EXPLOITS UNIVERSITY

FACULTY OF COMMERCE

DEPARTMENT OF BUSINESS ADMINISTRATION

BACHELOR OF ACCOUNTANCY- YEAR 3

BACHELOR OF BUSINESS ADMINISTRATION- YEAR 3

BACHELOR OF ARTS IN HEALTH SYSTEMS MANAGEMENT- YEAR 3

BACHELOR OF ARTS IN HUMAN RESOURCE MANAGEMENT- YEAR 3

BACHELOR OF ARTS IN LOGISTICS AND SUPPLY CHAIN MANAGEMENT- YEAR 3

END OF SEMESTER EXAMINATION

BBA 3102- STRATEGIC MANAGEMENT

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Instructions
1. This examination has TWO sections.
2. SECTION A is compulsory.
3. SECTION B has FIVE questions: Answer any THREE.
4. Write all your answers in the answer book provided.
5. Start answering each question on a separate page in the answer
book provided.
6. This is a closed book examination; books, dictionaries, notes, phones or
any other written material are not allowed in the examination hall.

DO NOT TURN OVER LEAF UNTIL YOU ARE TOLD TO DO SO BY THE INVIGILATOR

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 SECTION A: COMPULSORY

Question 1

(a) ‘The intensity of competition depends on several factors.’ Identify

these factors and discuss briefly on them. (10 Marks)

(b) Can cost leadership strategy allow a firm to earn above-average

returns despite strong competitive forces? Discuss. (15 Marks)

(c) Explain: Cost leadership vs. cost reduction. (15 Marks)

Model Answers

Answer 1(a) The intensity of competition depends on several factors.

The possible factors are as follows : (i) Large number of equally
balanced competitors. When the competition is intense, firms may try
to avoid competing on price. (ii) The rate of growth in Industry.
Where growth is slow or stagnant, rivalry may intensify and the firms
may indulge in competing with each other for greater market share.
(iii) Ease of switching will encourage suppliers to compete. (iv)
Competitors may guess each others intentions. This may lead to
uncertainty because of competitive strategy. (v) Capacity and costs.
Industries, characterized by economies of scale from substantial
capacity increase, may face recurring periods of over capacity and
price cutting. (vi) High fixed costs and relatively low variable costs.
This temps the firms to compete on price and sell at prices above
marginal costs. As a result, there may be a failure to recover fixed
costs. (vii) High strategic stakes. A firm, putting in high capital funds
and extensive efforts to achieve targets and making success(a
strategic action), is likely to be more proactive and competitive to
attain further high targets. (viii) Exit barriers- are the circumstances

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which make it difficult for an existing supplier to leave the country.
(15 Marks)

Answer 2. (b) Cost leadership strategy will allow a firm to earn above
average returns despite strong competitive forces. A glaring example
is that of Tata’s Nano Venture. The following factors facilitates a firm
under ‘Cost leadership strategy’ to earn above average returns
despite strong competitive forces : (i) Rivalry : Having the low cost
position serves as a valuable defense against rivals . Because of the
cost leader’s advantageous position, especially in logistics, rivals
cannot reduce their costs lower than the cost leaders and so they
cannot claim above average returns. (ii) Buyers : The cost leadership
strategy also protects against the power of customers. Powerful
customers can drive prices lower but they are not likely to be driven
below that of the next –most – efficient industry competitor. Prices
below this would cause the next –most –efficient competitor to leave
the market, leaving the cost leader in a stronger position relative to
the buyer. (iii) Suppliers : The cost leadership strategy also allows a
firm to better absorb any cost increases forced on it by powerful
suppliers because the cost leader has greater margins than its
competitors. In fact, a cost leader may be able to force its suppliers
to keep prices low for them. (iv) Entrants : The cost leadership
strategy also discourages new entrants because the new entrant
must be willing to accept no better than average returns until they
gain the experience and core competencies required to approach the
efficiency of the cost leader. (v) Substitutes : For substitutes to be
used , they must not only perform a similar function but also be
cheaper than the cost leader’s product. When faced with substitutes
products, the cost leader can reduce its price.
(15 Marks).

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 Answer 2. (c) Cost is the greatest and the most enduring competitive
advantage for the long-term success of any product or service. Cost
leadership, i.e. enjoying the lowest costs often translates into market
leadership, allowing a company to dictate terms in the market place.
There are five major variables which influence cost leadership. They
are: output level, factor prices, factor productivity, technology and
size of the unit. Obviously, the cost tends to be the lowest for a firm
with; the highest output levels; the lowest factor prices; the highest
factor productivity; the right and relevant technology; and an
economically optimum size. No cost is at a level that it cannot be cut
and reduced. Cost cutting and reduction is an important exercise
which should be periodically undertaken in every enterprise. The
areas of cost reduction can be classified as: raw material and
inventory costs; manufacturing costs; labour costs; finance costs;
marketing costs; R&D costs; general administrative costs. However,
these areas are a brief outline only. Many more operational areas of
cost reduction can be identified. Cost reduction is not a one-shot
exercise. One should keep at it continually and vigourously,
practically, all the time. Otherwise, costs have a natural tendency to
rise. On their own, they will never come down. One must continually
push them down. Believe that cost can always be cut. They must be
cut. Once one acquire cost leadership, one’s survival in the market
place is better assured. Try competing with Bajaj Auto in scooters,
with Raymonds is worsted suiting, then one will know what it means
to be a market leader through cost leadership. The task is
formidable. (15 Marks)

SECTION B: ANSWER ANY THREE QUESTIONS

QUESTION TWO.

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(a) List the Environmental factors that can affect an organization’s
Strategy. (10
Marks)

(b) How would you analyse Competitive Environment? (10 Marks)

Answers
Answer 2. (a) The following list of environmental factors that can affect an
organisation’s strategy: The demographic change — • A general change in
educational level. • A distinct shift in the value system. • Increase in
productivity, augmented by automation. • A general erosion of values and
ethics. • Decreasing family sizes. • Loss of stability of family units. •
Decreasing power of religion • Increasing geographic mobility. • Increasing
domestic mobility. • Increasing role and power of women in society. •
Change in worker’s attitude to work. The economic environment — •
Inflation. • Energy shortage. • Energy resource. • Growth rate in
productivity. • Individual savings rate. • Growing international
interdependence. • Clear environment. • Quality education. • Old age
security. • National economic factors. The Political/Legal environment — •
Economic goals of the government. • Fiscal policies. • Monetary policies •
Foreign exchange/balance of payment. • Privatisation policies. • Education
policies. • Corporate and industrial laws. The technological environment —
• R & D facilities for new technologies. • Tax and interest incentives. •
Investment in new technologies • Growth in new technologies. The
industry environment — • Market size/age. • Number of competitors •
Rules of game. • Industry trends/driving forces. • Industry attractiveness.

Answer 2. (b) With growing industrialisation, expanding size of business

operation and rapid advancement of technology, degree of competition
within the industry and across the industry has increased tremendously.
There is neck-to-neck competition among the business organisations who
are investing massive funds on research and development to innovate new
methods of production or new uses of existing products or adopting new
marketing devices in their market share. Under these circumstances
managers must be fully aware of the competitive environment and

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formulate strategy to cope with the competition. The competitive
environment should be analysed from the viewpoint of all such factors
which affect the ferocity of competitive behaviour. These factors are
market share of the participants in the industry, growth, rate of the
industry, general level of profits, cost of entry into and exit from an
industry, degree of differentiation, economies of scale and nature of
product. Analysis of market share of different firms at a point of time and
over a period of time provides an insight into the competitive strength of
the organisation. Such analysis should be undertaken to discern the factors
responsible for differential market share of firms. These factors could be
product differentiation, pricing, high corporate competence, wide
distribution network, customer service, dispensation of discount facilities,
etc. The management must keep these factors in view while formulating
strategy. Furthermore, analysis of the competitive environment presents a
picture of dominance of the industry by a few firms. An industry dominated
by one firm having a significant market share tends to be less fiercely
competitive than the one having no firm with dominant market share. In
studying the competitive environment it should also be the prime concern
of the management to find out if there is a minimum critical mass for the
product. Critical mass is the market share which a firm must obtain so as
to become fully competitive on price and cost. Growth rate of the industry
decisively affects the competitive behaviour. Where growth rate of the
industry is relatively high and demand of industrial products tends to
expand, competitive behaviour will be less aggressive because each firm
can increase its sales without necessarily increasing its market share. But in
an industry with falling growth rate, competition will tend to be intense. In
such a situation the management should diversify the product line. High
level of profits in one industry is likely to provide a measure of tolerance
for competitors. A change to lower profits may trigger off more aggressive
behaviour. Cost of entry and exit is another vital factor which needs
comprehensive appraisal. If market shares in the industry are widely
diffused and small investment is needed to enter the business and if the
government does not foreclose entry to the industry, there will be great
mobility of firms in and out. In such a case, a firm in the industry lacks
security of its position because any entrepreneur with a small capital and
small operation can enter the market. Such a tendency poses a serious
threat of entry particularly to large established organisations which lack the
flexibility and quick response possessed by small firms. Small organisations

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will, however, consider such an environment as an opportunity to them.
Where investment is large, highly specialised and fixed costs are a
relatively high proportion of total costs; competition will not be aggressive
because the scope of new entrants will be very limited.

QUESTION THREE

.(a) The true nature of marketing today is not serving the customer; it is
outwitting & outfitting one’s competitors. Briefly explain the four
ways this war can be fought. (10 Marks)

(b) Discuss how ‘Gap Analysis’ might be applied to a product/market

situation. (10 Marks)

Answers
Answer 3. (a) It is true that the marketing War can be fought today by
following the principles of Defensive Warfare, offensive Warfare, Flanking
Warfare and Guerrilla Warfare. A brief Notes on each of the aforesaid ways
is given below : The Defensive Warfare : This is essential recommended for
market leaders. It aims at protecting against regulatory provisions,
industrial licensing restrictions etc. A leader has to spend more time in
safeguarding its interests against Government, Social and Public
Environment rather than the immediate next competitor. Thus for
Companies like TELCO, Hindustan Lever, Bajaj Auto etc. the major worry
may be the interference with the Government. At the same time, a leader
cannot afford to overlook the moves of the competitors. A leader should
also be able to attack itself. The three principles of defensive warfare are :
• Only the market leader should consider playing defence, • The best
defensive strategy is the courage to attack yourself, and • Strong
competitive moves should always be blocked. The Offensive Warfare :
Offensive warfare is almost like a mirror image of the defensive warfare.
Organisations occupying number two position in the industry are suggested
to follow the Offensive Strategy by identifying a weakness in leader’s
strength and attacking at the point. Thus, very high prices of steel tubes of

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Tata Steel gave an opportunity to other pipe manufacturers like Zenith
Tubes, Gujarat Steel Tubes and the like to capture sizable market at lower
prices. The principles of offensive warfare are : • The main consideration is
the strength of the leader’s position, • Find the weakness in the leader’s
strength and attack at the point, • Launch the attack on as narrow front as
possible. The Flanking Warfare : Flanking is the most innovative form of
marketing warfare. Over the years, most of the biggest marketing
successes have been flanking moves. It is recommended to firms with
limited resources. These firms can not afford to fight the large firms
holding number one or two position on the same battle ground. The entry
of ‘promise toothpaste with clove oil clout’ is an example of flanking
warfare. Flanking can be achieved in any manner such as flanking with low
price, flanking with small size, flanking with large size, flanking with
distribution, flanking with product form etc. Group-III : Paper-13 :
Strategic Management [ December ¯ 2011 ] 11 One can see a parallel
between a market-cutting a niche and flanking. Basically they mean the
same thing, i.e. creating a distinctive position for itself and avoiding any
head collision with the leaders. The principles of flanking warfare are : • A
good flanking move must be made in an uncontested area, • Tactical
surprise ought to be an important element of the plan, • The pursuit is just
as critical as the attack itself. The Guerrilla Warfare : The last form is the
guerrilla warfare. Most of the players in a marketing war would be fighting
in the market place like the guerrillas. Smaller companies can be highly
successful as long they do not try to emulate the giants in their field. Like
flanking form, there can be many guerrillas; like Geographic guerrillas,
Demographic guerrillas, Industry guerrillas, product guerrillas and High End
guerrillas. In each state, one will find both local make suitcase and other
luggage items along with the well known national brands. Local brands of
rubber and plastic chappals are the example of low price end guerrillas.
“Chirag Din” shirts, “Metro Shoes” (Both Mumbai based) are some
examples of high price end form of guerrilla warfare. The principles of
guerrilla warfare are : (i) find segment of the market small enough to
defend; (ii) no matter how successful you become, never act like the
leader; (iii) be prepared to buy out at a moment’s notice.

Answer 3. (b) If ‘gap analysis’ is applied to a product/market situation,

the organisation will consider its targets for different types of products it
wants to manufacture and different types of markets/ market segments

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where it wants sell its products. The product/market targets may be
quantified — (i) The organisation should have targets (quantitative) for its
products it wants to sell, classified into — • Those in the introductory stage
of their life, those in the growth stage, those in the maturity stage and
those in the decline stage (PLC classification); • Cash cows, stars, dogs and
question marks (BCG classification); • What sort of products the
organisation wants to sell, e.g. does it want a more diversified range of
products? (ii) There should also be targets for markets/market segments
that the organisation would like to be in and targets for — • Market share
or market segment share (both in the existing markets and the markets it
would likely to enter into); • Market positioning - positioning is concerned
with such matters as product quality, image and reliability, price, outlets,
types of customers. A projection of the organisation’s products and the
market shares and market positioning for each of its products would be
made on the assumption that :— • No new products are developed. • The
market mix for the existing products remains the same. The gap could be
analysed in terms of - • What products the organisation will be missing
from the product range? 12 • What markets/market segments it is failing
to enter into? • How far out of position in the market will the product be?
Strategies to close the gap would include — • new product development
strategies or new market development strategies; • a strategy of product
and market diversification through a takeover policy; • a marketing mix
strategy to gain the required position in target markets.

QUESTION FOUR

(a) “Advertising is used to build brand loyalty and sales promotion is used
to break brand loyalty”. Discuss. (10 Marks)

(b) Explain why a direct relationship between the cost of production and
selling price may be inappropriate as a pricing strategy (10 Marks)

Answers
Answer 4 (a) Sellers generally use inventive-type promotions to attract new
tiers, to reward loyal customers and to increase the repurchase rates of
occasional users. New tiers are of three types - users of another brand in

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the same category, users in other categories and frequent brand switchers.
Sales promotion often attracts the brand switchers, as they are primarily
looking for low price, good value or premiums. Accordingly, sales
promotion cause brand - quality - image dilution and decreasing brand
loyalty. Advertising on the other hand, appears to be capable of increasing
the “prime franchise” of a brand.

Answer 4. (b) The relationship between the cost of production and selling
price is technically termed as cost plus pricing policy. Such a policy is
inappropriate for the following reasons: This policy fails to recognize that -
• Sales demand is determined by sales price. • Profit-maximizing price is
not directly related to the cost of the product. • Product cost computation
is a subjective exercise as arbitrary cost apportionments decisions are in
practice. • A firm having spare capacity might be interested to accept
marginal business but this policy leads to high prices for losing potential
customers. • This policy could lead to an upward spiral of price increases if
it is undertaken regularly. • In the early stage of PLC, unit cost of a product
is high. This may not sufficient demand for achieving the desired market
share

QUESTION FIVE

Write short notes on:

(a) SBU (Strategic Business Unit)

(b) Conglomerate diversification
(c) Penetration pricing
(d) Corporate Reconstructing

Answers
Answer 5. (a) First conceived by McKinsey, the concept of Strategic
Business Units (SBU) has become an essential building block for the
strategic planning process. A SBU is normally defined as a division of the

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organisation where the managers have control over their resources and
direction over the deployment of resources within specified boundaries.
SBUs have, an external market, for goods/services, distinct from those of
other SBUs. In essence SBUs must have or be : • A unique business
mission • An identifiable set of competitors • A viable competitor •
Moreover the SBU strategic manager can make a strategic decision or
implement relatively independent of other SBUs. • Crucial operating
decisions can be made with in the SBUs.
Answer 5. (b) When a large firm acquires a business because it represents
an investment opportunity for them and a source of earning profits, the
strategy is known as conglomerate diversification. There is no concern to
create product or market synergy with the existing business. Financial
synergy is what is proposed to be achieved. It may seek to balance current
business with cyclical sales and acquired business having counter cyclical
sales to balance.

Answer 5. (c) Market penetration pricing is a policy of charging low prices,

when the product is first launched in order to gain sufficient penetration
into the market. It is therefore, a policy of, sacrificing short term profits in
the interest of long term profits. The circumstances which favour a
penetration policy are as follows : (i) The firm wishes to discourage rivals
from entering the market, (ii) The firm wishes to shorten the initial period
of the product’s life cycle, in order to enter the growth and maturity stage
as quickly as possible. (ii) A firm might therefore, deliberately build excess
production capacity and set its prices very low, as demand build up, the

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spare capacity will be used up gradually, and unit cost will fall; the firm
might even reduce prices further as unit costs fall; (iv) In this way early
year losses will enable the firm to dominate the market and have the
lowest costs.

Answer 5. (d) Corporate restructuring refers to the process by means of

which a firm makes an assessment and evaluation of itself at a point of
time and refocuses itself to specific tasks of performance for
improvements. It looks upon every activity as a green field project and
question the firm’s basic premise in order to engineer radical change rather
than aim for just incremental gains. The concept is sometimes referred to
as business process re-engineering as it involves consideration of at least:
business portfolio revaluation; financial engineering; and organisational
redesign. Corporate level restructuring strategies can be thought of from
two aspects: hardware and software. Hardware restructuring involves
redefining and/or modifying the structure of the organisation so as to make
it more efficient in decision-making, responsiveness and intra-
organisational communication etc. Some suggested strategies are : •
Identification of core competency and portfolio pruning • Flattening of
organisational layer • Downsizing • Creation of self directed teams •
Benchmarking. Software restructuring involves cultural and process
changes required to create collaborative environment for a firm’s growth.
Suggested steps are : • Business strategy communication • Co-ordination •
Trust • Stretch • Empowering people • Industry foresight • Training.

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