CHAPTER 8 – BUSINESS STRATEGY

Influences on strategy formation –

Resources available
All business resources are finite. Limited resources force a business to choose which strategies
to proceed with, and which to drop or scale back. For example, the strategy of launching a new
product nationwide may have to be scaled back because of lack of resources.

Strengths of the business

If a business has proven capabilities in certain areas, it is often advisable to apply these
strengths when developing future strategies. A long-term plan that takes a business away from
a proven area of operation may require business skills and experience that it does not have. In
addition, the expansion of the business may be best achieved if some underperforming areas
(or non-core businesses) are sold off. The business will then focus on its current successes to
achieve growth. After it purchased Quaker Oats, Pepsi sold off the breakfast cereal division, but
kept the soft drink division, which sells the highly successful Gatorade drink in the USA. This
allowed Pepsi to further develop its strengths in soft drinks.

Competitive environment
Competitors’ actions are a major constraint on business strategy. Innovations by competitors
may be difficult to copy or better. An example is Nintendo’s Wii gaming system, which was a
break from the incremental development of computer games by Nintendo’s rivals. All
businesses operate in a competitive environment to a greater or lesser degree. Price reductions
by supermarkets selling petrol in the UK forced a change of strategy by the main petrol
retailers. Esso quickly adopted a strategy called Pricewatch, which promised prices as low as
local supermarkets. Would this plan have been introduced without competitive pressures?

Objectives
The objectives of the business also influence strategy. Increasing returns to shareholders in the
short term might not be achieved by investing in extensive research and development with a
payback period many years into the future. Maximizing returns to shareholders might not be
the central objective of the business if it aims for the triple bottom line approach to corporate
objectives. If a business has a clear social responsibility objective, it will pursue different
strategies from those of a business that is focusing solely on shareholder returns.

Once SMART objectives have been set, the process of strategic management has three key
stages:
 Stages of strategic management Main purpose
Strategic analysis: assessing the current Decisions that do not start from knowledge
position of the company in relation to its of where the business is now may be
market, competitors and the external inappropriate and ineffective.
environment.
Strategic choice: taking important long-term A new direction for a business will require
decisions that will push the business towards key decisions to be taken about products and
the objectives set. markets.
Strategic implementation: allocating New business strategies always require
sufficient resources to put decisions into additional resources. These must be provided
effect, and evaluating success. at the right time and in sufficient quantities
to allow the new strategies to be effective.

Strategic management is the process through which an organization's leaders plan and execute
strategies to achieve specific goals and objectives. It involves the formulation and
implementation of plans and initiatives to ensure that an organization is positioned to achieve
sustainable competitive advantage in its industry or market.

Strategic analysis is a critical component of the strategic management process and involves
assessing and understanding various factors that can influence an organization's ability to
achieve its goals. It provides a foundation for informed decision-making and the development
of effective strategies.

Strategic choice is a stage in the strategic management process where organizations evaluate
and select the most appropriate strategies to achieve their goals and objectives. This involves
making decisions about the allocation of resources and determining the course of action based
on the analysis of internal and external factors.

Strategic implementation is the process of putting a chosen strategy into action. It involves
translating strategic plans into specific actions and initiatives to achieve organizational
objectives. This phase is crucial for the success of the overall strategic management process.

Strategy and Tactics -

Strategic management is the highest level of managerial activity. It is undertaken by, or at least
closely supervised by, the chief executive officer and approved by the board of directors.
Tactics, on the other hand, are concerned with making smaller-scale decisions aimed at
reaching more limited and measurable goals, which themselves are part of the longer-term
strategic aim.

The need for strategic management If a business did not undertake strategic management, it
would fail to:
• plan for the future
• respond logically to the changing business environment
• make effective long-term decisions based on clear objectives.

Understanding Blue Ocean Strategy

What are oceans?

Businesses operate in two kinds of market space called oceans

– Red and Blue.

Red oceans denote the known market space in which all industries currently operate. This
is where industry boundaries are defined and accepted, and competitive rules are set.
Companies try to outperform rivals to grab a greater share of existing demand. This market
space is crowded with competition and prospects for profits and growth are limited. Products
are commoditized, and cut-throat competition turns the ocean "bloody" hence the word Red.

Blue Oceans, in contrast, denote the unknown market space all the industries that are not
currently in existence. This is an untapped area where demand is yet to be created and
opportunities for highly profitable growth exist. In blue oceans, competition is irrelevant as the
rules of the game are waiting to be set. Any business that enters this space can address the
market without competition.

What Is Blue Ocean Strategy?

Blue ocean strategy is a business theory that aims to create new and uncontested market
spaces where competition is irrelevant. The main purpose of this strategy is to provide value
innovation by identifying new customer needs and preferences and offering unique products or
services to meet those needs.
Here are some key principles of the Blue Ocean Strategy:

1. Create Uncontested Market Space: Rather than fighting over a shrinking profit
pool, companies should look for ways to open up new areas of
demand.
2. Make the Competition Irrelevant: By creating a new market space, the competition
becomes irrelevant because you have created a new way to fulfill a need.
3. Create and Capture New Demand: Instead of focusing on existing
customers, blue ocean strategy is about tapping into non-customers and creating
new demand.
4. Break the Value-Cost Trade-Off: Companies often believe that to offer more value, they
must incur higher costs. Blue ocean strategy suggests that it is possible to
offer more value at lower cost.
5. Align the Whole System of a Firm's Activities with Its Strategic Choice of Differentiation or
Low Cost: The strategy involves ensuring that all aspects of a business are aligned with its
strategic choice to differentiate itself or offer a low-cost product.

How to Create?
There are two approaches to creating a strong blue ocean strategy. Let us look
at them:
1. Six-Path Framework: According to professors Kim and Mauborgne, every
firm approaching the blue ocean plan must follow a six-path framework. It includes the
 six principles mentioned above. The first step is to study the existing market, which
includes customers, competitors, and the industry. After that, firms can discover
the factors that can provide value innovation to customers. This will lead to the
discovery of an unknown marketplace or niche.

2. Four Actions Framework: After identifying the niche, firms can work on
exploring the value-added factors that can help develop the strategy canvas. The following four
action frameworks are as follows:

 Raise (identifying value drivers)

 Eliminate (removing unnecessary costs)
 Reduce (decreasing product or service offerings to save costs)
 Create (developing the strategy canvas)

Differences between red ocean and blue ocean strategies:

Red ocean strategy: focus on existing customers Blue ocean strategy: focus on potential customers
Compete in existing markets Create uncontested markets to enter
‘Out-compete’ the competition Make the competition irrelevant
Exploit existing demand Create and exploit new demand
High value to customer = high costs to business High value to customer but low cost to business
Product differentiation or low cost Product differentiation and low cost

Scenario planning is a strategic management tool that involves envisioning and preparing for
multiple possible future scenarios. It helps organizations anticipate and respond to different
future conditions by considering a range of possible events, developments, and uncertainties.

Benefits and limitations of scenario planning:

Benefits of scenario planning Limitations of scenario planning

It forces managers to consider the main risks and Managers try to consider too many uncertainties
uncertainties that affect their business. and become confused by the range of possible
scenarios.
Managers have to develop a range of strategies to deal with In contrast, some managers might only focus on
different scenarios. one possible future scenario and be unprepared
for others.
It makes managers adopt a flexible approach as different It will be less effective if only short-term risks are
scenarios will require different strategies. considered. Looking far into the future can lead to
more creative strategies.
Let us look at some examples to comprehend the concept better:
Example #1
American automobile company Ford Motors is one of the perfect examples of the
blue ocean technique. Before the launch of its series, there was a huge flood of luxury cars in
the market. Every car manufacturer focuses on creating expensive, fashionable car models.
However, it did not cater to the middle-class groups that did not want such vehicles. A car, on
the other hand, can provide comfort during muddy patches or bumpy roads. Thus, Ford Motors
applied the blue ocean strategy, identified the unknown market areas (comfort cars), and
applied the same. Thus, by the launch of Model T, customers could use them for everyday use.

Netflix as an example of BOS

Blue ocean examples show around us all the time. Consider Netflix's initial years. In an
age where streaming movies was unheard of, Netflix entered a blue ocean by
offering just that. It was able to create a new market space for itself by going beyond the
conventional DVD rental market (rèd ocean). By simultaneously offering low prices and the
convenience of streaming with a vast content library, Netflix quickly become the dominant
player in an uncontested market space. By the time competition followed, it was already a
dominant player with an established name. In contrast, Blockbuster - Netflix's primary
competitor swam too long in the red ocean (DVD rental market) and eventually headed
towards bankruptcy.

Advantages and Disadvantages –

The blue ocean strategy is applicable in most businesses. However, it does have
some advantages and disadvantages to consider. Let us look at them:

Advantages –
1. It discovers an unknown marketplace.
2. Firms can increase their growth potential by identifying new opportunities.
3. It creates new demand and customers.
4. Breakthrough of the value-cost trade-off.
5. It promotes value-based innovation.

Disadvantages –
1. Identifying the right blue ocean strategy can be challenging for firms.
2. They need help attracting new customers because of the new markets.
3. Sometimes, strategy execution might go wrong.
4. A lot of patience and trust are needed to acquire that market share.
5. Companies face high risk as it is a new field.

Blue Ocean Strategy Vs Red Ocean Strategy

Although the theories of blue ocean and red ocean were given by W. Chan Kim and Renee
Mauborgne in 2005, they differ. Let us look at them:
Parameters Blue Ocean Strategy Red Ocean Strategy
Meaning It is a strategy where businesses try to The red ocean strategy implies those
discover a new market without businesses that operate in the same
competition. existing market.
Purpose To explore new opportunities for To beat the competitors in the current
increased growth potential. market.
Impact on demand Create and capture new demand. To focus on existing demand.
Value-cost trade-off Break the traditional approach towards Developing and using the same trade-
trade-offs. off system.
Marketplace Unknown or new market with no Competing in the same market.
competition.

Red and Blue Ocean - the key differences

Competition-based red ocean strategy assumes that an industry's structural conditions are
given and that firms are forced to compete within them. Blue Ocean's Value Innovation-based
approach assumes that market boundaries and industry structure are not given and can be
reconstructed by the actions and beliefs of industry players.

Red Ocean Strategy Blue Ocean Strategy

Compete in existing market space Create uncontested market space
Beat the competition Make the competition irrelevant
Exploit existing demand Create and capture new demand
Make the value/cost trade-off Break the value/cost trade-off
Align the whole system of a company's activities with Align the whole system of a company's activities with
its strategic choice of differentiation or low cost its strategic choice of differentiation and low cost

How effective is the blue ocean strategy?

Professors Kim and Mauborgne, in their study spanning over three decades, quantified the
impact of creating blue oceans on a company's growth in both revenues and profits. Their
analysis covering 108 companies showed that 14% of the launches that aimed at creating blue
oceans contributed to 38% of the revenue and 61% of the total profits.

Data adapted from the book Blue Ocean Strategy

Netflix as an example of BOS

Blue ocean examples show around us all the time. Consider Netflix's initial years. In an age
where streaming movies was unheard of, Netflix entered a blue ocean by offering just that. It
was able to create a new market space for itself by going beyond the conventional DVD rental
market (red ocean).
By simultaneously offering low prices and the convenience of streaming with a vast content
library, Netflix quickly become the dominant player in an uncontested market space. By the
time competition followed, it was already a dominant player with an established name. In
contrast, Blockbuster - Netflix's primary competitor swam too long in the red ocean (DVD rental
market) and eventually headed towards bankruptcy.

A history of blue oceans

Though BOS is a new term, it has been a feature of business for a very long time. A hundred
years ago, some of the most basic industries of today didn't exist. Many of these started as blue
ocean strategic move at some point before the boundaries disappeared and competition took
over.

Ford's Model T, introduced in 1908, is a classic example of a market-creating-blue ocean

strategic move that challenged the conventions of the automotive industry. Same can be said
about the future. As industries continuously evolve, operations improve, markets expand, and
players come and go. In future, many of the industries unknown today will come into existence.
These are the blue oceans waiting to be explored.

Why is BOS more important than ever?

Accelerated technological advances substantially improve industrial productivity. While
suppliers can produce an unprecedented array of products and services, limited demand raises
the bar for competition.

As globalization shrinks trade barriers between nations and regions, information on products
and prices become instantly available. This breaks down niche markets that were once havens
for monopoly. As brands tend to become more and more similar, consumers increasingly select
based on price.

The business environment in which most strategy and management approaches of the
twentieth century evolved is increasingly disappearing. As red oceans become increasingly
bloody, businesses will need to focus on blue ocean strategies than competing within the
saturated existing markets.

SWOT analysis:
A SWOT analysis is a strategic planning tool used to identify and evaluate the Strengths,
Weaknesses, Opportunities, and Threats involved in a project or business venture. It involves a
comprehensive assessment of both internal and external factors that can affect the success of a
project, business, or any other endeavor.

SWOT analysis is a useful technique for businesses. It helps them to understand their strengths
and weaknesses, and also helps to identify both the Opportunities and Threats it is likely to
lace. From an organization's point of view SWOT will show the following:

SWOT is commonly used as part of strategic planning and looks at:

 1. Strengths - These are internal factors that contribute positively to the objective. They could
include things like a strong brand, skilled workforce, efficient processes, or proprietary
technology.

2. Weaknesses - These are internal factors that may hinder the achievement of the objective.
Weaknesses could include lack of resources, outdated technology, poor management, or other
internal limitations.

3. Opportunities in the environment - These are external factors that the project or business
could take advantage of to achieve its objectives. Opportunities may include market trends,
changes in consumer behavior, technological advancements, or other external factors that can
be leveraged.

4. Threats in the environment - These are external factors that could present challenges or
risks to the project or business. Threats might include competition, economic downturns,
regulatory changes, or other external factors that could negatively impact the endeavor.

The goal of a SWOT analysis is to identify key factors that can inform strategic planning and
decision-making. By understanding these internal and external factors, organizations can
develop strategies to capitalize on strengths, address weaknesses, take advantage of
opportunities, and mitigate threats. SWOT analyses are commonly used in business planning,
marketing, and project management.

Importance of SWOT Analysis:

SWOT can help management in a business discover:
1. What the business does better than the competition
2. What competitors do better than the business
3. Whether the business is making the most of the opportunities available
4. How a business should respond to changes in its external environment
The result of the analysis is a matrix of positive and negative factors for management to address

Positive factors Negative factors

Internal Factors Strengths Weaknesses
External Factors Opportunities Threats

The key point to remember about SWOT is that:

Strengths and weaknesses

1. Are internal to the business
2. Relate to the present situation

Opportunities and threats

1. Are external to the business
 2. Relate to changes in the environment which will impact the business

Using SWOT analysis

There is no point producing a SWOT analysis unless it is actioned! SWOT analysis should be
more than a list-it is an analytical technique to support strategic decisions. Strategy should be
devised around strengths and opportunities.

The key words are match and convert:

Match Strengths with Opportunities
Convert Weaknesses into Strengths

A key challenge for any business is to convert weaknesses into strengths. For example:

Weakness Possible response

Outdated technology Acquire/take over competitor with leading
technology.
Skills gap Invest in training & more effective recruitment
Overdependence in a single product Diversify the product portfolio by entering new
markets
Poor quality Invest in quality assurance
High fixed costs Examine potential for outsourcing or off shoring.

Don't forget that for every perceived threat, the same change presents an opportunity for
business.

Benefits of SWOT Analysis:

The main advantage of conducting a SWOT Analysis is that it has little or no cost involved.
Anyone who understands a business can conduct its SWOT Analysis. Business can also use
SWOT Analysis when it does not have enough time to address a complex situation. It means
that business can take steps to improve without the expense of external consultant or business
advisor.

Another advantage of a SWOT Analysis is that it concentrates on the most important factors
affecting a business.

Using SWOT Analysis, a business can:

1. Understand itself in a better way.
2. Il can identify and address its weaknesses.
3. It can plan effective to respond to threats in a more effective manner.
4. It can design a strategy to capitalize on opportunities.
5. It can take advantage of its strengths in a more effective manner.
6. It can develop business goals and strategies for achieving them.
 Specimen of SWOT analysis of a cosmetic company: (November 2008, P-2)

Limitations of SWOT Analysis:

When a business is conducting SWOT Analysis then it must keep in mind that it is only one

Strengths: Weaknesses:
 Loyal customer base  High costs, particularly wages and materials
 Excellent customer care  No management experience of rapid growth
 Highly motivated, committed workforce that  High prices compared to competitors
willingly takes on responsibilities 'Family'  High cost of quality control.
atmosphere
 High quality products
 Ethical approach to customers, employees and
the environment
 Only use natural ingredients
 No testing on animals.
Opportunities: Threats:
 New markets in other countries  Competitors use cheaper materials and cheap
 Lower production costs at facilities in labour
developing countries.  Competition less ethical and able to charge
lower prices
 Multinational competitors benefit from
economies of scale and mass marketing.

stage of the planning process. For complex issues, business will usually need to conduct more
in-depth research and analysis to make decisions.

There could be certain limitations of SWOT Analysis:

1. It only identifies issues but does not prioritize them.
2. It also does not provide solutions or offer alternative decisions.
3. Business can generate too many ideas but it cannot help to choose the best one.
4. It can produce a lot of information, but not all will be useful for business.

PEST or External Environment Analysis

PEST Analysis:
A PEST analysis is a strategic management tool used to analyze and evaluate the external
macro-environmental factors that can affect an organization, project, or business. The acronym
"PEST" stands for Political, Economic, Social, and Technological factors. This analysis helps in
understanding the external influences on a business and is often used as a complementary tool
to SWOT analysis (which focuses on internal factors).
For the success of planning or strategy it is essential that while designing them business must
consider internal and external environment. PEST is an external environmental analysis which
will ensure that business has considered Political, economic, social and technological
environment while defining its plan or strategy. Business would need to conduct this analysis
along with SWOT analysis.

Whether implemented alongside SWOT, or separately, the PEST analysis allows business to look
into future and identify potential obstacles well in advance so that business can do planning to
avoid them before they will affect it.

1. Political factors: These involve the impact of government policies, regulations, and political
stability on the business environment. Political factors can include things like tax policies,
trade tariffs, labor laws, and government stability.
In this business will analyze political factors and government policies. Political factors refer to
the degree that government is going to intervene in economy. It could include labor, laws, tax
policies, consumer protection laws, environmental regulations, and tariff and trade restrictions.

In this business must consider:

1. How stable political environment is in the country. If political environment is stable, then
it might encourage to increased business investment in country.

2. It must also analyze that will government policy will influence laws that could be related
to taxation and might affect business.

3. Business must also analyze government's policy of marketing ethics. This will help
business to design its marketing campaign. (Advertising etc.).

4. Business would also need to analyze government's policy on the economy. For
example if government policy related to economy is favorable then it could lead to more
foreign investment or vice versa.
2. Economic environment: This category encompasses economic conditions and their impact
on a business. Economic factors include factors such as inflation rates, exchange rates,
interest rates, and overall economic growth or recession.

It is also a very important external environment factor that business would need to consider. In
this business might analyze factors such as, interest rates, inflation and credit availability. In
addition to the basic economic factors that influence business, it is also important to consider
the trickle-down effects, such as how rate of inflation might affect your employees. For
example, salaries etc. More specifically business will be looking at elements such as current
business cycle.

Businesses need to consider the state of a trading in the short and long term this is especially
true when planning for international marketing business needs to
look at:
 1. What is the current interest rate? It will help them to determine the rate of inflation
and cost of borrowing. For example, if interest rate is low then it would mean that there
will be increased demand for goods and services and cost of borrowing money will be
low. This could encourage businesses to enter into foreign markets.
2. Business would also need to analyze rate of unemployment. This will enable them to
determine labor supply and wage rate. Apart from this it would also need to consider
per capita income in economy. It will enable them to determine product mix for the new
market and pricing strategy they should use.
3. Business would also need to analyze long term prospects for the economy. For
example, it might need to analyze gross domestic product (GDP) to determine rate of
economic growth in country. If GDP is increasing, then it would mean that economy is
growing and this would generally be a positive sign for business and encourage it to
enter into this market.

3. Social environment: These factors relate to the social and cultural aspects that can
influence a business. Social factors include demographics, cultural trends, social attitudes and
values, lifestyle changes, and population growth.

Social environment relates to cultural, religion and demographic aspects of society. It is an

analysis of macro environment of the business. Social factors include career attributes, age
distribution, population and its growth rate, health consciousness and safety awareness in
market/country.

The social and Cultural influences on business vary from country to country. It is very important
that business must consider such factors. These factors could be:

1. What is the dominant religion in country? This will enable business to finalize product mix
and promotional campaign
2. What are the features of foreign products and services in the market/country?
3. How long are the population living? Are the older generation really wealthy?
4. How much time consumers find for leisure?
5. The roles of men and women in society.

4. Technological environment: This involves assessing the impact of technology on the

business or industry. Technological factors can include innovations, research and
development activities, automation, and the rate of technological change.

It is also a very important external environmental factor that a business will have to
consider/analyze. The increased use of technology is a very important base of measuring
growth and success of business. It will have important effects on business operations. No
matter the size of a business organization is technology has both tangible and intangible
benefits that will help it make money and produce products consumers' demand.
Technological infrastructure affects the culture, efficiency and relationship of a business. In
analyzing technological environment business might have to consider:

1. Will technology allow products and services to be manufactured more economically.

2. Will technology allow business to improve quality standards of its products and services.
3. Will technology offer consumers and businesses more innovative products and
services? For example, internet banking, new generation mobiles etc.
4. How technology will change distribution of products. For example, internet buying,
booking tickets online etc.
5. How technology can help business to communicate effectively in internal and external
communication?

PEST factors analyzed by a business planning to export to another country:

Business Vision/Mission Statement and Objectives

What is a mission statement?

A statement in which a business will write down all fundamental objectives of its formation. It
will be displayed at prominent places in the organization. It will keep on reminding
 employees about the expectations of their employer. Creating a mission statement is one of the
first actions an organization should take. The mission statement can be the foundation stone or
an overall strategy and then be followed through into the development of more specific
functional strategies.

By defining a mission an organization is making a clear statement of its purpose. "A good
mission statement captures an organization's unique and enduring reason for being, and
energizes stakeholders to pursue common goals. It also enables a focused allocation of
organizational resources because it compels a firm to address some tough questions: What is
our business? Why do we exist? What are we trying to accomplish?" (Bart, 1998)

Example Mission Statements

Coca Cola - Everything we do is inspired by our enduring mission:
a. To Refresh the World ... in body, mind, and spirit.
b. To Inspire Moments of Optimism... through our brands and our actions.
c. To Create Value and Make a Difference everywhere we engage.

Advantages & disadvantages of mission statement:

Advantages Disadvantages
1. It provides direction to employees that what they 1. A disadvantage of mission statement is that
are expected to achieve. Without directions chances of its design and implementation being
businesses might be operating without purpose and wrong are very high. A mission statement could
this can be dangerous. have confusing objectives. Care must be taken to
avoid such contusion.
2. It will also help to resolve conflicts as members of Such confusion.
management can easily make quick. If mission
statement is not properly developed reference to 2. If mission statement is not properly developed,
mission statement in case of conflict and argument. then it can contradict with other objective and can
eventually lead to conflicts.
3. It will also act as a communication tool.
Management or owners of business can use mission 3. Like other planning activities e.g., budgeting
statement to communicate to their desire to other designing a mission statement will be a time
members of the company. consuming exercise and apart from these other
resources will also be wasted if ultimate objectives
4. It will also provide a frame work for decision of mission statements are not achieved.
making as mission statement can be used as a
framework that effective managers can easily use 4. Objectives set in mission statement might be
as a guide in discharging their everyday unrealistic in reality. Things are not straight
management functions. forward in reality as they are on paper. A basic
weakness of mission statement that in most cases
objectives turned out to be unrealistic and over
optimistic by the time things start to unfold.
Boston Matrix

What is product mix/portfolio?

Different products that a company is selling in market are collectively known as its product mix
or product portfolio.

In other words, A product mix or product portfolio refers to the complete range of products or
services offered by a company or business. It represents the totality of what the company
brings to the market to meet the needs and preferences of its customers. A well-balanced and
strategically planned product mix is crucial for a company's success, as it allows the
organization to cater to diverse customer segments, respond to market changes, and manage
risk through a variety of offerings.

What is product line?

A product line refers to a group of related

products or services offered by a company that
are similar in terms of function, customer
groups, distribution channels, or price range.
Product lines are a way for businesses to
organize and categorize their offerings, making
it easier to manage and market their products.

A range of product that is offered under an

individual product is known as its product line.
For example, Unilever is selling a brand of
shampoo named Sunsilk. It is available in a range
which suits different hair types. This will be
known as product line of Sunsilk.
Boston Matrix:
It is quite difficult for companies such as Unilever, Proctor & Gamble, nestle to manage their
huge product mix. The Boston consulting group's product portfolio matrix (BCG matrix) is
designed to help with long term strategic planning to help businesses consider growth
opportunities by reviewing their product portfolio to decide whether to invest to discontinue or
develop products. It is also known as Growth/share matrix.

Stars: Products or business units with high market

share and high market growth rate. Stars typically
require substantial resources to maintain and
increase their market share but have the potential
to become the next cash cows as the market
matures.

1. Product has a high market share in a high growth market

2. They are very successful products which create a large amount of revenue for the
business
3. They still require a large amount of money to be spent on their promotion, in order to
keep ahead of the rival products in the market place.
 4. They are at the growth stage of the product life cycle.

Cash cows: Products or business units with high market share but a low market growth rate.
Cash cows are considered stable and generate significant cash flows for the company. They
may not require heavy investments but contribute substantially to the company's
profitability.

1. They have a very high market share I a stable market (i.e. market growth is low)
2. They are at the 'maturity' and 'saturation' stage of their product life cycle.
3. They produce a very large revenue for the business
4. This money is often used to promote the 'problem child' and to develop new products

Problem child/Question marks/Wild cats: Products or business units with low market share
but a high market growth rate. These are in the early stages of their product life cycle and
require careful consideration regarding investment. They may become stars if they gain market
share or may be divested if they don't.

1. Such products have a low market share in a high growth industry/market

2. These products have often been launched quite recently and have not had the
necessary time to establish themselves in the market.
3. They will require a significant amount of money to be spent on their promotion in order
to achieve a healthy market share.
4. They are at the introduction stage of their product life cycle.

Dogs: Products or business units with low market share and a low market growth rate. Dogs are
often mature products in a saturated market, and they may not generate significant profits.
Companies may need to decide whether to maintain or divest these products.

1. Such products have a very low market share in a low growth market
2. They produce very little revenue for the business and are at the decline of the product
life cycle.
3. The business has to decide whether to try and extend the life cycle and boost sales
revenue, or whether to delete the product from the product portfolio.

Using the BCG Box to determine strategy

Once a company has classified its SBU's, it must decide what to do with them. In the diagram
above, the company has one large cash cow (the size of the circle is promotional to the SBU's
sales), a large dog and two, smaller stars and question marks.

Conventional strategic thinking suggests there are four possible strategies for each SBU:
1. Build Share: Here the company can invest to increase market share (for example turning a
"question mark" into a star)
2. Hold: Here the company invests just enough to keep the SBU in its present position
3. Harvest: Here the company (reduces the amount of investment in order to maximize the
short-term cash flows and profits from the SBU. This may have the effect of turning Stars into
Cash cows.
4. Divest: The company can divest the SBU by phasing it out or selling it - in order to use the
resources elsewhere (e.g., investing in the more promising "question marks").

Importance of Boston matrix:

1. It is an important tool to analyze product portfolio of business and make decision related
to it.
2. It is particularly beneficial for businesses who are trying to manage their product portfolio as
they must ensure a balance between the number of products in each category of the
matrix.
3. The use of Boston matrix can help management to identify appropriate time for launching
new products onto the market.
4. The information provided by the Boston Matrix can indicate the likely cash flow position
of each product within the context of its market.

Benefits of Boston matrix:

1. The matrix helps organizations in strategic planning by providing a clear visual representation
of their product portfolio. This aids decision-makers in understanding the relative position of
each product or business unit in terms of market growth and market share.
2. The Boston Matrix assists in allocating resources effectively. By categorizing products into
stars, cash cows, question marks, and dogs, companies can make informed decisions about
where to allocate resources such as capital, marketing efforts, and personnel.
3. It offers a systematic way to analyze and manage a diverse product portfolio. Businesses can
use the matrix to identify which products are contributing the most to profits and which ones
may need strategic adjustments or divestment.
4. The matrix helps in assessing and managing risks associated with different products. For
example, it highlights potential risks and opportunities for products in the question mark
category, guiding decisions on whether to invest more or divest.
5. Boston Matrix aligns with the product life cycle concept. It allows businesses to identify
where each product stands in terms of its life cycle and make appropriate decisions based on
whether a product is in the growth, maturity, or decline phase.
6. The matrix serves as a communication tool, facilitating discussions among stakeholders. It
provides a common framework for discussing the strategic position of products and business
units and aligns teams on overall organizational strategy.

Limitations of Boston matrix:

1. Boston Matrix only uses market share and market growth to assess the strength and
weaknesses of a product portfolio.
2. Current market share information tells us very little about the future prospects of product.
3. Critics suggest that the analysis provided is too simple and does not reflect economic
reality. The Boston Matrix is theoretical model only and therefore cannot take account of all
economic activity.
4. There is an assumption that higher rates of profit are directly related to high rate of
market share. This may not always be the case. When Boeing launch a new jet, it may gain a
high market share quickly but it still has to cover very high development costs.
5. The Boston Matrix simplifies the complexity of business situations by categorizing products
into only four classifications. In reality, business environments are more intricate, and factors
beyond market share and growth rate can influence a product's success.
6. The matrix relies solely on market growth rate and relative market share as the primary
criteria for classification. It does not consider other crucial factors such as competition,
technological changes, or external market dynamics.
7. The model assumes that market growth rates remain constant, which may not be the case in
dynamic industries where market conditions can change rapidly. In rapidly evolving markets,
products may move between categories more quickly than the model implies.
8. The Boston Matrix places significant emphasis on market share as an indicator of success.
However, high market share does not always equate to profitability, and there may be
instances where a product with a lower market share is more profitable.
9. While the Boston Matrix provides a framework for classifying products, it offers limited
guidance on specific strategies. Decisions about resource allocation, investment, and
divestment are not explicitly prescribed, and companies may need to look beyond the matrix
for detailed strategic planning.
10. The model assumes linear growth in market share and neglects the potential for nonlinear,
disruptive growth patterns that may occur in certain industries.

Porter's Five Forces

Porter's five forces analysis:

It is an analysis tool which used live industry forces to

determine the intensity of competition in an industry and its
profitability level. This model was created by M. Porter in
1979 to understand how live key competitive forces can
affect an industry.

These five forces are:

Threat of New Entrants:
It will help to determine that how easy (or not) it is to enter an industry. If an industry is
profitable and there are few barriers to entry, then more competitors will be likely to enter to
intensify competition. In this situation businesses will have to compete for market share, and
profits will be likely to fall.

It would be important for existing businesses to create high barriers to entry to deter new
competitors.

Threats of new entrants might be high when:

1. There is low amount of capital required to enter market.
2. Existing businesses and retaliating that much.
3. Existing businesses don't have patent right, trademarks etc.
4. There are no government regulations.
5. There is lack of brand loyalty.
6. Businesses can easily achieve economies of scale.

 This force examines the ease with which new competitors can enter the market.
 Barriers to entry include factors such as high start-up costs, economies of scale enjoyed
by existing firms, brand loyalty, and government regulations.
 The higher the barriers, the lower the threat of new entrants.

Bargaining Power of Buyers:

 This force assesses the power of buyers (customers) to influence prices and terms.
 Factors influencing buyer power include the availability of alternative products, the
importance of each buyer to the seller, and the ability of buyers to integrate backward
(produce the product themselves).
 High buyer power can put pressure on prices and reduce the profitability of the
industry.

Bargaining Power of Suppliers:

It is also a very important force according to Porter. If bargaining power of suppliers is strong
then it will enable them to sell at high price or they may even sell low quality products. This will
definitely affect businesses as their profit margin will decrease due to high cost of inventory.

Suppliers may have strong purchasing power when:

1. There is high demand but low supply.
2. There are few substitutes (raw material) available
3. Suppliers have scarce resources.

 This force examines the power of suppliers to influence prices and terms.
  Factors affecting supplier power include the concentration of suppliers, the uniqueness
of their products, and the availability of substitute inputs.
 Industries with few suppliers and limited alternatives may face higher supplier power.

Threat of Substitute Products or Services:

This force could be really threatening when buyers can easily find substitutes with attractive
prices and better quality. For example, to switch from coffee to tea does not cost anything,
unlike switching from car to bicycle.

 This force considers the availability of alternative products or services that could fulfill
the same need as those in the industry.
 The more substitutes available, the higher the threat to the industry's profitability.
 Industries with unique or differentiated products may face a lower threat of substitutes.

Intensity of Competitive Rivalry:

It is the major determinant on how competitive and profitable an industry is. In case of
competitive industry, firms have to compete aggressively for a market share, which results in
low profits.

Rivalry among firms could be intense when:

1. There will be many competitors in market.
2. Barriers to exit industry are high.
3. Growth of industry is slow or negative.
4. There is low customer loyalty.

At the end we can say that Porter's five forces is a great tool to analyze industry's structure and
use the results to formulate strategy of a business. However, it has limitations and requires
further analysis to be done, such as SWOT, PEST analysis.

 This force assesses the level of competition among existing firms in the industry.
 Factors influencing rivalry include the number and balance of competitors, industry
growth rate, and the degree of product differentiation.
 High rivalry often leads to price competition and reduced profitability.

These forces determine structure of an industry and the level of competition in that industry.
The stronger competitive forces in the industry will be the less profitable it will be. And industry
with low barriers to entry, having few buyers and suppliers but many substitute products and
competitors will be considered as very competitive and thus, not so attractive due to its low
profitability.
 Attractive industry-High profits Unattractive industry-low profits
1. There will be high barriers to entry. 1. There will be low barriers to entry.
2. The bargaining power of suppliers will be 2. The bargaining power of suppliers will be
weak. strong.
3. The bargaining power of buyers will also be 3. The buying power of buyers will also be strong.
weak. 4. There will be many substitutes available due to
4. There will be few substitutes available due to high level of competition.
less competition.

A core product refers to the fundamental or primary benefit that a product provides to
customers. It is the primary reason why customers choose to purchase a particular product or
service. The core product represents the essential function or utility that meets the needs or
wants of the customers.

Core Competencies -
Core competency is an organization's defining strength which provides the foundation from the
business will grow, seize upon new opportunities and deliver value to customers. Core
competency of a company not easily replicated by other organizations, whether existing
competitors or new entries into its market.

Origin and history:

The concept of core competency grown out of article titled, "The core competence of the
corporation, written by C.K Prahalad and Gary Hamel and published in Harvard business
Review. In that article, the authors asserted in their opening paragraph that business executives
in the 1980's 'were judged on their ability to restructure, declutter (to organize and prioritize}
and delayer their corporations." But moving forward in the 1990's they would "judged on their
ability to identify, cultivate and exploit the core competencies that make growth possible."
Prahalad and Hamel observed that successful enterprises viewed themselves as a portfolio of
competencies versus a portfolio of businesses," and these competencies" empower individual
business to adapt quickly to changing opportunities.

Core Competencies and Strategy:

The term core competency was coined by the leading management experts, CK Prahalad and
Gary Hamel in an article in the famous Harvard Business Review. By providing a basis for firms
to compete and achieve sustainable competitive advantage, Prahalad and Hamel pioneered the
concept and laid the foundation for companies to follow in practice. Some core competencies
that firms might have include technical superiority, its customer relationship management, and
processes that are vastly efficient. In other words, each firm has a specific area in which it does
well relative to its competitors, this area of excellence can be reused by the firm in other
markets and products, and finally, the area of strength adds value to the consumer. The
implications for real world practice are that core competencies must be nurtured and the
business model built around them instead of focusing too much on areas where the firm does
not have competency. This is not to say that other competencies must be neglected or ignored.
Rather, the idea behind the concept is that firms must leverage upon their core strengths and
play to their advantages.

Some Examples:
If we take the examples from real world companies and evaluate their core competencies, we
find that many firms have benefited from the application of this theory and that they have
succeeded in attaining competitive advantage and sustainable strategic advantage. For
instance, the core competencies of Walt Disney Corporation lie in its ability to animate and
design its shows, the art of storytelling that has been perfected by the company, and the
operation of its theme parks that is done in an efficient and productive manner. Hence, Walt
Disney Corporation would be well advised to configure its strategy around these core
competencies and build a business model that complements these competencies.

The loss of core competencies:

Businesses also aim to cut or control costs. Such cost cutting moves from businesses might
sometimes destroy the ability to build core competencies. For example, decentralization make
it more difficult to build core competencies because autonomous groups rely on outsourcing of
critical tasks, and this outsourcing prevents the firm from developing core competencies in
those tasks since it no longer consolidates the know how that it spread throughout the
organization.

Failure to recognize core competencies may lead to decisions that could result in their loss. For
example, in the 1970's-man U.S manufacturers divested themselves of their television
manufacturing businesses, reasoning that the industry was mature and that high quality, low
cost

Models were available from Far East manufacturers. In the process they lost their core
competence in video, and this loss resulted in a handicap in the newer digital television
industry.

Closing Thoughts:

The important aspect to be noted is that core competencies provide the companies with a
framework wherein they can identify their core strengths and strategize accordingly. Of course,
the identification and evaluation of core competencies must be done as accurately and reliably
as possible since the divestment of non-core areas must not lead to the firm missing key areas
of operation and competitive advantage. Finally, care must be taken when building the
organization edifice around the core competencies to avoid the situation where many or too
few of the competencies are identified leading to redundancies or scarcity.

SMART objectives are a framework for setting goals that are specific, measurable, achievable,
relevant, and time-bound. The SMART criteria are designed to enhance the clarity and
effectiveness of objectives in various contexts, such as personal development, project
management, or organizational planning. Each letter in the SMART acronym represents a key
characteristic of a well-defined objective:

1. Specific: Objectives should be clear and specific, leaving no room for ambiguity. They should
address the who, what, where, when, and why. A specific objective provides a clear direction
for action.

2. Measurable: Objectives should be quantifiable and include specific criteria for measuring
progress. This helps in tracking the achievement of the objective and provides a clear basis for
evaluating success.

3. Achievable (or Attainable): Objectives should be realistic and feasible. While it's good to set
challenging goals, they should also be within reach. Setting unattainable objectives can lead to
frustration and demotivation.

4. Relevant (or Realistic): Objectives should be relevant to the overall mission and goals of the
individual, team, or organization. They should align with broader strategies and contribute
meaningfully to the desired outcomes.

5. Time-bound: Objectives should have a specific timeframe or deadline. This helps create a
sense of urgency and provides a timeframe for assessment. It also helps prevent objectives
from being open-ended.

Here's an example of a SMART objective:

Non-SMART Objective: Increase sales.

SMART Objective: Increase quarterly sales revenue by 10% within the next six months by
implementing a targeted marketing campaign to attract new customers and offering
promotions to existing customers.

The SMART criteria help ensure that objectives are well-defined, realistic, and actionable,
contributing to more effective planning and execution.

Benefits of SMART Objectives:

 SMART objectives provide clear and unambiguous goals, reducing confusion and
ensuring everyone understands what needs to be achieved.
 The criteria enable the quantification of progress, allowing for effective tracking and
assessment of goal achievement.
 SMART objectives encourage the setting of realistic goals, fostering motivation and
preventing frustration.
 By aligning objectives with broader strategies and goals, SMART criteria ensure that
efforts contribute meaningfully to the overall mission.
  The time-bound aspect of SMART objectives creates a sense of urgency, helping to
prioritize tasks and prevent procrastination.

Limitations of SMART Objectives:

 The rigidity of SMART objectives may stifle creativity and adaptability in dynamic
environments.
 The focus on measurability may lead to neglect of qualitative aspects critical to goal
achievement.
 Strict adherence to SMART criteria may result in objectives lacking inspirational or
visionary elements.
 The framework may discourage ambitious goals that push beyond conventional
boundaries and foster innovation.
 SMART objectives may not adequately account for external factors and uncontrollable
variables influencing goal attainment.

The Ansoff Matrix –

Igor Ansoff, in his book 'Corporate Strategy" stated that the main factor that a business needs
is to identify a competitive advantage. In order to this business would need to analyze whether
it needs to continue with its existing products or whether it needs to develop new products.
Igor Ansoff developed these ideas into a matrix. This matrix is used heavily as a marketing tool.
It also has implications for long term strategies of a business.
The four main categories -
Ansoff's matrix provides four different growth strategies:

Market penetration: Market penetration refers to a strategy in which a company seeks to

increase its market share and sales within its existing market or industry. This strategy
involves selling more of the current products or services to the organization's current
customer base. Market penetration is often one of the initial strategies pursued by companies
aiming to grow and strengthen their position in the marketplace. In this a business will try to
achieve growth by increasing market share of its existing products in its existing/current market
segments. This is the lowest risk strategy as product will already have brand image in existing
market. However, market penetration will have certain limitations as once market will
approach saturation stage then business would need to implement another strategy if business
would wish to continue to grow.

Market development/expansion: Market development is a business strategy that involves

expanding the reach of existing products or services into new markets. This strategy aims to
tap into new customer segments or geographical areas to increase sales and overall market
share. Market development can take different forms, such as entering new geographical
regions, targeting different demographic groups, or finding new applications for existing
products. In this business will decide to launch its existing product a new market. The
development of a new market for the existing product may be a good strategy if company's
core competencies are related more to the specific product than to its experience with a
specific market segment. This is a medium risk strategy as in new market business might have
develop brand image of its product. For example, Gourmet launched its bakery in Karachi.

Product development/expansion: Product development is a strategic process that involves

creating and introducing new or improved products or services to the market. This strategy is
crucial for companies seeking growth, innovation, and a competitive edge. Product
development can take various forms, including the introduction of entirely new products,
enhancements to existing products, or the adaptation of products to meet new market
demands. In this business will develop a new product and will launch it in its existing market.
This strategy may be appreciating if company's strengths are related to its specific customers
rather than to the specific product itself. This is also going to be a medium risk strategy as
business will have its brand engage in existing market segments. For example, Beacon House
launched Concordia colleges.

Diversification: Diversification is a business strategy that involves entering new markets or

industries with products or services that are different from the company's existing offerings.
The goal of diversification is to spread risk, explore new revenue streams, and potentially
achieve a higher level of overall business growth. In this business will grow by launching a new
product in a new market. This is going to be high risk strategy as business will not have any
brand goodwill in that market. However, diversification may be a reasonable choice if the high
risk is compensated by the chance of a high rate of return (profit). Other advantage that
business might gain due to its diversification strategy is that it could get a foothold in an
attractive industry and it could also reduce overall business portfolio risk. For example,
Gourmet bought Silk Bank and diversified its operations into financial market.

Advantages & dis-advantages of Ansoff Matrix:

Advantages
1. It provides knowledge to marketing managers about different strategies that they can
use for growth.
2. It helps them to set out aims and objective. For example, whether they would like to
adopt low, medium or high-risk strategy for business growth.
3. It is presented in form a matrix which is easily presentable to different stakeholders.
4. It will also help business to consider alternative strategies by considering potential
problems.

Disadvantages
1. It only identifies the degree of risk involved. Risk will still exist and business will not be
able to avoid it.
2. Business would still need to use other methods alongside. For example, investment
appraisal in order to ensure that it has also considered quantitative/financial factors to
ensure quality decisions.
3. Ansoff matrix fails to show that market development and diversification strategies
require a change to every day running of the business.

Force field analysis –

Force Field Analysis was developed by Kurt Lewin (1951) and is widely used to inform decision
making, particularly in planning and implementing change management programs in
organizations. It is a powerful method of gaining a comprehensive overview of the different
forces acting on a potential organizational change issue, and for assessing their source and
strength.
Purpose of force field analysis:
Force Field Analysis is a general tool for systematically analyzing the factors found in complex
problems. It frames problems in terms of factors or pressures that support the status quo
(restraining forces and those pressures that support change in the desired direction (driving
forces). A factor can be people, resources, attitudes, traditions, regulations, values, needs,
desires, etc. As a tool for managing change. Force Field Analysis helps identify those factors that
must be addressed and monitored if change is to be successful.
Procedure of force field analysis:
1. Define the problem: What is the nature of our current situation that is unacceptable and
need modification? It is useful to separate the specific problem from those things that are
working well.
2. Defining the change objective: What is the desired situation that would be worth working
towards? Be as specific as possible.
3. Identify the driving forces: What are the factors of pressures that support change in the
desired direction? What are the relative strengths of these forces? Place these driving forces o
e chart on the Force Field Analysis diagram as labelled arrows with the length of the arrow
reflecting the relative strength of each force. What are the inter-relationships among the
driving forces?
4. Identify the restraining forces: What are the factors or pressures that resist the proposed
change and maintain the status quo? Represent these forces on the diagram as you did those
for the driving forces. What are the inter-relationships among the restraining forces?
5 Developing the Comprehensive Change Strategy: The diagram created in steps three and
four reflect what could be called a state of quasi- stationary equilibrium. Although this is a
relatively stable state, movement can be achieved altering the factors currently contributing to
this equilibrium. Change can occur as a result of any combination of the following: -
strengthening any of the driving forces - adding new driving forces (possibly by transforming a
former restraining force) - removing or reducing any of the restraining forces Step 5 should also
include some consideration of some of the possible unintended consequences when
equilibrium forces are altered (e.g., increase resistance, new alliances, fear, etc.).
Using your analysis:
Once you've done your Force Field Analysis, you can use it in two ways:
1. To decide whether or not to move forward with the decision or change.
2. To think about how you can strengthen the forces that supports the change and weakens the
forces opposing it, so that the change is more successful.

3. If we had to implement the project in example above, the analysis might suggest a number of
changes that management could make to initial plan. For example, management could

4. Train staff ((Cost +) to minimize the fear of technology ("Staff uncomfortable with new
technology-2).

5. Show staff that change is necessary for business survival (new force that supports the change
+2).
6. Show staff that new machines would introduce variety and interest to their jobs (new force
that supports the change, + 1).
7. Raise wages to reflect new productivity ("Cost"+1, 'Loss of overtime" -2).
8. Install slightly different machines with filters that eliminate pollution ("Impact on
environment" -1).
These changes would swing the balance form 11:1 0 (against the plan), to 13:8 (in favor of the
plan).
The advantages of Force Field Analysis -
1. Brings into the open factors which will work for and against the closing of a gap.
2. Identified by a needs analysis.
3. Helps to recognize circumstances which can and cannot be changed.
4. Provides a means to analyze ways to minimize or eliminate barriers to goal attainment.
The Limitations of Force Field Analysis -
1. Process is subjective and requires collaborative thinking and agreement.
2. Concerning forces for and against the solution to a particular problem.
3. May oversimplify the relationships between factors that impact a problem.
4. All aspects of a problem may not be identified.
6.3.3 Decision Trees:
A decision tree is a visual representation of a decision-making process, often in the form of a
tree-like structure. It's a powerful tool used in various fields, including decision analysis,
operations research, and machine learning. The decision tree consists of nodes, branches, and
leaves, where each node represents a decision or a test on a specific attribute, each branch
represents the outcome of a decision or test, and each leaf node represents a decision or the
final outcome.
The basic objective of this technique is to improve quality in decisions. It will help to calculate
possible outcomes of alternative decisions and at the end business will select best decision. A
decision tree will graphically describe the decision to be made. It uses branching method to
illustrate every possible outcome of a decision. The events that occur and the possible
outcomes associated with combinations and events are taken into consideration while drawing
a decision tree diagram. Probabilities are assigned to the events, and values are determined for
each outcome. A decision tree diagram can be drawn by hand or created with a graphic
program or specialized software.
Things to remember:
1. The decision tree is laid out from left to right.
2. Every decision tree diagram will start with the decision node. It means at this point a decision
is to be made.

3. Probabilities are represented by, which is also known as a probability/chance node.

4. Expected monetary value is calculated with the help of the following formula:
Expected value = actual value x probability
In decision tree analysis, the expected value is a concept used to calculate the average
outcome of a decision, considering all possible outcomes and their associated probabilities. It is
particularly relevant in decision analysis and risk assessment.
5. The actual values are always given at the end of each option/probability.
Example:
Abdul Rahim owns a piece of land and he wants to sell it to raise some money for business
expansion. He has been suggested two options:
Option# 1: He could sell the land now for a guaranteed price of $300,000, with an associated
selling cost of $5,000.
Option# 2: He could wait for a year for the market price to hopefully rise. In this case selling
cost will be $10,000.

Following could be the probabilities:

Option# 1:

Expected profit = Revenue - cost

Expected profit = $300,000 - $5,000

Expected profit = $295,000.

Expected profit = $295,000.

Expected value of option # 2:

High price $400,000*0.60 = $240,000
Same price $300,000*0.30= $90,000
Low price $200,000*0.10 = $20,000
$350,000
Less: Cost (($10,000)
Total expected value $340,000
The above-mentioned calculation shows that diagram is in favor of option#2, i.e., he must wait
for a year to sell land and in this case expected value is $340,000 as compared to option #1
which is expected to return $295,000.
On monetary value basis it is more feasible to go for option #2. On diagram two parallel lines
have been drawn to reflect that option#1 has been rejected.
Benefits and limitations of decision trees:
Benefits -
1. These diagrams are simple to understand and interpret One can easily understand decision
tree diagram after a brief explanation
2. Decision tree diagram helps to set out problems clearly and logically.

3. Enable to determine worst, best and expected values for alternative decision.
4. Construction of decision tree may enable management to shown possible courses of action
which it did not consider previously.
5. Another benefit is that one case sees different options on decision tree diagram physically
and can easily identify problems he/she can face rather than attempting to visualize expected
problems.
Limitations -
1. Calculations are based on probabilities and of they are not realist then there might be a
question mark on reliability of these calculations.
2. It is a quantitative analysis technique which ignores qualitative factors. For e.g., consumer
trends, competitive environment.
3. It is assumed that probabilities will remain same any change in external environment might
change probabilities and actual result might be different.
4. there is a possibility of biased results, as in order to pursue to go for favorite option
managers might manipulate data.
5. There is a possibility that management might consume a lot of time in decision. making and
during this time prediction might become out of date.