Importance of Strategy

With the increase in the pressure of external threats, companies have to make clear strategies and implement them effectively so as to survive. There have been companies like Martin Burn, Jessops, etc that have completely become extinct and some companies which were not existing before they became the market leaders like Reliance, Infosys, etc. The basic factor responsible for differentiation has not been governmental policies, infrastructure or labour relations but the type of strategic thinking that different companies have shown in conducting the business

1. Strategy provides various benefits to its users:
2. Strategy helps an organization to take decisions on long range forecasts
3. It allows the firm to deal with a new trend and meet competition in an effective manner
4. With the help of strategy, the management becomes flexible to meet unanticipated changes
5. Efficient strategy formulation and implementation result into financial benefits to the organization in the form of increased profits
6. Strategy provides focus in terms of organizational objectives and thus provides clarity of direction  for achieving the objectives
7. Organizational effectiveness is ensured with effective implementation of the strategy
8. Strategy contributes towards organizational effectiveness by providing satisfaction to the personnel
9. It gets managers into the habit of thinking and thus makes them, proactive and more conscious of their environment
10. It provides motivation to employees as it paves the way for them to shape their work in the context of shared corporate goals and ultimately they work for the achievement of these goals
11. Strategy formulation and implementation gives an opportunity to the management to involve different levels of management in the process
12. It improves corporate communication, coordination and allocation of resources
13. With all the benefits listed above, it is quite clear that strategy forms an integral part of an organization and is the means to achieve the end in an efficient and effective manner.

Financial Statement Analysis

Financial Statement analysis helps figuring out strengths and weaknesses of a firm. This is done by matching the income statements to balance sheets.

The three most common statements used for analysis are

a) Cash Flow Statements- A compilation of the cash receipts and disbursements of a company.

b) Profit and Loss account- indicates how a company’s revenue is converted to net income

c) Balance Sheet- A compilation of assets and liabilities of the company and tells the value of the company

Types of analysis

1) Trend analysis

Trend analysis- comparing values over the years. It gives a sort of a trend certain values follow. For e.g an investor would want to know the future growth prospects of the company and he would forecast that value based on the past revenues, EBITDA, net income etc. Therefore such an analysis can give a growth estimation. Also it can be used to observe sudden improvement or decline in the performance the company in a particular year, the reasons for which can be found out

2) Ratio Analysis (comparables analysis)

Ratio Analysis is generally of use to the investors and acquirers. It helps investors compare two different stock based on certain ratios. The most common ratios are P/E, EV/ EBITDA(Enterprise Value/ EBITDA). Each ratio has a different utility. For example P/E ratio may be useful in determining whether a stock is undervalued or overvalued by comparing it to the industry standards. Lower the value of P/E more chances of the stock being undervalued if the fundamentals and growth prospects of the company are good.  EV/EBITDA is a multiple that might be used by the acquirers to value a company.

Similarly other ratios such as Current Ratio and also information like operating cycle and debt to equity ratio can help banks decide whether to see how leveraged the firm and also to see if short terms loans be given to them etc.

Thus these statements have multiple utility and can be used by Shareholders, Investors, Acquirers, Banks and even the internal management.

To the internal Management these statements give an account of where the company is standing. Cash flows help the company understand how much cash is it actually generating which is the ultimate aim of a company. The profit and loss statement helps companies decide how profitable their operations and what the major areas of expenditure. It also helps analyzing the operations in part. It is possible to know exactly where the major issue is incase of losses. It could be a lower gross margin, higher administrative expenditure etc.

Disadvantages of Financial Statement Analysis

If the financial statements are not prepared properly they may actually end up misleading the user leading to poor decision making

Financial statements may not be useful for planning at times since they are based on the historical data and the conditions that prevailed then may not be applicable now

Financial Statements only provide a quantitative aspects about a business’s position, therefore, a complete financial statement analysis may lead to ignorance of qualitative factors affecting the business..

Financial statement analysis is highly subjective and may vary from person to person. One may consider a growth of 10% as high but other may consider it low. Therefore, conclusions may vary from person to person. 

Patent Laws- Socially Cost Justified?

The economic welfare attributed to the patent regime has been a topic of constant debate amongst academics, economists, lawyers etc. The primary criticism against according property rights in inventions concern the socials costs imposed and the proportionality of these costs with benefits.  Though there are methods that the patent regime undertakes such as limited term to reduce the social cost imposed, arguments against the characteristics of patenting in relation to social justifications still stand strong. To estimate the social value of patents, relative quality of patents are looked at since patent applications are required to cite prior patents of which applicants are aware and hence, the number and character of citations to a given patent are used and a patent is considered more valuable if cited in more areas of technology. This however, does not reveal any information about whether the invention would still have been made without the prospect of patenting.

Patent renewal rates provide an insight into the value accorded to patents by the industry members themselves. Patents have to renewed by the patentee during the term for continual enjoyment and the low depreciation rates in spite of the high renewal fees is evidence of the value accorded to the protection conferred by these patents. The objective behind these renewals can be deemed to be the need of the firms to cover their fixed costs. This raises the question that to what extent is patent protection the only method of ensuring that copying does not occur? Sometimes, even without a patent regime, the cost of imitating in industrial innovations is extremely high due to the learning curve that must be overcome. Though, in practicality, cost imitation is likely to be much less than the cost of innovation as seen in the drug industry whereby research and development is 30% of the total cost of a new drug. Therefore, without a patent regime innovations will be discouraged as no firm will want to take the initiative for R&D for fear of cheap imitators.

The acceptance of patents as a social beneficially tool is also dubious when considering the difficulty of inventing around patents. High transaction costs are imposed on firms who want to innovate around patents as licenses will need to be obtained for all of them. This will hamper further innovation for fear that whilst experimenting, innovators might infringe upon patent rights. However, this does not ultimately hamper the society as inventors will be forced to negotiate and thereby will employ the best technologies possible after reconciling the original with the improved innovation. In the United States, the Hatch-Waxman Act of 1984 allows drug manufacturers to begin the FDA testing of drug before patent on brand name expires thereby interpreting an ‘experimental use’ doctrine of patent law. This is not applicable for scientists in patented research tools thereby continuing to present the problem of inventing around the patent and high transaction costs. Patent laws have found ways to combat these problems through the imposition of doctrines such as the ‘reverse doctrine of equivalents’ which purports that if the contribution made by the improvement greatly exceeds contribution by original patent, the improver is allowed to practice his invention without infringing the original.

The effect of patents on the social sphere can also be analysed looking at the research conducted by universities. The incentive of income through patent licensing has induced universities to substitute the basic research conducted for applied research. This may result into a net social loss as the focus from basic research would have shifted. On the other hand, universities can use applied research to undertake research into fields that are socially beneficial whereas companies would undertake applied research only to the extent that it would benefit them.

On the whole, though patent accords monopoly over a certain innovation to the patentee, this innovation occurred due to the investment of the inventor in terms of R&D, time, effort, labour etc. If this investment is not rewarded is sufficient ways, ultimately innovations will be discouraged. The social gain through patent protection is ultimately higher than the cost imposed by a patent regime. 

Levels of Strategy

It is believed that strategic decision making is the responsibility of top management. However, it is considered useful to distinguish between the levels of operation of the strategy.

Strategy operates at different levels vis-à-vis

·                     Corporate level

·                     Business level

·                     Functional level

There are basically two categories of companies – one, which have different businesses organized as different directions or product groups known as profit centres or strategic business units (SBUs) and other, which consists of companies which are single product companies. Eg. Reliance Industries and Ashok Leyland Limited.

The SBU concept was introduced by General Electric Company (GEC) of USA to manage product business. The fundamental concept in the SBU is the identification of dicrete independent product/market segments served by the organization. Because of the different environments served by each product, a SBU is created for each independent product/segment. Each and every SBU is different from another SBU due to the distinct business areas (DBAs) it is serving.

Each SBU has a clearly defined product/market segment and strategy. It develops its strategy according  to its own capabilities and needs with overall organizations capabilities and needs. Each SBU allocates resources according to its individual requirements for the achievement of organizational objectives. As against the multi product organizations, the single product organizations have single strategic  business unit. In these organizations, corporate level strategy serves the whole business. The strategy is implanted at the next lower level by functional strategies. In multiple product company, a strategy is formulated for each SBU (known as business level strategy) and such strategies lie between corporate and functional level  strategies.

The three levels are explained as follows 

Corporate level strategy 

At the corporate level, strategies are formulated according to organization wise policies. These are value oriented, conceptual and less concrete than decisions at the other two levels. These are characterized by greater risk, cost and profit potential as well as flexibility. Mostly, corporate level strategies are futuristic, innovative and pervasive in nature. They occupy the highest level of strategic decision making and cover the actions dealing with the objectives of the organization. Such decision aremade by top management of the firm. The examples of such strategies includeacquisition strategies, diversification, structural redesigning, etc. The board of directors and chief executive officer are the primary groups involved in this level of strategy making.  In small and family owned businesses, the entrepreneur is both the general manager and the chief strategic manager

Business Level Strategy 

The strategies formulated by each SBU to make best use of its resources given the environment it faces, come under the gamut of business level strategies. At such a level, strategy is a comprehensive plan providing objectives for SBUs, allocation of resources among functional areas and coordination between them for achievement of corporate level objectives. These strategies operate within the overall organizational strategies i.e within the broad constraints and policies and long term objectives set by the corporate strategy. The SBU managers are involved in this level of strategy. The strategies are related with a unit within the organization. The SBU operates within the defined scope of operations by the corporate level strategy and is limited by the assignment of resources by the corporate level. However, corporate strategy is not the sum total of business strategies of the organization. Business strategy relates with the“how” and the corporate strategy relates with the “what”. Business strategy defines the choice of product or service and market of individual business within the firm. The corporate strategy has impact on business strategy.

Functional  level Strategy

This strategy relates to single functional operation and the activities involved therein. This level is at the operating end of the organization. The decisions at this level within the organization are described as tactical. The strategies are concerned with how different functions of the enterprise like marketing, finance, manufacturing, etc contribute to the strategy of other levels. Functional strategy deals with a relatively restricted plan providing objectives for specific function, allocation of resources among different operations within the functional area and coordination between them for achievement of SBU and corporate level objectives

Sometimes a fourth level of strategy also exists. This level is known as the operating level. It comes below the functional level strategy and involves actions relating to various sub functions of the major function. For example, the functional  level strategy of marketing function is divided into operating levels such as marketing research, sales promotion, etc

The three levels of strategies have different characterstics as shown below –

Dimensions	Levels
	Corporate	Business	Functional
Impact	Significant	Major	Insignificant
Risk Involved	High	Medium	Low
Profit potential	High	Medium	Low
Time Horizon	Long	Medium	Low
Flexibility	High	Medium	Low
Adaptability	Insignificant	Medium	Significant

Military tactics in Business

Military tactics have formed an integral part in business ever since. Since many a time business is compared to war many military tactics are also used in business.

These tactics are generally used in a competitive environment where one company needs to capture the other companies market. These tactics may be defensive or aggressive depending on whether one is defending market share or capturing it.

The different types of aggressive tactics are


Frontal Attack- Frontal Attack is a direct head on attack to your competitor where you attack your competitor in the market where he is strong. This is generally between companies of equal strength. It is an attack directly on the opponent’s strength and is, therefore, not the sharpest form of attack. Companies should consider such an attack if they have the resources of that can be committed to such an attack for a long time and have no other option available


Flank Attack- Flank attack is the form of attack where a company engages the competitor in an area where the opponent is weak. The target area is not one where the opponent is initially engaged but it is merely to distract the opponent. The idea is to split the competitor’s resources and distract him so that an attack can be launched at the main area later on.


Guerilla Attack- It aims at weakening the opponent by launching small attacks in different areas. The idea is to destabilize the opponent while remaining mobile.


Encirclement Attack- Encirclement attack is the form of the attack where you surround your competitor and then down him from the centre. The company must be able to block the opponent in whatever direction he turns thereby diluting his ability to retaliate in strength.

The different types of defensive tactics are


Position Defense- This is the form of defense where the company holds its position in the area where it is strong. This generally demobilizes the defender who may then become a sitting duck for the competitor.


Mobile Defense- This is the form of defense where a company creates more than one base and therefore the competitor does not know where to attack. In the meanwhile the company can collect its resources to launch a final attack to save its position. Such sort of a defense can be obtained by diversification of businesses.


Counter attack- Attack is sometimes considered the best form of attack and counter attack is generally used by companies which means attacking the area where the attacker is strong thereby making him withdraw to protect his own base. Another variation of counter attack is the pre-emptive attack where the company attacks in anticipation of an attack thereby saving its position.


Flanking Defense- In flanking defense a company generally occupies a position that could be of importance to the competitor in the future. This would provide the company with a vantage point and may prevent the competitor from attacking in the first place.


Withdrawl- Sometimes it is best to withdraw from the battlefield if the opponent is way too strong based on your resources. However, withdrawl is generally not a preferred option by business mainly due to emotional attachment, a feeling of loss, exit barriers in the industry etc.

Diversification, Over diversification and Re-focusing

Ansoff Matrix - A video