end up in failure. Some of the problems related with M & A are listed below.

· Problems before the decision is made
The decision with regard to the merger and acquisition has to be taken in an extremely short period. Further, it is necessary to maintain a high level of secrecy. Therefore, there is a possibility of occurrence of a phenomenon of “Group Thinking”, where the decision making by the group may be diverted due to the group environment. As a result, there is possibility of wrong M & A, that too without any suspicion.

Moreover, the decision has to be made on the basis of limited information only. Therefore, M & A is extremely risky proposition in some cases.

· Problems from the management point of view
The organisational culture of one enterprise is different from that of the other and M & A always results in friction within the organisation. Therefore, it becomes difficult to accomplish the synergy, particularly the employees of the company which has been acquired or merged may have strong psychological resistance against the other company which is acquiring.

Further, it may not be necessarily possible to generate added value to justify the premium of operation even when M & A has been carried out successfully.

The management, particularly after the merger and acquisition is an extremely difficult problem. However, whatever may be the problems, there is probably not going to be major change in the concept of merger and acquisition, which shall remain one of the important strategies for the future.

Classification of M and A

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As seen from the above explanation also, it became clear that there are various of M & A depending upon the time and the place. Let us try to classify and organise the different types of M & A here.

1. Merger and Acquisition
M & A (merger and acquisition) has so far, been explained as a single concept. However, strictly speaking merger and acquisition need to be defined separately.
A merger stands for formation of combined entity on the basis of a merger agreement by the two or more than two companies. According to the Commercial Law Act, there are two types of mergers, namely, the merger by absorption (merger) or the merger by new establishment (consolidation).

In the case of merger (by absorption), one by the two companies which are merging disappears, whereas, the other survives and continues. On the other hand, in the case of consolidation (new establishment), all the merging companies cease to exist and a new company is formed.

In the case of acquisition, the acquiring enterprises or the individuals aim at acquiring either partially or the total management right or control right of the other company and procures the assets, different operation departments and shares etc. of the company, which is being acquired.

However, the M & A is very often used as single concept and it is not necessary to over-emphasise on the strict boundaries. Now let us try to see the classification of M & A from different angles.

2. Classification on the basis of functions
While laying focus on the type of changes an operation structure undergoes as a result of M & A, it is possible to classify the M & A broadly into three, as understood by the history of M & A in America. These categories are given below.

· Horizontal M & A
Horizontal M & A is the merger and acquisition of enterprise belonging to the same industry. This type of M & A is executed while aiming at expansion of operation, increase in the market share and to evade competition.

· Vertical M & A
Vertical M & A is the merger and acquisition of enterprises which deal with different manufacturing stages of the same product. This type of merger and acquisition is executed in order to avoid application of Monopoly Prevention Act as seen in the case of second wave in the history of America or in order to establish the consistent manufacturing process and to stabilise the management.

· M & A for diversification
The M & A for diversification basically aims at diversification and it involves acquisition and merger of these enterprises, which posses such products that have no competitive relationship with the operations of one’s company. It is called Conglomerate type M & A when there is absolutely no relationship with the operations of one’s own company.

3. Rival M & A and friendly M & A
This is a classification based on the degree of mutual satisfaction or dissatisfaction among the partners. It is called friendly M & A when the partners, who have undergone merger and acquisition are mutually satisfied. The typical examples of friendly M & A are the relief acquisition etc. In contrast, it is called rival M & A when the enterprise, which is merged or acquired is not defensive steps as far as possible.

In Japan, as explained earlier also, there is almost no case of rival M & A.

4. Classification on the basis of mode of payment
There can be classification on the basis of mode of payment for the merger or acquisition. One is the payment in cash and the other is through transfer of stocks.

Actual State of M and A

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Let us first try to see the actual state of M & A in America and Japan.

1. M & A in America
Itami, Kagono “Zeminaru Keieigaku nyumon” (Seminar Management Science Introduction), Nihon Keizai Shimbunsha (Japanese Economics Newspaper Company), 1989.

2. M & A in Japan
In May 1992, there was a big happening when the DAIEI, a big player in the distribution industry took over the Recruit Company under its umbrella, which was under huge debts. The DAIEI, so far, had been carrying out the organisation of its operations on the basis of volitional merger and acquisition. The “total life industry” as pointed out by DAIEI can probably be called as having entered the final stage by acquiring the information industry with its own umbrella.
Just before the merger of Mitsui and Taiyo Kobe bank and the merger of Kyowa Saitama bank were very much in the news, the reorganisation of financial industry was progressing in a big way. In this way, it can be said that the merger and acquisition was being carried out very actively. Let us try to find out if there were any conspicuous characteristics or trend in the M & A in Japan.

After that, the oil shock bought down the activity and M & A became calm. However, recently, M & A have shown a tendency of gradual increase with the recovery in economy. Though, it is said that merger and acquisition of enterprises do not go well with the traditional industrial customs and working in Japan, it can probably be said that M & A has become an established concept in Japan.

Still, even in the case of Daiei or the other M & A, all the mergers and acquisitions in Japan are of friendly nature. They are either merger on equal terms or merger for the sake of rescue. The example of acquisition of Koito Seisaku by T.B. Pickens, Jr is a very rare example in which foreign capital is involved. It can be said that there are almost no hostile cases of M & A in Japan.

The hostile M & A could not take roots in Japan. It is probably possible to explain this tendency on the basis of the way of thinking and the customs etc. which are followed by the Japanese enterprises like trying to restrict the special right of stock holders etc. However, the sense of morale of the Japanese like “taking over is bad” can be called as the most important factor for not allowing the hostile merger and acquisition.

M and A

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The term M & A is heard very often. M & A stands for merger and acquisition. The growth on the basis of M & A is not achieved on the basis of resources accumulated by the enterprise within the house. This method brings about enterprise growth where the enterprise or the operation is acquired in the form of one set. It can also be called as growth from outside in order to have a contrast with growth from within.

Structure of Operation Portfolio

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(1) Positioning of Operation Portfolio

(a) Growth of enterprise

A large number of enterprises are aiming at growth. It is through growth that an enterprise can increase its profits on a long term basis, sustain the active working place, carry out the expansion and provide the chance of promotion and increment to the employees and managers. The directions of growth of enterprise can broadly be classified into two; one is the expansion of existing operations and the other is to diversify into new operations and carry out with multiple number of operations.

There is no absolute answer to the question of finding which one is the correct option. However, any industry has a life cycle and it can be said that diversification is an inevitable process. Let us try to consider the problem of operation portfolio which occurs as a result of diversification.

The operation portfolio, as said earlier, is a list of operations that are carried out under the operation activities of the enterprise or of the total activities. It determines in concrete from what type of operations with what weightage and combination should be conducted within the domain of the enterprise. The following reasons can be attributed to aiming of growth with multiple number of operations by the enterprise.

· Effective use of unused resources
· To cope up with the environmental change
· Economy of the scope
· Risk dispersion
· Activation of the organisation

· Effective use of unused resources
In any enterprise, different management resources keep on appearing which are not sufficient utilised for the existing operations, continuously. A typical example of this type of resources is the information resource. The people, who form an enterprise, have the capability to learn new things, therefore, the information resources are accumulated continuously.

An enterprise can maintain a further effective state by utilising these resources more effectively. Consequently, the enterprise orients itself towards diversification into such operations in which the resources can be utilised effectively, in order to achieve growth.

· To cope up with the environmental changes
The environment in which the enterprise is placed changes continuously and the enterprise cannot expect to survive and grow, unless it copes up with these changes. One of the factors for the ongoing changes in the environment is the life cycle of industry. When an enterprise clings to only one operation, the decline as well as the destiny of the industry get linked to this operation mainly.

Any enterprise can survive and grow through diversification. An earlier mentioned example of fibre industry clearly establishes this fact.

· Economy of scope
In some cases, the total expenses required for carrying out the multiple number of operations simultaneously by one enterprise are less than the total expenses of operations when the same number of operations are carried out by different enterprises. In such a case, it is said that there exists an economy of scope among the operations.

For example, let us compare an example of one company engaged in manufacturing of passenger cars and trucks simultaneously, with tow different companies engaged in manufacturing of passenger cars and trucks independently. The former will certainly have the cost benefit in the operation. This becomes possible due to the common use of management resources like manufacturing equipment and technology as will as the brand image etc. The enterprises advance into multiple number of operations aiming at this type of cost effect.

· Risk dispersion
It becomes difficult to cope up with the unforeseen circumstances in an industry or with regard to a particular product, if a company is engaged in manufacturing of one product or when it belongs to one industry only. Therefore, the enterprises go in for multiple number of operation, to avoid such risk.

One concrete example is the diversification of Ajinomoto. Till 1955, Ajinomoto had a major share in monosodium glutamate. However, in 1956, KYOWA HAKKO KOGYO entered the monosodium glutamate market with a new technology using direct fermentation method. Ajinomoto was suddenly exposed to the menace. However, it used this challenge as a change to diversify into various areas. Further, in 1969, an American scholar came out with the explanation regarding harmful effect of monosodium glutamate. Therefore, Ajinomoto further accelerated the pace of its diversification process. Though, it was later found that the theory of harmful effect of glutamate was not correct, it proved how fragile an enterprise can be against the risk when it is involved in just one operation.

· Activation of the organization
Entry into multiple number of operations can help in extracting more energy from the members of the organization. This is because of the fact that more the number of operations, more will be the requirement for higher posts. Further, the entry into new industry for the sake of growth gives an interesting impetus to the operations and it motivates the employees to carry out the work more vigorously.

(b) Structure of the operations
In this way, any enterprise tries to have multiple number of operations due to the reasons explained above. However, the problem of how to deal with the structure of overall operations becomes very significant. This includes two problems, namely, the setting of scope and selection of combination.
Scope setting falls within the preview of the area of one’s company and it defines to what extent the operation scope of one’s company can be extended. This has been explained earlier as a definition of domain.
The selection of combination concerns the problems of how to combine various operations within the scope as specified by the domain. It concerns various options like whether the operation

must be carried out in concentrated manner or should the company diversify and have multiple number of operations. Further, in the case of over all diversification, the extent, direction as well as the relationship among the various operations covered under diversification are also the options to be selected.
This is the problem of selection of operation portfolio. This section aims at explaining the theory for the study of these problems.

(2) Selection of Operation Portfolio
The research regarding how to select the operation portfolio of an enterprise and what would be the management result, is being carried out in America as well as in Japan. In this type of research, the operation portfolio of an enterprise is divided into a number of patterns and the performance of each portfolio is compared.

(a) Classification of diversification
It can broadly be classified into five types of standard strategies, depending upon the degree of diversification of operation portfolio, as given below. Further, it can be classified into more fine seven types of strategies depending upon how the resources are linked.

(i) Single exclusive operation Strategy (S: Single).
(ii) Vertical Integrated Strategy (V: Vertical).
(iii) Diversification Strategy with focus on many operations (D: Domain).
· Constructed Diversification Strategy.
(D.C: Domain-Constrained).
· (Diffused Diversification Strategy (DL: Domain Linked)
(iv) Related Diversification Strategy (R: Related).
· Constructed Diversification Strategy
(RC: Related Constraints).
· Diffused Diversification Strategy (RL: Related Linked).
(5) Unrelated Diversification Strategy (U: Un-related).
This classification has been carried out by using Specialisation ratio (SR). It is expressed by the total percentage in the overall sales, which has the maximum sales in the total sales, of the operation field having vertical integrated strategy. Further, it also uses the related ratio (RR) which represents the percentage share of total of maximum related operations in the total sales.

Moreover, besides this type of quantitative criterion, the qualitative criterion like the type of resources linked in the various operations, is also used. The method of linking in the various operations, is also used. The method of linking these types of resources can broadly be classified into two types.

One type is called the constrained model, in which there is a close relationship between various operations and the industry is known as linked or dispersed model, where entry had been made in various new fields with new operations as the stepping stone.

(b) Trends of diversification
What type of operation portfolios are actually selected by the Japanese enterprises. Let us try to understand this with the help of above discussed classification techniques.

(3) Multiplier Effect (Synergy Effect)
The above discussed relationship between diversification and management resources shows why it is necessary to consider the problem of selection of operation portfolio. A proper selection of operation strategy shall certainly determine the management results of the enterprise.

However, it is not an easy task to find an answer to the problem of type of operation portfolio suitable for a particular enterprise. Though, it may be possible to give the guidelines for finding an answer to such problems.

The above analysis showed that a medium level of diversification brings about the maximum profitability for the enterprise, whereas a higher degree of diversification brings about good result on growth aspect. The reason for such a trend is mostly explained through the synergy effect. The synergy effect was advocated as a concept by Anzov in 1965 and was translated as multiplier effect in Japan. Generally, this means that a higher effect like “2+2=5” can be obtained in total when multiple number of operations are handled by one enterprise.

Synergy effect must be differentiated from the mutually supplementing effect. For example, let us take an example of an enterprise engaged in the manufacturing of blankets. The enterprise, when making only blankets, will certainly have some equipments lying idle at some time, therefore, in such cases, this type of enterprise can start manufacturing towels using the equipment, which could not be manufactured on full time basis due to demand or other reasons.

The effective use of resources like this is called mutually supplementing effect because the two different fields could supplement to each other whatever was lacking in the other. This effect can be expressed by “1+1=2”.

On the other hand, this additional operation activity creates a new brand image as a consequence of towel manufacturing. This might increase the sales of blankets also. This is called multiplier effect and can be expressed by “1+1=3”. In this case, the prestige in the form of information management resources can be used simultaneously by two different operations, therefore, this type of effect is generated.

The synergy effect can be achieved by the overlapping use of information management resources after the diversification has progressed to some extent. This increases the profits also. However, an excessive diversification dilutes the management resources and it becomes difficult to make use of resources in an effective manner. Consequently, the profits also get affected.

A company engaged in the manufacturing of blankets could succeed in the towel operation. This does not mean that it can succeed in the manufacturing of handkerchieves or scarfs also. The management resources, which become necessary in such an event, might be totally different also. Further, there may be a possibility that the combination of blankets and handkerchieves or scarfs may end up in a poor image. In such a case, “1+1” becomes less than two. In other words, a negative synergy effect gets generated.

Further, the growth increases in a linear fashion with the progress in the degree of diversification. The adaptability towards the market changes increases as a result of diversification. Therefore, it can be considered that the progress of diversification has a bigger effect on the growth rather that the synergy effect.

In any case, it is necessary to consider such types of multiplier effect while selecting the operation portfolio. It becomes necessary to consider what exactly are the management resources with one’s company and how or in what combination the operations should be performed so that these resources can be properly utilised. Further, it is possible to accumulate the management resources so that further multiplier effect can be expected. It is also necessary to select the operation portfolio which has the possibilities of development, while assuming the possibility of multiplier effect in failure also.

Operation Portfolio and the Resource Distribution

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As explained earlier in the precious section, a large number of Japanese enterprises have undergone diversification and are performing multiple number of operations. The view of an enterprise is determined on basis of a very important condition whether the limited management resources can be distributed properly in the multiple operation environment.

The American enterprises which are one step ahead in diversification as compared to Japanese enterprises, have already faced a very serious management problem in 1970’s when it became difficult to manage multiple number of operations as a result of progress in diversification. The distribution of limited resources in the diversified operation scenario became a very big management problem. One of the techniques developed for solving this type of problems is known as PPM (Product Portfolio Management). A large number of methods have been developed in relation to PPM so far. We shall learn the important basis structure here.

(1) PPM
PPM was developed by Boston Consulting Group (BCG). It has already been explained that the management resources comprise men, material, money and information. The PPM lays more emphasis on the capital money, its management resources and especially on the flow of funds. Further, PPM has the experience curve and product life cycle as the pre-requisite conditions and it explains in a vision, how the market share and the market growth and cashflow are linked.

(a) Inflow of funds
Inflow of funds is closely related to the market share. Any enterprise, which is at the position of a leader in the market share obviously produces maximum quantity of products. Therefore, experience curve can progress towards right bottom faster as compared to the other companies and can produce the product a minimum unit cost. Therefore, it has the pre-dominance in the competition and the cash flow is higher. In this way, the cash inflow is determined by the position of the said operation in the market competition.

(b) Cashflow : Outflow of funds
The outflow of the funds related to the growth rate of the market. In a market having higher growth rate, it requires large amount of funds to maintain the market share. Further, the expansion of market share also requires more amount of funds. The cash outflow varies largely depending upon where exactly the operation stands in the overall life cycle. In PPM it is important that the cash inflow and outflow are balanced in overall industry.

In concrete terms, the growth rate of the market and the relative market share (the ratio of market share of one’s own company to the market share of the biggest competitor) are taken as the standards and various products as well as the operations of one’s company are placed in four cells (product portfolio matrix) . The relative market share expresses the competitive strength of the operation and the growth rate of the market expresses the attention of the market.

The PPM provides a tool for striking a balance in the cashflow by clearly defining the required quantity and output quantity of cash for each operation ( it summarises in tabular form) and it suggest what type of strategy must be followed for each operation.

(c) Discrimination of operation unit
First of all, it is necessary to distinguish the operation units, to which the resources are considered for distribution, in order to place various operations in 4 cells and to carry out the distribution of the management resources. Operation units must satisfy the conditions given below.

· It should have an operation mission independent of other operation units.
· Having clearly defined competitors.
· To become an independent competitor in the market.
· To plan and integrate strategy, independent of other operation units concerning the product, market, equipment and organisation.
· The persons responsible for operation unit should be allowed to freely handle within the scope of the plan the technology, manufacturing and marketing, necessary for the success of the operation unit.

(2) Characteristic features and the strategy for each cell can be compiled as given below

(a) Goose that lays golden eggs
Those operations which have lower market growth rate but higher market share are termed as the goose that lays golden eggs. This type of operation belongs to a market which has already reached maturity stage.

Therefore, the attraction of market growth is poor. However, it has pre-dominance of competition, therefore, the cash outflow is low and cash inflow is more. It generates cash for re-investment which is required for maintaining the market predominance. Therefore, the goose that lays the eggs is major fund resource which shall meet the requirement of funds for the growth of other operations.

The typical strategy takes care of diverting surplus cash inflow to a different product, once a strong position has been ensured.

(b) Popular product (*)

The growth rate of market is high and the share is also large. The operations which fall in this cell are more attractive and the competition strength of the enterprise is also more. The cash inflow quantity is very high because this operation has the pre-dominance of competition. However, it requires large amount of capital in cash for investment by the enterprise to sustain the pre-dominance of the competition for the high growth market. Therefore, the cash outflow is very high. The surplus cash generated by this operation is not very high.

This “popular product” can become “goose that lays golden eggs”, if the operation involved can sustain the high share. Further, it can become a resource for supply of cash for the other operation, which require funds.

(c) Problematic child (?)

Any operation, where market growth rate is very high but the market share is very low, is called problematic child. In most of the cases, this operation, requires too much of cash investment as compared to the cash generated. This is so because the market attraction is more whereas the operation has failed to ensure the pre-dominance in the market competition. It requires large amount of funds to ensure higher market share in the high growth market. The cash outflow is very high but the cash inflow is low.

In the event of its just sustaining the share, it reaches the stage of the underdog once the market growth has stopped, even when the cash supply continues. Therefore, it becomes necessary to select to from among the problematic children an operation in which it is possible to attain the pre-dominance of competition in the high growth market by investing funds. It is also necessary to withdraw from an operation when pre-dominance of competition can not be ensured.

(d) Underdog (X)
A product which has low market growth as well as low market share, is called as underdog. The cash inflow as well as cash outflow are low in such an operation. The industry does not have much attraction for this operation and the competition strength is also very weak. There is no other option but to withdraw when possibility of switch over to a better state is remote.

Considering from the view point of balance of cash flow, the popular product which has high growth and strong competition strength, the goose that lays golden eggs, which can supply cash required for the growth in the future and the problematic child which can be turned into popular product by further investment are necessary for the growth of the enterprise. The underdog is not required.

(3) The Problems and the Limitations of PPM
Various problems and the limitations of PPM have also been pointed out. These have originated mostly because of classification based on simple common standards and due to excessive importance given to positioning.

PPM helps in forecasting the flow of funds in the existing operations. However, a large number of problems are faced when PPM is applied mechanically. There is possibility that an operation which can be switched over to a better state is positioned with undergo and is processed accordingly. The use of PPM in a mechanical manner ends up in giving importance to simple and common standards. This means that the typical characteristics of each operation are not given the due importance.

The standard also varies depending upon the industry. Further, life cycle also varies many times depending upon the industry and is not fixed feature. Variations in experience curve on the basis of industry is also not a rare phenomenon.

Further, in PPM the market share is given importance, therefore, the pre-dominance of competition on the basis of low cost gets emphasised. Pursuing the logic of PPM in analytical manner also results in giving importance to low cost strategy. However, the low cost strategy is not the only strategy that ensures the competitive strength. There are two more strategies which were learnt in previous posts, namely the strategy based on creation of distinction and the strategy based on concentration, besides the low cost strategy, that ensures the competition strategy.

Besides these important aspects there are other problems and limitations of PPM which are given below.

(a) Does not take into account the synergy other than the financial aspect between various operations.

The typical characteristics of individual operations are given less importance in PPM. In addition, the relationship between different operations and the aspects other than the financial part are not given due consideration. The PPM gives a lot of importance to striking an overall balance of cash flow. Therefore, it gives emphasis on mutually supplementing the financial relationship. Whereas, synergy among the operations, ups and downs as well as the effect of operation are not given due importance. Such operations are those which have deeper mutual relationships on technological front and all other aspects like marketing etc.

The diversification of an enterprise includes acquiring of new management resources and it is the process of accumulation also. These management resources help in strengthening the competitive power of existing operations and sometimes these resources provide the capabilities which form the basis for conducting new operations. There is a high risk that such important aspects of operations may not be given due importance in PPM.

(b) Does not touch upon raising of funds from outside sources.
The balance of cash flow is given important in PPM. However, it is also possible to raise the funds from outside sources. It may not always be necessary to strike a balance of cash flow in the event of raising funds from outside sources.
(c) Little concern of psychological aspect of the constituting member.
Similar to the direction of the operation, the energy required for moving the members constituting the organisation from inside is also important for any action of the enterprise. It is closely related to the psychological status of the people, who form the organisation and to the policy which must be adopted. In PPM, sufficient funds are not distributed to the operations which are positioned as goose that lays golden eggs and the underdog.
It is not possible to expect growth in future for the operations that are positioned as underdog or the goose that lays golden eggs. Therefore, it is difficult to motivate the inhouse members. It is necessary to give due consideration to the inhouse morale and motivation.
(d) PPM can hardly become a tool helpful for new operations.

It is difficult to position absolutely new operation through PPM.

There are many cases where the limited the management resources are distributed to a large number of operations which amount to tips for all or where large amount of management resources are distributed to strong operations. The PPM was adopted by many large enterprises in America as it allocates positions to large number of operations on the basis common standards and provide index for rationalisation of management resources and for reasoning of withdrawal.

However, considering the various problems and limitations of PPM it is dangerous to distribute the management resources by totally depending on PPM. It is necessary to understand that PPM is one of the logics for resource distribution. The logic of PPM forms the guiding principles for actual distribution of resources only on proper combination with the logic of domain.

PPM can also be used on a very limited basis. It is possible to obtain the information necessaryPPM can also be used on a very limited basis. It is possible to obtain the information necessary for formulation of strategy. For example, the directions of changes in portfolio and the relatives strong as well as the weak points of one’s company vis-a-vis the rival company by comparing with the operation portfolio with the other company by analysing the operation portfolio on time series.

This was the basic structure with main focus on PPM as developed by Boston Consulting Group (BCG). However, there are various other techniques of PPM which have been developed besides this basic structure. Most of these techniques are based on upgradation of BCG matrix.

One typical technique is the business screen as developed jointly by McKinsey and G.E. (General Electric). It is formed on two axis, namely degree of attraction of industry and the operation unit. These two axis are not divided equally into high and low only, but a third measure is also added. Further, the degree of attraction of industry and the position of operation unit are not evaluated only on the basis of single standard like market share or the growth rate of the industry. These are evaluated on the basis of multiple number of standards. Various operations are positioned in 9 different cells on the basis of many standards through which the position of the operation unit can be evaluated.

Definition of Domain

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Domain is a word which expresses the order of operation in which the enterprise carries out its activities. In simple terms, it is an answer to the question as to what are the operation of our company and what exactly our company deals in. This is an important aspect which must be defined properly at the initial stage of formulation of all types of strategies. Furthermore, it is a particularly difficult problem.

(1) Why is it necessary to define the Domain?
For any enterprise, the effects given below can be expected by deciding the domain.

· The focus of attention gets restricted
The focus of attention and care which must be paid by the managers and all other persons responsible for decision making gets restricted and concentrated. As a result, the dispersion of management resources can be prevented.
· The index of accumulation of management resources can be obtained
By defining domain, it helps in not only clearly defining the type of management resources that need to be accumulated, it also clearly displays the management results that are required in the future.
· Helps in realisation of synergy
It clearly defines the possibilities of realisation of synergy showing what type of synergy today exists among the various operations. Further, the directions of realisation and synergies also start appearing.
· Gives birth to a feeling of oneness in the organisation
It helps in making all the individual members of the enterprise feel themselves a part of one body and makes it easy to seek the overall cooperation in the organisation and also to achieve the economic status within the scope.

This can be better understood by considering a case where clear domain does not exist or by imagining an activity carried put under wrong domain. The management resources gets dispersed and invested in under such a stage. The directions in which enterprise must progress becomes vague and the group of the organisation members become weak.

(2) Defining of Operation
While defining the domain, it is necessary to clearly distinguish it with the definitions various operations levels. The definition of operations shall form the definition of domain also, if an enterprise continues to operate only one operation without going in for diversification. However, today most of the companies are engaged in multiple number of operations, therefore, the definition of operation cannot be used as it is, as the definition of overall company domain.

However, the concept of defining individual operations forms the starting point for the definition of overall domain of the company. A proper understanding of this concept shall provide large number of suggestions. Therefore, let us first try to consider the definition of operation.

(a)Physical definition and functional definition
Traditionally, the definition of operation has always been provided in relation to the product.

For example, it is often said that “the operation of our company is the computer operation” or “our company deals in computer”. This type of definition can be called as physical definition which is based upon the physical characteristics of the product. This type of definition of operation does not provide for expecting continuous growth, so long as there exists a life cycle of the of product.

Therefore, T. Rebitt emphasised the necessity of functional definition on the basis of customer’s needs, besides the normal physical definition on the basis of product. He pointed out that the decline in the America Railway Company was because of their self imposed physical definition that they were engaged in Railway operations. He explained the necessity of defining the operation very broadly on the basis of customer needs. According to him, operation should be defined not by the product, but by the functions which are provided to the customers.

It is necessary to consider, that for what the customer has been paying the money actually? In other words, the railways company should have defined their operation as the “transportation” operation rather the “railway” operation.
However, the term “transportation” operation is also excessively ambiguous and it does not clearly define the exact operation. Further, a simple and wider definition also does not server the purpose . An excessively wide definition of operation without clear directions may end up in dispersion of management resources.

Three dimensional definitions
D.F. Eibell has carried out a detailed analytical study of definition of operation. And, he has attempted to define the operation from three dimensions, namely the customer layer, customer function and technology as against the two dimensional definition based on product and market, which has been prevalent so far.

The customer layer is classification based on the other person, in other words, who is to be satisfied. Precisely, it means the classification on the basis of identity. The identity dimension can be the region, sex, age or personality. For example, the target for a particular product may be unmarried male persons in the age group of 20’s in city.

Customer function deals with the problem of pursuing the requirement of customer and what needs to be satisfied. It can also be called as the functions fulfilling the product or the services provided to the customers. In the case of railway operations, transportation and leisure are the customer functions.

Technology is the method of performing a specific function of the customer. For example, the method of accomplishing the transportation can be the railways, bus, taxi, or the ship etc., whereas the method for accomplishing the function of entertainment can be the film and television or dram etc.

Growth and Diversification of the Enterprise

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(1) Growth Vector

The growth strategy of any enterprises can be divided into two, strategy of diversification brought about by the development of new operations and the strategy of expansion for the existing operations. The direction of enterprise growth is given by growth vector.

. Market penetration This growth strategy pursues increase in sales with the existing technology and the market. It becomes possible either by increasing the sales quantity for the existing customers or by finding new customers.
· Market development Market development is strategy to search for new needs with the help of existing technology only.
· Technology development Technology development is a strategy which helps in developing the new technology in place of existing technology while maintaining the existing needs.
· Diversification Diversification is strategy that pursues absolutely new aspects both on technology and need fronts for an enterprise.

The market penetration, market development and technology development can be considered as a part of operation strategy as described in the previous chapter. However, the diversification strategy has the characteristics different from the other three growth strategies. The strategy of market penetration, market development and technology development make use of the marketing resource like technology, finances, merchandise similar to those of the existing products, whereas the diversification strategy to generally requires new technology and equipment as well as new skills. As a result, it brings about a physical organisation reform in almost natural manner and forms the central topic for the overall strategy of the company.

Regarding the directions of diversification, there are two types of diversifications; one which is related to the existing operations in some way and the other which has almost no relation with the existing operation. A detailed explanation about the directions of diversifications is given 3.3.

(2) Life Cycle of an Industry and the Diversification
Generally, any industry has a life cycle and most of the industries pass through a life cycle of introduction, growth, maturity and decline similar to that of the life cycle of the operations. It is normally not possible that any industry shall continue to grow for many decades.

The life cycles of an industry is not a fixed type of cycle. There may be some industries which face the decline in a very short duration, while there may be the other which carry on with the growth over a long period. Further, the life cycle of any industry may not necessarily follow only one direction. There are some industries which have entered the growth period once again after passing through the maturity period. Further, it may also be possible to continue to grow by pouring in new ideas in the same business.

However, in most of the cases, there is a limit to the maximum growth and the duration of growth as well as maturity period. Looking at the post-war history of the Japanese industries, it can be said that the diversification is essential for the long term growth of an enterprise, surpassing the life cycle of the industry. Let us try to understand it further through the example of the fibre industry.

(3) Experience of the Fibre Industry
It is interesting to note from the post-war history of Japanese economy that the industry which played the major role in the Japanese economy kept on changing a number of times. It was the fibre industry and the steel industry that provided the lead the Japanese economy after the second world war and after the automobile industry and the electrical appliances industries took over the lead of the Japanese economy from the fibre industry and steel industry.

The changes in the position of fibre industry in the overall manufacturing industry in terms of total amount of the manufactured and dispatched goods (according to industrial statistical chart) shows that the relative position of fibre industry had continued to decline. In 1955, the fibre industry captured about 19% share of the overall manufacturing companies which came down to about 12% in 1965, 7.4% in 1975 and 5% in 1985.

The growth rate of fibre industry and other industries showed a very big gap. The growth rate of fibre industry during 1950 and 1982 was about 16.4 times. However, the growth rate of automobile industry during this period was about 749.8 times. The growth rate in the industries showed on overwhelming opening.

Introduction

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It is necessary to maintain a certain rate of growth for the sake of survival of any enterprise. However, no industry in which an enterprise can carry out the operation strategy can have an unlimited growth. The stage of maturity confronts every industry and finally it faces the decline also. Consequently, it becomes necessary to carry out the reconstruction of the operations in harmony with the life cycle of the industry, in order to continue to survive and develop.

The most basic aspect to be taken care of in such an event is the decision regarding the operation portfolio and the selection of domain. These are, in fact, the problems concerning the renewal or metabolism of operations and acquiring as well as distribution of necessary management resources required for it.

The overall strategy of the company is also known as the strategy of operation structure and the relevant problem here is how to acquire and develop the management resources required for the operation of one’s own enterprise in the future. The management resources, particularly the knowhow, technology, brand image, trust, the enterprise image as built up outside the enterprise and other information resources are highly specific to the respective enterprise and are very difficult to procure or obtain from the market. On the other hand, these information resources are accumulated through the day-to-day operations, therefore, these are very closely related to the strategic decisions like what type of operations are to be carried out by one’s company and upto what extent.

In this chapter, we shall learn about the growth and diversification of enterprise. This will be followed by a better understanding about the definition of domain structure of operation portfolio. The major aspect covered in this chapter is the operation portfolio and the resource distribution. Any enterprise can make use of only a limited management resource at any given time. The resource development strategy is a basic policy which decides how to distribute the management resources. The techniques like PPM analysis as developed by consulting companies like McKinsey, BCG etc can be used for making the decision the regarding management resource distribution in a rational manner. Here, we shall take up the PPM and its limitations.

In this chapter, the resource development strategy has been explained with the help of examples. One of the keys of the resource development strategy is the problem related to the management resources that are required for the growth, whether these should be developed and accumulated within the enterprise or acquired from outside. Generally, the former is known as in- house growth and the latter is known as the growth from outside. M&A as well the strategic cooperation are taken up as the comparing it with in-house growth. The strategic cooperation has been explained with main focus on information resources.

Operation Strategy at maturity stage

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Whichever might be the industry, the sharp rapid growth as witnessed in the initial stage does not continue permanently. At some point of time, a stage is encountered where it is not possible to expect rapid growth. A competition environment in the industry changes very widely in many cases during this maturity period.

For example, it becomes difficult to expect the appearance of new applications and new technology. The focus of competition shifts to cost and service. Furthermore, the share of competition including the international competition also becomes very severe and depending upon the case, trends like decline in profits are seen. Besides this, changes take place on various other points and in the methods including research and development, manufacturing, sales and marketing etc.

In this way, the competition environment changes fundamentally during the period of maturity and the enterprise has to adjust and modify its strategy matching these changes. There might be some mistakes in the strategy during the growth period, however, these did not pose big problem and the recovery was also very easy. However, it does not work in this manner during the maturity stage. Much finer aspects and deeper problems need attention during this period. Some of these problems are listed below.

· Organising and integrating the product line.
· Working out the steps for bringing down the cost for the product through standardisation and grouping the common features.
· To study once again in the cost system while maintaining the cost control more strictly.
· Laying more emphasis on improvement of production process rather than product innovation.

Of course, withdrawal is also one of the possibilities that can be selected. On the other hand, if the industrial environment can assure the limited profit, this type of confusion during the conversion stage can be a very good opportunity for those enterprises are considering the entry.

The internal organisational structure also calls for a change matching the change in the strategy. It is also important to carry out the coordination among different departments more strictly as compared to what has done do far in order to achieve cost competition edge. In order to do so, sometimes the directives of decentralization as formed under operation department based organisation is reserved and the centralised authority system is introduced.

During the maturity period, the pioneering spirit falls down. The promotion avenues and chance of rise in salary also become dull. The budget faces severe cuts. In this way, the control intensifies on various fronts. The employees also get a feeling of being deprived of their independence, therefore, it is natural that the desire to work gets affected. The resistance against the change also starts appearing.

Managers are expected to take due care of the feelings of the employees and promote motivation by establishing the promotion standards and reward and performance appraised system etc. The managers are expected to cope up with such sensitive aspects. Generally, it can be said that the capability and the quality as expected from the managers are different in the growth period and the maturity period.

Operation Strategy for information and growth period

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New products or services come into existence as result of efforts made by enterprises and individuals where technology reforms, appearance of new consumer needs and the economic as well as social changes are properly incorporated. Various new industries have come into existence in different fields ranging from the light technology area represented by personal computer and optical communication, a while ago, to various service industries of today.

Any new industry has an uncertain future because of various factors like uncertain future prospects of the technology, all the customers are new or the strategy difference has not stabilised. It is also not certain as to what type of competition will prevail. Further, it is very natural that the size of the industry is also not very big. However, though the risk involved is also very big in this type of industry, the possibilities of a very high return are also very high, provided it succeeds. If it works well, it may be possible to create an environment which is which is beneficial for one’s company.

In any new industry, it is very important to construct a perfect system covering procurement of material, production and sales, after taking positive and resolute decisions on the basis of development of creative technology. One must not fear the risks involved even as compared to the quantity of management resources. There are many instances where the venture companies, which do not have very rich management resources, have proved to become the pioneer of the new industries.

This, however, does not mean that the planning is unnecessary. It is necessary to create a feasible scenario which is beneficial to one’s company and then making creative plan and efforts in that direction. This type of scenario can probably be created by systematically developing the product and the technology forecasting, future analysis for the market and competition environment etc.
The most important requirement in particular, in any new industry, is to find out the difference and to fix the customer segment which shall buy the new products from the industry in the initial stage. Therefore, this will require a proper study for fixing the targets on the basis of customer needs and purchasing attitudes as well as the switching cost etc. Further, in this type of industry, there are some sensitive problems while considering how one must confront the competition rival. There is a fear that the industry may face the problem of image, trust and disorientation from the customers. Therefore, it is necessary to establish the cooperative relationship to some extent.

For example, it is possible to widen the technology base through cross- licensing of patents. Sometimes, letting other companies own the company to a small extent, also helps in promoting the popularity of the products. This increases the customer awareness about the product. Further, cooperation on the front of standardisation is also beneficial.

Development Stage of the Industry and Operation Strategy

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1. Life cycle of industry
Structure of an enterprise is not something that changes easily. Any enterprises should establish a strategy which matches the industrial environment at the given time.

Let us try to understand the idea of life cycle of a product of an industry here. Any industry grows gradually while passing through various stages.

First of all, the sales do not increase because the new product is not fully known or acknowledged by the general customers at the initial stage on entry. The sales pick up promptly once the merits of the new products have been acknowledged. After some time when almost all the major customers have procured this new product and the demand is mainly restricted to these customers, who want operation go in for a change, it results in dull growth. Finally, the growth rate becomes zero. Further, the sales decline due to severe cost competition as well as the changes in needs. The fall in growth rate and the sales is further severe when new alternate products start appearing.

Further, in actual practice it can not be denied that this type of standardized concept is free from problems. It is not surprising to find some industries, which have recovered the high growth rate through innovations and new application of products, though it is considered to be at a stage of maturity period. The competition pattern probably varies depending upon the industry and it may not be exaggeration to call the method of comparing the industry on the basis of single index i.e. growth rate, a too simple an approach. The structure of an industry changes fundamentally at times and there are various factors besides the growth rate, which force this change. Some of the factors are the change in technology base and characteristics feature of the product, dispersion of monopolistic know how and technology information like patent etc, originality in marketing and the change in appropriate size etc.

However, it is not the structural factors prevalent inside the industry alone, which determine the type of enterprise that should remain or enter in the industry and the type of enterprises which must move out of the industry. There are other important factors which affect the industry strongly. These factors include the policy changes by the Government and structural changes in the related industries like the world of customers or the supplier of the alternate product, the parts supplier, or material and extra finance etc.

It is necessary to formulate the strategy considering various factors, as described above during the stages of developments.

Let us try to understand the operation strategies for different periods, e.g. by dividing the periods in three, namely introduction and growth period, maturity period and decline period.

Operation Strategy during decline period

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An industry is called as going through decline period when it is confirmed that its sales figures have been showing a trend of decline for a very long period and there is no hope of reactivation in real sense.

The competition within the industry becomes severe under the conditions when sales have reduced. The extent and trend of this change vary depending upon the forecast regarding the future demand and its uncertainty as well as on the basis of existence of barriers against withdrawal. Further, the negotiation power vis-a-vis the related areas like the suppliers of raw material and parts and the distribution and transportation also weakens.

It is common to consider the rule of selecting one of the two strategies, namely the harvesting strategy in which the capital investment is recovered by earning and increasing the cash flow as far as possible and the immediate withdrawal from the operation during the period of decline, besides the positives efforts to avoid any fresh investments. However, the strategy which the enterprise must adopt during the decline period is also not to so simple to decide in actual practice.

Even in case of decline in industry, there remains some demand ultimately, provided the need has not dried up totally or the alternate product has not driven away the original product completely. Consequently, if a few companies survive in the industry, it may be possible to carry out a rather congenial and interesting business. In such cases, the position of an enterprise in the overall industry can be maintained or improved depending upon the competition environment and the state in which the enterprise is placed. It is also possible to ensure only a particular segment for the business.

Consequently, the survival of only a small number of enterprises in the industry, depends on how many other enterprises withdraw from the field. There are various strategies which can be adopted to take care of such a situation. These include clearly showing the difference in the strength one processes vis-a-vis its competitor or by simply buying the equipment of the rival company and abandoning it. There is another technique of reducing the withdrawal barriers by taking over the OEM production and the production of supplementary parts etc. Even after this type of strategy has shown its results, it may be possible to sustain the position, which has been ensured through this exercise for a longer period and there is also a possibility of shifting to the harvesting strategy or the withdrawal strategy.

Finally, the main points related to harvesting strategy or withdrawal strategy are briefly explained below.

1. Harvesting strategy
In the harvesting strategy, the new investment is restricted very vigorously and efforts are made to recover the capital investment to the maximum, ultimately paving the way for withdrawal. In concrete terms, the small customers are dropped, the product line is organised and integrated. The service standards are lowered and the expenses on public relations exercise are cut to improve the cash flow. Subsequently, it leads to disposing off the operation or resorting to liquidation.

For a smooth perusal of this type of strategy, the enterprise must have the privilege of an industrial environment where the competition is not very severe even during the decline period and the enterprise should have the sufficient strength. There are not many enterprises which can maintain the trust of supplier as well as the customers even while resorting to this type of strategy. Further, it is also a very difficult problem to maintain the high morale of employees when this type of strategy is being pursued.

2.Withdrawal strategy
In the case of withdrawal strategy, the pre-requisite condition is the early disposal of assets at a higher cost during early stage. Once the withdrawal of any industry becomes known publicity, the cost of its assets reduce very widely. Withdrawal from a particular operation does not affect the said operation alone, it has more influence in relation to the other departments of company as well as enterprise image. Therefore, there are many cases, when OEM supplies are obtained from other companies even when the in-house operations have been discontinued. In this way, the business is continued and withdrawal is affected part by part now.

The selection of strategy during the decline period may be decided after due consideration to the further demand forecast and the strengths as well as weaknesses of one’s own company and those of powerful rival company. The analysis of withdrawal barriers and the strategic relationships with the other division in the company also need to be considered.

Follower

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Follower enterprise is the one which does not have the pre-dominance in the quality of management resources. A follower enterprise, if it intends to continue its operations shall, for the time being, ensure the profit sufficient enough for sustaining its existence and shall make efforts for accumulating the management resources.

A strategy which it can adopt under circumstances is to copy others. It adopts the manufacturing techniques that have been successfully tried by the bigger enterprises. It aims at a market segment which has either been taken lightly or ignored by the larger enterprises. In other words, it performs the gleaning operation.

Nicher

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Nicher refers to those enterprises, which possess special capability or assets, i.e. capable of matching the leader or the challenger in terms of quantity management resources. A nicher enterprise does not try to confront the large enterprises and fight for the market share. It exploits its own special characteristics and ensures for itself the pre-dominance of specified niche market. It makes efforts to establish its name and image and pursue the profits.
The concentrated strategy is also called as nicher strategy sometimes, therefore, a nicher enterprise is the one which adopts the concentrated strategy. A nicher enterprise is leader for a small niche market. Therefore, it works for the overall expansion of demand of its market. It avoids the cost competition as far as possible and makes efforts in maintaining good environment within the niche market.

The typical examples of nicher enterprises are Honda in the passenger car market, specialising in small car Sony in audio-Visual and domestic electrical appliances has special strength in the audio-visual field. Further, both Honda and Sony are already on their way to become challenger from their nicher level or may have already become challengers.

Challenger

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The Challenger is an enterprise that matches or even exceeds in comparison with the leader enterprise on the quantity of management resources. However, its management resources are inferior in quality. A Challenger works for expanding the market share and it targets the position held by the leader. Therefore, it is necessary for the Challenger to adopt some progressive strategy in a bold manner that cannot be copied by the leader. It may not serve the purpose for the Challenger, which is inferior in terms of management resources, if it follows a strategy similar to that of the leader or a strategy through which it can follow the leader.

The concentrated strategy is also not very sufficient for the challenger, who is trying to expand its market share considering the shortfalls in the market share. At the present stage, the low cost strategy also has its problems. It is expected of challenger to adopt a strategy based on creation of distinction which cannot be copied by the leader in total.

One of the examples in which the above mentioned strategies showed it effect was Minolta which succeeded in capturing the single lens reflex camera market share, particularly, the auto focus camera (Alfa-7000). The Cannon which is the biggest player, faced difficult problems to follow suit. A single lens reflex camera is composed of a main body and various types of replaceable lenses. Therefore, it was necessary to modify the interface between the main body and the lens, in order to incorporate the functions of auto-focus. Therefore, it became mandatory to provide an absolutely new product line.

Leader

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A leader enterprise has nothing lacking in quantity as well as quality of management resources and has already ensured top position in the industry. For a leader, sustaining the holding of maximum share, improvement of reputation and image and maximizing the profit are the obvious targets and the leader has to look around everywhere in all the directions for marching towards these target.
Considering the size of the share, it is important for the leader enterprise to maintain cordial market environment in the industry. Particularly, it should make efforts to increase the overall demand in the industry by cultivating the dormant customers and by development of new applications, It should try to avoid the cost competition as far as possible.

In the event of appearance of an enterprise, which is capable of threatening the position of leader enterprise, it should get involved in the similar competition and explore the possibility of taking advantage on the basis of difference in management resources.

Probably, there should be no objection in calling Philips dealing in audio product, Maruti in passenger cars and United Group dealing in manufacturing of liquor, the leader enterprises. All these enterprises can be considered as following the earlier mentioned strategy almost in full.

Competition Position and Operation Strategy

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The operation strategy to be conducted by any enterprise differs depending upon the management resources possessed by the company. Here, position of the company can be classified into four different types namely, leader, challenger, niche and follower on the basis of the quantity (power) of the management resources as well as its quality (skills).

The quantity of management resources means the abundance of capital, size of production capability, number of marketing personnel and the scale of distribution channel.

Quality of management resources is represented by the quality of product, technology standards, brand image and the spirit of the industrial house.

Three basic Strategies

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Michael E. Porter has talked about three basic strategies, which are

1. Cost relationship (low cost) strategy,2. Strategy, based on distinction and 3. Controlled strategy.

1. The cost relationship (low cost) strategy
This strategy is based upon the earlier mentioned experience effect. The experience accumulated by acquiring a larger market share and efforts are made to grab the cost leadership. Considering the economy scale also, the cost pre-dominance of leader enterprise becomes very important. However, cost pre-dominance does not depend on market share and scale alone. It is also important that the product should be so designed that the product becomes simpler, the cost may be distributed by perfecting the lines for the other related products and efforts must be made to develop alternate products which involve now raw-material cost.

In this strategy, it is demanded that the managers would implement strictly the cost control including the direct cost, however, there are some exception related to important fields like research and development, advertisement and P.R. and other such market as well as service related activities.

2.Strategy of distinction:
Creation of distinction means an opportunity to appeal something special and different in the service or the product which is to be supplied to the customer. There are various methods which can be considered for the creation of distinction on these include the creation of distinction on the basis of product style or brand image, distinction on the basis of technology, distinction on the basis of customer service and the distinction on the basis of dealer network etc. (here, the creation of distinction does not include those aspects which are based upon low cost).

All these methods are not the alternative methods to each other. It is desirable to implement the creation of distinction on more number of points. Further, in the strategy of distinction, it means that creation of distinction on more number of points. Further, in the strategy of distinction, it means that though the cost is not the prime target of the strategy, it does not mean that the cost can be ignored completely.

The margin can be set at higher level depending upon the brand loyalty of the customer, therefore, it is possible for the manufacturer to survive in the industry even when it is little disadvantageous from the cost point of view. The higher margin percentage and better customer loyalty play an advantageous role even while tacking the threat from alternate product or during negotiations with the supplier. However, it may be noted that the strategy based on creation of distinction has its limitations with regard to the share expansion.

Creations of distinction itself requires some cost and it does not go well with the establishing, which is cost sensitive, on this account. Further depending upon the point on which the creation of distinction is based, it may involve large amount of expanses for maintaining the marketing, research and development, customer services and dealer networking etc.

The customers who pay large amount of money for excellent services, high quality and brand image may not necessarily form the large part of the overall clientele.

3.Concentrated strategy:
Concentrated strategy stands for a strategy in which focus is laid on a specific part or specific customer segment or the original market and not the full line of product field in the industry.

The low cost strategy and the strategy based on creating distinction are meant for the overall products and the markets of the industry, whereas, the concentrated strategy pursues the low cost or the creation of distinction for specific market segment. Both can be achieved in the limited narrow scope.

This was a brief explanation about the three basic strategies. However, in actual practice, the organization, the resources and the business system which are involved in coordination of the strategy also have their respective diversified content.

Typical Competitive Strategy

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So far, the explanation laid emphasis on the aspects like cost pre-dominance and market share. However the world of market economy is much more complex, diversified and dynamic and it may not be possible to reason out so easily just with the help of quantity aspects. It may not always be necessary that the cost reduction or expansion of market share becomes the most preferred factors in the strategy to be adopted by the enterprises.

The strategy which is adopted by any enterprise, may always have lots of variations. Competition strategy is a product of creative and direct confronting as well the analytical thought of the people who are involved in its designing. However, the competition strategy, which is prevalent in the actual world can be classified in to a few basic pattern. Here, we shall take up the three patterns mentioned below.

1. The three basic strategies as emphasis by porter.
2. Four competition strategies matching the different market levels.
3. The progress of competition strategy matching the life cycle of the industry.

PIMS

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Brief summary of PIMS

PIMS is an acronym of Profit Impact of Market Strategies and it stands for a project in which the influence affected by the market strategies on the profit, is surveyed and studied. Originally, this project was initiated as an inhouse project of General Electric (G.E.) in 1960, for the sake of explanation and forecasting of the results of operation management. It covered market strategy and rate of return on investment. The G.E. used computer based regression model and experimented for the sake of explanation of essential differential portion of rate of return on investment (R.O.I.) on the bases of large quantity of operation data covering various operational fields. Thereafter, this project was taken over and continued till the beginning of 1970s by Harvard University, Marketing Science Research Institute.

In 1975, a non-profit making organisation called SENRYAKU KEIKAKU KENNKYUSHO (Strategy Planning Research Institute) was established with an aim to integrate the overall activities by member companies in order to promote the PIMS programme at a larger scale. In 1980, more than 200 companies with about 2000 operations participated and supplied the financial data related to different and multiple number of their operation fields. On the other hand, the research institute analysed the data and carried out the analysis of significant information which was obtained through this exercise. The results was provided back to the companies as feedback.

The problems, which are pursued by PIMS can be summed up as given below:

(a) What is the relationship of various factors and average standard of cashflow and R.I.O. in various operation fields?
(b) What would be the type of transmission in cashflow and R.I.O. in future assuming that the market environment and strategy are constant in a particular operation?
(c) How should the marketing strategy be modified so that the performance improves in future in particular operation?
(d) What would be the type of transition in a cashflow and R.I.O. in future due to the change in the strategy to be adopted in a particular operation?

If a suitable solution can be found for all these problem, it will definitely contribute in the actual management from the view point of resource distribution like management and capital as well as the analysis of performance of forecast of profits. Further, it will also be possible probably to apply the finding for the other purpose like evaluation of new operation opportunities.
However, the analysis is unit of PIMS should be so designed that the comparison among these should become meaningful. For the purpose, the following operation division standards have been provided.

· A service or a product which has been clearly differentiated and defined from others is being provided.
· The clear competition rivals are more than a particular fixed number.
· It does not depend upon other divisions for technology, product and marketing. The operation is self-sufficient and independent.
· Has or can have the management strategy for that particular operation.

Results of PIMS

Various findings have been arrived at regarding the relationship between market strategy and the performance as result of PIMS project. The most conspicuous findings are given below.

(a) The market share is the biggest most important factor among the various factors which affect the profits. Specially, the R.O.I. affects the market share in a big way. The concrete results showed that average R.O.I. for an operation having 40% or above market share was 2.5 times of R.O.I. for operation where market share is 10% or less. This means that the R.O.I. increases by 5% on an average when market share has gone up by 10% (figure 2.7)
(b) The qualitative difference of market share price among the enterprises shows the tendency of widening with the passage of time. It was confirmed that certain level of shares form the boundary line. The enterprises having market share above this boundary line show an increase whereas those which have lower market share go further down.
(c) A fixed pattern was confirmed with regard to distribution of shares among the enterprises. Comparing the shares of la few companies with some of the top enterprises in the order of their holding, it was found that in most of the markets, it showed the relationship in geometrical series with about 0.63 as the ratio.
(d) The increase in market cost in excess of market growth rate quality improvement and new product development contributes a great deal to the expansion of market share.
(e) The cost standards do not contributes to the increase or decrease of the market share.

Effect of the Experience

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What is the effect of the experience?

Experience effect is a concept which was advocated by Boston Consulting Group (B.C.G). Generally, human beings learn in depth while accumulating the experience. In the process, their proficiency continuous to increase. Even in the industrial operation, the accumulation of experience plays a very important role in the reduction of cost.

Whatever has been discussed so far, was something very obvious. However, B.C.G. has proved with substantial evidence that the unit cost for the production and sale of a product reduces in percentage, everytime the accumulated production quantity in a particular product field doubles.

B.C.G. has conducted surveys in various fields ranging from automobiles, I.C, electric shaver, chicken broiler and wide ranging products and services. According to their survey, it was found that the percentage decrease in the cost should normally be ranging between 10% to 30% everytime the cumulative production quality doubles.

Why such an experience effect is seen? It is considered to be due to the involvement of factor given below.

· Improvement in working capability (as the individuals gain experience in different professions, their proficiency level increases, displaying the effect) .
· Specialisation of professions (normally this happens as a result of division of labour).
· Improvement of production process and the reforms (improvement in operation method etc.)
· Upgradation of production equipment (improvement of existing production equipment and automation etc.).
· Improvement in product design.
· Improvement in yield and bad product ratio.

The effect of experience probably can be considered as the effect obtained by a combination of all these factors.

However, there is no basis for determining whether the clear relationship. Rationally considering, any industry would like to take up only those aspects in the beginning in which cost can be reduced effectively with little efforts normally there are more opportunities of reducing the cost also. On the other hand, the experience curve can probably be understood as an index at the time of determining the cost or while planning target for the cost reduction.

The cumulative production quality expands rapidly when the scale is bigger. Therefore, the profit of experience effect and the scales act simultaneously more often. As a result, there is a tendency to pick up the two simultaneously. However, the two should be treated independently as the concepts. The experience effect is directly proportional to cumulative production quality from the past upto the current state, whereas the economy of scale is proportional to the current production quality.

1. Share Expansion Strategy
Whenever cost forms an important factor in an industry. And it is possible to except the cost reduction thought experience effect, having larger share of cumulative production quantity as compared to other companies in the industry, gives an edge for forming the resource of competition power.

Let us try to understand this fact through example. There are three companies ‘a’, ‘b’ and ‘c’ which have the major share in a particular industry and they all are above a particular experience curve. The cumulative production quantity and cost for these three companies at the present stage is shown by the three points on the broken line corresponding the strength line. The industrial cost follows the lower line as the experience of the overall industry accumulative for the sake of competition. However, at this point, the industrial cost is the going cost as expressed in the figures. The margin of the three companies is expressed by the difference in the cost of an enterprise and the going cost. The company ‘A’ which has the maximum cumulative production quantity shows the maximum margin, whereas the company ‘C’ which has little cumulative production quality has a deficit.

Under such conditions, the fight for the market share in most cases tends to spread over. Larger the shares, higher the sales quantity and better is profit rate per unit of the product. As a result, the company can have a beneficial position from the point of view of relative rate of share. Further, the company in question will enjoy the profit of scale also, the difference in share keeps on widening further with the passage of time.

With such being the prevalent conditions, there is possibility that the companies may appear which resort to dumping and try to capture the shares at a low cost beyond the future projected reduced cost. Further, if tendency prevails, there is a danger of sluggish cost competition.

Basic Concept for Formulation of Operation Strategy

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The operation strategy, as described so far, is established on the basis of competition analysis, customer analysis, business system analysis and one’s own capability as well as the management resources and the mission of the operation as assigned by the head Office. It is not as simple a solution that can be obtained automatically simply by carrying out a certain analysis. The enterprises, under certain given circumstances, very often select a similar type of operation strategy.

A few major concepts, which are useful for establishing the operation strategy, are explained here along with the similar type of operation strategies which are often picked up depending upon the development state of industries and the management resources as available with the industry.

Threat of Alternate Product

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Alternate product refers to a product developed by the other industry but is capable of providing functions similar to those of the original product. For example, electronic musical instruments in place of piano or laser disk in place of video are the typical example. Rental car service is also another type of alternate product in place of the automobile as a product.

The alternate products which have shown remarkable trend of better price-performance ratio and those supplied by the industries which have shown very high yields need careful attention. Presence of an alternate product does not allow the cost hike easily even when there is a lot of demand. Therefore, the latent profits get restricted inspite of all the efforts. A joint action by all the members is very effective in the case of an industry facing the threat of offensive by the alternate products.

Negotiation Power of the Customers

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The customer always have various types of needs related to the product like cost, quality and functions etc. To what extent an enterprise in an industry can sacrifice its profits to satisfy the customers demands depends upon the negotiation power relationships of the two. The conditions given below increase the negotiation power of the customer.

· The customers are concentrated at one place and they contribute a considerable amount of share of profits of the supplier.
· The price of the product supplied by the supplier forms a big cost factor for the customers.
· The supplied product can not be made distinctive or standard product.
· The switching cost for changing the supplier is low for the customer.
· Earning power of the customer is problematic.
· The supplied product does not form a very important factor with regard to quality of the product or the services for the customer.
· The customer has considerable amount of information.

There is nothing like a state in which the supplier can select the customers, however, in this case, the supplier must consider the above mentioned conditions and it is important to select a customer in such a manner that it can carry out the transactions under most beneficial conditions.

Hostile Relationship among the Competitors

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Hostile relationships among the enterprises involved in similar business is the most easy to understand in competition. This hostile relationships become further severe when following conditions are prevailing.

· Either there are more number of enterprises involved in similar business or the companies with almost the same scale are competing against each other.
· Slow growth in the industry.
· Higher fixed or inventory costs.
· No distinction on the basis of product.
· It does not require such switching cost for changing the customer.
· It is not possible to increase the supply capability bit-by-bit.
· The strategy adopted by the different competitors is diversified.
· The results are very high once the success is achieved.
· Barrier against withdrawal is very big.
· The major barriers against withdrawal are listed below:
· Sunk cost (an investment which has been made in the past and is not possible to recover).
· Fixed cost for withdrawal.
· Restrictions from the Government or society.
· Sentimental barriers.
· Strategic inconveniences, which results in bad relation with the other operation division.

Competition Analysis

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Probably, it is necessary to carry out the analysis of competition environment in the industry from various aspects in order to establish the operation strategy or the competition strategy. Even while saying so, it is not very simple to control the important factors by understanding the diversified and complex realities.

A framework of analysis was constructed on the basis of 5 competition factors which are described below, as shown by Michael E. Porter in his book “Kyoso no Senryaku” (Competition strategy). This framework is very useful for streamlining the information and compiling the ideas.

1. Threat due to new entrants.
2.Hostile relationships among the competitors.
3.Threat of alternative product.
4. Negotiation powers of the customer.
5. Negotiation power of the suppliers.

Analysis of Customer Need and Segmentation

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While selling the product or services in a particular operation field, the question of what type of product or services should be sold to whom in what manner is one of the fundamental problem of operation strategy. The analysis of customer need and market segmentation are most important for finding then proper solution to such problems.

Competition and Creation of Distinction at Two Levels

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It has already been explained that the operation strategy has inseparable relationship with competition.

Considering from the point of view of individual enterprise, competition is a menace. Every enterprise would like to have no competition. It could be possible to live a more comfortable life, if there was no competition. Further, if the competition is conducted in absolute genuine manner, it will end up in state where no one would be able to make profit. No amount of efforts would be rewarded. Therefore, in order to survive in the competition, it becomes necessary to create a state where there is no competition in some parts. The basic means for doing so is to create distinction.

Creation of distinction is a step to escape from competition. In order to create distinction, it is necessary to make serious efforts to find out where does the customer puts the value. However, even the creation of distinction is accompanied by competition. The competition in course of distinction brings about development of company and in this society of competition, it can also be said that “people are trying to compete in order to escape from the competition”.

1. Creation of distinction for the product and service
The distinction can be created at two levels. One is the level of individual products and services. This is method through which a difference is created vis-a-vis the products and services of other companies. Some of the examples of competition through creation of distinction at product level are the fight between “Esteem VX” and “Cielo” in the high grade automobile market, the fight between “Pepsi” and “Coke” in the soft drink market and “Surf” of Hindustan Lever and “Ariel” of Proctor & Gamble in the field of detergents.

The competition for creating distinction at this level becomes very conspicuous. In many cases, it becomes a topic of day-to day discussion also. However, the course of distinction of product or service level always has weak points also. First of all, its life is very short. Whenever an enterprise succeed on the basis of creation of distinction, other enterprises which could create the same successfully appear very soon and sometimes the rival enterprises bring a further distinguished product also.

2.Creation of distinction on the basis of business system
Another level of creation of distinction is the distinction in the system of operation. In this level of creation of distinction, difference is created in the operation system on the basis of elements and technology required for development of products or the services, in the system and technology for its production, in the system of sales and distribution, in the consciousness of the people working in the operation and the organization and in the accumulation of image and trust among the customer etc.

This type of creation of distinction is not very conspicuous in visibility. There are many aspects which are not visible when seen from outside. A customer can see only the product or the service, whereas, the system which falls in the background is not to the customer as well as to the competition rivals. Therefore, it becomes difficult to copy the same. Further, this type of system reflects the total efforts of an enterprise and if any other company thinks of duplicating the system, it will have to create the same system and the organisation also, which is a time consuming process. Therefore, creation of distinction on the basis of system is very difficult to copy.

This type of system is called business system. In most of the cases, the creation of distinction on the basis business system is long drawn out policy.

Operation Strategy and Product Strategy

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Let us try to understand the relationships between the operation strategy and product strategy. The product strategy decides the basic policy covering various factors like what type of services are to be provided for a particular product to what type of customers and in order to do so what should be the attributes and performances of this product. The logic similar to that of operation strategy can be used while setting up this product strategy.

In this way, the product strategy and operation strategy have considerable amount of common points. In this text book, most of the points deal with setting up of mainly the operation strategy, however, a major part of these points is certainly applicable to the product strategy also.

Though, there are many common points, the two have dissimilarities also. The biggest dissimilarities deal with the management resources and business system. The operation strategy includes the decision regarding what should be done about the business system. On the other hand, the business system forms a postulate or the given conditions in connection with the decision on product strategy. The product strategy is decided on the basis of given business system which in turn is decided by the operation strategy. From this point of view, it can be said that products strategy is a lower level strategy of operation strategy.

Further, the product strategy is again restricted on the basis of what type of appointed tasks have been fixed for the said product among the different products. These type of appointed tasks are normally decided in the operation strategy.

The fundamental topic of operational strategy is to make a business system. However, there are other decisions also which need to be carried out under the product strategy and these are, who should be targeted as customers for a particular product or service, what should be the attributes and performances of the product which has to be supplied to the customer and the worth and the other factors include secondary service, place of sales, advertisement and propaganda and the price etc.

Business System

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The competition of product becomes easily conspicuous and the successes brought about by this competition is glaring also. Human eyes always tend to concentrate on the competition at this level. However, the enterprises which have successfully built competition pre-dominance over a long period in the industry have done so by winning on the basis of creation of distinction of business system. The companies like Matsushita Denki, Toyota, Philips, Coca Cola, I.B.M., Xerox, Mercedes Benz etc. have succeeded in demonstrating success continuously on the basis of creation of distinction of business system.

These enterprises could retain the top position in the industry not on the basis of product development only. Sometimes they could lead on the bases of product development, whereas, sometimes they were led by the competition rival. They were capable of catching up even from behind whenever they were led by the rival companies on the basis of product development. In other words, these enterprises were not leading on the basis of product, rather it was a business system, which gave them the leading edge. A company which could not maintain the lead on the basis of business system had no other way but to compete through the distinction of product. However, any distinction of product fades away in very short duration in most of the cases and it was not possible to continue and maintain the success on a long term basis.

Let us try to understand the business system in more concrete form. The management scholars use different terms for business system. For example, Michael E. Porter has called it value chain. Whatever may be the name, a business system covers various activities from the production of value by enterprises in different operation fields upto the delivery of product or services to the customers.

In the case of a manufacturing company, purchase and delivery, manufacturing, dispatch and distribution as well as marketing and the after sales service are the concrete activities. These are not the independent activities, rather they from one system. These activities can be compiled through various system like information system, logistic system, technology development system, personnel and labour system and organization as well as control management system.

Formulation of Operation Strategy

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It was mentioned earlier that the operation strategy basically answers three question, viz. “to whom”, “what” and “how”. This requires various types of analysis and decisions. The various topics of the chapter include these factors and their explanations like what must be thought of under operation strategy and what type of analysis should be conducted through what types of methods etc.
In order to establish the operation the strategy, it is necessary to carry out the analysis and decisions on the following four aspects.

i. Decision regarding operation field (operation domain).
ii. Customer analysis.
iii. Competition analysis.
iv. Analysis of capability and system of one’s own company.

1. Deciding operation field
Definition of operation field (in other words the operation domain) is the first problem while setting up the operation strategy. This deals with deciding the place where one is fighting.

Generally, the operation field for setting up the operation strategy refers to an industry or a market field, where the independently decision making makes sense and it is possible to carry out the decision making regarding the operation independent of other operation fields. However, this does not mean that the operation field is decided unilaterally.

Let us try to study it further with the example of electrical appliances. The industry of electrical appliances can be classified as one operation field through a wider definition. However, it includes various market fields which can be considered independently for setting the operation strategy because of difference in characteristics like those of heavy duty domestic electrical appliances and electronic components etc. Further, even in the field of domestic electrical appliances, it covers the fields of audio-visual instruments and other may also have significant meaning. Further, the domestic electrical appliances field covers vacuum cleaner, washing machines, air-conditioner, micro-wave oven and various other such products. It is also possible to establish operation strategy for each product.

It is very difficult to decide the conditions, which can satisfy everybody while defining the criteria on suitability of level of operation field. The decision with regard to what needs to be defined as operation field depends upon the position of each enterprise, e.g. Matsushita Denki (National Panasonic) may decide product-wise detailed operation fields. Whereas Mistubishi Denki or Hitachi may take a broader view for the definition and pock up domestic electrical appliances as the unit for setting up the operation strategy. Considering the difference in the circumstances for each enterprise, it may not be possible to say that the method adopted by Matsushita is correct and the one adopted by Mistubishi or Hitachi is wrong.

Again, there is another problem related to the section from which the definition is arrived at. Depending upon the section, the understanding regarding the customer needs and the competition rivals will vary, e.g. an operation division dealing with piano or a piano manufacturer shall have the other piano manufacturing companies as the competition rivals, if the operation field is read in literal sense. However, if the piano manufacturing company or the division considers manufactures of musical instruments as well as electronic musical instruments shall form the rival group. The three dimensions of customer layer, customer functions and technology (or product) are the typical sections or the opening in the case. This three dimensional approach has been explained in detail under clause 3.2 of chapter 3 in this book.

Once the operation field (domain) is decided, the battle front also gets decided. The next topic is to decided about what type of customers have to be targeted (decisions regarding the customer) and with who else the customer has to deal with (decision regarding the competition rival).

2. Customer analysis
It is necessary to carry out the customer analysis in order to arrive at a decision for selecting the customers and type of values to be provided to the customer. When all the customers within a particular operation field are targeted to be satisfied, it always leaves some dissatisfaction for all the customers. The demands of customer will vary depending upon the targeted customers. For example, in the case of a travel agency dealing with airline service, a businessman may lay importance on the punctuality of time and cutting down the time requirement, whereas general tourists shall lay more importance on expenses.

Therefore it becomes necessary to divide the customers in a number of groups in order to analyses what exactly are the demands of different types of customers. The techniques for doing so is explained under clause 2.3 of this chapter.

3. Competition analysis
Some sort of competition always exists in the market. While making effort to create distinction vis-a-vis the competition rival, it becomes necessary to know about the competition rivals and what are their capabilities and systems. It order to know these factors, competition analysis plays a major role.

4.Analysis of capability and system one’s own company
It is necessary to attain a persistent and constant capability and establish a stabilised system in order to provide a constant value to the customer and to display a distinction vis-a-vis the competition rival. The resource for capability of any enterprise is the management resource. Further, it is necessary to establish and provide value in a stable and consistent way to the customers on a continuous basis.

The management resources and the tasks of operation as assigned and distributed by the head office are taken as a starting point and the 3WH viz. “to whom”, “what” and “how” are decided on the basis of above mentioned customer analysis, competition analysis and the analysis regarding capability and system of one’s own company.

Overall Company Strategy and the Operation Strategy

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The operation strategy should be established in such a manner that it conforms with the overall company strategy.

The missions of various operations are decided on the basis of overall strategy in a rather diversified enterprise and it is very normal that its operation strategy is decided to accomplish these missions. The missions or the appointed tasks of operations are, e.g. “first of all strengthen the position in the market even if the issue of profit in this operation field has to be overlooked” or “increase the profit while restriction the investment” or “to become the main stay” etc.

In the case of failure to establish operation strategy through which the selected task of an operation can be accomplished, it becomes mandatory to study once again the validity of selected task itself. Consequently, the selected task of any operation in not to be decided from the top, i.e. through top down management. In most of the cases, it is decided through negotiation between the people, who decide the overall strategy for the company and those, who decide the operation strategy.

Further, the distribution of management resources is also decided by the head office along with the decision regarding the selected tasks of operations. The above mentioned PPMs works as a mean for arriving at this decision also. The resource distribution is also not decided unilaterally by the set of people to decide the overall strategy of the company. It is rather decided in most of the cases through discussion with those who establish the operation strategy.

Functions of Operation Strategy

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(-) Operation Strategy

Operation strategy is the basic conception for carrying out the operations in a particular operation field. It can be described as an overall concept in concrete form which takes care of different aspects like what items of value needs to be supplied to what type of customers and what are the capabilities and system requirements for accomplishing the same.

Operation strategy is the lower level strategy of the overall company strategy. The basic problem of overall strategy of the company is to cope up with the structural changes in the environment and the conceptions of how to carry out activities in the operation structure to achieve the dream and vision of the company. The overall strategy of the company (strategy of operation structure) shall be taken up for learning in details in chapter 3 of this book.

In contrast, the topics regarding operation strategy include basically the type of customers to be targeted in a particular operation field and the type of products or the services (or the combinations of the two) to be provided in what manner. In other words, it deals with providing answers for “to whom”, “what” and “how”.

However there is one more additional item which is the competition. The competitive rival has also been making similar efforts to provide similar type of value to similar customers. While establishing the strategy for overall company, the competition is not the essential problem, whereas, it forms the most essential problem in the case of operation strategy. This is why operation strategy is sometimes called competition strategy.

In the operation strategy, creation of some difference somehow as compared to the competition rival becomes the essential problem. This is known as creation of distinction and “how” as described above means “how to create the difference”.

The establishment of operation strategy is normally carried out at the level of operation division (marketing). However, there are some companies which have used strategy operation unit extending over to the operation division as the unit for establishing operation strategy. As against this, the overall strategy of the company is decided by the head office.

Operation Strategy

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The problem, which forms the core of the operation strategy, is the internal competition within various industries due to the different operation activities conducted by the contributing enterprises. It becomes necessary to formulate a fundamental policy for establishing distinctive pre-dominance against the rival enterprise, in order to win and survive in the industrial competition. In other words, the key concept is the competition strategy. From this point of view, it can also be said that competition concept is the most important factor of the operation strategy.

Earlier, the problem of competition strategy used to be discussed as the problem of strategy of marketing division. However, today the enterprise level competition is not limited to the marketing division. It is very much linked to different divisions of the enterprise. It is based on the cooperative actions taken by the people from different professions in the enterprise. Therefore, the problem of competition among the enterprises is looked upon as competition strategy from various view points, for example, the major contributing elements of the rival companies, strength and weakness of one’s own company, customer segment, industry and the market and decisions regarding the means of establishing competitive pre-dominance.

The strategy with regard to various products can be considered under the operation strategy. The products strategy has the theory similar to that of operation strategy. However, in the case of operation strategy the construction of basis set up for the competition forms the major topic, whereas in product strategy, stratification of products within the existing set up forms the major topic.

Let us try to learn about the operation strategy and products strategy in this chapter. The topics like similarities and dissimilarities between operation strategy and products strategy, the relationship between operation strategy and basic set up of competition (business system), the framework for competition analysis, basic similar models of competition strategy, life cycle of the industry etc. have been taken up in this posts.

Flexibility and Confirmity in Behaviours

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It has already been expressed that which type of strategy will play what type of role. However, the different conceptions with varying degree of abstractness shall play different roles depending upon the degree of abstractness.

For example, if the abstract form goes as high as the level of dreams and vision, the function which acts for conformity of behaviour, may delink. However, it is possible to make behaviour more flexible because it becomes possible to approve conflicting and contradiction concepts and behaviours. Further, if it is possible to make expressions which touch the human it can play the role of mobilising the psychological energy of human beings. In relation to the function for conformation of behaviour, the idea as well as concept are at a lower level as compared to plan and the budget. However, as a result of co-existence of idea and concept, it becomes possible to know how to perform and at the same time the knowledge and the information regarding why it should be performed in that manner also becomes common. As a result, it may be possible to obtain to some extent the flexibility and conformity of behaviours at this level simultaneously.

The plan and budget which forms the most concrete level, can play the function of conforming of behaviour and decision making at various points of time in different departments of an enterprise. However, in order to ensure the flexibility and to have the functions where mobilising the psychological energy of human beings is important, it may be necessary to probably go even below high level of abstract form.

The conception level strategy has different functions which can be played depending upon the difference in the degree of embodiment. Consequently, it can be said that various types of embodiment level conceptions are necessary in order to accomplish the different types of functions.

Level of Abstractness and Embodiment

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The highest degree of abstract form of a concept is to have a dream of becoming like a particular company. In the example of decision regarding entry into the American market by Honda, this type of dream formed the background. It is debatable whether it is suitable to call it a strategy or not. However, it can certainly be called as a strategy with highest degree of abstract form.

A slightly concrete form of dream takes the dream to the level of vision. This is an expression through which it is explained in simple terms. What type of company one would like to be or what shape one wants to give to the company. A vision is always guided from the insight concerning the changes taking place in the world. As described earlier and mentioned in the example of Honda also, Mr. Fuzisawa had an insight that the consumer culture will propogate all over the world from America and on the basis of the insight, he could arrive at a vision that the car should succeed in America first.

A level in which vision is expressed in the form of concrete figures is the management target e.g. the “Global Ten” of Toyota automobile is a concept in which it aims at capturing 10 % market share in the world market. This is concrete figure through which Toyota has expressed what type of company it would like to become.

The “idea” is a further concrete level of conception. It gives a hint of how the dream, vision, management target are to be expressed. If the concrete idea is for materialising a problem or the target is not available, the conception ends up in simple effort target only.

A further concrete shape given to the “idea” is the “concepts”. A concept expresses in very concise form, what type of products or services are to be provided to what type of customers in what manner. Probably. This level is the most suitable one to call strategy of conception.

The conception level strategy is given further concrete from at the plan (medium and long term plan) level. Budget expresses it in the form of figures and is a further concrete level. These levels also express the future conceptions and from this point of view it can be considered that these are included in the conception level strategy.

One of the reasons for giving generic names to these strategies is the nature of abstract conception which forms the intermediate product and semi-products which give birth to concrete plan and budget. The abstract dream or the vision takes concrete shape gradually and forms products plan and budget for the concrete final products. From this point of view, probably it can be considered that the conceptions of different level of abstraction play different roles.

Level of Embodiment of Management Strategy

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In this text, the management strategy is used as a concept for the future. However, the concept type strategy is formed on the bases of factors with different degree of abstractness.

Operation Strategy and the Strategy of Overall Company

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the management strategy can broadly be divided into three parts forming the overall company strategy drawn out from the view points of operation strategy, function-wise strategy and the overall enterprise strategy. Among these, the function-wise strategy shall be taken up in the detail in Unit 3 and the other two viz. operation strategy and the overall enterprise strategy are taken up here.

The operation strategy and overall company strategy reflect the difference of different layers in the organization. Their roles also differ. In the operation strategy, various problems related to the different operation are analysed, whereas, in the overall company strategy, the different topics and problems related with the overall company are taken up more broadly and the analysis is carried out on the basis of long term view point. At the same time, it is necessary to study the conformity between the operation strategies.

As the company becomes larger and its operation activity also widens, the management strategy comes into existence as a result of cooperative working of large number of people in the organization. The first problem under such circumstances is how to draw a management strategy. In other words, how to seek the cooperative working of all the people and how to draw a implementation of such a system. To what extent, the management strategy can be defined in concrete form in such cases? The abstract form management strategy as well as the concrete from management strategy have their own respective merits.

Profession-wise Strategy and Operation-wise Strategy

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In this way, strategy matching the profession is formed and at the same time, a strategy matching the operations is also formed. The relationship between the two differs depending upon the state in which the enterprise is placed. For example, it may not be possible to divide the enterprise which has only single operation, on the basis of operation.

On the other hand, and enterprise having multiple number of operations and when it has extremely high degree of heterogeneity in relation to the technology and the market for its operations, consideration of a common profession-wise strategy does not have any meaning except in the case of financial strategy.

Further, whenever organizational structure and planning system of enterprise differ, the method of coordinating will also differ. Accordingly, the content of management strategy and the degree of conformity also varies.

In the case of Division on the basis of Operation

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The management strategy is divided with different operation units forming the basis. Further, the competitive strategy becomes the most difficult problem in the case of the strategy divided on the basis of operation unit. This is because of the fact that in the competitive strategy, how to fight with the competitors is the topic in the particular operation field. The method of competition varies depending upon the nature of the products. These products include the manufactured goods as well as the commercial products (except in the case where special references is made, the two will be referred as “product” in the following text). Accordingly, though it is necessary to divide the strategy into commercial products strategy and manufactured products strategy, a common word “ product strategy ” shall be used in this text.

The product-wise strategy is also necessary when operations are seen product-wise. Though, the operation field might be same, the characteristics of the product may vary in some cases. Accordingly, the product strategy will also differ. This is because of the fact that if a product differs, the resource accumulation and distribution for the particular product will also differ in natural course. The strategy at such product level is known as product strategy.

In the product strategy, the necessary accumulation and distribution of resources are determined with the product as the standard, and, accordingly the competitive strategy is drawn out. From this point of view, it can be considered that the product strategy is the most concrete and detailed strategy.

Profession-wise Strategy

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On the basis of profession, the management strategy can be divided into different functions like product strategy, research and development strategy, financial strategy, marketing strategy and personnel strategy etc. The resource accumulation and distribution form a very important constituting element in the profession-wise strategy

Multi-Layer Structure of Management Structure

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Standards for Dividing the Management Strategy

The management strategy is required at all the levels in different organizations of any enterprise. For this reason, the management strategy also plays a role of providing guidelines for an organisational cooperative working. The proposition “Organisation is based upon the strategy” expresses this most clearly.

However, in today’s scenario the management strategy can not be arrived at according to the instructions of any particular individual in large enterprises. Rather lit may be better to understand that the people form an organization collectively, make the decision and the management strategy evolves as a result of thorough communication among them.

From this point of view, it can be said that the organization it self is responsible for giving birth to strategy. This means that there is another proposition now where it is said "Strategy is based on the organization".

In the way, the management strategy and the organization depend upon each other mutually and it is not true that one is followed by the other.

It is important to note that different management strategies exist to meet the varying requirements of different organizational levels. The management strategy is system which has multilayer structure formed from different types of sub-systems. The overall strategy of a company plays the role of integrating these sub systems. Core of this strategy are the defining of the domain and decision with regard to the operation portfolio as well as the resource development.

There are basically two factors which form the standards for division of management strategy into sub-systems. One is the profession (function) and the other is the operation field. The coordination of the strategy on the basis of one of these axis is determined by organizational structure of the enterprise and the conditions under which the enterprise is working.

Clearly Defining the Focal Point of Attention for the Constituting Members

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Second important role is to clearly define the focal points of attention for the constituting members in the organization. The focal points of attention for the constituting members, who belong to different professions in the organization, are clearly defined, the common understanding is improved and the feeling of oneness is created by displaying the future directions and the future imagination of the enterprise.

However, because the clear conception exists, a decision taken in one Department and another decision taken in another Department strengthens the decision making mutually giving better results.

Means for Regulating Decision Making

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The first role of management strategy is to act as the key for regulating the various type of decision making that takes place in any industry. The role of management strategy is limited to providing of guidelines for decision making or providing the determining rules for this purpose.

The organizational activity of any enterprise is based upon the cooperative working of its constituting member. However, the integration of decision making of the constituting members becomes very important for making the cooperative working possible. The strategic management provides the guidelines for this integration as well as for regulating the process of decision making.

The existence of consistent conception makes it possible to achieve bigger results because any decision making performed at a certain point of time or in a particular division is repeated at some other point of time or in a different division on the same pattern.

Further, some actions take place because the plan exists. These behaviours could not have been seen in the absence of a clear plan. Further, because of the plan, the behaviour also keeps on changing. The strategy in the form of plan forms the guidelines for time-wise and space-wise regulation of decision making in the organization.

Functions of Management Strategy

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What is the function of the management strategy in the overall management of an enterprise? To began with, following four roles can be considered:

[1] Means for regulating the decision making.
[2] Clearly defining the focal points of attention for the constituting members.
[3] Clear indication of directions on resources accumulation.
[4] Clearly indicating the confidence and dream.

Competitive Strategy

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Competitive strategy is the decision for establishing the competitive preferential order in each operational field. The basic topics in this connection are to understand the actual state of competition in the industry and market segment and the segment position of one’s own company as well as to come into competitive preferential order through the combination of management resources through this understanding. The competitive strategy is basically of three types, viz. cost leadership, discrimination and concentration.

The above discussed four aspects are closely related to each other. Therefore, the coordination of four decisions becomes an important topic management strategy.

Resource Development

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Once the operation fields, which constitute the domain, have been decided, next it becomes important to decide about the necessary accumulation and distribution of resources required to meet the composition in each field. This composition is the resource development strategy.

The management resource can be divided into substantive resources (human beings, articles, money) and the informative resources (technology, know-how, and brand image). In the case of substantive resources, it is the distribution which is more important than the accumulation of resources. A proper distribution matching the discriminate preferential order for every operational field is the key factor. On the other hand, it is the accumulation rather than the distribution which is more important in the case of information resources and its key factor is the organizational learning.

Establishing of synergic effect between accumulation resources and the construction of a set up for organizational learning matching one’s domain is the main point of resource accumulation.

Operation Portfolio

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Once the domain has been understood properly, the industry tries to establish its constant position within the domain. Therefore it becomes necessary to decide in concrete terms, “the type of works and the depth”. The combination must also be included in this domain.

The operation portfolio is a table of operations or the overall structure while carrying out the operational activity in the industry. Normally, it is necessary to decide about the following two selections to determine the operation portfolio.

[1] Which fields are to be included in the portfolio (deciding the composition of the portfolio).

[2] How to handle the patterns given by the multiple number of operations (deciding the structure of portfolio).

While deciding the operation portfolio, the attention of individual operation fields are important, but it is more important to consider how much total effect can generated through all the combinations of various operations. The operation portfolio shall be taken up in detail in future posts.

Definition of the Domain

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First of all it is very important to decide what importance the future operations of an enterprise have in order to decide the relationship between industry and environment. This also amount to drawing the long term composition of how the industry shall adapt itself to the environment. This is the definition of domain. Zone of survival as the definition of domain is the base for deciding the other definitions.

It is said that the failure of Railways Industry in America was because of mistaken definition of domain. The American Railways Industry can be called as pilot representative of large industry. However, the Railway Industry thought that its work is only that of the railway operation rather that the transportation work. As a result, it failed to match the rapidly increasingly demand from the transportation sector. The declining market and capturing of the demand by the alternate means of transportation were basically responsible for this failure and in its background was the failure of defining the domain.

Domain specifies the work area in which the operational activities of an enterprise are carried out or it is expressed as a concept covering all such operations. Operation portfolio is the example of the former, and the latter can be expressed by “C & C” (Computer and Communication) of NEC and Life and Cultural industry of Santory.

On the other hand, the definition of domain for the American industry relatively market oriented and it includes many elements which are close to the successful factors in the market. “IBM means Services” can be called as domain of IBM (the IBM operation is not to sell the machines but to sell the functions of the products). Secondly, it comes out with solution for the problems of the customer. “Develop, Make and Sell” (technological reforms, productivity and market share) are the basics for the operation development of the Texas Instruments (TI). These are some typical examples.

For example, the management targets of IBM in 1980s can be understood from the technology map which is an internal document of the company . This map is used for describing the domain of IBM. The portion covered with mesh represents the area of activity where IBM is involved and it holds an edge technically also. It can be understood that from here it extends its operation to almost all the areas of information industry business. In this connection, it may be noted that the portion covered by full lines represents the operations of AT & T, whereas the areas covered by hatched line represents the operational are of Olivetti.

Contents of Management Strategy

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Let us first try learn about the details of management strategy in order to clearly define the conception of management strategy.
The management strategy deals with relationship between industry and the environment. What type of decisions are required to decide this relationship? It is necessary to decide regarding the four areas mentioned below in order to determine the management strategy:

[1] Definition of Domain
[2] Operation Portfolio
[3] Resource Development
[4] Competitive Strategy

Let us try to consider the contents of deciding these four areas.

Definition of Management Strategy

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How do we define the management strategy?

The most common definition of management strategy can be: Management strategy is a future oriented conception in which the relationship between the industry and the environment (pattern for adapting to the environment) is described and it forms the guiding principles for the people in the industry for decision making.
It is obvious that the state of affairs with regard to the management strategy like the number of years for which the strategy has been planned, how minutely it has been described and for what level of people it forms the guiding principles etc., varies from industry to industry. However, it plays a fixed role towards the behaviour of each industry. Let us now try to understand the major role of management strategy.

Two strategy

2007-09-10T16:18:00.000-07:00

The problem of management strategy cannot be divided into formulation of strategy and the implementation of strategy, in the present day industry, Particularly in the large industry, the formulation day strategy is no more the job of only one group of people, who were called as the strategy making staff. As the diversification of jobs progresses and the operations also becomes more complicated, it is certainly not an easy task to form a system where necessary information for strategy formulation can be provided to the top management so that the top management can accordingly take the suitable measures on the basis of this information in a smooth manner. In this way, it can be considered that the formulation of strategy takes birth from the cooperative and joint working of all the members which constitute the organization in the industry.

The concept of management strategy is being used at least with two meanings. One is the strategy which results from the concrete behaviour. It points out to the chain of behaviours which are actually implemented. The people outside the organization can normally understand the strategy of this type. Another type of strategy is the conception for the future. This concerns the broader plan related to the future of the industry as well as its operations.

These two types of strategies may not necessarily always match. The actual world is full of unnecessary that the conceptions are implemented in the same form always. However, it is also true that the two types of strategies are mutually linked to each other. There is always some sort of conception in the background of any behavioural action. Further, various unforeseen matters and the new ideas also come into existence in natural manner and are linked to the behavoiur.

The worthiness of management strategy is ultimately evaluated on the basis of result of a chain of actions. Therefore, it may, probably not be proper to evaluate the conceptual strategy on the face of it alone. However, the conceptual strategy plays a very important role in the organization

The concept provides a chance to guide the behaviour. Because of the existence of the concept, the behaviours change or new behaviours come into existence. Further, when all the people in an organization believe in the common concept, the behaviour as decided by different departments and the behaviour as decided at the time of any difference of opinion has a multiplying effect. In fact, it may be appreciated that the conceptual strategy is basically responsible for introducing, coordinating and synchronising the behaviour in the organization. The term management strategy, in this tutorial, refers to the conceptual strategy.

Social change and the management strategy

2007-09-10T15:58:00.000-07:00

In today’s society, various organisations like industry, hospitals and Government offices etc. are performing the activities with specific purposes. One has to adapt to the surrounding environment for the continuous sustenance of the organisational set up. However, the change in the present day social environment is very severe and is full of uncertainly.

The long existence of the organisation itself as well as their further expansion cannot be accomplished just through the daily routine type decision making under such a state of affairs. In fact, it has become important to detect the opportunities and the threats from the changes and develop the capability to handle these opportunities and threats. Management strategy forms the key for such capabilities.

Management strategy is applicable not only to the industry, it has become equally important for the Government offices, hospitals and schools. However, most of the study which has been carried out with regard to the management strategy deals with analysis of industry. Industry has to face very severe competition on day-to-day basis and the standards regarding the evaluation of its results are also very clearly defined. The study of management strategy in relation to industry has also grown equally.