Unit-1

Meaning of Strategy
The word “strategy” has entered in the field of management from the military services where
it refers to apply the forces against an enemy to win a war. Originally, the word strategy) has
been derived from Greek 'strategos' which means generalship. The word was used for the first
time in around 400 BC. The word strategy means the art of the general to fight in war.

In management, the concept of strategy is taken in more broader terms. According to Glueck,
"Strategy is the unified, comprehensive and integrated plan that relates the strategic
advantage of the firm to the challenges of the environment and is designed to ensure
that basic objectives of the enterprise are achieved through 7 proper implementation
process."

Another definition of strategy is given below which also relates strategy to its
environment. Strategy is organization's pattern of response to its environment over a
period of time to achieve its goals and mission."

Nature of Strategy
Based on the above definitions, we can understand the nature of strategy. A few
aspects regarding nature of strategy are as follows:

 Strategy is a major course of action tlirough which an organization relates itself

to its environment particularly the external factors to facilitate all actions
involved in meeting the objectives of the organization.
 Strategy is the blend of internal and external factors. To meet the opportunities and
threats provided by the external factors, internal factors are matched with them.
 Strategy is the combination of actions aimed to meet a particular condition, to solve
certain problems or to achieve a desirable end. The actions are different for different
situations.
 Due to its dependence on environmental variables, strategy may involve a
contradictory action. An organization may take contradictory actions either
simultaneously or with a gap of time. For example, a firm is engaged in closing down
of some of its business and at the same time expanding some.
 Strategy is future oriented. Strategic actions are required for new situations which
have not arisen before in the past.
 Strategy requires some systems and norms for its efficient adoption in any
organization.
 Strategy provides overall framework for guiding enterprise thinking and action.

The purpose of strategy is to determine and communicate a picture of enterprise

through a system of major objectives and policies. Strategy is concerned with a unified
direction and efficient allocation of an organization's resources. A well-made strategy
guides managerial action and thought. It provides an integrated approach for the
organization and aids in meeting the challenges posed by environment.
Features of Strategy
 Specialized plan to outperform the competitors.
 Details about how managers must respond to any change in the business environment.
 Redefines direction towards common goals.
 Reflects the concern to effectively mobilize resources.
 Maximizes the organization's chances to achieve the set objectives.

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-a-vis:
1. Corporate Level
2. Business Level
3. 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. The example of first category can be that of Reliance Industries Limited which is
a highly integrated company producing textiles, yarn, and a variety of petro chemical
products and the example of the second category could be Ashok Leyland Limited which is
engaged in the manufacturing and selling of heavy commercial vehicles. 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 discrete 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 The three levels are explained as follows:

Corporate Level Strategy

At the corporate level, strategies are formulated according to organization wise polices. 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 tlie actions dealing with the objectives of
the organization. Such decisions are made by top management of the firm. The example of
such strategies include acquisition decisions, diversification, structural redesigning etc. The
board of Directors and the Chief Executive Officer are the primary groups involved in this
level of strategy making. In s~nalaln d family owned businesses, the entrepreneur is both the
general manager and 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 polices 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 a 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.

Importance of Strategy
With the increase in the pressure ofexternal 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, Technologies 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.
Strategy provides various benefits to its users:

 Strategy helps an organization to take decisions on long range forecasts.

 It allows the firm to deal with a new trend and meet competition in an effective
manner.
 With the help of strategy, the management becomes flexible to meet unanticipated
changes.
 Efficient strategy formation and implementation result into financial benefits to
the organization in the form of increased profits.
 Strategy provides focus in terms of organizational objectives and thus provides
clarity of direction for achieving the objectives.
 Organizational effectiveness is ensured with effective implementation ofthe
strategy.
 Strategy contributes towards organizational effectiveness by providing
satisfaction to the personnel.
 It gets managers into the habit of thinking and thus makes them, proactive and
more conscious of their environment.
 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.
 Strategy formulation & implementation gives an opportunity to the management
to involve different levels of management in the process.
 It improves corporate communication, coordination and allocation of resources.
 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.

STRATEGIC MANAGEMENT
Strategic management is the process by which an organisation formulates its objectives and
manages to achieve them. Strategy is the means to achieve the organisational ends. A strategy
is a route to the destination viz., the “objectives of the firm”. Picking a destination means
choosing an objective. Objectives and strategies evolve as problems and opportunities are
identified, resolved and exploited. The interlocking of objectives and strategies characterise
the effective management of an organisation. The process binds, coordinates and integrates
the parts into a whole. Effective organisations are tied by means-ends chains into a
purposeful whole. The strategies to achieve corporate goals at higher levels often provides
strategies for managers at lower levels. Managers must have strategic vision to become
strategic managers and thereby to manage the organisation strategically. Strategic vision is a
pre -requisite of the strategic managers. Strategic vision implies a profound scanning ability
of the environment in which the company is in i.e., knowing the objectives and values of the
organisation stakeholders and bringing that knowledge into future projections and plans of
the organisation. The manager’s strategic vision involves:

 The ability to solve complex and more complex problems;

  The knowledge to be more anticipatory in perspective and approach, and
 The willingness to develop options for the future.

Strategic management can be defined as the art and science of formulating, implementing,
and evaluating cross-functional decisions that enable an organisation to achieve its objectives.
As this definition implies, strategic management focuses on integrating management,
marketing, finance/accounting, production/operations, research and development, and
information systems aspects of a business to achieve organisational success. The term
“strategic management” is used at many colleges and universities as the title to the capstone
course in business administration, “business policy,” which integrates material from all
business courses.

The strategic-management process consists of three stages: strategy formulation, strategy

evaluation. Strategy formulation includes developing a business mission, identifying an
organisation’s external opportunities and threats, determining internal strengths and
weaknesses, establishing long-term objectives, generating alternative strategies, and choosing
particular strategies to pursue. Strategy-formulation issues include deciding what new
businesses to enter, what businesses to abandon, how to allocate resources, whether to expand
operations or diversify, whether to enter international markets, whether to merge or form a
joint venture, and how to avoid a hostile takeover. Strategy implementation requires a firm to
establish annual objectives, devise policies, motivate employees, and allocate resources so
that formulated strategies can he executed; strategy implementation includes developing a
strategy-supportive culture, creating an effective organisational structure, redirecting
marketing efforts, preparing budgets, developing and utilizing information systems, and
motivating individuals to action. Strategy evaluation monitors the results of formulation and
implementation activities and includes measuring individual and organisational performance
and taking corrective actions when necessary. Although making good strategic decisions is
the major responsibility of an organisation’s owner or chief executive officer, managers and
employees both must also be involved in strategy formulation, implementation, and
evaluation activities. Participation is a key to gaining commitment for needed changes.

Basic Elements of Strategic Management Process:

1. Environmental Scanning

 Societal Environment PESTL

 o Composed of general Economical forces in environment (Political -–
Social – Technological-Economical-Legal)
 Task Environment
o Groups in environment that directly affect or are affected by the
organization’s operations
(Often called industry)
 Structure
o The way an Organization is organized in terms of communication,
authority, and workflow
 Organization Culture
o Collection of beliefs, expectations, and values learned and shared by
members and transmitted from one generation of employees to another
 Resources
o An asset, competency, process, skill, or knowledge controlled by the
corporation

2. Strategy Formulation
 Strategy Formulation
o The process of developing long-range plans to deal effectively with
environmental opportunities and threats in light of the organization
strengths and weaknesses
 Composed of
o Vision/ Mission
o Objectives
o Strategies
o Policies

3. Strategy Implementation
 The process of putting strategies and policies into action through the
development of
o Programs
o Budgets
o Procedures

4. Strategy Evaluation and Control

Organizations set up appropriate monitoring and control systems, develop standards and
targets to judge performance. This stage involves monitoring performance and progress in
meeting objectives, taking corrective action as necessary and reviewing strategy.
STRATEGIC INTENT

Setting of organizational vision, mission and objectives is the starting point of strategy
formulation. The organizations strive for achieving the end results which are ‘vision’,
‘mission’, ‘purpose’, ‘objective’, ‘goals’, ‘targets’ etc. The hierarchy of strategic intent lays
the foundation for the strategic management of any organization. The strategic intent makes
clear what an organization stands for. It is reflected through vision, mission, business
definition and objectives. Vision serves the purpose of stating what an organization wishes to
achieve in long run. The process of assigning a part of a mission to a particular department
and then further sub dividing the assignment among sections and individuals creates a
hierarchy of objectives. The objectives of the sub unit contribute to the objectives of the
larger unit of which it is a part. From strategy formulation point of view, an organization
must define ‘why’ it exists, ‘how’ it justifies that existence, and ‘when’ it justifies the reasons
for that existence. The answers to these questions lie in the organization’s mission, business
definition, objectives and goals. These terms become the base for strategic decisions and
actions.

Vision
It is at the top in the hierarchy of strategic intent. It is what the firm would ultimately like to
become. A Vision Statement describes the desired future position of the company. Elements
of Mission and Vision Statements are often combined to provide a statement of the
company's purposes, goals and values.

Advantages of having a Vision

A few benefits accruing to an organization having a vision are as follows:
 They foster experimentation.
 Vision promotes long term thinking.
 Visions foster risk taking.
 They can be used for the benefit of people.
 They make organizations competitive, original and unique.
 Good vision represent integrity.
 They are inspiring and motivating to people working in an organization.

Mission
The mission statements stage the role that organization plays in society. It is one of the
popular philosophical issue which is being looked into business managers since last two
decades. A few definitions of mission are as follows:

Hynger and Wheelen --“ purpose or reason for the organization’s existence.
David F. Harvey-- “ A mission provides the basis of awareness of a sense of purpose, the
competitive environment, degree to which the firm’s mission fits its capabilities and the
opportunities which the government offers.

Nature of Mission
A few points regarding nature of mission statement are as follows:
 It gives social reasoning. It specifies the role which the organization plays in society.
It is the basic reason for existence.
 It is philosophical and visionary and relates to top management values. It has long
term perspective.
 It legitimises societal existence.
 It has stylistic objectives. It reflects corporate philosophy, identity, character and
image of organization.

Characteristics of Mission
In order to be effective, a mission statement should posses the following characteristics.
i) A mission statement should be realistic and achievable. Impossible statements do
not motivate people. Aims should be developed in such a way so that may become
feasible.
 ii) It should neither be too broad nor be too narrow. If it is broad, it will become
meaningless. A narrower mission statement restricts the activities of organization.
The mission statement should be precise.
iii) A mission statement should not be ambiguous. It must be clear for action. Highly
philosophical statements do not give clarity.
iv) A mission statement should be distinct. If it is not distinct, it will not have any
impact. Copied mission statements do not create any impression.
v) It should have societal linkage. Linking the organization to society will build long
term perspective in a better way.
vi) It should not be static. To cope up with ever changing environment, dynamic
aspects be looked into.
vii) It should be motivating for members of the organization and of society. The
employees of the organization may enthuse themselves with mission statement.
viii) The mission statement should indicate the process of accomplishing objectives.
The clues to achieve the mission will be guiding force.

Examples of Mission Statement

A few examples of mission statement (academically not accepted) are as follows:
(i) India Today “ The complete new magazine”.
(ii) Bajaj Auto, “Value for Money for Years”.
(iii) HCL, “ To be a world class Competitor”.
(iv) HMT, “Timekeepers of the Nation”.

Objectives
Objectives refer to the ultimate end results which are to be accomplished by the overall plan
over a specified period of time. The vision, mission and business definition determine the
business philosophy to be adopted in the long run. The goals and objectives are set to achieve
them.

Meaning
 Objectives are open ended attributes denoting a future state or out come and are stated
in general terms.
 When the objectives are stated in specific terms, they become goals to be attained.
 In strategic management, sometimes, a different viewpoint is taken.
 Goals denote a broad category of financial and non-financial issues that a firm sets for
itself.
 Objectives are the ends that state specifically how the goals shall be achieved.
 It is to be noted that objectives are the manifestation of goals whether specifically
stated or not.

Characteristics of Objectives
The following are the characteristics of corporate objectives:
i) They form a hierarchy. It begins with broad statement of vision and mission and
ends with key specific goals. These objectives are made achievable at the lower level.
ii) It is impossible to identify even one major objective that could cover all possible
relationships and needs. Organizational problems and relationship cover a multiplicity
of variables and cannot be integrated into one objectives. They may be economic
objectives, social objectives, political objectives etc. Hence, multiplicity of
objectives forces the strategists to balance those diverse interests.
 iii) A specific time horizon must be laid for effective objectives. This time frame
helps the strategists to fix targets.
iv) Objectives must be within reach and is also challenging for the employees. If
objectives set are beyond the reach of managers, they will adopt a defeatist attitude.
Attainable objectives act as a motivator in the organization.
v) Objectives should be understandable. Clarity and simple language should be the
hallmarks. Vague and ambiguous objectives may lead to wrong course of action.
vi) Objectives must be concrete. For that they need to be quantified. Measurable
objectives help the strategists to monitor the performance in a better way.
vii) There are many constrants internal as well as external which have to be
considered in objective setting. As different objectives compete for scarce resources,
objectives should be set within constraints.

STRATEGIC DECISION MAKING PROCESS

Strategic decision-making is a process of understanding the interaction of decisions and their
impact upon the organization to gain an advantage. Wrong decisions taken at the wrong time,
may result in catastrophic consequences. In other words, the power of strategic thinking lies
in combining the power of the right decision with the right time.

To remain competitive and survive, organizations must make decisions that will maximize
short-term results and minimize long-term risks. Strategic decision-making uncovers the
future possibilities for a company and those options that can be implemented to achieve
success. Strategic and data-driven strategies are gaining trends in the business world.

The process of strategic decision-making combines the concepts of opportunity, threat,

countervailing factors, and risk. The process of strategic decision-making is the lifeblood of
your organization.
CORPORATE GOVERNANCE
Corporate Governance is a system in which companies are directed and controlled. Good
corporate governance and transparency are fundamental elements to achieve an organization's
vision and objectives. Corporate Governance is a term that refers broadly to the rules,
processes, or laws by which businesses are operated, regulated, and controlled. The term can
refer to internal factors defined by the officers, stakeholders or constitution of a corporation,
as well as to external forces such as consumer groups, clients, and government regulations.

“Corporate Governance is concerned with the way corporate entities are governed, as distinct
from the way business within those companies are managed. Corporate governance addresses
the issues facing Board of Directors, such as the interaction with top management and
relationships with the owners and others interested in the affairs of the company.” Robert Ian
(Bob) Tricker (who introduced the words corporate governance for the first time in his book
in 1984) “Corporate Governance is about promoting corporate fairness, transparency and
accountability”.

Principles of Corporate Governance

The fundamental or key principles of corporate governance are described below:

(i) Transparency: Transparency means the quality of something which enables one
to understand the truth easily. In the context of corporate governance, it implies an
accurate, adequate and timely disclosure of relevant information about the
operating results etc. of the corporate enterprise to the stakeholders. In fact,
transparency is the foundation of corporate governance; which helps to develop a
high level of public confidence in the corporate sector. For ensuring transparency
in corporate administration, a company should publish relevant information about
corporate affairs in leading newspapers, e.g., on a quarterly or half yearly or
annual basis.
(ii) Accountability: Accountability is a liability to explain the results of one’s
decisions taken in the interest of others. In the context of corporate governance,
accountability implies the responsibility of the Chairman, the Board of Directors
and the chief executive for the use of company’s resources (over which they have
authority) in the best interest of company and its stakeholders.
(iii) Independence: Good corporate governance requires independence on the part of
the top management of the corporation i.e. the Board of Directors must be strong
non-partisan body; so that it can take all corporate decisions based on business
prudence. Without the top management of the company being independent; good
corporate governance is only a mere dream.

Objectives of Corporate Governance

To align corporate goals of its stakeholders (society, shareholders, etc.)

• To strengthen corporate functioning and discourage mismanagement

• To achieve corporate goals by making investment in profitable investment outlets.

• To specify responsibility of the B.O.D and managers in order to ensure good corporate
performance.

Corporate Governance is a system of structuring, operating and controlling a company with

the following specific aims:— (i) Fulfilling long-term strategic goals of owners; (ii) Taking
care of the interests of employees; (iii) A consideration for the environment and local
community; (iv) Maintaining excellent relations with customers and suppliers; (v) Proper
compliance with all the applicable legal and regulatory requirements.

Need for Corporate Governance:

Corporate Governance is needed to create a corporate culture of Transparency, accountability
and disclosure. It refers to compliance with all the moral & ethical values, legal framework
and voluntary adopted practices. This enhances customer satisfaction, shareholder value and
wealth.

 Corporate Performance: Improved governance structures and processes help ensure

quality decision-making, encourage effective succession planning for senior
management and enhance the long-term prosperity of companies, independent of the
type of company and its sources of finance. This can be linked with improved
corporate performance- either in terms of share price or profitability.
 Enhanced Investor Trust: Investors consider corporate Governance as important as
financial performance when evaluating companies for investment. Investors who are
provided with high levels of disclosure & transparency are likely to invest openly in
those companies. The consulting firm McKinsey surveyed and determined that global
institutional investors are prepared to pay a premium of upto 40 percent for shares in
companies with superior corporate governance practices.
 Better Access to Global Market: Good corporate governance systems attracts
investment from global investors, which subsequently leads to greater efficiencies in
the financial sector.
 Combating Corruption: Companies that are transparent, and have sound system that
provide full disclosure of accounting and auditing procedures, allow transparency in
all business transactions, provide environment where corruption will certainly fade
out. Corporate Governance enables a corporation to compete more efficiently and
prevent fraud and malpractices within the organization.
 Easy Finance from Institutions: Several structural changes like increased role of
financial intermediaries and institutional investors, size of the enterprises, investment
choices available to investors, increased competition, and increased risk exposure
have made monitoring the use of capital more complex thereby increasing the need of
Good Corporate Governance. Evidence indicates that well-governed companies
receive higher market valuations. The credit worthiness of a company can be trusted
on the basis of corporate governance practiced in the company.
  Enhancing Enterprise Valuation: Improved management accountability and
operational transparency fulfill investors’ expectations and confidence on
management and corporations, and return, increase the value of corporations.
 Reduced Risk of Corporate Crisis and Scandals: Effective Corporate Governance
ensures efficient risk mitigation system in place. The transparent and accountable
system that Corporate Governance makes the Board of a company aware of all the
risks involved in particular strategy, thereby, placing various control systems to
monitor the related issues.
 Accountability: Investor relations’ is essential part of good corporate governance.
Investors have directly/ indirectly entrusted management of the company for the
creating enhanced value for their investment. The company is hence obliged to make
timely disclosures on regular basis to all its shareholders in order to maintain good
investor’s relation. Good Corporate Governance practices create the environment
where Boards cannot ignore their accountability to these stakeholders.

Importance of Corporate Governance:

• It shapes the growth and future of capital markets of the economy

• It helps in raising funds from capitals markets

• It links company’s management with its financial reporting system.

• It improves efficiency and effectiveness of the enterprise and wealth of the economy

• It improves international image of the corporate sector and enables home companies
to raise global funds

• It help management to take innovative decisions for effective functioning of the

enterprise

Corporate governance is a mechanism established to allow different parties to contribute

capital, expertise and labour for their mutual benefit the investor or shareholder participates
in the profits of the enterprise without taking responsibility for the operations. Management
runs the company without being personally responsible for providing the funds. So as
representatives of the shareholders, directors have both the authority and the responsibility to
establish basic corporate policies and to ensure they are followed. The board of directors has,
therefore, an obligation to approve all decisions that might affect the long run performance of
the corporation. The term corporate governance refers to the relationship among these three
groups (board of directors, management and shareholders) in determining the direction and
performance of the corporation

Responsibilities of the board

Specific requirements of board members of board members vary, depending on
the state in which the corporate charter is issued. The following five responsibilities of
board of directors listed in order of importance
1. Setting corporate strategy ,overall direction, mission and vision
2. Succession: hiring and firing the CEO and top management
3. Controlling , monitoring or supervising top management
4. Reviewing and approving the use of resources
5. Caring for stockholders interests

Role of board in Strategic Management

The role of board of directors is to carry out three basic tasks
1. Monitor
2. Evaluate and influence
3. Initiate and determine

Appointment of Directors

The appointment of Directors of a company is strictly regulated by the Company’s Act, 2013.
Every company is required to have a Board of directors and it should be consisting of
individuals as directors and not an artificial person. Section 149 lays down the minimum
number of directors required in a company as follows:

1. Public Company– At least 3 directors

2. Private company- At least 2 directors
3. One person company– Minimum 1 director

There can be a maximum of 15 directors. A company may appoint more than 15 directors
after passing a special resolution. The Central Government may prescribe a class or classes of
a company have a minimum one women director. Every company is also required to have a
minimum of one director who has stayed in India in the previous year for a period of 182
days or more.

General provisions relating to appointment of directors

1. Except as provided in the Act, every director shall be appointed by the company in general
meeting.

2. Director Identification Number is compulsory for appointment of director of a company.

3.Every person proposed to be appointed as a director shall furnish his Director Identification
Number and a declaration that he is not disqualified to become a director under the Act.

4. A person appointed as a director shall on or before the appointment give his consent to
hold the office of director in physical form i.e. Consent to act as a director of a company.

5. Articles of the Company may provide the provisions relating to retirement of the all
directors. If there is no provision in the article, then not less than two-thirds of the total
number of directors of a public company shall be persons whose period of office is liable to
determination by retirement by rotation and eligible to be reappointed at annual general
meeting. Further independent directors shall not be included for the computation of total
number of directors.
Woman Director

Every listed company shall appoint at least one woman director within one year from the
commencement of the second proviso to Section 149(1) of the Act. Every other public
company having paid up share capital of Rs. 100 crores or more or turnover of Rs. 300 crore
or more as on the last date of latest audited financial statements, shall also appoint at least one
woman director within 1 years from the commencement of second proviso to Section 149(1)
of the Act.

Independent Director

An independent director means a director other than a managing director or a whole-time

director or a nominee director who does not have any material or pecuniary relationship with
the company/ directors. Every listed public company shall have at least one-third of the total
number of directors as independent directors (fraction is to be rounded off to one). Central
Government has prescribed under Rule 4, public companies with specified limits as on the
last date of latest audited financial statements mentioned below shall also have at least 2
directors as independent directors:- paid up share capital of Rs. 10 crore or more; or turnover
of Rs. 100 crore or more; or in aggregate, outstanding loans/borrowings/ debentures/
deposits/ exceeding Rs. 50 crore or more. In case a company covered under this rule is
required appoint higher number of independents directors due to composition of its audit
committee and then they shall appoint such higher number of independent directors.

Minimum/Maximum Number of Directors in a Company-

Section 149(1) Section 149(1) of the Companies Act, 2013 requires that every company shall
have a minimum number of 3 directors in the case of a public company, two directors in the
case of a private company, and one director in the case of a One Person Company. A
company can appoint maximum 15 fifteen directors. A company may appoint more than
fifteen directors after passing a special resolution in general meeting and approval of Central
Government is not required. A period of one year has been provided to enable the companies
to comply with this requirement.

Duties of directors-

According to Section 166, duties of directors have been defined as—

A director of a company shall : —

 Act in accordance with the articles of the company.

 Act in good faith in order to promote the objects of the company for the benefit of its
members as a whole, and in the best interests of the company, its employees, the
shareholders, the community and for the protection of environment.
 Exercise his duties with due and reasonable care, skill and diligence and shall exercise
independent judgment.
 Not involve in a situation in which he may have a direct or indirect interest that
conflicts, or possibly may conflict, with the interest of the company.
  Not achieve or attempt to achieve any undue gain or advantage either to himself or to
his relatives, partners, or associates and if such director is found guilty of making any
undue gain, he shall be liable to pay an amount equal to that gain to the company.
 Not assign his office and any assignment so made shall be void. If a director of the
company contravenes the provisions of this section such director shall be punishable
with fine which shall not be less than Rs. 1,00,000 but which may extend to Rs.
5,00,000.

ROLES AND RESPONSIBILITIES OF THE BOARD OF DIRECTORS

The roles and responsibilities of the board of directors are as follows

1. Trusteeship: The board of directors act as trustees to the property and welfare of the
company. Hence, the board must use the company’s property for the long-run gain of the
company, but not for their personal use.

2. Formulation of Mission, Objection and Policies: Board of directors must see the long
run view and have long run perspective of the company. The board formulates, reviews and
reformulates the company’s mission, objectives and policies which forms the basis for
strategy formulation and implementation.

3. Designing Organizational Structure: The board designs the structure of the organization
based on the objectives, policies, environmental factors, degree of competition, role of
quality, expectations of employees etc.

4. Selection of Top Executives: The board should assume the responsibility of screening and
selecting the top executives who can formulate and implement the strategies. Chief
executives are key personnel in the process of strategy implementation.

5. Financial Sanctions: The important financial decisions like sanctioning of finances to

various projects, reserves, distribution of profit to shareholders and repayment of loans and
advances etc., are taken by the board. Further, the board reviews the financial performance of
the company from time to time and reformulates the financial policies.
6. Feed forward and Feedback: The board has to obtain information from the external
environmental factors and feed that information forward to various key points in the company
in order to prevent possible hurdles and mistakes in the process of achieving organizational
goals. Further, the board also obtains the information from internal sources of the
organization, and feeds it forward to prevent possible failures in decision-making by the top
level executives.

7. Link between the Company and External Environment: The board acts a vital and
continuous link between the company and external environment like government, other
companies, social and economic institutions etc.
CORPORATE SOCIAL RESPONSIBILITY

The term is often used interchangeably for other terms such as Corporate Citizenship and is
also linked to the concept of Triple Bottom Line Reporting (TBL) that is people, planet and
profits., which is used as a framework for measuring an organization‘s performance against
economic, social and environmental parameters. It is about building sustainable businesses,
which need healthy economies, markets and communities.

Corporate Social Responsibility (CSR) is an important activity to for businesses. As

globalization accelerates and large corporations serve as global providers, these corporations
have progressively recognized the benefits of providing CSR programs in their various
locations. CSR activities are now being undertaken throughout the globe.

The key drivers for CSR are

Enlightened self-interest - creating a synergy of ethics, a cohesive society and a sustainable
global economy where markets, labour and communities are able to function well together.

i) Sustainability : Sustainability means "meeting present needs without compromising the

ability of future generations to meet their needs‘.

ii)Social investment - contributing to physical infrastructure and social capital is increasingly

seen as a necessary part of doing business.

iii)Transparency and trust - business has low ratings of trust in public perception. There is
increasing expectation that companies will be more open, more accountable and be repaired
to report publicly on their performance in social and environmental arenas.
Increased public expectations of business - globally companies are expected to do more than
merely provide jobs and contribute to the economy through taxes and employment. Corporate
social responsibility is represented by the contributions undertaken by companies to society
through its core business activities, its social investment and philanthropy programmes and
its engagement in public policy. In recent years CSR has become a fundamental business
practice and has gained much attention from chief executives, chairmen, boards of directors
and executive management teams of larger international companies.
 Unit-2
(Includes only those topics which have been covered in class)

ENVIRONMENTAL SCANNING
Environmental scanning refers to possession and utilization of information about
occasions, patterns, trends, and relationships within an organization's internal and
external environment. It helps the managers to decide the future path of the organization.
Scanning must identify the threats and opportunities existing in the environment. While
strategy formulation, an organization must take advantage of the opportunities and minimize
the threats. A threat for one organization may be an opportunity for another. Internal
analysis of the environment is the first step of environment scanning. Organizations should
observe the internal organizational environment. This includes employee interaction with
other employees, employee interaction with management, manager interaction with other
managers, and management interaction with shareholders, access to natural resources, brand
awareness, organizational structure, main staff, operational potential, etc. Also, discussions,
interviews, and surveys can be used to assess the internal environment. Analysis of internal
environment helps in identifying strengths and weaknesses of an organization. Analysis
of external environment includes exploring macro-economic, social, government, legal,
technological and international factors that may influence the environment. The analysis of
organization’s external environment reveals opportunities and threats for an organization.
Figure below shows the Elements of Industrial or Organizational Environment:
UNDERSTANDING THE MACRO ENVIRONMENT

As business becomes more competitive, and there are rapid changes in the external
environment, information from external environment adds crucial elements to the
effectiveness of long-term plans. As environment is dynamic, it becomes essential to identify
competitors’ moves and actions. Organizations have also to update the core competencies and
internal environment as per external environment. Environmental factors are infinite, hence,
organization should be agile and vigile to accept and adjust to the environmental changes. For
instance - Monitoring might indicate that an original forecast of the prices of the raw
materials that are involved in the product are no more credible, which could imply the
requirement for more focused scanning, forecasting and analysis to create a more trustworthy
prediction about the input costs. In a similar manner, there can be changes in factors such as
competitor’s activities, technology, market tastes and preferences. Let us now see the process
for analyzing the external environment. This consists of three steps which are as follows:

Step 1: Identifying the firms – on industry as a whole or there may be sub focus groups called
strategic groups.

Step 2: Intelligence gathering or environmental scanning on the general environment of the

industry or strategic group.

Step 3: Organizational Environment Information-Scenario planning is a process suitable for

the purpose and form the best inputs for the strategy formulation process.

The information can be gathered from the following sources:

1) Internal ii) Newspaper/Magazine/Net iii) Government iv) Survey Secondary Database v)

Customer and Suppliers vi) Competition Using these sources the environmental analysis for
any organization can be done.

While in external analysis, three correlated environment should be studied and analyzed —

 immediate / industry environment

 national environment
 broader socio-economic environment / macro-environment

PESTEL or PESTLE Analysis

A PESTEL analysis is a tool used to gain a macro picture of an industry environment.
PESTEL stands for Political, Economic, Social, Technological, Environmental and Legal
factors. It allows a company to form an impression of the factors that might impact a new
business or industry.

Political Forces

The political sector of the environment presents actual and potential restriction on the way an
organization operates. Among the most important government actions are: trade and safety
regulations, taxation, expenditure, takeover (creating a crown corporation, and privatization.
The differences among local, national, and international subsectors of the political
environment are often quite dramatic. Political factors also include the outcomes of elections.
Political instability in some areas makes the very form of government subject to
revolutionary changes. In addition the basic system of government and the laws the system
promulgates, 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. Political activity may also have significant impacts 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 market place, Therefore, knowledge of government strategies can help a firm to avoid
unfavorable confrontation with government as a competitor. In general, the impact of
government is far-reaching and increasing.

Example: Let’s take an example of Starbucks, in some countries; governments provide a

suitable environment for Starbucks to access the market or suppliers. However, in other
countries, a rigid bureaucratic behaviour of government may create hurdles for Starbucks to
expand its business, especially in developing countries.

Economic Forces

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
asses 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.

Example: Let’s take the example of Starbucks, declining unemployment rates and high
economic growth of developing countries is an opportunity for Starbucks to gain more
revenue from across the world. However, the external factors like rising labour cost in
developing countries can be a threat for Starbucks, as it may increase in spending more on the
workforce.

Social Forces
Social forces include traditions, values, societal trends, consumer psychology, and a society's
expectations of business. The following are some of the key concerns in the social
environment: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. Behaviour factors also affect
organisations internally, that is, the employees and management. A society's expectations of
business present other opportunities and constraints. These expectations emanate from
diverse groups referred to as stakeholders. Stakeholders include a firm's owners
(stockholders), members of the board of directors, managers and operating employees,
suppliers, creditors, distributors, customers, and other interest groups - at the broadest level,
stakeholders include the general public. 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.

Example: Let’s take the example of Starbucks, the demand for Starbucks coffee increases due
to the growing coffee culture across the world. Further, this growing culture and hygienic
products have created the opportunity to fetch health-conscious customers to Starbucks café.

Technological Forces

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. 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 non-competitive. In general, Technological trends include not only
the glamorous invention that revolutionizes our lives, but also the gradual painstaking
improvements in methods, in materials, in design, in application, unemployment, and the
transportation and commercial base. They diffusion into new industries and efficiency" (John
Argenti). 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. Changing technology can offer major opportunities for
improving goal achievements or threaten the existence of the firm. Therefore, "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). These capabilities should result in the creation of a
technological strategy. Technological strategy deals with "choices in technology, product
design and development, sources of technology and R&D management and funding" (R.
Burgeleman and M. Maidique). The effect that changing technology can have upon the
competition in an industry is also dealt with other chapters. Technological forecasting can
help protect and improve the profitability of firms in growing industries.

Example:

Let’s take the example of Starbucks, the mobile apps and other linked technologies have
created an opportunity to increase supply through online purchase. However, rising demand
for home use coffee machines is a threat to Starbucks.

Environmental Factors

The impact of the environmental factors has come to the forefront in recent years. They are
now essential due to the shortage of raw materials, pollution targets, and carbon footprint
targets set by governments. The factors that include in this category are – ecological and
ecological traits such as climate, weather, environment offsets, and the change in climate,
which may affect industries such as farming, tourism, insurance, and agriculture.

Example: Let’s take the example of Starbucks, the business sustainability trend improve a
business process that ensures minimal environmental impact. Further, growing demand for an
environmental-friendly product creates an opportunity to increase the supply chain. Also,
Starbucks is doing well in these areas.

Legal Forces

Legal factors include the legislation, and court judgments as well as the decisions rendered by
various commissions and agencies. These factors have some similarity with the political
factors; as they include more specific laws like labour laws, discrimination laws, consumer
protection laws, copyright and patent laws, safety laws, etc. It shows that companies must
know what is legal and illegal to make trade successful without compromising ethics and
principles. However, it becomes tricky when the organization’s business is global since each
nation has its own sets of rules and regulations.

Example: Let’s take the example of Starbucks; business has an opportunity to improve its
performance by maintaining the public safety regulations and ingredient regulations. It can be
seen that Starbucks is doing well in these aspects. However, increasing employment
regulation can be a threat for Starbucks, as it can increase spending for human resource.
Importance of PESTEL Analysis
PESTEL analysis plays a great role in the growth of a business. Whether it is an expansion of
a product line or opening a new company in a new location, PESTEL analysis is a key in
making strategies and planning. The following points validate its importance:

 Whether it is a startup or an established organization, PESTEL analysis can help every

business owner in identifying significant changes in the political, economic, social,
technological, environmental, and legal factors.
 It helps organizations doing strategic planning to expand their businesses.
 Any department in the business like accounts, sales, and marketing can be controllable
from inside; as you can put more people in sales to generate the revenue. A the end,
these results depend on the people working inside. However, external factors like
political, economic, social, technological, environmental, and legal are existed and will
continue to exist without your input. This is where PESTEL analysis plays a great role.

Advantages of PESTEL Analysis

Let’s check out various advantages of PESTEL Analysis:

 Cost Effectiveness
Time and effort are the only cost of PESTEL analysis. In addition, certain additional
programs are also there which can help in organizing inputs and feedback.

 Deeper Understanding
The best thing about the PESTEL analysis is that it makes easy to understand the
factors that affect the business environment. When it comes to the development of a
new product, it increases strategical thinking and deeper understanding of various
factors like consumer laws, new technological trends, etc., which affect the product
launch in the market.

 Alertness Development
PESTEL analysis helps companies to get prepare for possible threats, which arise
time to time because of external factors. An example for a mobile manufacturing
company, any change in technology like the innovation in mobile features is a threat
if a company does not adapt to the innovation changes in their mobile brand. Hence,
they will lose market share to its competitors.

 Exploit opportunities
It helps in exploiting opportunities that arise from time to time due to external factors.
For say, the Lower interest rate in the real estate industry is an economic factor that
creates an opportunity to increase demand for housing; as housing loans get cheap due
to a lower interest rate.

Example of PESTEL Analysis

 EFE Matrix
External Factor Evaluation (EFE) Matrix is a strategic analysis tool used to evaluate firm’s
external environment and to reveal its strengths as well as weaknesses.

Five Steps to Develop an EFE Matrix:

1. List the External Factors and Categorize Them as Opportunities or Threats.
2. Assign a Weight to Each Factor.
3. Assign a Rating.
4. Determine the Weighted Scores.
5. Total Weighted Score.

Key External Factors

When using the EFE matrix we identify the key external opportunities and threats that are
affecting or might affect a company. By analysing the external environment with the tools
like PESTLE analysis, Porter’s Five Forces, the key external factors can be identified. The
general rule is to identify as many key external and internal factors as possible.

Weights

Each key factor should be assigned a weight ranging from 0.0 (low importance) to 1.0 (high
importance). The number indicates how important the factor is if a company wants to succeed
in an industry. If there were no weights assigned, all the factors would be equally important,
which is an impossible scenario in the real world. The sum of all the weights must equal 1.0.

Ratings

The ratings in external matrix refer to how effectively company’s current strategy responds to
the opportunities and threats. The numbers range from 4 to 1, where 4 means a superior
response, 3 – above average response, 2 – average response and 1 – poor response. Ratings,
as well as weights, are assigned subjectively to each factor. In our example, we can see that
the company’s response to the opportunities is rather poor, because only one opportunity has
received a rating of 3, while the rest have received the rating of 1. The company is better
prepared to meet the threats, especially the first threat.

Weighted Score

The score is the result of weight multiplied by rating. Each key factor must receive a score.
Total weighted score is simply the sum of all individual weighted scores. The firm can
receive the same total score from 1 to 4 in both matrices. The total score of 2.5 is an average
score.

Note that EFE analyses only help identify and evaluate the factors, but do not directly help
formulate a strategy or the next best strategic move.
Industrial Organization Approach (I/O model)

Industrial Organization is the study of the workings of markets and industries (defined as any
largescale business activity), especially in the manner firms competes with each other.
Industrial organization is a field of economics dealing with the strategic behavior of firms,
regulatory policy, antitrust policy and market competition. Industrial organization applies the
economic theory of price to industries. The main focus of Industrial Organization’s (IO)
approach lies on the following aspect of interaction between firms in any industry:

1. Price Competition

2. Product Competition

3. Effects of Advertising

4. Research and Development

Grounded in economics, the I/O model has four underlying assumptions:

 First, the external environment is assumed to impose pressures and constraints that
determine the strategies that would result in above-average returns.
 Second, most firms competing within an industry or within a segment of that industry
are assumed to control similar strategically relevant resources and to pursue similar
strategies in light of those resources.
 Third, Resources used to implement strategies are assumed to be highly mobile across
firms, so any resource differences that might develop between firms will be short-
lived.
 Fourth, organizational decision-makers are assumed to be rational and committed to
acting in the firm’s best interests, as shown by their profit-maximizing behavior.

Example of Industrial Organization

Industrial organization is concerned with analysing industries and determining answers
related to their development.

Example: consider the smartphone industry. Apple Inc. (AAPL)) was the first company to
manufacture smartphones in an attractive design and load it with features for the average
consumer. But the product's price - $499 for 4GB and $599 for 8GB - was prohibitively
expensive. To ensure mainstream adoption without denting its profit margins, the Cupertino
company tied up with network providers to defray the cost of a smartphone over a period of
time.

Apple's sales were on an upward curve until Google and Samsung came along. They
exploited the demand for smartphones by offering cheaper versions, packed with similar
features, into the market. The competition turned out to be good for the overall industry and,
over time, the device's market expanded beyond the United States. It encompasses major
markets in developed and developing countries. The number of smartphone manufacturers
has also exploded.

This fairly simple account of the smartphone industry's growth gives rise to several questions.

Here are some:

 Why were Apple's phones expensive?

 What innovation did Samsung and Google undertake in the manufacturing process to
make phones cheaper?
 How and why did network providers agree to the partnership with smartphone
manufacturers?
 How did Apple attempt to defend its turf and why did it fail?
 What regulation contributed to the smartphone industry's success?

Industrial organization studies such questions and attempts to answer them.

Structure Conduct Performance Approach

 The SCP model or paradigm is a crucial aspect of industrial organization theory. This
model was first published in 1933 by two economists Edward Chamberlin and Joan
Robinson before it was later developed by Joe S. Bain in 1959.The Structure-
Conduct-Performance model is used to trace the causes of industry performance. It is
based on a model of Cause and Effect: Industry financial Performance is caused by
the competitive Conduct of players in the industry; this Conduct is is turn caused by
the industry Structure. SCP paradigm was considered as a pillar of the industrial
organization theory because it serves as an analytical framework for analysing the
major elements of market. Market structure and conduct are major determinants of
market performance. There are three elements or variables of market that are
considered important as they influence market behaviours exhibited by both buyers
and sellers. These elements are structure, conduct and performance.
 Structure - this refers to the construction, formation and the makeup of an industrial
organization. It also describes the kind of environment in which an organization or
market operates.
 Conduct - this describes the behavior or comportment of buyers and sellers to the
structure of a market. It also refers to the way buyers and sellers interact with each
other and the way they behave.
 Performance - this refers to the achievement or accomplishment or results of a
particular market or industry. Performance variables that are considered in the market
include product quantity, product quality, and production efficiency.
Uses of SCP model:

The SCP model is very useful in analysing a non-changing industry, it is also useful in the
prediction of the effects of external shock on an industrys profitability. It is useful in the
analysis of the response of an industry's structure to price conduct and vice versa. It studies
whether structure drives performance and also influence conduct. Also, any inquiry into
structure, conduct and performance of an industry or a market makes the SCP model useful.
This model can be used to justify consolidation in the industry. It also helps in the analysis of
the effects of a more attractive industry structure on the performance of the industry.

Industrial organization focuses on understanding and evaluating the behavior of businesses,

the markets that they participate in, and the interaction between the two. The goal is to
increase the internal efficiency of the business so it is poised to compete more effectively in
the marketplace. This is managed by not only refining the structure and operating processes
of the business, but also adapting them so they can more effectively address what is
happening within the wider market.

Industrial organization studies of How firms behave in markets; whole range of business
issues –price of flowers; payment to be official sponsor of major events ; which new products
to introduce ; merger decisions ; methods for attacking or defending markets etc.

Porter’s Five Forces Model

Porter's Five Forces Framework is a tool for analyzing competition of a business. It draws
from industrial organization economics to derive five forces that determine the competitive
intensity and, therefore, the attractiveness of an industry in terms of its profitability. These
forces can be explained as:
1. Competitive Rivalry
The first of the five forces refers to the number of competitors and their ability to undercut a
company. The larger the number of competitors, along with the number of equivalent
products and services they offer, the lesser the power of a company. Suppliers and buyers
seek out a company's competition if they are able to offer a better deal or lower prices.
Conversely, when competitive rivalry is low, a company has greater power to charge higher
prices and set the terms of deals to achieve higher sales and profits.

2. Threat of New Entry

A company's power is also affected by the force of new entrants into its market. The less time
and money it costs for a competitor to enter a company's market and be an effective
competitor, the more an established company's position could be significantly weakened. An
industry with strong barriers to entry is ideal for existing companies within that industry since
the company would be able to charge higher prices and negotiate better terms.

3. Power of Suppliers
The next factor in the five forces model addresses how easily suppliers can drive up the cost
of inputs. It is affected by the number of suppliers of key inputs of a good or service, how
unique these inputs are, and how much it would cost a company to switch to another supplier.
The fewer suppliers to an industry, the more a company would depend on a supplier. As a
result, the supplier has more power and can drive up input costs and push for other
advantages in trade. On the other hand, when there are many suppliers or low switching costs
between rival suppliers, a company can keep its input costs lower and enhance its profits.

4. Power of Buyers or Customers

The ability that customers have to drive prices lower or their level of power is one of the five
forces. It is affected by how many buyers or customers a company has, how significant each
customer is, and how much it would cost a company to find new customers or markets for its
output. A smaller and more powerful client base means that each customer has more power to
negotiate for lower prices and better deals. A company that has many, smaller, independent
customers will have an easier time charging higher prices to increase profitability.

5. Threat of Substitution
The last of the five forces focuses on substitutes. Substitute goods or services that can be used
in place of a company's products or services pose a threat. Companies that produce goods or
services for which there are no close substitutes will have more power to increase prices and
lock in favorable terms. When close substitutes are available, customers will have the option
to forgo buying a company's product, and a company's power can be weakened.

Understanding Porter's Five Forces and how they apply to an industry, can enable a company
to adjust its business strategy to better use its resources to generate higher earnings for its
investors. These forces have been explained using example of Uber cab service in the figure
below: