Strategic management

Strategic Management P.G.KATHIRAVAN

MANAGEMENT ACCOUNTING AND
STRATEGIC MANAGEMENT – II MFC
- P.G.KATHIRAVAN

CONTENTS
UNIT I : PLANNING ENVIRONMENT ECONOMICS 01 – 30

UNIT II: STRATEGIES 31 – 57

UNIT III: MODEL BUILDING AND MODELS 58 – 81

UNIT IV: BASIC CONCEPTS OF MARKETING 82 – 95

UNIT V: CONTROL OR APPLICATION OF MANAGEMENT
ACCOUNTING IN MARKETING 96 - 125

Semester Question paper- November 2011 126 -127
Semester Question paper- November 2010 128- 128
Answers to Semester Question paper 2010 129 – 132
Semester Question paper- November 2009 133- 133
Semester Question paper- November 2008 134 - 135
Semester Question paper- November 2007 78

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MANAGEMENT ACCOUNTING AND STRATEGIC MANAGEMENT – II MFC

Unit I:

Prepared by
Prof.P.G.Kathiravan M.com.,M.phil.,PGDCA.,MBA.,Ph.D

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FORECASTING TREND AND CHANGES
Forecasting: involves the analysis of revenues, costs and volumes for making
the projections into the future, based on the past trends and after considering
all the other factors, affecting profits and retums.

In many cases the environmental forecasting needs to make multiple
forecasts so that contingency goals and action plans can be developed.

A Forecast is a prediction of future events and their quantification for
planning purposes. It includes the assessment of environmental changes and
in this respect, forecasting assist in obtaining strategic fit.

Forecasting involves the estimation of the trend in future variables sales,
tastes or profit using both quantitative and judgment techniques whereas
extrapolation is a purely statistical exercise.

The strategic environment of the firm consists of economic, political, legal,
social and technologic factors, which influence the ability of the organization
to survive and make profits.

Examples of environmental variables with which a fit must be achieved
include the following:

The changing tastes of the customers
Developments in the market demand for a product
The likely trend of interest and exchange rates.

Forecasting can be more than Just a numerical exercise on estimated trends .
Whilst trends in price, interest rates, market growth rates and margins will
involve numbers, other forecast does not:

Value profiles are long range forecasts of consumers and social attitudes
Geographical forecasts consider changes in national economic power
and can alert the firm to new markets or potential competitive threats.

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The important role which forecasting plays in strategic planning is therefore
to forewarn managers of possible changes in environmental factors. The long-
term nature of strategic change means that effective forecasting is necessary
to give the organization time to adopt and obtain a good fit with its
environment.

Fore casting Techniques / Models
Different forecasting models are used in taking management decisions.

Forecasting models happens to be important constituents of the category of
decision support system models. These are extremely helpful in transforming
user inputs into useful information. Planning for the future is the essence of
any business. Businesses need estimates of future values of business
variables. Commodities industry needs forecasts of supply, sale and demand
for production planning, sales. marketing and financial decisions.

Some businesses need forecasts of monetary variables eg., costs or price.
Financial insertions face the need to forecast volatility in stock prices.There
are macro economic factors that have to be predicted for policy-making
decisions in Governments.The list is endless and forecasting is a key 'decision-
making practice' in most organizations.

Forecasting models are needed to develop strategic plans for long range
perspectives. Forecasting models are of 4 types as lised below:

I. Qualitative Models

a). Delphi model- Collects and analyses panel of expert opinions
b). Historic data- Develop analogies to the past data. .
c). Normal group technique-participative group process

II. Naive (Time Series) Quantitative Models

a). Simple average- Averages past data to project the future based on
that average.
b). Exponential smoothing- Weighs differently earlier forecasts and
the recent one to project the future.
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III. Causal Quantitative Models:
a). Regression analysis- defines functional relationships among
variables as to whether it is linear or non-linear.
b) Economic Modeling: offers an overall forecast for a variable like
Gross Natioal Product (GNP).
IV.Combination of monetary & physical projections
a. Marketing projections- Monetary by region, product and product
group.
b. Economic prejections- Monetary by region, industry and broad
product group
c. Historical projections- In units, monetary by product and product
group.
d. Demand forecast-In units by product and product group for
operations management and monetary for sales and financial planning (
a combinations of a, b, and c)

Various criteria used in selecting a a forecasting method:
Managers are often confronted with the problem of preparing forecasts for
which sourcing of data becomes a difficult problem and the decisions
regarding selection of the method of forecast with the available data.
Following are some of the factors that would influence the criteria for
selecting a forecasting method.
 Quantum of data : Maximum/ minimum , no. of observations, peaks and
troughs, weightages, seasonal data etc.,
 Pattern of data: stationary, trend, seasonality, complexity, cyclic etc,
 Time horizon :short, medium and long.
 Preparation time : short, medium and long.
 Type of skills required: no sophistication, moderate sophistication or
high sophistication.

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Types of forecasting:

Types of forecasting

Economic forecast Social forecast Political forecast Technological forecast

1. Political Forecasting : When it is underteken to forecast the political
changes.
2. Economical Forecasting : When it is underteken to forecast the
changes in the Economy.
3. Social Forecasting : When it is underteken to forecast the Societal
changes.
4. Technological Forecasting : When it is underteken to forecast the
technological changes.

Laws of Forecasting
1. Forecasts are Always Wrong: No forecasting approach or model can
predict the exact level of the future variable. Point estimates are almost
always off by some amount.
2. Forecasts for the near-term tend to be more accurate: Predicting
tomorrow’s gas price will likely be more accurate than predicting gas
price 6 weeks from now.
3. Forecasts for groups of products or services tend to be more
accurate: Predicting the demand for trucks will likely be more accurate
than predicting for green trucks with a 6-disk CD player.
4. Forecasts are no substitute for calculated values: When the actual
demand is known, then this will be more accurate than a forecast. For
example, A manufacturer produces widgets and his customer has placed
a purchase order of 6000 widgets. That purchase order is an actual
future value of widgets that the manufacturer needs to manufacture.
That number can be used instead of a forecast using historical data.

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ENVIRONMENTAL ANALYSIS

Business decisions, particularly strategic ones, need a clear identification
of the relevant variables and in-depth analysis of environmental forces.

There are many pieces of vital information available in respect of a number
of matters. Such information should be analysed to understand the impact
on and implications for the organization.

Basic goals of Environmental analysis

Environmental analysis has three basic goals.

(i) The analysis should provide an understanding of current and potential
changes taking place in the environment. It is important that one must be
aware of the existing environment and at the same time have a long-term
perspective too.

(ii) Environmental analysis should provide inputs for strategic decision-
making. Mere collection of data is not enough. The information collected
must be used in strategic decision-making.

(iii) Environmental analysis should facilitate and foster strategic thinking
in organization, typically, a rich source of ideas and understanding of the
context within which a firm operates. It should challenge the current
wisdom bringing fresh viewpoints into the organization.

Process of environmental analysis / Steps in environ
mental analysis /Approaches to environmental
analysis
The steps in environmental forecasting are similar to the steps in
formulating and executing a research project. The important steps in
environmental forecasting are the following.
1. Identification of relevant environmental variables
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2. Collection of information
3. Selection of forecasting technique
4. Monitoring

Monitoring

Selection of forecasting technique

Collection of information

Identification of relevant environmental variables

1. Identification of relevant environmental variables: To envision the
future environment, it is essential to identify the critical environmental
variables and to predict their future needs. Omission of any critical variable
will affect the assessment of the future environment and strategies based
on that premise. Similarly, inclusion of variables which are not adequately
relevant could have misleading effects.

2. Collection of information: It involves identification of the sources of
information, determination of the types of information to be collected,
selection of methods of data collection and collection of the information.

3. Selection of forecasting technique: The choice of forecasting technique
depends on such considerations as the nature of the forecast decision, the
amount and accuracy of available information, the accuracy required, the
time available, the importance of the forecast, the cost, and the competence
and interpersonal relationships of the managers and forecaster involved.

4. Monitoring: The characteristics of the variables or their trends may
undergo changes. Further, new variables may emerge as critical or the
relevance of certain variables may decline. It is, therefore, necessary to
monitor such changes. Sometimes the changes may be very significant so
as to call for re-forecasting.

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Importance or benefits of environmental analysis
The following are the specific benefits of environmental study:

a. It makes one aware of the environment – organization linkage.
b. It helps an organization to identify the present and future threats and
opportunities.
c. It provides a very useful picture of the important factors which
influence the business
d. It helps to understand the transformation of the industry
environment.
e. It helps to identify the risks.
f. It is a prerequisite for formulation of right strategies – corporate,
business and functional strategies.
g. It helps suitable modifications of the strategies as and when
required.
h. It keeps the managers informed, alert and often dynamic.
i. It helps to develop action plans to deal with development of
technological advancements.
j. It helps to foresee the impact of socio-economic changes at the
national and international levels on the firm’s stability.
k. It helps to analysethe competitor’s strategies and formulation of
effective counter measures,

Factors affecting environmental analysis

Availability of information
Variables relevant
Selection of forecasting techniques
Co operation of the people

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SOCIAL, POLITICAL, LEGAL AND TECHNOLOGICAL
IMPACTS
A scan of the external macro-environment in which the firm operates can be
expressed in terms of the following factors:

Political (P)
Economical (E)
Social (S)
Technological(T)

The acronym PEST for sometimes rearranged as ("STEP") is used to describe a
framework for the analysis of these macro environmental factors.

PEST Analysis or Types of forecasting

A PEST analysis into an overall environmental scan as shown in the following
diagram:
All organizations are affected by
four macro environmental
forces: political-legal, economic,
technological, and social. To
know the impact in advance , a
firm can make Political forecast,
Economical forecast, Social
forecast and technological
forecast.

I. Political

The political sector of the environment presents actual and potential
restriction on the way an organization operates. The most important
government actions are: regulation, taxation, expenditure, takeover .The
political environment might include such issues as monitoring government
policy toward income tax, relative influence of unions, and policies
concerning utilization of natural resources.

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Political activity may also have a significant impact on three additional
governmental functions influencing a firm's external environment:

Supplier function. Government decisions regarding creation and
accessibility of private businesses to government-owned natural
resources and national stockpiles of agricultural products will
profoundly affect the viability of some firm's strategies.

Customer function. Government demand for products and services
can create, sustain, enhance, or eliminate many market
opportunities.

Competitor function. The government can operate as an almost
unbeatable competitor in the marketplace, Therefore, knowledge of
government strategies can help a firm to avoid unfavorable
confrontation with government as a competitor.

II. Economical

Economic forces refer to the nature and direction of the economy in which
business operates. Economic factors have a tremendous impact on
business firms.

The general state of the economy (e.g., depression, recession, recovery, or
prosperity), interest rate, stage of the economic cycle, balance of payments,
monetary policy, fiscal policy, are key variables in corporate investment,
employment, and pricing decisions.

The impact of growth or decline in gross national product and increases or
decreases in interest rates, inflation, and the value of the dollar are
considered as prime examples of significant impact on business operations.

To assess the local situation, an organization might seek information
concerning the economic base and future of the region and the effects of
this outlook on wage rates, disposable income, unemployment, and the
transportation and commercial base. The state of world economy is most
critical for organizations operating in such areas.

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III.Social

Social forces include traditions, values, societal trends, consumer
psychology, and a society's expectations of business.

The key concerns in the social environment are:ecology (e.g., global
warming, pollution); demographics (e.g., population growth rates, aging
work force in industrialized countries, high educational requirements);
quality of life (e.g., education, safety, health care, standard of living); and
noneconomic activities (e.g., charities).

Moreover, social issues can quickly become political and even legal issues.

Social forces are often most important because of their effect on people's
behaviour. For an organization to survive, the product or service must be
wanted, thus consumer behaviour is considered as a separate
environmental behaviour.

A society's expectations of business present other opportunities and
constraints.

Determining the exact impact of social forces on an organization is difficult
at best. However, assessing the changing values, attitudes, and
demographic characteristics of an organization's customers is an essential
element in establishing organizational objectives.

IV. Technological

Technological forces influence organizations in several ways. A
technological innovation can have a sudden and dramatic effect on the
environment of a firm.

First, technological developments can significantly alter the demand for an
organization's or industry's products or services.

Technological change can decimate existing businesses and even entire
industries, since its shifts demand from one product to another.

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Moreover, changes in technology can affect a firm's operations as well its
products and services.These changes might affect processing methods, raw
materials, and service delivery.

In international business, one country's use of new technological
developments can make another country's products overpriced and
noncompetitive.

The rate of technological change varies considerably from one industry to
another. In electronics, for example change is rapid and constant, but in
furniture manufacturing, change is slower and more gradual.

"The key concerns in the technological environment involve building the
organizational capability to (1) forecast and identify relevant
developments - both within and beyond the industry, (2) assess the impact
of these developments on existing operations, and (3) define
opportunities" (Mark C. Baetz and Paul W. Beamish).

External Opportunities and Threats

The PEST factors combined with external micro environmental factors can
be classified as opportunities and threats in a SWOT analysis. i.e.,

Analysis of macro environmental (external) factors = PEST analysis
Analysis of both macro and micro environmental factors = SWOT analysis

DISTRIBUTION CHANNELS
A distribution channel links the manufacturer of a product with the end users
i.e. the consumers. Decisions regarding distribution channels are of great
significance to the manufacturers.

1. Strategic Issues in Distribution

Organizations can have strategic distribution systems that help them to
examine the current distribution system and decide on the distribution
system that can be useful in the future. They are

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 Issues Related to Marketing Decisions
 Product Issues
 Issues Related to Channel Relations

2. Steps involved in designing a distribution channel for an organization

In designing a distribution channel for an organization, there are mainly three
steps –

 identifying the functions to be performed by the distribution system,
 designing the channel, and
 Putting the structure into operation.

3. Types of Distribution Channels

There are different types of distribution channels depending on the number of
levels that exist between the producer and the consumer. The distribution
channel may be

 Reverse Channel of Distribution
 Flexible Distribution Channels

4. Considerations in Distribution Channels

In deciding on the kind of distribution strategy to be used, there are various
considerations to be kept in mind. They are:

 Middlemen Considerations: The middlemen should have the necessary
financial capacity to carry out the task effectively.
 Customer Considerations: Customers should be able to get the products
conveniently.
 Product Considerations: Product features to be considered include
durability, toughness etc.
 Price Considerations: The price of the product also requires
consideration in deciding the distribution strategies.

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5. Distribution Intensity

Distribution intensity can be referred to in terms of the number of retail
stores carrying a product in a geographical location. It may be

 intensive distribution
 exclusive distribution
 selected distribution

a) In intensive distribution, the manufacturer distributes the products
through the maximum number of outlets.
b) In exclusive distribution, the number of distribution channels will be
very limited.
c) In selected distribution, the number of retail outlets in a location will be
greater than in the case of exclusive distribution and fewer than in the
case of intensive distribution.

6. Conflict and Control in Distribution Channels

 Identifying Channel Conflict: Channel conflicts should be identified.
 Avoidance of a Channel Collapse: Channel collapse should be avoided.

7. Managing the Channel

 Distribution management is of strategic importance to any organization
as distribution plays a crucial role in the success of the product in the
market. Distribution management also helps to maximize profits.
 In managing the distribution channels, maintaining a mutually
beneficial relationship between the manufacturer and distributor is
necessary.

8. International Channels

 International distribution is gaining importance with the increase in the
number of multinational companies.
 There are certain factors to be considered in international distribution.
The distributors should be chosen carefully with a long-term focus. It is
better to build a long-term relationship with the local distributors.
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 They should be provided with all the necessary support in expanding
their operations. The marketing strategy for the product should be
controlled solely by the MNC.
 Information plays an important role in distribution and the MNC has to
ensure that the local distributors provide them with the required
information which will help them to increase sales and expand their
business.

COMPETITIVE FORCES (BY PORTER)

Introduction
The model of the Five Competitive Forces was developed by Michael E. Porter
in his book “Competitive Strategy: Techniques for Analyzing Industries and
Competitors’’ in 1980. Since that time it has become an important tool for
analyzing an organizations industry structure in strategic processes.

Porters’ model is based on the insight that a corporate strategy should meet
the opportunities and threats in the organizations external environment.
Especially, competitive strategy should base on and understanding of industry
structures and the way they change.

Porter has identified five competitive forces that shape every industry and
every market. They are:

(i) Bargaining Power of Suppliers
(ii) Bargaining Power of Customers
(iii) Threat of New Entrants
(iv) Threat of Substitutes
(v) Competitive Rivalry between Existing Players

These forces determine the intensity of competition and hence the
profitability and attractiveness of an industry.

The objective of corporate strategy should be to modify these competitive
forces in a way that improves the position of the organization.

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Porters’ model supports analysis of the driving forces in an industry. Based on
the information derived from the Five Forces Analysis, management can
decide how to influence or to exploit particular characteristics of their
industry.

The Five Competitive Forces
The Five Competitive Forces are typically described as follows:

(i)Bargaining Power of Suppliers

The term 'suppliers' comprises all sources for inputs that are needed in order
to provide goods or services.

Supplier bargaining power is likely to be high when:
 The market is dominated by a few large suppliers rather than a
fragmented source of supply,
 There are no substitutes for the particular input,
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 The suppliers’ customers are fragmented, so their bargaining power is
low,
 The switching costs from one supplier to another are high,
 There is the possibility of the supplier integrating forwards in order to
obtain higher prices and margins. This threat is especially high when

 The buying industry has a higher profitability than the
supplying industry,
 Forward integration provides economies of scale for the
supplier,
 The buying industry hinders the supplying industry in their
development (e.g. reluctance to accept new releases of
products),
 The buying industry has low barriers to entry.
 In such situations, the buying industry often faces a high
pressure on margins from their suppliers. The relationship to
powerful suppliers can potentially reduce strategic options for
the organization.

(ii)Bargaining Power of Customers

Similarly, the bargaining power of customers determines how much
customers can impose pressure on margins and volumes.

Customers bargaining power is likely to be high when
 They buy large volumes; there is a concentration of buyers,
 The supplying industry comprises a large number of small operators
 The supplying industry operates with high fixed costs,
 The product is undifferentiated and can be replaces by substitutes,
 Switching to an alternative product is relatively simple and is not
related to high costs,
 Customers have low margins and are price-sensitive,
 Customers could produce the product themselves,
 The product is not of strategical importance for the customer,
 The customer knows about the production costs of the product
 There is the possibility for the customer integrating backwards.

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(iii)Threat of New Entrants

The competition in an industry will be the higher; the easier it is for other
companies to enter this industry. In such a situation, new entrants could
change major determinants of the market environment (e.g. market shares,
prices, customer loyalty) at any time. There is always a latent pressure for
reaction and adjustment for existing players in this industry.

The threat of new entries will depend on the extent to which there are
barriers to entry. These are typically

 Economies of scale (minimum size requirements for profitable
operations),
 High initial investments and fixed costs,
 Cost advantages of existing players due to experience curve effects of
operation with fully depreciated assets,
 Brand loyalty of customers
 Protected intellectual property like patents, licenses etc,
 Scarcity of important resources, e.g. qualified expert staff
 Access to raw materials is controlled by existing players,
 Distribution channels are controlled by existing players,
 Existing players have close customer relations, e.g. from long-term
service contracts,
 High switching costs for customers
 Legislation and government action

(iv)Threat of Substitutes

A threat from substitutes exists if there are alternative products with lower
prices of better performance parameters for the same purpose. They could
potentially attract a significant proportion of market volume and hence
reduce the potential sales volume for existing players. This category also
relates to complementary products.

Similarly to the threat of new entrants, the threat of substitutes is determined
by factors like

 Brand loyalty of customers,
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 Close customer relationships,
 Switching costs for customers,
 The relative price for performance of substitutes,
 Current trends.

(v) Competitive Rivalry between Existing Players

This force describes the intensity of competition between existing players
(companies) in an industry.

High competitive pressure results in pressure on prices, margins, and hence,
on profitability for every single company in the industry.

Competition between existing players is likely to be high when
 There are many players of about the same size,
 Players have similar strategies
 There is not much differentiation between players and their products,
hence, there is much price competition
 Low market growth rates (growth of a particular company is possible
only at the expense of a competitor),
 Barriers for exit are high (e.g. expensive and highly specialized
equipment).

Summary of entry and exit barriers

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GOVERNMENT POLICIES
The following are the (various) policies of the government enunciated in
various sectors of the economy.

Government Policies

Real sector Fiscal policy External sector Monetary Financial sector
Policies Policies Policies Policies

I) Real sector policies.

a) Agriculture and allied activities:
National Rain Fed Area Authority (NRAA) has been created in
November 2006, to support up gradation and management of dry
land and rain fed agriculture.
The National Agricultural Insurance Scheme (NAIS) and the
National Rural Employment Guarantee Scheme (NREGS) are two
Important schemes Implemented recently.

b) Manufacturing & Infrastructure policies
Formulated Policies to upgrade the infrastructure facilities in the
country.
Following have been identified as areas which need growth in
future.
- Up gradation of human skills
- Work on golden quadrilateral
- Introduction of public-private partnership model.
- Increase in the power production capacity.

Government takes efforts to find alternatives to fuel.
Wind energy is encouraged to reduce the utilization of coal
reserves.

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Micro, small and medium enterprises development Act 2006 has
been passed and micro, small and medium enterprises were
defined.
Definition of micro enterprises : Investment in plant &
machinery does not exceed 25 Lakhs / 10 Lakhs in case of
Sector.

Definition of small enterprises : Investment in plant &
machinery does not exceed 25 Lakhs / 10 Lakhs 5
crores/2crores

Definition of medium enterprise: Investment in plant &
machinery does not exceed 25 Lakhs / 10 Lakhs 10
crores/5c

To strengthen the drug regulatory system, and patent office , a
new national pharmaceutical policy has been announced in 2006.
Concept of SEZ (Special Economic zone) has been introduced.
To regulate IT applications, security practices, and procedures
relating to such applications, “The IT amendment bill 2006” was
announced.

2) Fiscal Policy:

Government realized the (importance) / necessity of reducing
fiscal deficit by introducing fiscal corrections.
The tax base is being broadened to include more and more new
services in the tax net to encourage savings and increase
disposable incomes.
Personal taxation is being reduced.
VAT was introduced to maintain price stability and increase
earnings.

3) External Sector Policies:
Foreign trade policy of 2004- 2009 was modified in 2007 for
increasing the incentives provided for focused products and
market.
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Recommendations of committee of fuller capital account
convertibility were considered
- To simplify and liberalise the external payments
- To encourage foreign exchange market.
Policy Initiatives undertaken by Govt., of India:
- Increasing the overseas investment limits for joint ventures.
- Increasing the overseas investment limits for wholly owned
subsidiaries abroad by Indian companies.
- Fixing higher portfolio Invt., limits for Indian companies /
domestic mutual funds.
- Fixing higher ceilings for invts by foreign institutional
investors in government securities.
- Enhancing repayment limits for external commercial
borrowings.

4) Monetary Policies:
Through the monetary policy, Government tries to balance the
growth of economy with containing inflationary pressures.
RBI has taken its stance on the monetary policy to continue to
reinforce the emphasis on price stability and financial stability by
using (Reverse Repo and Repo rates). (The rate at which RBI
lends money to commercial banks.)
Rates of inflation are keenly monitored and interest rates are
being modified whenever necessary.

5) Financial sector policies:
RBI have
- Tightened provisioning norms and risks weights to ensure
asset quality.
- Strengthened the accounting and disclosure norms for greater
transparency and discipline.
Final guidelines for the implementations of the new capital
adequacy frame work have been issued.
RBI continues to take measures for
- Protecting customer’s rights and
- Enhancing the quality of customer’s service.

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GOVERNMENT EXPENDITURE
GDP = Money value of Goods and services produced by an economy
during a year.
Aggregate expenditure
i) Aggregate expenditure as a % of
GDP in 2006- 07 = 14.1 %
(-) Aggregate expenditure as a % of
GDP in 2007- 08 = 13.8%
________
Reduction = 0.3%
This was done by reducing non – planned expenditures particularly
Interest payments and
Subsidies.

Planned expenditure
ii) Planned expenditure to GDP ratio in 2006-07 = 20.9%
Planned expenditure to GDP ratio in 2007-08 = 22.5%
_________
Increase 1.6%
Planned expenditure was increased to support central plan
Capital expenditure
Capital expenditure as a % of GDP in 2006-07 = 1.8%
Capital expenditure as a % of GDP in 2007-08 = 1.8%
remain Unchanged

Education expenditure
Education expenditure as a
Proportion to total exp. in 2006-07 = 3.7%
Education expenditure as
Proportion to total exp. in 2007-08 = 4.1%
_______
Increase 0.4%.

Health expenditure
Health expenditure as a proportion to total
Expenditure in 2006-07 = 1.8%
Health expenditure as a proportion to total

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Expenditure in 2007-08 = 2.1%
_________
Increase. 0.3%
The share of expenditure for
agriculture and Rural department = same level at around 10%.

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PUBLIC AND PRIVATE SECTOR INVESTMENT
Public-Private Partnership (PPP or P3) involves a long-term contractual
agreement between a public sector authority and a private party.

PPP model is a concept of collective approach mooted by Government of India
involving government and private agencies / institutions in order to bridge
the deficit in infrastructure like railways, road transport and highways, ports,
civil aviation, power infrastructure considered to be vital for economic
growth.

According to the Viability Gap Funding (VGF) scheme and guidelines for the
India Infrastructure Development Fund, issued by the Ministry of Finance, GoI,
a public-private partnership occurs when government agencies share
resources and revenue with a non-government company.

These partnership arrangements are used to meet specific niche requirements
and are legally binding.

According to the Asian Development Bank, PPP is a range of possible
relationship between public entity and the private party in the context of
infrastructure and core services. This partnership is a mutually beneficial
long-term relationship between the public and private sectors, which are an
effective way to bridge gaps between demand and available resources, quality
and accessibility, and risk and benefit.

The concept of Public- Private Partnership (PPP) has been a comparatively
new one in our national economic development scenario. It has been observed
that the growth of infrastnucture has lagged behind and may assume serious
proportions impeding our economic growth. To overcome this, Govemment of
India has been actively pursuing PPP to bridge the gap in the infrastructure.

Under the overall guidance of the committee of infrastructure, headed by the
Prime Minister the PPP programme formulation and implementation are
being closely monitored by the relevant ministry/departments. An appraisal
mechanism has been given a mandate and guidelines for drawing up time-
frame for according approvals to proposals in a speedy manner.

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PPP projects normally involve long term contracts between the Government
and the private parties detailing the rights and obligations of both the
contracting parties. Government has decided to develop standardized frame-
works, based on due diligence and agreements will follow international
practices. They will also create a framework with a right matrix of risk
allocation, obligations and returns.

Planning Commission has also issued Model Concession Agreement (MCA) for
ports, state highways and operation maintenance agreements for highways.To
promote PPP programmer all state governments and central ministries are
setting up PPP cell with a senior level officer as a nodal officer. Technical
assistance has been obtained from Asian Development Bank (ADD) including
hiring of consultants and training of personnel.

ROLE OF GOVERNMENT IN CONTROLLING INFLATION

Inflation: a general increase in prices and fall in the purchasing value of
money.

Inflation can be controlled by
1) By checking on supply of money.
2) By reducing deficit financing
3) By increasing Agricultural production.
4) By increasing industrial production.
5) By enforcing national wage policy
6) By making proper use of fiscal policy
7) By distributing through fair price shops.
8) By checking black money.
9) By controlling over population.
10) By using appropriate monetary policy.
11) BY banning export of essential consumption goods.
12) BY reducing administered prices.

1) By checking on supply of money.
To check rise in price, supply of money shouldn’t be allowed to expand,
it should be freezed.
2) By reducing deficit financing
27


Deficit financing can be reduced
 by levying taxes on agriculture.
 by reducing unessential expenditure.
 by withdrawing of subsidies.

3) By increasing Agricultural production.
Inflation can be controlled by increasing agricultural production.
Agricultural production can be increased

o By using improved seeds.
o By producing not only food grains but also oil seeds, pulses,
sugarcanes& Jutes.
o By using good quality fertilizers.
o By providing better irrigation facilities.

4) By increasing industrial production at low cost:
The ways to increase industrial production at low costs are:
 In the short run => Fuller utilization of production
capacity in industrial units.
 In the long run =>
By setting up of new industries
By using domestic resources than
imports.
By developing small scale and cottage
industries.
By using modern technology.

5) By enforcing national wage policy:
Inflation can be controlled by enforcing national wage policy. This can
be done
 By linking wages with productivity : more wages for more
productivity and Less wages for less productivity
 By banning strikes and lock out through the co-operation of
labourers.

6) By making proper use of fiscal policy
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Both Central and State governments should make use of fiscal policy
properly to control inflation.

 Role of state govt : -By introducing unnecessary public exp.
- By tapping new sources of revenue.
 Role of central govt -By cutting down the non departmental
Expenditure.
-By encouraging savings and investments
Savings, investments, productions, prices.

7) By distributing through fair price shops.
Hoarding of essential goods creates artificial demand and inflation. This
can be controlled
 By opening more fair price shops ( ration shops) at
village and in backward regions
 By distributing the essential goods among the poor at
low price through fair price shops.

8) By checking black money.
Black money is one of the major reasons for inflation. Black money can
be checked by applying the following two ways:

 Way1 : Suggesting demonetization of the currency ( like
Germany)
 Way 2: Giving long term bonds to the amount of black money
declared by the persons who possess.

9) By controlling over population.
 Population is incasing day by day. The increasing population
needs hue amount of essential goods. When the supply of
essential goods is not equal to the demand, it increases the prices
and creates inflation.
 In order to control the inflation, the population should be
controlled.
 The growth in population can be controlled by making extensive
publicity of family planning (welfare) program.
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10) By using appropriate monetary policy.
Inflation can be controlled
-By reducing supply of money.
-By increasing rate of interest on savings.
-By contracting credit.

11) By banning export of essential consumption goods.
In order to control inflation, export of essential consumption goods
like
 onions
 vegetables
 cement
 Sugar.
Should be banned and they should be channelized for domestic
consumption.

12) By increasing the growth of power and transport:
By increasing the supply of electricity, coal and the other sources of
power, industries will get appropriate raw material at the appropriate
time.

30


MANAGEMENT ACCOUNTING AND STRATEGIC MANAGEMENT

Unit II:

Prepared by

STRATEGY
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A strategy can be thought of in either of two ways:
 as a pattern that emerges in a sequence of decisions over time, or
 as an organizational plan of action that is intended to move a company
toward the achievement of its shorter - term goals and, ultimately, its
fundamental purposes.

Strategy should be both deliberate and emergent, and firms should both adapt
to and enact their environments, with the situation determining which option
to choose.

FACTORS THAT SHAPE A COMPANY'S STRATEGIES
Organizations do not exist in a vacuum. Many factors enter into the forming
of a company's strategy. Each exists within a complex network of
environmental forces.
These forces, conditions, situations, events, and relationships over which
the organization has little control are referred to collectively as the
organization's environment.
In general terms, environment can be broken down into three areas:
Environment

Macro environment Operating environment Internal environment

I. Macroenvironment, or general environment (remote
environment) - that is, economic, social, political and legal
systems in the country;

II. Operating environment - that is, competitors, markets, customers,
regulatory agencies, and stakeholders; and

III. Internal environment - that is, employees, managers, union, and
board of directors.

STRATEGIC PLANNING

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Strategic planning is about matching the strengths of a business to available
market opportunities.

Strategic planning means, defining clearly the objectives and assessing both
the internal and external situation to
 formulate strategy,
 implement the strategy,
 evaluate the progress and
 make adjustments as necessary to stay on track.

The major assumption in strategic planning is that an organization must be
responsive to a dynamic, changing environment.

The emphasis in strategic planning is on understanding how the environment
is changing and will change, and in developing organizational decisions which
are responsive to these changes.

In short, strategic planning is a disciplined effort to produce fundamental
decisions and actions that shape and guide
 What an organization is,
 What it does, and
 Why does it, with a focus on the future

Long range Planning : It becomes the basis for the strategies to be
pursued to drive an organization towards its mission. It is a long-term view of
what an organization is planning to become in future, indicating the basic
thrust of the firm, including its products, business and markets. It focuses on
forecasting the future by using economic and technical tools.

Corporate Planning : From a company’s perspective, corporate planning
involves formulating long term business goals so that strategic planning of
an enterprise may be developed and acted upon. The corporate planning term
that was popular in the 1960s has since been referred to as strategic
management.

STRATEGIC MANAGEMENT
33


Strategic management can be defined as the art and science of formulating,
implementing and evaluating cross-functional decisions that enable an
organization to achieve its objectives.

Strategic Management is the means by which the management establishes
purpose and pursues the purpose through co-alignment of organizational
resources with environment, opportunities and constraints.

Strategic Management deals with decision making and actions which
determine an enterprise’s ability to excel , survive or due by making the best
use of a firm’s resources in a dynamic environment.

The Strategic Management Process
The four basic processes associated with strategic management are:

1. Situation analysis
2. Establishment of strategic direction
3. Strategy formulation
4. Strategy implementation

1. Situation analysis

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All of the stakeholders inside and outside of the firm, as well as the major
external forces, should be analyzed at both the domestic and international
levels.

The external environment includes groups, individuals, and forces outside of
the traditional boundaries of the organization that are significantly influenced
by or have a major impact on the organization.

External stakeholders, part of a company’s operating environment, include
competitors, customers, suppliers, financial intermediaries, local
communities, unions, activist groups, and local and national government
agencies and administrators.

The broad environment forms the context in which the company and its
operating environment exist, and includes socio-cultural, economic,
technological, political, and legal influences, both domestically and abroad.

One organization, acting independently, may have very little influence on the
forces in the broad environment; however, the forces in this environment can
have a tremendous impact on the organization.

The internal organization includes all of the stakeholders, resources,
knowledge, and processes that exist within the boundaries of the firm.

SWOT analysis is also “situation analysis “

2. Establishment of strategic direction

Strategic direction pertains to the longer - term goals and objectives of the
organization.

At a more fundamental level, strategic direction defines the purposes for
which a company exists and operates. This direction is often contained in
mission and vision statements.

An organization’s mission is its current purpose and scope of operation, while
its vision is a forward – looking statement of what it wants to be in the future.
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Unlike shorter - term goals and strategies, mission and vision statements are
an enduring part of planning processes within the company. They are often
written in terms of what the organization will do for its key stakeholders.

3. Strategy formulation

Strategy formulation, the process of planning strategies, is often divided into
three levels: corporate, business, and functional i.e.,

a) Corporate level strategy (“ where to compete, ” )
b) Business level strategy or Competitive strategies (“ how to compete in
those areas, ” )
c) Functional- level strategies (“the functional details of how resources will
be managed so that business - level strategies will be accomplished.”)

(a) Corporate level strategy is to define a company’s domain of activity
through selection of business areas in which the company will compete.

(b) Business level strategy formulation pertains to domain direction and
navigation, or how businesses should compete in the areas they have selected.
Sometimes business - level strategies are also referred to as competitive
strategies.

(c) Functional - level strategies contain the details of how functional
resource areas, such as marketing, operations, and finance, should be used to
implement business - level strategies and achieve competitive advantage.
Basically, functional - level strategies are for acquiring, developing, and
managing organizational resources.

4. Strategy Implementation

Strategy formulation results in a plan of action for the company and its
various levels, whereas strategy implementation represents a pattern of
decisions and actions that are intended to carry out the plan.

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Strategy implementation involves managing stakeholder relationships and
organizational resources in a manner that moves the business toward the
successful execution of its strategies, consistent with its strategic direction.

Implementation activities also involve creating an organizational design and
organizational control systems to keep the company on the right course.

Organizational control refers to the processes that lead to adjustments in
strategic direction, strategies, or the implementation plan, when necessary.

Thus, managers may collect information that leads them to believe that the
organizational mission is no longer appropriate or that its strategies are not
leading to the desired outcomes.

A strategic - control system may conversely tell managers that the mission
and strategies are appropriate, but that they have not been well executed. In
such cases, adjustments should be made to the implementation process.

PROCESS OF DEVELOPING A STRATEGIC PLAN
37


TThe process of developing a strategic plan is explained below:

I. Mission and Objectives

The mission statement describes the company's business
vision, including the unchanging values and purpose of
the firm and forward-looking visionary goals that guide
the pursuit of future opportunities.

Guided by the business vision, the firm's leaders can
define measurable financial and strategic objectives.
Financial objectives involve measures such as sales
targets and earnings growth. Strategic objectives are
related to the firm's business position and may include
measures such as market share and reputation.

II. Environmental Scan

The environmental scan includes the following components:

internal analysis of the firm
Analysis of the firm's industry (Task environment)
External macro environment (PEST analysis)
The internal analysis can identify the firm's strengths and weaknesses and the
external analysis reveals opportunities and threats. A profile of the strengths,
weaknesses, opportunities, and threats is generated by means of a SWOT
analysis

An industry analysis can be performed using a framework developed by
Michael Porter known as Porter's five forces. This framework evaluates entry
barriers, suppliers, customers, substitute products, and industry rivalry.

III. Strategy Formulation

Given the information from the environmental scan, the firm should match its
strength to the opportunities that it has identified, while addressing its
weaknesses and external threats.

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To attain superior profitability, the firm seeks to develop a competitive
advantage over its rivals. A competitive advantage can be based on cost or
differentiation. Michael Porter identified three industry-independent generic
strategies from which the firm can choose.

IV. Strategy implementation

The selected strategy is implemented by means of programs, budgets, and
procedures. Implementation involves organization of the firm's resources and
motivation of the staff to achieve objectives.

The way in which the strategy is implemented can have a significant impact
on whether it will be successful. In a large company, those who implement the
strategy likely will be different people from those who formulated it. For this
reason, care must be taken to communicate the strategy and the reasoning
behind it. Otherwise, the implementation might not succeed if the strategy is
misunderstood or if lower-level managers resist its implementation because
they do not understand why the particular strategy was selected.

V. Evaluation & Control

The implementation of the strategy must be monitored and adjustments made
as needed.Evaluation and control consists of the following steps:
1. Define parameters to be measured 2. Define target values for those
parameters 3. Perform measurements 4. Compare measured results to the
pre-defined standard 5. Make necessary changes .

SWOT ANALYSIS
The traditional process for developing strategy consists of analyzing the
internal and external environments of the company to arrive at organizational
strengths, weaknesses, opportunities, and threats (SWOT).

Analyzing the environment and the company can assist the company in all of
the other tasks of strategic management. For example, a firm’s managers
should formulate strategic direction and specific strategies based on

39


organizational strengths and weaknesses and in the context of the
opportunities and threats found in its environment.

A scan of the internal and external environment is an important part of the
strategic planning process. Environmental factors internal to the firm usually
can be classified as strengths (S) or weaknesses (W), and those external to the
firm can be classified
as opportunities (O) or
threats (T). Such an
analysis of the
strategic environment
is referred to as a
SWOT analysis.

The SWOT analysis
provides information
that is helpful in
matching the firm's
resources and capabilities to the competitive environment in which it
operates. As such, it is instrumental in strategy formulation and selection. The
given diagram shows how a SWOT analysis fits into an environmental scan.

Thus , SWOT analysis is a tool, strategists use it to evaluate Strengths,
Weaknesses, Opportunities, and Threats.

 Strengths: A firm's strengths are its resources and capabilities that can
be used as a basis for developing a competitive advantage. Examples of
such strengths include:
patents exclusive access to high
strong brand names grade natural resources
good reputation among favorable access to
customers distribution networks
cost advantages from
proprietary know-how

 Weaknesses are resources and capabilities that a company does not
possess, to the extent that their absence places the firm at a competitive
disadvantage. The absence of certain strengths may be viewed as a
40


weakness. For example, ear of the following may be considered
weaknesses:

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

In some cases, a weakness may be the flip side of a strength. Take the
case in which a firm has a large amount of manufacturing capacity.
While this capacity may be considered a strength that competitors do
not share, it also may be considered as weakness if the large investment
in manufacturing capacity prevents the firm from reacting quickly to the
changes in the strategic environment.

 Opportunities : The external environmental analysis may reveal
certain new opportunities for pit and growth. Some examples of such
opportunities include:
an unfulfilled customer need
arrival of newtechnologies
Loosening of regulations
Removal of International trade barriers

 Threats : Changes in the external environmental also may present
threats to the firm. Some examples of such threats include:
shifts in consumer tastes away from the firm's products
emergence of substitute products
new regulations
increased trade barriers

Features of SWOT Analysis

Ω Systematic analysis : SWOT analysis involves a systematic analysis of
the internal strengths and weaknesses of a firm (financial,
technological, managerial) and of the external opportunities and threats

41


in the firm's environment (changes in the markets, laws, technology and
the actions of the competitors.)

Ω Exposing the strengths and weaknesses : It is an internal appraisal of
a firm. The purpose of SWOT analysis will be to expose the strengths
and weaknesses of the firm.

Ω Identifying profit-making opportunities and threats : An analysis of
Opportunities and Threats is concerned with identifying profit-making
opportunities in the business environment and for identifying threats-
eg., falling demand, new competition, government legislation etc., It is
thus an external appraisal, strengths and weaknesses analysis.

Ω Basis for evaluation and identification: This will provide a basis for
evaluating the extent to which the firm is likely to achieve its various
objectives and for identifying new products and market opportunity.

Ω Defining the strategic approach : SWOT Analysis will help in defining
the strategic approach to be formulated that will fit in admirably with
the environment.

Ω Preventing the company from poor results : Identification of
shortcomings in skills or resources could lead to a planned acquisition
programme or staff recruitment and training. Thus SWOT analysis helps
in highlighting areas within the company, which are strong and which
might be exploited more fully and weaknesses, where some defensive
planning might be required to prevent the company from poor results .

MAJOR OUTCOMES OF SWOT ANALYSIS:
Ω Matching the company strengths to take advantage of the opportunities
in the market place like say, converting a fast food stands into a full-
fledged restaurant.
Ω Converting threat or weakness into an advantage.
Ω Eliminating the weaknesses that expose a company to external threats.
Ω Exposure of shortcomings in the company's present skills and resources

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Ω Strengths, which the firm should seek to exploit.

SWOT Analysis thus assesses the firm's internal strengths and weaknesses in
relation to the opportunities and threats, offered by the environment.

THE SWOT MATRIX

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

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

S-O strategies pursue opportunities that are a good fit to the company's
strengths.

W-O strategies overcome weaknesses to pursue opportunities.

S-T strategies identify ways that the firm can use its strengths to reduce
its vulnerability to external threats.

W-T strategies establish a defensive plan to prevent the firm's
weaknesses from makino it hiohlv suscenhble to external threats .

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STRATEGIES FOR GROWTH THROUGH EXPANSION
VERSUS DIVERSIFICATION

Growth strategy
Organizations pursing a grown strategy do not necessarily grow faster than
the economy as a whole but do grow faster than the markets in which their
products are sold; tend to have larger than average profit margins; attempt to
postpone or even eliminate the danger of price competition in their industry
regularly develop new products, new markets, new processes, and new uses
for old products and tend to adapt the outside world to themselves by
creating something or a demand for something that did not exist before.

Expansion strategy: It is followed when an organization aims at high
growth by substantially broadening the scope of one or more of its businesses
in terms of their respective customer group , customer functions. It is followed
to improve its overall performance.

Diversification strategy: It involves a simultaneous departure from
current business . Firms choose diversification when the growth objectives
are very high and it could not be achieved with in the existing product market
scope.

Classification of diversification
Various types are given below:

1. Concentric diversification :Concentric diversification is a growth strategy
that involves adding new products or services that are similar to the
organization’s present products or services

2. Vertical integration :Vertical integration is a growth strategy that involves
extending an organization’s present business in two possible directions.

Forward integration moves the organization into distributing its own
products or services.

44


Backward integration moves it into supplying some or all of the
products or services that are used in producing its present products or
services.

3. Horizontal diversification : Horizontal diversification is a growth strategy
in which an organization buys one of its competitors.

4. Conglomerate diversification : Conglomerate diversification is a
growth strategy that involves adding new products or services that are
significantly different from the organization’s present products or services.

ACQUISITION AND MERGER STRATEGIES
Mergers and acquisition are two frequently used methods for implementing
diversification strategies.

A merger takes place when two companies combine their operations,
creating, in effect, a third company.

An acquisition is a situation in which one company buys, and, controls,
another company.

DIFFERENCE BETWEEN MERGERS AND ACQUISITIONS
Though the two words mergers and acquisitions are often spoken in the same
breath and are also used in such a way as if they are synonymous, however,
there are certain differences between mergers and acquisitions.

MERGER ACQUISITION

The case when two companies (often The case when one company takes
of same size) decide to move forward over another and establishes itself as
as a single new company instead of the new owner of the business.
operating business separately.
The stocks of both the companies are The buyer company “swallows” the
surrendered, while new stocks are business of the target company, which
45


issued afresh. ceases to exist.

For example, Glaxo Wellcome and Dr. Reddy's Labs acquired Betapharm
SmithKline Beehcam ceased to exist through an agreement amounting
and merged to become a new $597 million.
company, known as Glaxo SmithKline.

A buyout agreement can also be known as a merger when both owners
mutually decide to combine their business in the best interest of their firms.
But when the agreement is hostile, or when the target firm is unwilling to be
bought, it is considered as an acquisition.

M&A DEALS IN INDIA.

Sectors like pharmaceuticals, IT, ITES, telecommunications, steel,
construction, etc, have proved their worth in the international scenario and
the rising participation of Indian firms in signing M&A deals has further
triggered the acquisition activities in India.

In spite of the massive downturn in 2009, the future of M&A deals in India
looks promising. Indian telecom major Bharti Airtel is all set to merge with its
South African counterpart MTN, with a deal worth USD 23 billion. According
to the agreement Bharti Airtel would obtain 49% of stake in MTN and the
South African telecom major would acquire 36% of stake in Bharti Airtel.

Classification of Mergers or Acquisitions
a. Horizontal Mergers or Acquisitions
b. Concentric Mergers or Acquisitions
c. Vertical Mergers or Acquisitions
d. Conglomerate Mergers or Acquisitions

a) Horizontal Mergers or Acquisitions are the combining of two or more
organizations that are direct competitors.

b) Concentric Mergers or Acquisitions are the combining of two or more
organizations that have similar products or services in terms of technology,
product line, distribution channels, or customer base.
46


c) Vertical Mergers or Acquisitions are the combining of two or more
organizations to extend an organization into either supplying products or
services required in producing its present products or services or into
distributing or selling its own products or services.

d) Conglomerate Mergers or Acquisitions involve the combining of two or
more organizations that are producing products or services that are
significantly different from each other.

Reasons for mergers and Acquisitions
The following are the reasons for mergers and acquisitions.

Major reason

 Getting the potential benefit that can accrue to the stockholders of both
companies.

Other reasons
 Providing a better utilization of existing manufacturing facilities
 Selling in the same channels as existing channels to make the existing
sales organization more productive.
 Getting the services of proven management team to strengthen or
succeed the existing staff.
 Smoothing out cyclical/ seasonal trends in present products or services.
 Providing new volume to replace static or shrinking volume in present
products or services.
 Providing new products or services and better margins of profit in order
to supplement older products or services still selling in good demand
but at increasingly competitive levels.
 Entering a new and growing field
 Securing or protecting sources of raw materials or components used in
its manufacturing process ( vertical integration)
 Effective savings in income and excess profits taxes.
 Broadening the opportunities for using the managerial ability of the
acquiring organization’s personnel or its resources.
 Providing an avenue for the selling of the organization’s stock.
 Providing resources for expanding the organization.
47


 Reducing tax obligations ( income tax, estate and inheritance taxes)
 Providing for management succession and the perpetuation or
continuation of the business.

Merger and Acquisition Strategies
Merger and Acquisition Strategies are extremely important in order to derive
the maximum benefit out of a merger or acquisition deal.

It is quite difficult to decide on the strategies of merger and acquisition,
especially for those companies who are going to make a merger or acquisition
deal for the first time. In this case, they take lessons from the past mergers
and acquisitions that took place in the market between other companies and
proved to be successful.

Strategies for Successful Merger or Acquisition Deal
Through market survey and market analysis of different mergers and
acquisitions, it has been found out that there are some golden rules which can
be treated as the Strategies for Successful Merger or Acquisition Deal.

Before entering in to any merger or acquisition deal, the target
company's market performance and market position is required to be
examined thoroughly so that the optimal target company can be chosen
and the deal can be finalized at a right price.
Identification of future market opportunities, recent market trends and
customer's reaction to the company's products are also very important
in order to assess the growth potential of the company.
After finalizing the merger or acquisition deal, the integration process
of the companies should be started in time. Before the closing of the
deal, when the negotiation process is on, from that time, the
management of both the companies requires to work on a proper
integration strategy. This is to ensure that no potential problem crop up
after the closing of the deal.
If the company which intends to acquire the target firm plans
restructuring of the target company, then this plan should be declared
and implemented within the period of acquisition to avoid
uncertainties.
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It is also very important to consider the working environment and
culture of the workforce of the target company, at the time of drawing
up Merger and Acquisition Strategies, so that the laborers of the target
company do not feel left out and become demoralized.

Reasons for failure of mergers
Ω Overoptimistic appraisal
Ω Overbidding
Ω Overestimation of synergies
Ω Poor post acquisition integration

MERGER AND ACQUISITION STRATEGY PROCESS
The merger and acquisition strategies may differ from company to company
and also depend a lot on the policy of the respective organization. However,
merger and acquisition strategies have got some distinct process, based on
which, the strategies are devised. They are:

1) Determining Business Plan Drivers

2) Determining Acquisition Financing Constraints

3) Developing Acquisition Candidate List

4) Building Preliminary Valuation Models

5) Rating/Ranking Acquisition Candidates

6) Reviewing and Approving the Strategy

1) Determining Business Plan Drivers

Merger and acquisition strategies are deduced from the strategic
business plan of the organization. So, in merger and acquisition
strategies, the first need is to find out the way to accelerate the strategic
business plan through the M&A. The strategic business plan is to be
transformed into a set of drivers, which merger and acquisition
strategies would address.
49


While chalking out strategies, an organization needs to consider the
points like

 the markets of its intended business,
 the market share that it is eyeing for in each market,
 the products and technologies that it would require,
 the geographic locations where it would operate its business in,
 the skills and resources that it would require,
 the financial targets and the risk amount etc.

2) Determining Acquisition Financing Constraints

Now, the organization needs to find out if there are any financial
constraints for supporting the acquisition.

Funds for acquisitions may come through various ways like cash, debt,
public and private equities, PIPEs, minority investments, earn outs etc.

The organization needs to consider a few facts like
 the availability of untapped credit facilities,
 surplus cash, or untapped equity,
 the amount of new equity and new debt that it can raise etc.

The organization also needs to calculate the amount of returns that it
must achieve.

3) Developing Acquisition Candidate List

Now the organization has to identify the specific companies (private
and public) that it is eyeing for acquisition.

It can identify those by market research, public stock research, referrals
from board members, investment bankers, investors and attorneys, and
even recommendations from its employees. It also needs to develop
summary profile for every company.

4) Building Preliminary Valuation Models

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This stage is to calculate the initial estimated acquisition cost, the
estimated returns etc. Many organizations have their own formats for
presenting preliminary valuation.

5) Rating/Ranking Acquisition Candidates

The next step is rating or ranking the acquisition candidates according
to their impact on business and feasibility of closing the deal. This
process will help the organization in understanding the relative impacts
of the acquisitions.

6) Reviewing and Approving the Strategy

In this stage, merger and acquisition strategies are reviewed and
approved. The organization needs to find out whether all the critical
stakeholders like board members, investors etc. agree with it or not. If
everyone gives their nods on the strategies, it can go ahead with the
merger or acquisition.

JOINT VENTURES
Meaning

Joint ventures are equity arrangements between two or more independent
firms. They are usually temporary partnerships in which two or more
business entities (proprietorship, partnership, corporation, or other) join for
the purpose of conducting a specific project.

Joint ventures are used frequently in the construction business.

The joint venture is treated as a separate entity from the other business of the
partners, and it keeps a separate set of accounts.

When the project is completed, the joint venture is terminated, with all profits
distributed to its members (or loses covered by them).

Characteristics

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 Two partners coming together to create a common undertaking
contributing money, effort, knowledge, skill, or any other asset.
 The subject matter of a joint venture is interest in joint property.
 Right of management or mutual control of the enterprise.
 Presence of “adventure” to anticipate profit.
 Normal limitations to the objective of a single undertaking or ad hoc
enterprise

Motives for joint venture:
 Lack of funds
 Learning experience
 Sharing risk and resources
 Regulating authorities are flexible in regard to joint ventures

STRATEGY OF JOINT VENTURE IN INDIA
Three basic strategies have been proposed for use in joint ventures. They are:

1. Spider’s web
2. Go together-split
3. Successive integration
The spider’s web strategy : In ‘Spider Web Strategy', a small firm establishes
a series of joint ventures, so that it can survive and not absorbed by its large
competitors.

Go together- split is a strategy in which two or more organizations co
operate for an extended time and then separate. This strategy is particularly
appropriate on projects that have a definite life span, such as construction
projects.

Successive integration starts with a weak joint venture relationship between
the organizations, becomes stronger and results in a merger.

STRATEGY OF JOINT VENTURE IN ABROAD
A foreign company can commence operations in India by incorporating a
company under the Companies Act, 1956 through

52


Joint Ventures; or
Wholly Owned Subsidiaries

Joint venture with an Indian Partner
Foreign Companies can set up their operations in India by forging
strategic alliances with Indian partners.

In Joint venture, the domestic company and a foreign company enter into
50:50 agreement in which both of them take 50% of ownership stake and
operating control is shared between team of managers drawn from both
companies.

It involves technology collaboration, so the company may lose control
over its proprietory technology.

Joint Venture may entail the following advantages for a foreign investor:
a. Established distribution/ marketing set up of the Indian partner
b. Available financial resource of the Indian partners
c. Established contacts of the Indian partners which help smoothen the
process of setting up of operations

Reasons for failure of joint venture

a. The research and development for a new technology never materialized
b. Preparation and planning for a joint venture might have been
inadequate
c. Conflicts in regard to the basic objectives of the joint venture cropping
up after the formation.
d. Revealing the secrecy of the partner
e. Difficulties faced in sharing managerial control between the partners
made into a dead lock.

MARKETING STRATEGY
Marketing strategy:

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The marketing concept of building an organization around the profitable
satisfaction of customer needs has helped firms to achieve success in high-
growth, moderately competitive markets. However, to be successful in
markets in which economic growth has leveled and in which there exist many
competitors who follow the marketing concept, a well-developed marketing
strategy is required. Such a strategy considers a portfolio of products and
takes into account the anticipated moves of competitors in the market.

In short, marketing strategy means, the marketing logic by which the business
unit hopes to achieve its marketing objectives.

Process of Marketing Strategy:
a) Scanning the marketing environment.
b) Internal scanning- Process of assessing the firm’s strengths and
weakness and identifying its core competencies and competitive
advantages.
c) Setting marketing objectives – to provide clear cut direction to the
business regarding its future course of action.
d) Formulating marketing strategy
e) Developing the function plans – elaborating the marketing strategy
into detailed plans and programmes.

Marketing strategy as a part of corporate strategy:
A marketing strategy for a company needs to be an integral part of a corporate
strategy, which is the umbrella. The business strategy of a company shapes
the marketing strategy, which has to be developed and implemented through
functional level strategy involving superior efficiency, quality, innovation and
customer responsiveness.

54


According to David Aakar, the marketing strategy involves laying down
strategic specifications as follows.

1. Scope of the product market in which the company desires to compete
has to be laid down.

2. The level of investment required taking into consideration the timing,
nature and phase of the market will have to be determined.

3. Identifying the functional strategies required for implementation.

4. The strategic assets like brand name, loyal customer base, talent
inventories required for building sustainable competitive advantage
will have to be built.

5. In case of multiple businesses need for proper allocation of resources
both financial and non financial becomes important.

6. Synergy among the various market activities for the different
businesses of the same company will have to be developed.

RESOURCE ANALYSIS AND EVALUATION

Various resources of an organisation:
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The following diagram shows the various sources of an organisation.

Evaluation of Resources
The resource - based view of the firm explains that an organization is a bundle
of resources, which means that the most important role of a manager is that of
acquiring,developing, managing, and discarding resources. According to this
view, firms can gain competitive advantage through possessing superior
resources. Superior resources are those that have value in the market, are
possessed by only a small number of firms,and are not easy to substitute.
Most of the resources that a firm can acquire or develop are directly linked to
an organization’s stakeholders, which are groups and individuals who can
signifi cantly affect or are signifi cantly affected by an organization’s activities.
A stakeholder approach depicts the complicated nature of the management
task.
Diversification of product mix, technology, customer base, capital structure
for further growth, as a defensive move or for improved resource utilization.

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57


MANAGEMENT ACCOUNTING AND STRATEGIC MANAGEMENT

Unit III:

Prepared by

58


STRATEGIES IN THE DEVELOPMENT OF MODELS
Models are a group of tools, which help comprehension of problems and help
assist in taking decisions.
A typical modeling process starts with the identification of a problem and
analysis of the requirements of the situation.
This analysis will include the scope of the problem, internal or external forces
acting as part of the problem and the dynamics of the situation. While such an
analysis is attempted, the need to identify variables and their relationship is
very essential.
Whenever a model is built, assumptions are made. These assumptions usually
are untested beliefs or predictions and as such they will have to be tested for
their relevance to the model. As otherwise the results of the model may not be
realistic
Analysis

Static analysis Dynamic analysis

Static analysis:
It means that all occurrences take place in a single interval whose duration
can be either short or long.
For example, “make or buy decisions “belong to static analysis.

Dynamic analysis:
It is applied to situations which are subject to change over a period.
A simple example would be a financial projection either of profitability or
funds over five year period. The input data such as investments, costs, prices
and quantities are likely to change from year to year.

The various models used are given below:
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I. DELPHI MODEL
 This method, developed by the RAND Corporation in the 1950s,
estimates the future based on experts’ evaluation.

 It asks an anonymous panel of experts to estimate individually the
probability of certain events occurring in the future.

 After scoring or weighting their estimates, the panel members are given
several chances to revise their answers, and receive feedback on the
distribution of the panel’s evaluation.

 The goal of this technique is to have participants converge on future
views by comparing their answers with those of others.

 Although this technique provides an opportunity to explore each
expert’s perspective and opinions in depth, it has been criticized for
problems such as peer pressure and the lack of dialectical conversations
among decision-making participants

Delphi study proceeds
 A questionnaire designed by a monitor team is sent to a select group of
experts.

 After the responses are summarized, the results are sent back to the
respondents to re-evaluate their original answers, based upon the
responses of the group.

 By incorporating a second and sometimes third round of
questionnaires, the respondents have the opportunity to defend their
original answers or change their position to agree with the majority of
respondents.

 The Delphi technique, therefore, is a method of obtaining what could be
considered an intuitive consensus of group expert opinions.

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II. ECONOMETRIC MODEL
Econometric Model is the model that studies the different economic
variables and their inter-relationships and used for forecasting.

Econometric modeling is one of the most sophisticated methods of
forecasting. In general, econometric models attempt to mathematically
model an entire economy

Econometric model is designed as numerical interpretations of real
world systems (e.g. national economies, ecologies, production systems)

Most econometric models are based on numerous regression equations
that attempt to describe the relationships between the different sectors
of the economy.

Here the analyst changes assumptions or estimations with in the model
to generate varying outcomes.

By varying the income variables in the model, the analyst examines this
impact on whatever mobility variables the model contains, thus
assessing their sensitivity to income changes.

For example, in a dynamic population forecasting model, one might
wish to assess the impact of changes in personal income on population
mobility.

In doing so the analyst is able to evaluate the model itself, as well as gain
some understanding of contingency outcomes.

A particular advantage of this technique is the ability to perform
sensitivity analyses. Econometric modeling is very expensive and
complex and is therefore, primarily used by very large organizations.

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III. MATHEMATICAL PROGRAMMING
Mathematical programming (MP) refers to a class of analytical (algebraic)
methods that prescribe the best way to achieve a given objective while
complying with a set of constraints.

MP models determine the optimal allocation of economic resources among
competing alternatives within an operational system.

MP constitutes a pivotal(crucial or central importance) element in the study of
rational decision making.

The term programming as used here means systematic planning. Thus MP
stands for “planning a decision mathematically.”

MP provides a sound theoretical basis for properly understanding the broader
implications inherent to managerial decision making in general.

Certain MP models depict the consequences of alternative courses of action by
quantifying the opportunity costs of scarce system resources.

Managers are thus made aware of the value forgone by not making optimal
decisions.

MP offers a way to avoid the pitfalls associated with the satisficing criterion by
providing a comprehensive view of the decision problem that can assist
managers in attaining and sustaining a solid competitive advantage.

MP comprises a variety of paradigms (theoretical frameworks) tailored to
different kinds of problems. The most widely used variant is linear
programming (LP), a form of MP where the objective and all constraints are
expressed as linear functions.

Other variants include integer programming (IP), for problems requiring
integer solutions; nonlinear programming (NLP), where the objective
and/or one or more constraints are nonlinear functions; and goal
programming (GP), for problems with multiple objectives.

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