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Course Code: 611 & 612 Dr. Subir Sen – Faculty Member, IBS
E-Mail: firstname.lastname@example.org, 9830697368 1) Crafting & Executing Strategy – Thompson & Strickland. 2) Strategic Management – Pearce & Robinson. 3) Strategic Management – Fred. R. David. 4) Exploring Corporate Strategy – Johnson & Scholes. 5) Competitive Advantage – Michael E. Porter. 6) HBR – Articles & Case Studies.
STRATEGY - DEFINITION
Strategy is all about making trade-offs between what to do and more importantly what not to do; consciously choosing to differentiate. It reflects a congruence between external opportunities and internal capabilities. Types of strategies – Corporate Strategies – It is all about making choices across various businesses and allocating resources among them. Business Strategies – It is all about developing leveraging and sustaining competitive advantage. Functional Strategies – It is all about finding newer ways to perform existing processes, or 3 better still adopting new processes altogether.
STRATEGIC MANAGEMENT DEFINITION
Strategic management attempts to integrate the traditional management functions and align the organization as a whole with the broader environment to make resource allocations in a way to achieve the strategic intent of the organization. This alignment is called strategic fit. It serves as a road-map for the organization in its growth trajectory. It provides the direction – extent – pace – timing. It depends on the turbulence of the environment and the aggressiveness of the organization. It distinguishes the winners from the losers.
PILLARS OF STRATEGIC MANAGEMENT
Differentiation – Differentiation of key inputs and technologies helps a firm to consciously move away from homogeneous to heterogeneous markets enabling them to earn super-normal profits from normal profits. Integration – Whenever dealing with a complex task of managing a business (i.e. involving a no. of variables with cross linkages) it is in the interest of simplicity that the task be broken up in smaller components. However, for effective control, integration is essential. Alignment – Since differentiation is prone to replication, it is in the interest of the firm to differentiate continuously by aligning the resources with environmental opportunities.
STRATEGIC MANAGEMENT FRAMEWORK
Economic al Strategic Finance Fit Political Strategic Intent Fit Political Marketin g Manageme nt Social & Cultural
It is about adaptation and response to the same.STRATEGIC MANAGEMENT . 7 . It requires full commitment of the top management.FEATURES It forms the core activity of the top management. It is a holistic and integrated approach. It involves substantial resource outlay. It is long-term in nature. It is irreversible. It provides broad guidelines. It is all about creativity and innovation.
It is about forecasting. It is rocket science. It brings instant success. It attempts to minimize risk. It is fool-proof in nature. It a bundle of techniques or even tricks. It involves only the top management. It is about a definite formula. 8 . It involves nitty-gritty's.STRATEGIC MANAGEMENT – MYTHS It involves short-cuts. It about mere data and facts.
To assimilate change faster. again and again ……. . To tap markets across boundaries. To leverage size. To be proactive.STRATEGIC MANAGEMENT IMPERATIVES To be continuously alert. To innovate. scale and scope. rather than reactive. To be future oriented. To generate large resource pool. To gain expertise in technologies. To be insulated against environmental threats. 9 To develop core–competencies.
today's battles are fought over markets. battles fought on the market front are won by companies by virtue of their obsession & strategies. and more importantly . but with a lot a rigour and robustness.ORIGIN The word strategy has its origin from the Greek word strategia meaning Military Commander. In contrast. but by virtue of their courage. whose origin can be traced to some of the greatest battles fought in the ancient days. 10 . In the ancient days battles were won not by virtue of size of the army or armory.STRATEGY . In the ancient days battles were fought over land.strategies. It is an old wine in a new bottle. obsession. Even in today’s markets.
SOME PARALLELS Japan’s attack on Pearl Harbour – Strategy: Attack where it hurts the most. – Yahoo and Microsoft challenging Google. Napoleon’s attack on Russia – Strategy: Waiting for the right time. US attack of Morocco to capture Germany – Strategy: Pin-hole strategy – Wal-Mart challenging Sears by entering small towns. challenging GM and Ford. Allied Forces Vs Germany (WW-II) – Strategy: Forging alliances. 11 . – Toyota’s entry in the US. – Reliance’s entry into telecom.
– Mass Production Organization Size – Complicated Processes – Complex Structures Evolving of an emerging paradigm – survival of the fittest (Fayol & Taylor.EVOLUTION OF MANAGEMENT As Peter Drucker refers to it. The first major discontinuity in the history of global business environment was the . 12 .Industrial Revolution. A paradigm is a dominant belief about how the business and its environment operates. The things happening around the firm when totally disconnected from the past leads to a paradigm shift. 1910). a radical change in the business environment brings about discontinuity.
Survival of the most adaptable becomes a new management paradigm (Ansoff.e. Efficiency and effectiveness are no longer sufficient. – Homogeneous to heterogeneous products. – Affluence of the new customer (i. push to pull). 1960). performance across firms became differentiated. – Global market place.EVOLUTION OF STRATEGIC MANAGEMENT The second major discontinuity in the history of global economic environment – World War II. From uniform performance. – Changes in the technology fore-front. The question of outperforming the benchmark became the new buzzword. 13 .
ENVIRONMENTAL CHANGE Phase IV: Horizon of Scenarios 2 1 Phase I: Extrapolation of the past 1 3 1990 onwards 1 2 1 3 1A 1B 2A Prior to 1950 Phase II: Discrete Scenarios Phase III: Range of Scenarios 1970 to 1990 2 2B 1950 to 1970 14 .
– Biases and prejudices has a very little role to play in strategic choices pursued by managers. 15 . Ansoff (1960) – Strategy can be segregated into certain mutually exclusive and inter-related components aimed at managing the growth of an organization. Learning always begin on a clean sheet of paper. – It is primarily the top management’s prerogative. – The choice of strategy is primarily concerned with external ones rather than internal ones. – The choice of product-market mix is based on conscious evaluation of risk – return factors.APPROACHES TO STRATEGY Analytical Approach – Igor H.
everything else follows. – The top managers then decide on the type of organization structure & systems to be in place. how it will compete. – Management control systems has a dominating role in influencing firm performance. Successful organizations align authority and responsibility of various departments in way to reach overall objectives. – Organization structure will precede and cause changes in strategy. 16 . Once the control systems are in place. who will be the top managers. The organization initially decides which industry to enter.APPROACHES TO STRATEGY Design Approach – Alfred Chandler (1970) – Structure follows strategy.
– An organization is seldom in a position to influence the larger business environment. – The environmental forces comprises of – supplier. customer.APPROACHES TO STRATEGY Positioning Approach – Michael E. competitors. Porter (1980) – Choose a consumer segment and position your product accordingly. 17 . – A firms performance is inversely related with the bargaining power of environmental forces to which it is exposed. – The organization will outperform the industry where environmental forces are weak and vice-versa. substitutes. new entrant.
They are complex resources and undermines a firms competitive advantage. K. but exploiting the resource differences among them.APPROACHES TO STRATEGY Core Competence – C. Prahalad (1990) – The key to superior performance is not doing the same as other organizations. locating in most attractive industries and pursuing the same strategy. – Core competencies are a set of skills that are unique and can be leveraged. – It enables a firm to deliver unimaginable value ahead of time. – Organizations can significantly alter the way an industry functions. 18 .
STRATEGIC MANAGEMENT PROCESS Strategic Intent Strategic Planning Strategic Gap – Environmental Scanning – Internal Appraisal of the Firm Strategy Formulation – Corporate Strategy – Business Strategy Strategic Choices – Functional Strategy Strategy Implementation Strategy Performance Strategy Evaluation & Control 19 .
TOP MANAGEMENT PERSPECTIVE 20 .
It provides a sense of direction and destiny. A gap that consciously manages between stagnation and atrophy. It involves an obsession to be the best or outperform the best. 21 . A strategic intent is a statement of purpose of existence. It implies a significant stretch. It’s a philosophy that distinguishes it from its competitors. A substantial gap between its resources and aspirations. It is the cornerstone of an organizations strategic architecture reflecting its desired future state or its aspirations. you cannot reach there.STRATEGIC INTENT If you cannot see the future.
STRATEGIC INTENT .HIERARCHY Integrativ e m Do an in Visio n Mission Dominant Objective s Goal s Plans Lo g ic Single Specifi c Man y 22 t .
e. Dominant logic changes.DOMINANT LOGIC A dominant logic can be defined as the way in which the top management team conceptualizes its various businesses and make critical resource allocation decisions. 23 . It is core to the strategic intent of the firm. To put it more simply. it can be perceived as a set of working rules (similar to thumb rules) that enables the top management to decide what can be done and more importantly what cannot be done. when radical changes in the internal and external environment (i. strategic variety) is apparent.
but achievable aspirations.VISION It is a dream (not a forecast) about what the company wants to become in the foreseeable future. – It stands for the unchanging core values of the company. It is a combination of three basic elements – – An organizations fundamental reason for existence. beyond just making money. It provides an unity of purpose amidst diversity of personal goals. 24 . It ensures that the company does not wander off into unrelated zones or fall into an activity trap. – It represents the company’s audacious. It enables the top management to remain focused.
CHARACTERISTICS Reliance – Where growth is a way of life. Clarity – Vividly descriptive image of what the company wants to be known for in the future.VISION . 25 . Reachable – It should be within a reasonable target in the known future. Brevity – It should be short. clear. and memorizable. not an utopian dream. In Reliance when a new project becomes operational top managers hand over charge to the SBU heads and move on to a new project. Sharing – The company across all hierarchies should have faith in it. Empathy – It should reflect the company’s beliefs to which it is sensitive.
It gives the impression of a forward-looking organisation. It fosters risk taking and experimentation. It lends integrity and genuineness. It gives a shared platform. It makes strategic alignment easier.ADVANTAGES To stay focused on the right track.VISION . It gives enlightment. 26 . It facilitates development of skills & capabilities. It provides a holistic picture. To prevent the fall in a activity trap.
It serves as a road map to reach the vision. It enables the firm to define its business landscape and identify its competitive forces. A broad mission statement helps in fending competitors. 27 .MISSION Mission defines the space that a business wants to create for itself in a competitive terrain. Although the purpose may change over time. It is intuitive for managers to conceive their business in terms of the customer needs they are serving – What business are we in? – Which customer needs are we serving? It should be broad based and relevant to all stake-holders. its reason for existence.
– We do not offer insurance. Some other examples – We do not offer shoes. We offer comfort. 28 . …………………. …………………. All the businesses of the company are strongly integrated with their main business. though some may seem unrelated in nature. – We do not offer steel. We offer solutions. …………………. We offer strength. …………………. – We do not offer software's.MISSION – SOME IDEAS Reliance – We are in the business of integration. We offer security.
It is an end result (quantifiable) something a firm aims and tries to reach in a time bound frame. – It keeps the mid management pre-occupied. It provides a quantitative feel to an abstract proposition. – It prevents deviation.GOALS & OBJECTIVES Reliance – We want to become a Rs.100K crore company by the year 2005. – It is based on Management by Objectives (MBO). – It lends direction – time frame in the medium term. – It provides a benchmark for evaluation. – It adds legitimacy and motivation. 29 . – It helps identifying key success factors.
– Acquire a market share of indomitable position. 30 . It is the process of garnering necessary inputs. – Use price-elasticity to break market barriers. – Leverage economies of size and scale. The details of the plan Reliance Telecom adopted were – Backward integrate process technologies. coordinating appropriate technologies. It is specific to a particular business. – Compress project times.PLANS Reliance – Desire to invest 25K crore in telecom business by circa 2010. and gaining access to desired markets to achieve the desired goals and objectives.
STRATEGIC DRIFT Due to top management commitment. This state of affairs is known as strategic drift. equilibrium is maintained. past strategies tend to have a bearing on future strategies. In such a context. radical change may lead to disequilibrium. Historical studies have shown that most organizations tend to continue with their existing strategies. It often leads to an organizational crisis. This tendency to restore continuity is known as inertia (resistance to change). When changes in the environment is incremental. However. 31 . strategies lose touch with the emerging realities.
STRATEGIC DRIFT FRAMEWORK Environmental Change Degree of change Strategic Change Radical Change Incremental Change State of Flux Continuity Stage of Transformation Strategic Drift Stage of Atrophy Time 32 .
Organizational politics involves intentional acts of influence to enhance or protect the self-interest of individuals or groups over organizational goals. – Creating a favourable image. Some instances of organizational politics – Formation of powerful groups or coteries. 33 . – Hiding vulnerability. – Creating obligations of reciprocity.ORGANIZATIONAL POLITICS Strategic drift often leads to organizational politics. – Developing a platform of support. – Distorting information to gain mileage. – Using covert tactics to pursue self interests.
– The environment context has changed.INTENDED & REALISED STRATEGIES An intended strategy is an expression of interest of a desired strategic direction. . – Persons responsible for strategy conceptualization and implementation are34 divergent. Other causes – – The plans are unworkable and utopian. – Influential stake-holders back out. Usually there is wide gap between the two when organizational politics is evident. A realized strategy is what the top management actually translates into practice.
Strategy formulation and implementation are linked together in a continuous improvement cycle. Learning is an integral part of logical incrementalism. but the master scheme of the rational comprehensive scheme is not apparent. However. They simply unfold the particulars of the sub-system in stages. this is not to be treated as “muddling”. 35 .LOGICAL INCREMENTALISM According to the incrementalism approach (contrary to integrated approach) practitioners simply do not arrive at goals and announce them in crafted and well defined packages. but as a defensible response to the complexities of a large organization that mitigate against publicizing goals.
IMPLEMENTING INCREMENTALISM General Concern – A vaguely felt awareness of an issue or opportunity. Leveraging Crisis – A sudden crisis or an opportunity should be used as a trigger to facilitate acceptance and implementation of change. The broader objective should serve the overall interest of the organization. Adaptation – As implementation progresses. Agent of Change – Formal ratification of a change plan through MBO. Macro Broadcasting – The broad idea is floated without details to invite pros and cons leading to finer refinements. 36 .
Tampering with surface level factors often leads to atrophy. .STRATEGIC TRANSFORMATION Strategic transformation (a complete overhauling of the strategic architecture) becomes inevitable whenever a strategic drift takes place. As it brings 37 with it a different dominant logic. Strategic transformation becomes smooth through a change in top leadership. Dominant logic’s are the cornerstones of change when strategic transformation is apparent. It creates blinders. Dominant logic’s are very rigid and sticky and prone to inertia.
– Informal Networks – Emerging of new ideas. It helps prevent a strategic drift from occurring at the first place. experience. A learning organization must continuously focus on unlearning as well. – Experimentation – Fosters a culture of risk taking.LEARNING ORGANIZATION A learning organization is capable of continual regeneration from knowledge. and skills that fosters experimentation and questioning and challenge around a shared purpose. – Organisational Slack – Enough free space. Factors that fosters a learning organization – Pluralistic – An environment where different and even conflicting ideas are welcome. – Constructive Bargaining – Agree to disagree. 38 .
ENVIRONMENTAL CONDITIONS Dynamic Scenario Planning Learning Organization Static Forecasting Decentralization Simple Complex 39 .
ANALYZING BUSINESS ENVIRONMENT 40 .
It is based on the assumption of radical change. It requires a quantum leap (i. It points to a position of superiority with relation to competition. Strategic planning is a function of discounting the future. Strategic gap basically points towards a vacuum of where the organisation wants to be and where it is. 41 . It is pro-active in nature. gap analysis).PLANNING & STRATEGIC PLANNING Formal planning is a function of extrapolating the past. It is reactive in nature.e. It is based on the assumption of incremental change. Competitive advantage provides the surest way to fulfill the strategic gap.
ENVIRONMENTAL SCANNING The environment is defined as the aggregate of conditions. Environmental scanning is very important component of strategic planning. The segments of the environment a top manager scans selectively depends upon his dominant logics. and influences that affect an organizations way of doing things. A manager has to continuously scan the environment to ensure alignment of the strategies with the radically changing environment. Environmental factors can be external as well as internal to the organization. It is exploratory in nature. events. The world is flat. 42 . not guided by any boundaries. resources and ideas move unhindered.
for which a holistic picture is required. It is not intended to be used as an exhaustive list. 43 . Understanding the composite effect is critical. which may be different from the past impact.PESTEL PESTEL attempts to provide a broad framework on how the broader environmental forces affects an organization and influences the way it practices strategy. It is particularly important that PESTEL be used to look at the future impact of environmental factors. but also to analyze the complex linkages across them. It is important not only to identify the structural drivers of change.
44 . Licensing & Quotas. Literacy Levels. Economic Cycles. Inflation & Interest Rates. Central – State Co-alignment. Economic Model. Income & Age Distribution. Subsidies & Protection. Religious Sentiments. Social – Population Diversity. Monsoon & Food Grains Reserves. Language Barriers. Currency Stability. Capital Market & Forex Reserves. Fiscal Deficit.PESTEL FRAMEWORK Political – Government Stability. Social Values. Infra-Structural Investments. Savings & Investment. Economic – GDP. Government Attitude. FDI Inflows.
Waste Disposal & Emissions. Patent Laws. Product Safety & Health Hazards. Extended Producer Responsibility. Environmentally Preferable Purchasing. Research & Development.PESTEL FRAMEWORK Technological – Innovation. Pollution Control Laws. ERP. Legal – Monopolies Legislation. 45 . Carbon Credits. Patents. Non-Fossil & Alternative Fuels. Technological Convergence. Consumer Protection Laws. Employment Laws. Direct & Indirect Taxes. Product Design. Obsolescence Rate. Environmental – Global Warming & CSR.
Curtailment of PSU’s. Dismantling price controls. PSU Disinvestments. Abolition of import licenses. Encouraging FDI. Rupee convertibility.ECONOMIC LIBERALISATION New Industrial Policy (NIP) – Liberalizing industrial licensing. MRTP Liberalization.VRS. Banking Sector Reforms. 46 . Structural Adjustments – Phasing out subsidies. Capital Market Reforms. FERA Liberalization. Economic Reforms – Fiscal & Monetary Reforms. Exit Policy. New Trade Policy (NTP) – Lowering import tariffs. Encouraging exports.
Survival of the fittest MNC Onslaught – Enhancing stakes – Power Equation – Joint Ventures – Technological Alliances – Take-over threat. Mergers & Acquisitions 47 .DISCONTINUITY Destabilization due to entrepreneurial freedom – Cocoon of protection disappears – Diversification spree – Existing notions of size shaken – Industry structures change radically – Economic Darwinism .
Consumerism Challenges on the technology front – Competencies become technology based – Investment in R&D become inescapable 48 .Globalization – Cheap Imports & Dumping – Push to Pull Marketing Buyers exacting demands – Shortage to surplus – Price competition – Life-style changes – Stress on quality.DISCONTINUITY Hyper Competition – MNC’s .
DISCONTINUITY Compulsion to find export markets – Identifying competitive advantage – Technological gap – Global presence – Depreciating currency – Exports Corporate vulnerability – It is no longer business as usual – Capital inadequacy – Lack of product clout and brand power – One product syndrome – Loss of monopoly 49 .
FIVE FORCES MODEL .PORTER Threat of New Entrants Bargainin g power of Suppliers Competition from Existing Players Bargainin gBargainin power g of power of Suppliers Customer s Threat of Substitutes 50 .
profit potential) per se. but also used to understand how they can be countered and overcome. It is even wiser to apply the same at the product – market level. It depicts the attractiveness of an industry (i.FIVE FORCES MODEL ASSUMPTIONS The model is to be used at the SBU level and not at the industry level.e. the forces are subject to changes. It should not only be used to understand the forces. incremental or otherwise. The five forces have strong cross-linkages. 51 . The model should not be used as a snapshot in time.
Capital requirements. 52 . Undifferentiated product. Industry stagnation. Unimportance of product quality. Low margins & stagnancy. Product differentiation through proprietary technology or brand power. Threat of Customers – Buyer concentration and volumes. Government policy. Presence of substitutes or unorganized sector. Resource profile & fear of retaliation. Scope for backward integration. Learning curve advantages. Low relative importance of the segment. Access to distribution channels. High switching costs. Low customer switching costs.PORTERS FIVE FORCES ANALYSIS Threat to Entry – Economies of size and scale.
Scope for forward integration. Low relative importance of the segment. Buyer’s propensity to substitute. Lack of substitute inputs. Unorganised sector. High customer switching costs. 53 . High exit barriers.PORTERS FIVE FORCES ANALYSIS Threat of Suppliers – Supplier monopoly. Differentiated inputs. Piracy and counterfeits. Industry stagnancy. Low level of differentiation. Jockeying for position – Fragmented market. Threat of Substitutes – Improvement in price -performance trade-off. Intermittent overcapacity. Product perishability. Produced by industries earning high profits. Diversity of players.
Inertia – Excessive commitment to past strategies prevents firms from tapping emerging opportunities. Resource Profile – It highlights the capabilities (generic) or competencies (business specific) of the firm. dominant or related diversified or unrelated diversified businesses (Infosys. Business Scope – The intention whether the firm wants to be in a single. 54 . Cohesiveness – Degree of bonding existing across affiliated firms. Reliance).FIRM ENVIRONMENT Size and Scale of Operations – It is a very important component of competitiveness in today's global context (Bharti – MTN. Tata).
The E-Curve thus enables organisations to build entry barriers. However.EXPERIENCE CURVE The cost of performing an activity declines on per-unit basis as a firm becomes more efficient. leverage it as a competitive advantage. experience teaches better and more effective way of doing things. 55 . Matured firms will always be positioned advantageously on the ECurve than new entrants. and with lower prices it can increase its sales volume. which further reduces costs. With lower costs. an E-Curve can prove to be futile during discontinuity. it can price its products more competitively. Experience curve has strong linkages with performance.
EXPERIENCE CURVE Cost per unit of output Decreases at an increasing rate Point of inflexion Decreases at a constant rate Decreases at a decreasing rate Production / Volume 56 .
EXPERIENCE CURVE .TRADITIONAL VIEW Efficiency = Lower Costs 2 3 1 Experience = Efficiency Lower Costs = Higher Sales Entry Barrier = Better Performance 4 6 5 Higher Sales = Lower Costs Lower Costs = Entry Barrier 57 .
EXPERIENCE CURVE .STRATEGIC VIEW Inertia = Limited Growth Experience = Inertia 2 3 1 Limited Growth = Diversification Strategic Failure = Poor Performance 6 5 4 Diversification = New Experience New Experience ≠ Old Experience 58 .
It is one of the earliest models in environmental scanning. Business Intelligence – Bankers. Observation. Case Studies – Structured Questionnaires. 59 Analysts. It helps an organisation to capitalize on the opportunities by maximizing its strengths and neutralizing the threats minimizing the weaknesses. Press Clippings & Interviews. Interviews. .VULNERABILITY ANALYSIS . Customers.SWOT The framework was originally conceptualized by Kenneth Andrews in 1970. Suppliers. A SWOT audit involves – Company Records – Annual Reports. Competitors. Websites. Acronym for Strengths – Weaknesses – Opportunities – Threats.
SWOT ANALYSIS .FRAMEWORK Opportunities Nullify weaknesses which prevents you from exploiting opportunities Leverage strengths to make use of opportunities Weaknesses Minimize weaknesses which prevents you from countering threats Strengths Threats Utilise strengths to counter threats (?) 60 .
ITC. Siemens. High quality products – Eg. Infosys. Large resource pool – Eg. Reliance. Volkswagen. Caterpillar. Toyota. Motivated employees & cordial industrial relations – Eg.SOURCES OF STRENGTH Strong brand identity – Eg. Strong after sales & service network – Eg. Tata Steel. Reliance. Tata. Infosys. Honda. SBI. Economies of scale – Eg. Strong R&D base – Eg. Biocon. Ranbaxy. Good credit rating – Eg. Aditya Birla. Sony. HUL. 61 . Excellent penetration – Eg. Engineering Skills – Eg. Dr. Reddy’s.
Inertia – Eg. Lack of product / brand clout – Eg. Organizational Politics – Eg. Tatas. Narrow business scope – Eg. J. Single product syndrome – Eg. Group . Excessive diversification – Eg.Raymond. Bijoligrill. CMC (Tata Group) 62 . Strategic myopia – Eg. K. B. Modi Group. Ballarpur Inds. Inefficient top management – Eg. CESC. Hindustan Motors. K. Procter & Gamble. Excess manpower – Eg.SOURCES OF WEAKNESSES Outdated technology – Eg. Nirma. Lacking experimentation culture – Eg. SAIL.
Globalization – Eg. Sugar. Middle-class buying power. Market driven Interest rates – Eg. Fertilizer. Sugar. VRS. Collaborations & Joint Ventures – Bharti & WalMart. Maruti. Free pricing – Eg. Retailing. Exit Policy – Eg. 63 . Banking.SOURCES OF OPPORTUNITIES Delicensing of Industries – Eg.Tata Motors. Insurance. Fertilizers. Abolishing MRTP – Eg. Market driven Pricing – Eg. Telecom. ECB’s. GDR’s. Abolishing CCI. Life style changes – Eg. Capital market reforms – Eg. Growing population – Eg.
Singur SEZ. Onida. Group disintegration – Eg.SOURCES OF THREATS Political instability – Eg. Land acquisition . 64 . Tata Steel. Bajoria – Bombay Dyeing. (1985–1990). Reliance. Lack of Corporate Governance – Eg. Satyam. Earth Quake. 26/11.Social activism – Eg. Import relaxation – Eg. Hostile take-over – Eg. (2008). 11/9. Nationalisation – Eg. Economic recession – Eg. Tsunami. Dumping from China. Terrorist attacks – Eg. Foreign Direct Investment (FDI) – Eg. Natural disaster – Eg.
scenario analysis). Stages in ETOP analysis – List the aspects of the environment that has a bearing on the organization. Holistic view – Prepare a complete overall picture. Assess the extent of impact of the factors. Delphi's technique. Strategic responses (including adaptation) to opportunities and threats is critical for survival and success.ETOP Acronym for Environment – Threat – Opportunity – Profile. Forecasting – Predict the future (i. 65 . time series.e. It represents a summary picture of the external environmental factors and their likely impact on the organization.
66 Vertical integration is a powerful strategy. It is also a form of assessing vulnerability through longitudinal analysis. selectively.PROFIT IMPACT OF MARKET STRATEGY PIMS is a database model developed by GE and later extended by HBS to examine the impact of a wide range of strategy variables on business performance. Relative attractiveness of the market. An organization can draw upon the experience of its peers in similar situations. . Some key findings on major performance drivers that explains 75% deviations in performance – Product quality and relative market share. High investment intensity acts as a drag.
. Authenticity of data is of prime importance – Contexts drawn across one organization may not be applicable to another. therefore 67 validity may be a question. – Contexts may vary across countries. Managers should be particularly cautious while referring to such data during times of discontinuity as it makes past patterns futile. – Contexts may vary over time. when radical changes in the economy takes place.PIMS . As every organization is unique in its own way.LIMITATIONS The analysis is based on historical data and it does not take care of future challenges.
It involves a three-stage process – Identify KSF – What does it take to be successful in a business? Drawing KSF – What should be the organizations response to the same? Benchmarking KSF – How do we evaluate organization success on this factor? 68 .KEY SUCCESS FACTORS (KSF) KSF relates to identification and putting concentrated effort on a particular activity or process which forms the very basis of competitive advantage. It enables the top management to draw focus. KSF helps organizations spot early opportunities and convert them into value adding business propositions.
IDENTIFYING ALTERNATIVE STRATEGIES 69 .
global) of a firm and deals with choices of allocating resources across them. It indicates the quality of growth an organization is looking for. It determines the locus a firm encounters with internal and external environment. national. It reflects the customer needs it intends to satisfy. A corporate strategy identifies and fixes the strategic gap it proposes to fill. unrelated) and geographical scope (local. It provides broad direction to the groups vision and mission. 70 .GRAND STRATEGY It is concerned with the overall business scope (single.CORPORATE . related. dominant.
CORPORATE STRATEGY MATRIX Corporate Strategy Stability Stability Growth Growth Combination Diversification Divestment Intensification Market Penetration Related Vertical Market Development Product Development Unrelated Horizontal 71 .
(Eg. The scale and scope of present operations remains almost intact. – To stop for a while and assess past records. does not relate to do-nothing (Eg. Stability however. Citibank). erosion of capabilities. – The firm may not be willing to take additional risk associated with new projects.STABILITY It involves maintaining status-quo or growing in a slow and selective manner. 72 . Even during adverse times firms need to adopt a strategy to sustain current performance levels. Hindustan Motors). – Why disturb the existing equilibrium set up? – Limited resource position. The reasons for stability strategy – – Lack of attractive opportunities.
GROWTH . 73 .ANSOFF’S MODEL New Product Existing Product Existing Market Market Penetration (+) Product Development (++) New Market Market Development (++) Diversificatio n (+++) Note: (+) indicates degree of growth and risk involved.
Nirma. – Elongated product life-cycle. Britannia). – The company carries a risk of product obsolescence. – Suitable for industries where scope for technological breakthrough is limited. within a well defined market segment. (Eg. direct non-users to users. 74 .MARKET PENETRATION It is a strategy where a firm directs its entire resources to the growth of a single product or a closely knit product set. Ujjala. – Helps firms which are not comfortable with unfamiliar terrain. Market penetration can be achieved by – increasing sales to current customers. convert competitors customers.
– Creativity and innovation – thinking out of the box. – Moves across geographical boundaries. upholstery. 75 . tyres. socks & stockings.MARKET DEVELOPMENT It is a strategy where a firm tries to achieve growth by finding new uses of existing products or its close variants and tap a new potential customer base altogether. (Eg. – Unconventional and flexible distribution channels. – Immense customer reach & flexible advertising. carpets. – Stretches product life cycles.…… or Teflon: aircraft technologies to cutlery to paints or Raytheon Corp – Microwaves: radars to kitchen appliances). Du Pont – Nylon: parachutes. fabrics.
Refills) 76 .Strolleys). conformance. serviceability.PRODUCT DEVELOPMENT It is a strategy where a firm tries to achieve growth through a radical new product (Eg. – Substitutes that serve the same needs (Eg. Microsoft: DOS to Windows) or a substantial improved version (incremental) of an existing product to repeatedly enter the same market (Eg. durability. perception. – Areas of product improvement – performance. – Leverage on customer and brand loyalty. aesthetics. – Leveraging through – innovation. features. – Deliverable through – redesigning or reengineering. Close Up: Fluoride – Gel toothpaste or VIP . reliability.
– Permits: quotas. – High transaction costs and institutional gaps. dominance).e. – Internal capital market. From the modern point of view they are strategically dissimilar. – Conglomerate or market power (i. Why do firms diversify in the Indian context? – Shift the growth trajectory or opportunistic. – Risk reduction.DIVERSIFICATION It marks the entry of a firm into newer markets with new products. licenses (i.e. thereby creating a new business. the new business is distinct from the existing business in terms of – inputs – technologies – markets. industrial embassies). 77 . From the traditional point of view.
What would be your ideal diversification strategy through optimization? 78 . the ice-cream business would register a return of 30%.HOW DIVERSIFICATION REDUCES RISK? Consider a hypothetical planet. Let us assume that there are two businesses constituting the entire market – coffee and icecream. If the hot wave dominates the planet. If on the other hand. ice-cream business would register a return of 10%. cold wave dominates the planet. either of which is equally likely to prevail. in which a given year is either under hot or cold wave. while the coffee business would register a return of 30%. while the coffee business would register a return of 10%.
If we diversified in either of the two businesses, our expected return will be 20%, with a possible risk of 10%. If, we split our investment between the two businesses in equal proportion, half of our investment will earn a return of 30%, while the other half would earn 10%, so our expected return would still be 20%. But in the second instance there is no possibility of deviation of returns (i.e. risk). Diversification results in 20% expected return with zero risk, whereas investing in individual businesses was yielding an expected return of 20% with a risk factor of 10%. The pivotal point is that the two businesses are negatively correlated. 79
It takes place when a company increases the breadth of a firms business or geographical scope by getting into product – market segments which compliments its existing businesses (Eg. Reliance). Alternatively, existing business may recreate new businesses, which are distinct, but supplements its existing business (Eg. Bajaj – scooters to motorcycles, Dove – soaps to shampoo). – It results in increased market power. – Leveraging existing capabilities. – Resources can be shared for mutual benefit. – Reduces economic risk (i.e. business cycles). – Enables brand or product line extension.
It increases the depth of its business scope either in a backward business process or in a forward one. Backward integration occurs when the company starts manufacturing its inputs or catalysts. In forward integration a firm moves into marketing of its products and services. Advantages of backward integration – – Cost competitiveness – entry barrier. – Better operational control – timely supplies, quality control, coordination – JIT, savings in indirect taxes. Disadvantages of backward integration – – It may spark of a chain reaction - contagion effect. – Long gestation & break even - investment in CAPEX.
Oil & Gas exploration Naptha-cracking Acetic Acid Paraxylene (PX)
Purified tetra-pthalic acid
Polyester Filament Polyester Staple Fibre (PSF) Yarn (PFY) Textiles 83
DIVERSIFICATION SUCCESS ?
While diversifying into new businesses, the scope of relatedness or unrelatedness should not be judged from the traditional static view, but from the modern dynamic view which incorporates strategic factors like capabilities and dominant logic. Countermanding reasons – Potential to reap economies of scope across SBU’s that can share the same strategic asset. Potential to use an existing capability to help improve the quality of a strategic asset in another business. Potential to use an existing capability to create a new strategic asset in another business. Potential to expand the existing pool of capabilities. Dominant logic ensures timely & appropriate response.
Ranbaxy. 85 . Dr.Where one firm has full ownership and control over all the stages of a value-chain in the manufacturing of a product (Eg. Tapered integration . and out-sources the noncore activities (Eg. Quasi-integration .QUASI & TAPERED INTEGRATION Full Integration . Maruti – Sona Steering). Usually the firm concentrates on its core activities.A firm produces part of its own requirements and buys the rest from outside suppliers with a variable degree of ownership and control. Reliance).A firm gets most of its requirements from one or more outside suppliers that is under its partial control through value chain partnerships (Eg. Reddy’s).
A CASE OF TAPERED INTEGRATION Partial Ownershi p Transmission Engine Design Electricals Steering 86 Seats & Carpets Windscreen Ordinary Components Zero Ownership Very Critical Component s Full Ownership Critical Component s .
– Cost of neglect (i. 87 . Firms usually engage in conglomerate diversification when emerging opportunities are very attractive and offers potential growth opportunities. myopia). and are also strategically dissimilar. lack of strategic intent. lack of knowledge of competitive forces). Drawbacks of unrelated diversification – – Cost of failure (i. synergies pulling in opposite directions). core business).e. – Cost of dysynergy (i.e.CONGLOMERATE DIVERSIFICATION It relates to entry of firms into businesses which are distinct in terms of – inputs – technologies – markets.e.e. – Cost of ignorance (i.
CONGLOMERATE DIVERSIFICATION Paper & Packaging Edible Oils Tobacco Hotels Food & Confectionary 88 .
Tatas sale of Goodlass Nerolac. L&TCement Division to Aditya Birla Group) technically known as divestiture or a product (Eg. It is may also be a pro-active strategy.e. Tata Press). Glaxo’s “Glucon-D” to Heinz). where a company simply exits because the business no longer contribute to or fit its dominant logic.DIVESTMENT Divestment is a defensive strategy involving the sale of entire stake (Eg. In strategy there is no scope for sentimentality with divestment. 89 . It may also involve a SBU (Eg. Tata Pharma. (Eg. ACC) in full to an independent entity. It taken into account when performance is disappointing (i. reactive) and survival is at stake and the firm does not have resources to fend off competitive forces.
1956 does not permit this mode. Sale of Diamond Beverages to Coca-Cola for US $ 40 million). where 100% of the assets (including intangibles) are valued and paid for. Hive-Off – A hive off is the creation of a new entity followed by transfer of assets. (Eg. where the equity is allotted amongst the existing shareholders on a pro-rata basis. 90 .3 billion. Leveraged Buy-Out (LBO) – Here the company’s shareholders are bought out through a negotiated deal using borrowed funds.DIVESTMENT . Tatas buy-out of Corus for US $ 11.ROUTES Outright Sale – Popularly known as the asset route. involving 608 pence per share). (Eg. the Companies Act. However.
e. and divestment strategies applied simultaneously or sequentially for a portfolio of businesses. because every business has its own unique external and internal environment. joint ventures). There can be no ideal strategy for every business. It is usually pursued by a business group with diverse interests across multiple industries. developing facilities right from the scratch) or through brown-field projects (i.COMBINATION STRATEGY It is a mixture of stability.e. A combination strategy can be implemented through green-field projects (i. 91 . mergers and acquisition. growth.
STRATEGY CHOICE & PORTFOLIO ANALYSIS 92 .
What then is the magical number? 93 . In most cases the trade-off is between resources and opportunities. Dominant logic enables top managers to selectively scan the environment and make trade-offs. It attempts to answer the following questions – How effective has the existing strategy been? How effective will that strategy be in the future? What will be the effectiveness of alternative strategies? It is impossible for a manager to assess all the alternatives.STRATEGIC CHOICE A strategic choice seeks to determine the alternative courses of action available before top managers to achieve its strategic intent.
managers need to ask the right questions.SELECTIVITY IS THE KEY The role of a top manager is not to solve a problem. The key task before a top manager is to identify the right problems. will help the firm achieve its intent. nor is to a define a problem for others to solve. They must choose problems which will lead to the right kind of opportunities. if addressed. To identify the right problems. For an optimal choice the following four issues need to be resolved – Is the strategy clearly identifiable? Is it consistent with the resources of the firm? Will it be able to exploit the opportunities in full? Is it in tune with the values and beliefs of the firm? 94 .
DEFINITION A business group is known by various names in various countries – guanxique in China. chaebols in Korea. Proximity to the corridors of power (i. keiretsus in Japan. Their roots can be traced to a single family or clan and share broad similarities. 95 Succession planning is critical to continuity. embassies). formal and informal ties. Managing Agency). Resource sharing. .e. business houses in India.BUSINESS GROUP . BRC). Their origins can be traced back to market imperfections existing in an economy (MRTP Laws. High degree of centralized control (GEO. Licenses & Quotas.
RESOURCE SHARING ACROSS FIRMS Parent Company Firm 1 Firm 5 Firm 3 Firm 2 Firm 4 96 .
STRATEGIC CHOICE – MACRO TIMING Recession (Stability) Prosperity (Diversificatio n) Depression (Divestmen t) Recovery (Intensification ) 97 .
Divestment Duration (Yrs) Inception Intensification 98 .STRATEGIC CHOICE – MICRO TIMING ReEngineering Growth (%) Maturity Stability Growth Diversification Decline .
Rules of the game are different.PORTFOLIO ANALYSIS Resource allocation across a portfolio of businesses is an important strategic choice. next only to choice of business. 99 . Power and resources often goes hand in hand. Why? Businesses are not about liquid assets. there are high costs associated with entry and exit. Redeployment of resources upsets the established power bases of a group. therefore. sometimes impossible. Investing in emerging businesses may not actually be so simple as it appears to be. Relatedness across resources are difficult to realize.
BCG GROWTH MODEL Relative Market Share (%) Industry Growth (%) Low High High Low Stars Question Mark ? Cash Cow Dogs 100 .
provided the company is able to build up on its market-share (i.BUSINESS ANALYSIS – TATA GROUP Question Marks – They have potentials in the long term.e. product development).e. market penetration. Stars – They achievers in the near term. These businesses are also net users of resources (Eg. provided the industry growth rate continues and the company is able to maintain its growth (i. Trent. 101 . and their risk profile is high (Eg. Tata Telecom. but to larger extent than a question mark. market development. diversification). which remains a big? These businesses are net users of resources. TCS. Tata-AIG). Tata Steel).
harvest. Tata Press). Groups prefer to dispose off such businesses (i. Indian Hotels. Given that the growth potential in the business is low. Nelco. and the company dominates the industry ahead of competition (i. stability).e. 102 .e. Tata Chemicals). divest) as achieving a dominant position in these businesses is a difficult task. Tata Tea. However. Tata Motors. Tata Pharma. they are generators of resources. cash cows may also need to invest provided the industry takes an upswing (Eg. Dogs – They are a drag on the group. and they lack on competencies to take on competition and are basically cash traps (Eg.BUSINESS ANALYSIS – TATA GROUP Cash Cow – These are matured businesses.
LIMITATIONS It does not address the concerns of a business which is in the average category (usually the majority). Armani). niche – Rolex. Certain businesses in the low market share category may be the result of a conscious strategy (i. factors are limited. Cartier. 103 . Mercedes Benz.BCG . The terminologies used are somewhat prohibitive. neither in high or low. Data may be prohibitive. Cash cows may actually need substantial investments to retain their market position (Eg.e. HUL). The model does not provide specific solutions within a particular category.
MATRIX Distinctive Capabilities Strong High Medium Weak Stability Industry Attractiveness Diversify (++) Intensify (+) Med Intensify(+) Stability Harvest (-) Low Stability Harvest (-) Divest (.GE .-) 104 .
LITTLE Inception Dominant Strong Favourable Tenable Weak Growth Maturity Decline Improve Selective Niche Abandon Industry Life-Cycle Divest Harvest 105 Competitive Position Invest Consolidate Hold .ARTHUR’ D.
SHELL – DIRECTIONAL POLICY MATRIX Business Sector Prospects Attractive Average Unattractive Generate Cash Phased Withdrawal Distinctive Capabilities Strong Market Leadership Try Harder Double Or Quit Growth Average Custodial Weak Phased Expand Withdrawal Divest 106 .
Gap Analysis – It emphasizes what a firm wants to achieve. SBU – A business unit which is strategically different from another and also shares a different SIC code. 107 . Portfolio – An organization is perceived as a portfolio of businesses.TERMINOLOGIES Harvest – It entails minimizing investments while trying to maximize short-run profits and cash flow with the intention to exit the business in the near future. Disinvestment involves selling in phases. BCG – Boston Consulting Group. Divest – Selling a part or the entire business at one go.
BUSINESS STRATEGY & COMPETITION 108 .
Such resources or activities should be distinctive and sustainable over time. Competitive advantage is the back-bone of strategy. and earning super-normal profits (i.e. rent).COMPETITIVE STRATEGY A competitive strategy deals with how a firm competes in a particular business or product-market segment. 109 . The principal focus is on meeting competition. The strength of a firm in a particular business usually stems from its competitive advantage. building market-share. Competitive advantage refers to a firms resources or activities in which it is way ahead of competition.
developing competitive advantage (Porter). 110 . leveraging (Prahalad). Resource Based View – Obsession with competence building. identifying critical success factors. involving harmonizing and integrating multiple streams of technologies.BUSINESS STRATEGY FRAMEWORKS How to be distinctive and yet sustainable – Differentiation – Understanding of the dynamics of competition. Delta Lock In – Two dominant players co-opt to selfreinforce and create or escalate an entry barrier. preventing new entry and/or competition (Hax & Wilde). Blue Ocean – Consciously moving away from overcrowded industries to uncharted territories and making competition irrelevant (Kim & Mauborgne).
Reliance) or may pass it to customers to increase market-share (Eg. Nirma. backward integration. Sources of cost advantage are varied and depends on the structure of the industry – Economies of size. T-Series). proprietary technology. Steep experience curve effects. Locational or early entry advantage. preferential access to raw materials. The firm may retain the benefits of cost advantage by enjoying higher margins (Eg. Ayur. 111 .PORTERS – COST LEADERSHIP Cost Leadership – It is a strategy that focuses on making a firm more competitive by producing its products more cheaply than its competitors. Compress project duration through crashing.
PORTERS – PRODUCT DIFFERENTIATION Product Differentiation – It is a strategy that attempts to provide products or services that are differentiated from competitive products in terms of its value proposition and uniqueness. Means of product differentiation are peculiar to each industry. Rayban). Creativity. (Eg. and sufficient slack. Culture of experimentation. It selects one or more attributes that buyers perceive as important. Successful product differentiation is often followed by premium pricing. innovation and out of the box thinking. Feeling the pulse of the customer. Focus on brand loyalty. 112 . Sony. undeterred attention to quality. Intel. avoiding brand dilution.
113 . Mont-Blanc. A focuser seeks to achieve a competitive advantage in its target segment. The target segment must have unusual needs or the delivery system catering to this segment must be unique.PORTERS NICHE OR FOCUS Focus / Niche – It is a variant strategy of cost leadership or product differentiation targeting a specific market or buyer sub-segment with the exclusion of others (Eg. Rolex. coupled with fear of structural erosion. though it may not possess an overall competitive advantage. Armani). Cartier. Maybach. Sub optimization alone may not be a source of superior performance. They are poorly served by mainstream players.
COMPETITIVE POSITIONS Competitive Advantage Cost Differentiation Product Differentiation Competitive Scope Broad Cost Leadership (Toyota) Product Differentiation (General Motors) Narrow Cost Focus (Hyundai) Differentiation Focus (Mercedes) 114 .
HYBRID STRATEGY A hybrid strategy is the simultaneous pursuit of cost leadership and differentiation. and usually outperforms a stand alone generic strategy. similarly differentiation may not always lead to rising costs (i. jugaad or frugal engineering). 115 . Though cost leadership and differentiation are inconsistent. in a hyper competitive context the two strategies need not be mutually exclusive. Firms focusing on a hybrid strategy typically aim at shifting the productivity frontier and recreating a new product-market segment altogether (Eg.e. Tata Nano). Reducing cost does not always involve a sacrifice in differentiation.
It will have a competitive disadvantage vis-à-vis a clearly positioned generic player. Industry maturity will usually widen the gap. 116 . leading to what is called – straddling.STUCK IN THE MIDDLE A firm that engages in a hybrid strategy and fails to achieve a competitive advantage because it was ill conceived will be . It tries to compete through every means. but achieves none. It is usually the result of a firm not willing to make trade offs.stuck in the middle. unless such a player is capable of discovering a profitable segment. The positioning therefore gets – blurred.
leading to a blurred productivity frontier and steep learning curve.EMERGING INDUSTRY Emerging Industry – An evolving industry characterized by .radical environmental changes. Nano technology. There is a lot of scope to define the rules of competition. First-time buyers. (Eg. Consumer behaviour pattern unstable and evolving. coupled with low penetration levels. technological innovations.) Excessive turbulence in the dynamics of the environment. Eg. Artificial intelligence). changing customer needs. Market segmentation not well defined. 3D imaging. Speech recognition software's. 117 . ending in a differential cost economics. It is characterized by – High level of technological uncertainty.
It is characterized by – Low entry barriers. MRTP may also cause fragmentation. Eg. 118 . Consumer durables. Eg. Air Conditioning. High exit barriers because of huge investment in CAPEX. because of lack of economies of size and scale. Scope for players to change the rules of the game. Paints. Government regulations in the form Eg.GROWTH / FRAGMENTED INDUSTRY Growth Industry – An industry characterized by high growth potential in the long run and where no firm has a significant market share (an edge over another). IT. Eg. Diverse customer needs. Retail and telecom. leading to clear fragmentation.
collaboration and co-option. Strong entry barriers. because of economies of size and learning curve effects. Limited scope for innovation . early entry and location advantages.MATURED INDUSTRY Matured Industry – An industry characterized by saturation in growth rates. established industry dynamics. well defined consumer behavioral patterns and imperfect competition leading to near monopoly. 119 . technological maturity.technological maturity. Firms are rule takers in the segment as productivity frontier is well defined. distribution networks. Cartel among existing players through collusion.
backed by corporate espionage. 120 . Firms facing a declining phase are characterized by inertia and slow to react to environmental changes. (Eg. with little or no signs of recovery. dot-matrix printers). and costly price wars. scooters. Learning abilities have been stunted and firms adverse to investment in R&D and make fresh investments.DECLINING INDUSTRY Declining Industry – An industry which has outlived its utility due to the entry of close substitutes and or radical product innovations which results in a shift of the productivity frontier. Typewriters. Nature of competition extremely high. Exit barriers are extremely high because of limited prospective buyers.
reengineer. premium pricing. regenerate. focus more on product differentiation or even a hybrid one. strictly product differentiation and not standardization.COMPETITIVE STRATEGIES Emerging Industry – Set benchmarks. Matured Industry – Sophisticated cost analysis. Fragmented Industry – Identify. or else exit the segment. assess and overcome fragmentation. move beyond boundaries. branding and promotion. strike alliances. recreate new markets. process innovation. strictly cost differentiation. increasing scope. aggressive building of distribution networks. 121 . Declining Industry – Redesign. Locate a defendable position. mergers and acquisition.
They are a standard in nature. and complex learning experiences in integrating and harmonizing technologies (distinctive capabilities) that play an important role in delivering competitive advantage through “causal ambiguity”. positions based on resources which are unique and inimitable are far more sustainable even in the long term. Intangible – These refer to goodwill. However. 122 .RESOURCE BASED VIEW Differentiation based on cost or products saturates and ceases to exist beyond the medium term. brands. patents. hence very rarely confer competitive advantage as can be easily acquired or replicated. A firms resources can be classified into – Tangible – These refer to real assets.
can be leveraged across businesses) or specific to a particular business. differentiation based on capabilities can be sustained even in the long run. They play a very critical role in shaping competitive advantage. 123 . they are woven around technologies. Therefore firms should concentrate on developing complex resources that forms the very basis of differentiation. but not necessarily.CAPABILITIES & COPMPETENCIES These include a complex combinations of tangible and intangible resources that organizations use to convert inputs to outputs. Hence. Capabilities can be generic (i. Typically.e. There is a high degree of internal and external causal ambiguity involved in it.
COMPETITIVE ADVANTAGE 124 .
e.COMPETITIVE ADVANTAGE A competitive advantage is a position of superiority relative (i. competitive advantage subsequently becomes the back bone for a competitive strategy. not absolute) to competition. Strategy drives competitive advantage. A portfolio of competitive advantage comprises strategic advantage profile (SAP). It results in a distinct differentiation advantage or a cost advantage or hybrid as well. 125 . and results in well springs of new business development. Success of a strategy critically depends on SAP. It enlarges the scope of an organization.
SAP changes from time to time. 126 . Identification of SAP is critical for and stretching and leveraging of resources.STRATEGIC ADVANTAGE PROFILE (SAP) Organizations have to systematically and continuously conduct exercises to identify its SAP. Most successful organizations around the world have a well balanced SAP. In most cases SAP is hidden and dormant. In today's world of discontinuity. Internal strategic fit between its strategy and dominant logics is essential for the top management to stretch and leverage SAP.
each of the players need to be efficient backed by sufficient coordination at the contact points (i.VALUE CHAIN ANALYSIS A value-chain segregates a firm into strategically relevant activities to understand its composite behaviour. Competitive advantage arises not from an individual activity but a stream of inter-related activities. VC pay-offs: better product availability. 127 . A VC is often compared with a relay team. faster product launches.e. Substantial cost reductions also follow. Inventory Mgt to Logistics Mgt to Supply Chain Mgt (SCM). kaizen or internal customer). Today SCM is integrated with greening the environment as CSR practices. and enhanced customer tracking – higher market share.
THE VALUE CHAIN Support Infrastructure n gi ar M Human Resource Management Technology Development Procurement Out Logistics Mktg & Sales In Logistics Operations Primary Service M ar gi n 128 .
A high fit involving a complex chain of activities drives both competitive advantage and its sustainability. Operational effectiveness is not strategy. Fit is important because discrete activities result in negative synergy and can also be easily copied by competitors. A learning organization helps create strategic fit. – Third order fit refers to optimization of effort. – First order fit refers to simple consistency between each activity and the overall strategy.STRATEGIC FIT – THE PORTER WAY The sustainability of the value chain depends on the degree of fit between the activities. 129 . – Second order fit occurs when activities are reinforcing amongst them.
A core competence usually has its roots in technology.CORE COMPETENCE A core competence represents the collective learning's of an organization around diverse streams of technologies. – Can be leveraged across businesses. Core competence has a high degree of external and 130 internal causal ambiguity embedded in it. – Can be sustained even in the long run. . – Cannot be easily imitated or substituted. It should satisfy the following conditions – Contributes significantly to customer benefits. These skills results in distinctive activities and processes. It forms the very basis of competitive advantage. but not necessarily.
only global leaders possess a core competence.CORE COMPETENCE A competitive advantage does not necessarily imply a core competence. A competitive advantage may or may not lead to superior performance. a core competence has its roots in a set of skills. A competitive advantage is sustainable in the shortmedium term. 131 . Majority of the firms have competitive advantage. A competitive advantage manifests from a function. a core competence is sustainable even in the long-term. a core competence usually does. a core competence always implies a competitive advantage.
Subsequent work on game theory by John Nash led him to win the Nobel prize in 1994. In fact there are no. illustrations depicting a win-win situation. Here the magnitude of gain offsets the magnitude of loss equally. In a game (similar to a business) one players win is always another's loss. A game is a contest involving two or more players. However. each of whom wants to win. the stringent assumptions of game theory and difficulty in ascertaining of pay-offs makes game theory application difficult in business. 132 . This is known as a zero-sum game.GAME THEORY The game theory was developed in 1944 by Oscar Morgenstern.
Firm Y’s Strategy Use Radio Use Radio +2 +6 Use Newspaper +7 -4 133 Firm X’s Strategy Use Newspaper Firm X’s Pay-Off Matrix . An unbiased game is one where both the players have equal chances of winning.BIASED AND UNBIASED GAME A game is said to be biased when one of the players have a disproportionate chance of winning.
A saddle point is a situation where both the players are facing pure strategies. Firm Y’s Strategy Use Radio +3 +1 Use Newspaper +7 -2 134 Firm X’s Strategy Saddle Point Use Radio Use Newspaper Firm X’s Pay-Off Matrix .PURE STRATEGY GAME The strategy each player follows will always be the same regardless of the other players strategy.
Coke Vs Pepsi). there is likely to be temptation by any of the players to try to steal the advantage over the other by breaking the rules of the game (Eg.g. It represents the classical “prisoner’s dilemma”. 135 .e. Yahoo Vs Microsoft). This is usually through learning by “experience or observation” (i.TYPES OF GAMES Simultaneous Games – This is a situation where the players have an option to choose to cooperate or not through collusion. iteration) rather than through collusion (E. Repeated Games – In this situation the players interact repeatedly with each other sub-optimizing the outcome possibilities. However. collaboration or cooption.
It results in a shift in the productivity frontier. – Building incentives for customer loyalty. – Making pricing more transparent. but 136 players do not always behave rationally. In a market dominated by price-based differentiation one may attempt to change the rules of the game by/when – – Bases of differentiation dependent on clear identification of what customer wants or value.CHANGING THE RULES OF THE GAME In a situation where a player is unable to compete with the existing rules of the game may attempt to change the rules of the game altogether. Game theory relies on the principle of rationality. .
DELTA MODEL & LOCK-IN
Its a systematic approach where-in two or more industry majors, who by default has achieved a proprietary position (Microsoft – Software / IBM – Computers) which are not necessarily best-products in the industry, co-opt to create a lock-in. A lock-in implies that other players has to conform or relate to that standard in order to prosper. Becoming the industry standard requires – strong brand, causal ambiguity, and close relationship with other companies offering complimentary services. Lock-in is self reinforcing and escalating (i.e. accelerating effect).
THE THREE STRATEGIC POSITIONS
System Economics Market Dominance Complementary Share
Enabled through effective use of technology
Total Customer Solutions
Customer Economics Cooperation Customer Share
Product Economics Rivalry Product Share 138
Bill Gates is the richest man in the world not necessarily because he has developed the world’s best software's or excels at customer satisfaction; but he has got an army of people working for him who are not on his payroll – all the application software providers who are writing programs based on “Windows” compatible operating platform. Once you create the lock-in it is sustainable because of the “network effects”; which creates the proverbial “virtuous cycle” – customers want to buy the computer with largest set of applications and software developers want to write programs for the computers with the largest installed base.
The proponents (Hax & Wilde) believe that every organization has the ability to create and sustain a “lock-in” positioning (though in varying degree). This “system lock-in” is referred to as “delta” – delta being the Greek letter that stands for transformation and change amongst the players. The lock-in once created becomes very difficult for a firm to penetrate, and becomes a distinct entry barrier. The model is based on the belief that it compliments Porter’s differentiation model and RBV framework instead of contradicting them. In a lock-in strategy the performance outcomes are dependent on the success of another.
It relates to translating strategy formulations into practice. Performance realization of a strategy depends on the implementation effort. Successful implementation also depends on the appropriateness of the strategy. Since strategy implementation is a time bound process, alignment (i.e. strategic fit) is a key variable during times of radical change. Some of the other levers of successful strategy implementation are – Transformational leadership and motivating power. Resource allocation; its stretching and leveraging. Compatible organization structure & control systems. Inertia & resistance to change.
internal strategic fit (strategy – dominant logic) is critical to strategy implementation. – Changing the rules of the game. – Resource commitment from top management. – Unlearning & learning of new skill sets. – Better strategic and operational control.IMPORTANCE OF STRATEGIC FIT Strategic fit has a central role to play in strategic management. A high strategic fit (co alignment) is useful because it enables – – Appropriate and timely response. 143 . – Development of capabilities & competencies. While external strategic fit (strategy – environment) is relevant for strategy formulation.
In fact. at the cost of sacrificing a lesser degree of control. learning levels are very low. learning levels are very high. effective strategies are better crafted when there is a subtle overlapping between the two (i. while control is very effective. In such a situation. emergent strategy vis-à-vis intended & realized). formulation & implementation can occur simultaneously. According to Mintzberg. Some of the key strategic learning's exists at the contact point between the organization and its customer. 144 . strategy formulation and implementation has been perceived to be distinct & independent.e.FORMULATION Vs IMPLEMENTATION Traditionally. In such a situation.
Pragmatism is the ability to make things happen. companies depend more on transformational leaders than transactional leaders. bring about transparency. He should be an agent of change. A transactional leader is usually confined to allocating tasks & responsibilities and extracting performance. 145 . Install a system of shared beliefs and values. transformational leaders go one step beyond – Design a well crafted and designed strategic intent of the organization.ROLE OF TOP MANAGEMENT To bring about change and to implement strategies successfully. shift from compliance to commitment. In contrast.
minimum requirement). machines) referred to as threshold resources (i.RESOURCE ALLOCATION Resources allocation includes tangible resources (Eg. Intangible resources (Eg. 146 .e. skills) also includes complex resources like capabilities and competencies. land. Performance Budget – SBU managers need to justify the distinctive resources in terms of the opportunity it is pursuing yields the highest possible pay-offs. labour. Zero Based Budget – In this case the budget of a SBU has to be worked out right from the scratch. The various methods of resource allocation includes Historical Budget – The budgets framed by HQ for a particular SBU keeping in mind past trends. brands. patents.
Flat Screen Displays. Moreover. these capabilities are sustainable even in the medium to long term. though not necessarily in the case of emerging markets. Distinctive capabilities are complex set of skills woven around technologies. Distinctive capabilities helps in stretching and leveraging resources thereby overcoming two major constraints involved in strategy implementation – times & costs. convergence of multiple streams of technologies at the product – market level is becoming increasingly evident (Eg.CAPABILITIES & COMPETENCIES Technology and business are slowly becoming in – separable. Mobiles). Due to causal ambiguity (complexity). 147 .
A firm in several unrelated businesses usually employs a SBU structure. processes become people independent. Once the structure is in place. The level of centralization and decentralization is decisive. A single product or a dominant business firm usually employs a functional structure. 148 . An appropriate organization structure & adequate control systems are essential to implement strategies and achieve stated goals.STRATEGY & STRUCTURE It is a framework within which individual efforts are coordinated to bring synergy. A firm in several related businesses usually employs a divisional structure.
SBU Structure – Businesses segregated in terms of strategic dissimilarities (Eg. Finance). Output). Virtual Structure – A boundary less or hollow organization.TYPES OF STRUCTURES Functional Structure – Activities grouped together by a common function (Eg.Technology. Divisional Structure – Units grouped together in terms of products. processes. Inputs . disbanded subsequently. with team members having dual line of control. based on skills and competencies. Project / Matrix Structure – A formal but temporary framework initiated for the completion of a particular project/crisis. Team Structure – An informal group formed for a crisis. or geographical locations. 149 . Marketing.
structures are becoming flatter and more simpler. It includes the desire for independence. 150 . facing challenges & crises. Technology – With more and more convergence of technologies in business.FACTORS INFLUENCING STRUCTURE Size – As an organizations size increases there is more specialization and differentiation leading to the top management moving away from operational issues and control. leading to a tall structure. Environment & People – Economic and political conditions have a major bearing on structure coupled with the attitude and aspirations of the people in the organization. assuming responsibility. as span is broader.
Most firms undergo periods of strategic continuity rather than strategic discontinuity. Inertia acts as an impediment in strategy implementation.e. Inertia is a characteristic of a firm that endures status quo (i. Common sources of 151 inertia – complacency with past successes. . irrespective whether it is from worse to good or good to worse. there is a tendency to continue along the same lines. co0ntinuity).INERTIA When a firm has been operating in a certain fashion for a long time. Changes in top management and unlearning helps overcome inertia. Top managers resist change.
certain authors propose misfit as a source of superior 152 performance. Deviation of fit is detrimental to performance and may lead to strategic failure. Since the internal and external environment is in a state of continuous flux. strategies need to be evaluated on an ongoing basis to prevent deviations of fit. firms should move beyond financial performance to strategic performance as organization systems are becoming complex. . However. To prevent deviation of fit.STRATEGY EVALUATION Strategy evaluation centers around assessment of strategic fit.
It attempts to answer the following questions – Is the strategic intent appropriate to the changing context? Are the organizations capabilities still holding good.STRATEGY CONTROL It is concerned with trafficking a strategy as it is being implemented. detecting changes in the external and internal environment and taking corrective action wherever necessary. competitive advantages becoming disadvantages? Has the company acquired any new competency? Has the company been able to overcome the 153 environmental threats. .
STRATEGY CONTROL IMPLEMENTATION It involves steering the company towards its original growth trajectory & stated goals. Implementation Control – It aims at assessing whether key activities are proceeding as per schedule. Premise Control – Checking the validity of the assumptions on which a strategy was based. However. It involves assessing – strategic thrusts and milestones. It is open-ended as well as . checking every premise is costly as well as difficult. Special Alert Control – It intends to uncover unanticipated information having critical impact 154 on strategies.
difficult to translate into practice. Strategy intent not linked with goals and objectives – Lack of coordination at lower levels leading to negative synergy.BARRIERS TO STRATEGY EXECUTION Vision and strategy not actionable – Utopian ideas. low strategic fit due to consultants intervention. Strategy not linked to resource allocation & capabilities – Lacking commitment of top management. “If you cannot . Performance measures are defective – What to evaluate against? How to measure the 155 construct? As a saying goes.
the relative importance of each factor may vary over time and context. Together these factors determine the way in which a corporation operates. to be sure of successful implementation of a strategy. Today it is considered one of the most powerful tools for strategy implementation determining success or failure.7S FRAMEWORK OF Mc KINSEY The 7-S Framework of McKinsey is a management model that describes 7 factors to organize a company in an holistic and effective way. important or not they're all interdependent. Large or small. 156 . so if one fails to pay proper attention to one of them. this may effect all others as well. On top of that. Managers should take into account all seven of these factors.
The 7-S model was born at a meeting of these four authors in 1982.BACKGROUND & ORIGIN The 7-S Framework was first mentioned in "The Art Of Japanese Management" by Richard Pascale and Anthony Athos in 1981. 157 . It appeared also in "In Search of Excellence" by Peters and Waterman. At around the same time in the US Tom Peters and Robert Waterman were exploring what made a company excellent. They had been investigating how Japanese industry had been so successful. Since then it is known as their 7-S model and is extensively used by corporations worldwide to implement their strategies. and was taken up as a basic tool by the global management consultancy company McKinsey.
Style – The way in which the top management influences the functioning of an organization. 158 . Strategy – Trade-offs for the allocation of a firms scarce resources. Staff – Human inter-relationships. formal & informal . Systems – The procedures. over time. to reach identified & stated goals. processes and routines that characterize how work should be done. Structure – The way in which the organization's units relate to each other in terms of their commonalities.THE 7’S Shared Values – It represents what the organization stands for and what the top management believes in. Skills – An organizations capabilities and competencies.
STRATEGIC FIT Strategy Structure Shared Values Systems Skills Staff Style 1st Order Fit 2nd Order Fit 3rd Order Fit 159 .
160 . Ineffective in case of a virtual company. their Japanese counterparts focus more on the soft S’s for their early success and sustainability. shared values) are very malleable and comparatively more difficult to identify & influence. style. staff. While the American co’s focuses on the hard S’s. In contrast. structure.A CRITIC OF THE 7S MODEL While the hard S’s (strategy. because most often they are culturally embedded and often neglected. A choice of an alphabet often limits the scope and skews the interpretation of a model. systems) are comparatively easy to identify and influence. the soft S’s (skill. Consider the 4P’s of marketing or 3R’s of SCM.
Low Take Overs 161 .STRATEGY IMPLEMENTATION ROUTES Strategic Fit .High Organic Growth Strategic Alliance Joint Venture Mergers & Acquisition Strategic Fit .
tax holidays. 162 Risk of cost and time overruns. soft loans. Long gestation leads to delayed market entry. . concessions are available for green-field projects. subsidized power). technologies. The entire infra-structural facilities are set up afresh having its own gestation and break-even. (Eg. (Eg. i. and markets. Govt. It has complete control over inputs.ORGANIC GROWTH Here a firm builds up its facilities right from the scratch and continues to do so without any external participation. Reliance Industries). i. SEZ’s.e.e. green-field projects. the entire value chain.
Tata Motors & Fiat). There is no funding or equity participation from the alliance partner & both the firms continue to operate independently. It touches upon a limited aspects of a firms value chain. Alliances are usually in the areas of technologies or markets (Eg. It has limited intervention power and usually lacks holistic commitment from the alliance partner. Alliances are usually short-lived and disbanded once the purpose is achieved. .STRATEGIC ALLIANCE It involves a pro-active collaboration between two or more firms on a particular domain or function for mutual gain. 163 It is a form of competitive collaboration.
Hero . . A comprehensive MOU is essential. (Eg. It is a win-win situation for both the companies.Honda). Degree and extent of management control must be clearly 164 laid down. Dominant logic of both the companies should be complimentary. Tata – AIG. Selecting the right partner is critical for success. leaving minimum scope of overlapping.JOINT VENTURES A joint venture involves an equivalent equity participation between two firms usually of similar strategic intent and comparable size to enter a particular market through a newly formed entity.
with the individual firms ceasing to exist any more (Eg.MERGERS & ACQUISITION It refers to the fusion of two or more firms into a single entity. Integration of assets and other financial resources. . Integrated distribution channel leads to better market penetration and overall synergy. Brooke Bond & Lipton). ITC Tribeni Tissues. Coca Cola – Thums Up). Economies in scale leading to lowering of costs. Revival of a sick-unit through better management practices is a major motive behind an acquisition 165 strategy. Acquisition is an outright purchase of a firm assets by another independent entity (Eg.
often the new firm is “left alone”.Corus). Larger geo-graphical diversity. Most countries have stringent laws that prevents hostile take over. Inform SEBI / Stock Exchange after 5% stake is 166 acquired. Tata Steel . Integration of organization structure & cultures is difficult. Consolidation in a fragmented industry.TAKE OVERS It refers to the acquisition of significant management control by buying out majority stake in a firm through due diligence or hostility (Eg. Make a public offer of not less than . Instant access to capacities and markets.
MANAGEMENT TOOLS IN STRATEGY 167 .
The past is ceasing to be an indication of the future. it is also a source of potential threat. Some tools to ensure that – Benchmarking – Adopt certain best practices. Companies therefore need to ensure competitive advantages doesn’t become competitive disadvantages. 168 . every time. TQM – Doing the right thing the first time. Radical change is superseding incremental change. Change provides enormous opportunities. or better still create next practices Reengineering – Redesigning work processes right from the scratch.WHY MANAGEMENT TOOLS? Change is becoming pertinent in the business environment. Balanced Scorecard – Tracking strategy 3600.
A best practice is defined as an activity performed by a company in a particular domain or function which distinguishes it from others and making them world-class. These exemplary practices involves the stakeholders of the company and helps achieve its strategic intent. Best practices centers around looking at a different way to satisfy various stakeholders. Benchmarking involves the identification, understanding and adapting of certain best practices and implementing them to enhance performance. Firms are moving towards next practices as best practices make firms look more and more homogeneous.
SOME BEST PRACTICES
Dell: Customized configuration of computers. Caterpillar: 48 hours delivery anywhere in the world. Citi Bank : Priority banking services. Maruti: Certified “true value” pre-owned cars. Microsoft: ESOP to employees. Infosys: Customized work-stations. TCS: Referencing potential new recruits. ITC: Shareholders factory visit. AmEx: Outsourcing data warehousing mining. MARG: Set-top box to study viewing patterns. Honda: CEO’s visit to dealers.
TYPES OF BENCHMARKING
Functional – Used by companies to improve a particular management activity. Eg. Motorola learnt delivery scheduling from Domino’s. Process – Improving specific key processes and operations from experiences in similar businesses. Eg. Ford adopting assembly lay-out plan of Toyota. Competitive – It involves assessing the sources of competitive advantage and imitating them. Eg. Samsung leveraging miniaturization skills of Sony. Strategic – It involves assessing business models and replicating them in a different market. Eg. Reliance replicating AT&T business model.
HOW TO BENCHMARK?
Phase 1: Planning – What to benchmark? Whom to benchmark? – Identify key performance indicators & Data source. Phase 2: Analysis – Assessment of performance gaps. – Predict future performance levels. Phase 3: Integration – Communicate findings and gain acceptance. – Establish functional goals and its implementation. Phase 4: Action – Implement and monitor progress. – Measure results against stakeholder wants and needs. – Recalibrate or outperform benchmarks.
WHOM TO BENCHMARK?
Selecting the benchmarking partner is critical to solving the problem. Firms should generally avoid selecting the industry leader, because it may not always adopt the best practices for every process or activity. Benchmarking partners may also be from different industries. Types – – Internal – It involves benchmarking against its own branches, divisions, SBU’s. Proximity to data and cooperation is taken care of automatically. – External – It involves benchmarking against firms that succeeded on account of their best practices. It may also involve benchmarking against world-class firms. Friction may arise due to presence in competing industries.
BENCHMARKING - ADVANTAGES
Finding better ways of meeting stakeholder needs. Organizational learning comes from internal as well as external sources. Establishing goals based on formal assessment of external conditions. Defining effective measure of indicators, facilitate comparison, adopt from other organizations. Ensuring a continuous learning organization. Reducing competitive disadvantage. Organizational turnaround, especially effective in case of a wide strategic drift when differentiation strategies fail to work. 174
It can at best complement it. While strategy is all about differentiation and not looking alike. Benchmarking is useful for bringing about operational efficiency.e. . Benchmarking merely reorients profits in the hands of few to profits in the hands in the hands of many (i.LIMITATIONS More and more companies benchmark. clustering). It does not shifts the growth 175 trajectory of the industry as a whole. but it cannot be used as a strategic decision making tool. Strategy is more of creating best practices rather than copying them. the more similar they end up looking.BENCHMARKING .
e. process mapping) and eliminating or improving them (E. . Windows 95 to 97). The task demands a total change in organisational 176 culture and mindset. clean sheet). for achieving performance improvement (E.e.g.g. DOS to Windows).RE-ENGINEERING Redesigning leads to identification of superfluous activities or product features (i. Re-engineering attempts to radically change an organizational products or process by challenging the basic assumptions surrounding it. Re-engineering involves complete reconstruction and overhauling of job descriptions from the scratch (i.
than people driven Innovative Vs Traditional Customer centric Vs Organisational centric 177 .REENGINEERING – KEY TENETS Ambition Focus Attitude Enabler Performance Large scale improvement by questioning basic assumptions about how work is done Micro Vs Macro Business Processes Vs Organisational Processes Starting right from the scratch Not historical More IT driven.
e. resource allocation and prepares the organization for the future through a reorientation of the entire strategic architecture. It can be of the following types – Functional – It looks into the flow of operations (i. BPR).REENGINEERING . customers and suppliers and protects the organization from the future (i. products. 178 . structures. etc) and supports the organization for the present. Business – It looks into markets. processes. Strategic – It looks into the process of strategic planning.LEVELS Reengineering can be successfully leveraged at all levels of an organization with varying degree of results. .e.
Indonesia). – Early entry advantages. It generally acts as a threat to innovation. learning curve advantage. reverse engineering is a top-bottom approach.REVERSE ENGINEERING It is a process by which a product is dismantled and analyzed in order to understand how the product was designed and manufactured. Cheaper versions of Intel chips and mother-boards manufactured in Taiwan. with an intention to copy it (Eg. However. – High cost and time acts as a deterrent. – Causal Ambiguity. protection can be had in the following ways – – Patenting. While traditional manufacturing is a bottom-up approach. 179 .
cost and effort necessary for the purpose of reverse engineering.e. designing facilities. Actualization – Obtaining and dismantling of the product to assess how it functions. Usually in such cases segmentation and pricing is different from the original innovator. Introduction – Launching the product in the market. Implementation – Developing of a prototype. machine tools to convert ideas into a marketable product (i. Inaccurate assessment at this stage may lead to a failure of the entire project. 180 .STAGES IN REVERSE ENGINEERING Awareness – Recognizing whether the product is found to be worth the time. nano-technology).
It has eight dimensions (Eg. – Reliability – Consistency in mileage. Car) – – Performance – Mileage of 14 kms to a litre of fuel. of service stations. – Features – Anti-lock braking systems. 181 . – Serviceability – Large no. Air bags. More and more companies are moving towards meeting implied rather than stated needs.WHAT IS QUALITY? It involves the totality of a product or service in meeting certain stated or implied needs.Euro IV. – Durability – 1980 manufactured cars still on road. – Aesthetics – Appeal in design. – Perception – Customer notions. – Conformance – Emission standards .
zero defects. Management of quality was traditionally inspect it . It had little impact on improving overall productivity.TOTAL QUALITY MANAGEMENT Objective – Management of quality ensures conformance to certain pre-set standards. It is deeply embedded as an aspect of 182 organisational life & culture. touching upon a limited aspect of a value chain. . TQM is a way of creating an organization culture committed to the continuous improvement of work processes – Deming. which ensures good market standing.fix it in nature.
fully involved in decision-making and fairly rewarded for results. not a final destination. 183 . Be customer centric – Generate the concept of internal customer (Ishikawa). Empowerment – It takes place when employees are properly trained. Kaizen – Make continuous improvement a way of life. Looking at quality as an endless journey.TQM – KEY TENETS Do it right. the first time – From reactively fixing error in products to proactively preventing errors from occurring at the first place (Juran). provided with all relevant information and best possible tools.
enabling the firm to concentrate on core activities essential to customer satisfaction.STRATEGIES Outsourcing – It is the process of self-contracting services and operations which are routine and mundane. 6-Sigma). Quality Circles – It a small group of shop-floor employees who meet periodically to take decisions regarding operational problems and crises. It is based on the principles of MBO (i. SQC – It is a process used to determine how many units of a product should be inspected to calculate a probability that the total no. 184 .e. of units meet preset standards (Eg. saving precious top management time. equal participation).TQM .
.... – Less than 10% of strategies effectively formulated are effectively executed..... – Efficiency and effectiveness is passé. – In the majority of failures – we estimate 70% – the real problem isn’t (bad strategy) ..... Source: Fortune Magazine Why CEO’s fail? 185 . it’s bad execution.BALANCED SCORE CARD Some interesting comments . strategy implementation has never been more important.
BSC . rather than effects. Organizations need to move from financial to strategic performance. These measures worked well when organizational systems were simple and unidirectional and more importantly the environment was static. Focus more on causes. Most managers tend to rely on traditional measures of performance having its origin in finance as they are well tried and tested. In today’s context when organizational systems have become complex and multi-directional we need to have a holistic view of performance to cut the lag effects.CONCEPTUALISATION A company’s performance depends on how it measures performance. 186 .
and distinguish strategic problems from operational ones. It has four dimensions – – How do customers see us? – What must we excel at? – Can we continue to improve and create value? – How do we look to shareholders? Firms more often have problems. 187 . The most critical element of a BSC is to measure these four dimensions.BSC – KAPLAN & NORTON (1992) A BSC helps a manager to track and communicate the different elements of company’s strategy. because they have too many.
ageing schedule) % of key customer transactions Ranking of key customer accounts No.e.CUSTOMER PERSPECTIVE GOALS Products Supply Preference Relationship MEASURES Relative market share (%) % of sales from new Vs proprietary products Timely deliveries and service Customer credit analysis (i. of visits or calls made % of NPA’s 188 .
BUSINESS PERSPECTIVE GOALS Skills Excellence Exposure Introduction MEASURES New capabilities and competencies Implementation & gestation period Bank and supplier credit limits & PLR Unit Costs / Conversion Ratio / Defect Ratio No. of times covered in media No. of new product launches Vs competition Product pricing Vs competition 189 .
of product innovations 190 .LEARNING PERSPECTIVE GOALS Technology Manufacturing Focus Timing MEASURES No. of new patents registered Time to develop next generation products Average and spread in operating cycle % of products that equal 2/3 sales No.
Return on Investment Market Capitalization / PE ratio 191 .FINANCIAL PERSPECTIVE GOALS Survival Success Prosper Divestment MEASURES Cash flows Growth in Sales and Profits EPS.
STRATEGY MAPPING 192 .
BSC .IMPLEMENTATION 2 Translate strategy into operational terms 1 Mobilize change through effective leadership 5 STRATEGY Make strategy a continual process 3 Align the organization to the strategy 4 Make strategy everyone’s job 193 .
As a result.e. Seek excellence. sharing of vision). they don’t know . The BSC brings together the different elements of a company’s strategy at a glance. Focus on cause not effects.e. doing right things instead of doing things right). 194 performance will automatically follow.what they don’t know. Modern managers should be poised to ask the right questions. It helps translating strategy into practice (i.ADVANTAGES Most often top managers face information overload. .BSC . Shift from control to strategy (i.
EFFICIENCY Vs EFFECTIVENESS Ineffective Effective Inefficient Goes out of Business quickly Survives Efficient Dies Slowly Thrives 195 .
Michael E. but also sustains it.EFFECTIVENESS + STRATEGY A company which is effective as well as strategic. Porter 196 . not only thrives. .
CORPORATE RESTRUCTURING 197 .
firms use restructuring strategies. Radical change brings about strategic variety. To adapt to the changing environment. Restructuring involves consciously driving significant changes in the way an organizations thinks and looks (Eg.. to survival of the most adaptable.CORPORATE RESTRUCTURING The only thing constant in today's business environment is change... “every organization must be prepared to abandon everything it does. Tata Group). As Peter Drucker pointed out. Strategic variety may be caused by changes in the as external well as internal environment... from survival of the fittest .. Strategic variety brings paradigm shift.” 198 .
Instead. they should strive to provide unimaginable value ahead of its time (Eg. . ATM. downscoping).RESTRUCTURING – BASIC TENETS Customer Focus – Restructuring ideally begins and ends with the customer. Fax.e. etc). Internal customers should also not be neglected. Structural Changes – Conventional hierarchical structures should be disbanded in favour of more 199 flexible ones (i. and dividing the core businesses into SBU’s (i. Core Business – Company’s should introspect – What business are we in? Business evolved out of opportunism or myopia should be divested.e. Walkman. downsizing or rightsizing). Company’s should go beyond just asking what he expects.
.... During the times of JRD.) Reliance dismantled their industrial embassies ..RESTRUCTURING – BASIC TENETS Cultural Changes – A culture represents the values and beliefs of the people about the organization.. 200 . . Ratan Tata now drives the point the group means business.. started focusing on their capabilities.. the Tatas were considered a benevolent and charitable organization.. Kumar Birla today is more dependent on professionals.. It is created and institutionalized by the top management. Restructuring also requires cultural reorientation..) The Aditya Birla group typically relied on the “marwari” community for key management positions ..
Carry out PR campaigns. “ … one reason our customers are satisfied is that we aren’t. Use the reach of networking technologies. Getting feedback & addressing customer complaints. Restructuring provides a platform to close this gap. they tend to move away from the customer.MOVING CLOSER TO THE CUSTOMER As companies evolve.” 201 . Publicizing welfare projects to demonstrate CSR. Honda’s ad says. Organizing customer and supplier meets. Communicating to the media about organization efforts to deliver quality products.
It can have two forms. spin-off and equity carve. Hive Off – It involves siphoning of assets under control. or conglo-merate. Further. It may include brands as well. including its intangibles – Mergers – It may be vertical. Asset Swaps – It entails divesting and acquisition simultaneously by two companies.ASSET RESTRUCTURING Asset Restructuring – The asset composition of a firm undergoes a major change. horizontal. it may be smooth (Eg. 202 . where the difference in valuation is settled off through cash or equity (Eg. Further spin-off can be classified as split-off and split-up. Tata – Corus) or hostile (Eg. Mittal – Arcelor) and can take various forms. Glaxo – Heinz).
– Split-Up – In a split-up.HIVE OFF Spin-Off – A spin off is the creation of a new entity. in which the equity is allotted amongst the existing shareholders on a pro-rata basis (Eg. Tata Industries selling 20% stake to Jardine Matheson). the existing shareholders receive equity in the subsidiary in exchange for the stocks of the parent company. Equity Carve – It involves selling a minority stake to a third party while retaining control (Eg. Reliance Ent). the entire parent company loses its identity after being split into a number of subsidiaries. 203 . Most of these practices are not in consonance with Indian laws. – Split-Off – In a split-off.
In 2005. for a specified market or in general with full management control. In 1995. Selling out in phases is called disinvestment (IPCL).DIVESTITURE It involves the sale of a brand or a division of a company to a third party. Parle sold its Thums Up brand to Coke for $40 million apprehending fierce competition. L&T sold its cements division to Aditya Birla group. 204 . but retained its engineering division. A complete sell-out is known as divestment (TOMCO). repay long-term debts. strategic misfit. Generic motives include – – Raise working capital. – Poor performance.
3 billion.The internal & external liability composition undergoes a major change – LBO – Acquiring control over a substantially larger company through borrowed funds (Eg. Tatas take-over of Corus for US $11. Share Buyback – It is a process of cancellation of shares out of free reserves to the extent of 25% of paid-up capital (Eg. It provides greater leverage as well as management control. involving 608 pence per share). Wipro).CAPITAL RESTRUCTURING Capital Restructuring . Conversion – Replacing debt with equity or vice-versa or costlier with cheaper debt or cross currency debt. 205 .
1860 cr . 256 cr ACC – Rs. 42 cr Voltas .Rs. 99 cr Tata Power – Rs. 1890 cr CMC – Rs. 150 cr VSNL – Rs. 230 cr Diversifications Tata Motors – Rs.BUSINESS RESTRUCTURING – TATAS Divestments Lakme – Rs. 1700 cr Trent – Rs. 120 cr Tata AIG – Rs. 1439 cr 206 Tata Timken – Rs 120 cr Tata Telecom – Rs. 950 cr Merind . 1170 cr Goodlass Nerolac – Rs. 250 cr Tata Tetley – Rs.Rs.
It can be carried out in the following ways – Downsizing – It is a systematic one-time reduction in the no. Turnaround is the primary motive. Downscoping – It involves reducing the business and/or geographical scope of a firm (Aditya Birla group). 207 . usually as a result external turbulence. Rightsizing – It is phasing of excess and redundant employees resulted out of faulty internal planning (SAIL). of a firm’s employees and sometimes in the no. keeping the composition of business intact (Jet Airways). Survival is the primary motive.ORGANIZATIONAL RESTRUCTURING Organizational structure and systems calls for a change when strategic variety is apparent. of operating units.
Dominant logic becomes deep-rooted in organizational contexts depending on the period it is in place (tenure of the CEO). The longer the period. as strategies are based on such beliefs and biases. The dominant logic represents the perceptions and biases (i. 208 .STRATEGIC CHANGE One of the most difficult components of organization restructuring is the mindset of the top management represented through its dominant logic and its shared values reflected in cultural orientation. the more difficult it becomes to uproot the paradigm (i. inertia).e.e. thumb rules) of the top management. Strategy change is unviable without a preceding change in its dominant logics.
Successful transformation requires – incorporating employees fully into the process – leading from a different place so as to maintain employee involvement – instill mental disciplines that will enable employees to behave differently.FORCES AGAINST STRATEGIC CHANGE The problem with strategic change is that the whole burden typically rests on few people (i. Companies achieve real agility only when people at every level rise above the ordinary to face the challenges – revitalization or transformation. In most organizations.e. 20% of the people carry out 80% of the changes). 209 . the factor that stifled change & performance was – culture.
Create relentless discomfort with the status quo. Encourage uncompromising straight talk. never take no for an answer. Manage from the future.SUCCESSFUL TRANSFORMATION Build an intricate understanding of the business model at all levels of the organization. process ownership. Harness setbacks. Understand and deliver the quid pro quo. Promote inventive accountability. The best way is to alter the institutional point of view. 210 . it is not about winning but about learning. Questioning every basic action of the organization.
also known as cultural-web. by identifying forces for and against change. that can be both enablers and blockages to change and restructuring. It involves diagnosing a change situation – systems & structures. Aspects of current culture which needs to be overcome.FORCE-FIELD ANALYSIS A force-field analysis provides an initial overview of change problems that needs to tackled. It involves identifying – Aspects of current culture which needs to be reinforced. Identify and implement facilitators of cultural change. Culture and style of management are two main impediments in force-field analysis. 211 .
Term Reduced labour costs Reduced debt costs Emphasis on strategic control Business High debt costs Higher risk 212 Long .Term Loss of human capital Lower performance Higher performance Capital .OUTCOMES Alternatives Organizational Short .RESTRUCTURING .
down-scoping or asset stripping. In order to put back the company on the right track they are resort to – Denominator – It assumes that turnover cannot be increased. focuses on reengineering.NUMERATOR & DENOMINATOR MGT Most firms across emerging markets undergo strategic discontinuity and as a result are forced to restructure their businesses. Numerator – It assumes that turnover is not a barrier or constraint. hence go in for downsizing. While the first strategy produces results instantaneously. reverse engineering and regenerating. 213 . the second one is a more viable strategy and sustainable option in the long run.
TURNAROUND MANAGEMENT 214 .
..WHY TURN AROUND MANAGEMENT? Some interesting insights . Source: Why do firms atrophy? (Business Today. January 1997). – Only seven of the first fifty Indian business groups in 1947 were even in business by the turn of this century... 215 (Govindarajan and Trimble.. – Less than 10% of the Fortune 500 companies as first published in 1955. and that the thirty-two of the country’s largest business groups in 1969 are no longer among the top fifty today. still exist as on 2005. ..
Stage Theory). ends the threat with a combination of strategies. and capabilities. process focuses on – A logic to explain a causal relationship between intervening variables. Both content (what) and process (how) are equally important for a successful turnaround.TURN AROUND MANAGEMENT A turnaround is said to occur when a firm perseveres through an existence threatening performance decline. A category of underlying principles and concepts. As a sequence of events describing how things change and why they change (i. systems. While content focuses on endogenous and exogenous variables. 216 .e. skills. and achieves sustainable performance recovery.
especially in key positions. Rising input costs. Some indicators Continuous cash flow crises as a result of dwindling market-share and profits. 217 . Low employee morale leading to high employee attrition at all levels. suppliers and bankers. Low stakeholder confidence.TURNAROUND INDICATORS Most firms atrophy simply because they fail to diagnose the indicators that acts as threat to organizational existence. unavailability or radical lowering of substitute costs or technological obsolescence. Uncompetitive products or services. leading to lack of acceptability from distributors and customers. Substantial shifts in consumer preferences.
consider extension. “all is not well”. Hence. liquidating dead assets. be more customer centric. Recalibrate prices. based on elasticity. 218 . prune work-force.TURNAROUND ILLUSION The first step to a successful turnaround is the basic acceptance of the fact that …. Extending work hours. Emphasis on advertising and market penetration. focus on power brands. Common approaches adopted Change in key positions.. which most top managers fail to appreciate. Product redesigning or reengineering. Revamp product portfolio. they adopt surface level measures (disprin popping) which most often fail.
TURNAROUND STAGE THEORY Stage 1 Decline Stage 2 Stage 3 Stage 4 Outcome Response Transition Performance Equilibrium Line Success Failure Indeterminate Nadir Time 219 .
It has its origin in “environment led fit” that subscribes to the view that a firm has little control over external factors. 220 . It involves the identification of the theoretical perspectives that explains performance decline – K-Extinction – It suggests that macro economic and industry wide factors are responsible for decline. primarily dwindling resources and capabilities are responsible for decline. Identification of the stimulus leads to the arrest of the downfall. It has its origin in “resource led stretch” and subscribes to the view that a firm has substantial power to override the context. R-Extinction – It suggests that organization factors.DECLINE Decline is the first stage in the turnaround process.
diversification. asset reduction. Operating responses typically focuses on the way the firm conducts business and involves tactics geared towards – cost cutting and process redesigning (BPR). Strategic responses focus on changing or adjusting the business the firm is engaged in through long term moves such as – integration. If the underlying cause is internal efficiency. If the decline stems from structural shifts. The response must match the cause of the decline.RESPONSE INITIATION Turnaround responses are typically categorized as operating or strategic. the response should be strategic. the response should be operational. 221 . new market initiatives.
which may be unavailable to a focused firm. Scope – A diversified conglomerate may acquire a distressed business to turn it around and gain valuable synergies.RESPONSE DICHOTOMY The response initiation is somewhat dichotomous and cannot be universally applicable. 222 . Untangling this question brings into focus three events – Domain – Many of the strategic cures have limited applicability for an affiliated firm. when decline deepens shifts in strategic position becomes essential. Contour – It is easier to reverse decline in the earlier stages through operational measures. Similarly new market initiatives is feasible only for multi-product firms.
However. 223 . transparency.e. Support from all the stake holders through resource commitment. consensus). Sustenance is the key factor in this stage. many a times early signs of recovery fades out. However.e. The top management has a key role to play through empowerment. role model. substantial amount of time usually passes before results begin to show (i. confidence building measures. participative management (i. Empirical studies show that average time is 7. lead – lag).7 years with a range of (4-16) years.TRANSITION Transition usually reflects the first signs of recovery. Effective levers of transition.
Supplier and banker confidence. Share price indications and media coverage. Instead of focusing on financial parameters alone. Commanding a premium in the market. Regaining lost market share and distributor confidence. Revival of key customers and new product launches.OUTCOME Outcome is said to be successful when a firm breaches the equilibrium performance level. it should adopt a holistic approach. Cut off points must be unequivocal. Failure is an indication that initial momentum was not sustainable characterized by irreversibility. 224 .
COOPERATIVE STRATEGIES & ALLIANCES 225 .
consortia. In the cooperative strategy continuum as firms move up the value order. and globalization . technology. Any cooperative strategy maybe between firms within the same country or cross border as well. strategic alliance. licensing. supply-chain partnership. 226 . It can assume any of the following forms – franchising. or joint venture.COOPERATIVE STRATEGIES Cooperative strategies are a logical and timely response to changes in business dynamics. More and more companies worldwide are moving away from competition to co-option to leverage their resources and enhance bargaining power. the commitment and the involvement between the firms increases manifold.
Switz Foods. owners of the brand Tanishq allows its franchisees to sell its jewellery products. 227 . owners of the brand Monginis allows its franchisees to sell its confectionary products. Titan Inds.FRANCHISING Franchising – It is a contractual agreement between two legally independent firms whereby the franchiser grants the right to the franchisee to sell the franchisor’s product or service or do business under its brand-name in a given location for a specified period of time for a consideration. It is an effective strategy to penetrate markets in a shortest possible time at a minimum cost. Branding is critical to franchising.
HM manufacturing GM range of cars in India with a buy-back arrangement is a perfect example of CBU. as in Tata Indica. Develop a product through its crude stage.LICENSING Licensing – It is a contractual agreement between two legally independent firms whereby the licensor grants the right to the licensee to manufacture the licensor’s product and do business under its brand-name in a given location for a specified period of time for a consideration. refine processes and adopt necessary technologies (SKD). Become a systems integrator (CKD). Different levels of licensing Manufacturing without embracing any technology (CBU). 228 .
Tata. Cross Holdings – A maze of equity holdings through centralised control to ensure earnings stability & threshold resources for critical mass (Eg. Collusion – Few firms in a matured industry collude to reduce industry output below the equilibrium level. Coke – Pepsi).CONSORTIA Consortia – They are defined as large inter-locking relationships & cross holdings between businesses in a similar industry. enabling them to increase prices (Eg. Hyundai). leverage upon size to preempt competition by escalating entry barriers (Eg. 229 . Airbus – Boeing). It can be of the following types – Multipartner – Intends to share an underlying technology or asset.
Tata Motors – IDEA). Companies in different industries with different but complimentary skills.SUPPLY CHAIN PARTNERSHIP It is a pro-active & collaborative arrangement between supplier and customer aimed at achieving better control over the value chain (Eg. . It usually provides a platform to sort out differences between conceptualization and implementation to suit local market needs. otherwise it 230 becomes routine outsourcing. link their capabilities to create value for end users. Continuous sharing of knowledge is critical to the success of a supply chain partnership.
Generic motives involved are . 231 . Partner selection is one of the critical success factors. enhance credibility.STRATEGIC ALLIANCE It is an short to medium term understanding between two or more firms to share knowledge and risk. design next generation products. effective R&D management. enter newer markets. Firm’s should undertake a long courtship with potential partners.learning organization. instead of hurrying into a relationship. Reliance – Du Pont). to gain knowledge and to obtain access to new markets (Eg. Despite their popularity (50-60)% of the alliances fail to accomplish their stated objectives. Tata Motors – Fiat. preempt competition.
Maruti). Airbus – Boeing). Complementary Equals – Two firms mutually promoting each others complimentary products (Eg. Bajaj – Castrol). Coke – Pepsi).TYPES Collusion – Tacit top management understanding to neutralize price wars (Eg. Alliances of the Weak – An alliance is entered into to preempt competition (Eg. Whirlpool – Tide. Bootstrap – An alliance between a weak and a strong company with an intention to acquire it. 232 . Backward – An alliance (quasi or tapered) with a supplier of critical components seeking commitment (Eg.STRATEGIC ALLIANCE .
Firms from developed markets seek access to markets and firms from emerging markets seeking access to technology. Cultural orientation has been found to have a profound effect on top management’s strategic orientation (Eg. – Japan Vs US). Too much stress on financials & structure be avoided. 233 .PARTNER SELECTION CRITERIA It is likely that partners will not have complete consent on alliance objectives because the institutional context in which the alliance embedded varies from country to country. Differences in level of economic development can produce differences in alliances motives.
PARTNER CHARACTERISTICS Complimentarity of Capabilities – The degree to which partners resources can be used in conjunction. Intangible Assets – Move beyond the financials of the firm. Managerial capabilities. Unique Resources – Abilities or skills which cannot be easily duplicated. Partner’s ability to acquire fresh skills. Dominant Logic’s – Similarity in beliefs & biases. including ability to provide quality products and services. Willingness to share knowledge and skills. Experience related to previous alliances. 234 .
vows to include commitment to expand the relationship. differences not anticipated earlier. Getting Engaged – It should incorporate a specific joint activity. incorporating clear signs of continuing independence for all partners. the value chain. degree of compatibility. 235 . instead of focusing controlling the relationship. Selection & Courtship – It involves self analyzing. Learning to collaborate – strategic. partners should nurture it.MANAGING ALLIANCES Alliances are more than just a deal. understanding the chemistry. operational & cultural integration. Setting up the housekeeping. Changing within.
whilst the partners continue to operate independently.e. separation is very 236 bitter. combining parts).e. Conceptually. It aims at creating new value (i. It lasts till the vision is reached. There are substantial linkages in the value-chain. . synergy) rather than mere exchange (i. a joint venture is a selection among modes by which two or more firms can transact.JOINT VENTURE A joint venture is a long term association between two equal partners to create an independent firm (SPV) by complementing their resources and capabilities to explore newer businesses or markets for achieving a shared vision.
Organizational Learning – It is a means through which a firm learns or seeks to retain their capabilities. in addition to a high degree of asset specificity. The market fails as sellers are unwilling to reveal their technology and buyers are unwilling to purchase in the absence of inspection. Strategic Behaviour – Firms may override transaction costs. though more profitable alternative to other choices. It may also be linked to deterring entry or eroding competitors position.JOINT VENTURE – GENERIC MOTIVES Transaction Cost – The situational characteristics best suited for a JV are high performance uncertainty. 237 .
Sharing of resources. Define future industry standards. Daimler – Chrysler (Premium Cars) 238 . Endorsement from government authorities. – Eg. – Eg. Renault – Nissan (Minivans – Cars). Learning new technologies. – Eg. Essar – Hutch (Vodafone). Yamaha – Escorts. – Eg. Eli Lily – Ranbaxy.OTHER MOTIVES Entry into newer markets. Maruti – Suzuki. TVS – Suzuki (4-Stroke Engines) Fill gaps in existing product lines. – Eg. – Eg.
e. – Godrej – Procter & Gamble. – Eg. LML – Piaggio Differences in size and resource base. PAL – Fiat If the cost of continuing exceeds the exit costs? – Eg. Risk of brain (i.RISKS INVOLVED Incompatibility – Differences in cultural background. Modi – Telstra What after exit (parenting disadvantage)? – Eg.Enka. Tata – Aditya Birla in Idea Cellular 239 . Century . Risk of over dependence. – Eg. technology) drain. – Maruti – Suzuki.
Culture – Reconcile gaps. Objectives – Shared vision. Incompatibility – Performance expectations. Inertia – Differences in age and evolution patterns. Focus – Avoid strategic myopia. 240 . Flexibility – Sufficient space to breathe and adjust. Costs – Other modes of transaction becomes cheaper.PRE-REQUISITES FOR SUCCESS Commitment – Mutual trust. Partner – Avoid duplication of skills and capabilities. time sharing. respect. Agreement – Clarity on operational control. Equality – Lack of dominance.
MERGERS & ACQUISITION 241 .
242 . reverses are also taking place through LBO) with a view to acquire conglomerate power and induce synergy (Eg. Ranbaxy . SEBI Takeover Code. Mittal Arcelor). Most countries have stringent laws that prevents hostile takeovers (Eg. Brooke Bond – Lipton). 2002). An acquisition is the purchase of a firm by a firm (of larger size. The larger objective is to leverage on size.Daichi) and hostile if it is without the consent of the management (Eg. An acquisition is said be smooth if it is with the consent of the management (Eg. HLL – Tomco). however.MERGERS & ACQUISITION A merger is a mutually beneficial consent between two or more firms (usually of similar size) to form a newly evolved entity by absolving their individual entities to preempt competition (Eg.
Hike – An acquirer who has already picked up a 5% has to make a mandatory disclosure for every additional 1% stake that it acquires. Preferential – A preferential allottee ending up acquiring 5% stake also comes under its purview. Control – A special resolution of 75% of the share 243 holders approving the change of guard.SEBI TAKEOVER CODE. creeping acquisition). 2002 Promoter – A person who has a clear control of atleast 51% of the voting rights of the company and confidence of all the major stakeholders.e. . Acquirer – Someone (individual or firm) who picks up an atleast 5% stake without mandatory disclosure having an intention to wrest management control (i.
the SEBI can intervene and block share transfers if: the acquirer has ulterior motives (i.e. credentials or track record is at stake. and/or does not enjoy the confidence of the different stake holders. 244 .SEBI TAKEOVER CODE. Grasim – L&T Cement. 2002 Pricing – Acquirers will have to offer minority shareholders (at least 20%) the past 26 weeks or past 2 weeks average price. Disclosure – All acquirers have to inform the respective stock exchanges where it is listed and SEBI upon acquiring the basic limit and upon every incremental limit thereon. asset stripping). SEBI – In case of a hostile take over. Gujarat Ambuja – ACC). whichever is higher as an exit route (Eg.
Reliance). The type of merger is depends on the degree of relatedness (strategic) between the two businesses. usually opportunistic (Eg. Electrolux . Conglomerate – It involves integration of two distinctly unrelated businesses.Kelvinator). ITC).TYPES OF MERGERS A business is an activity that involves procuring of desired inputs to transform it to an output by using appropriate technologies and thereby creating value for its stake holders in the process. Horizontal – It involves integration of two highly related businesses (Eg. 245 . Godrej. Vertical – It involves complimentarily (partially related) in terms of supply of inputs or marketing activities (Eg.
Overcoming entry barriers (Eg. Ranbaxy – Crosslands). Economies of size. Coinsurance effect – Higher debt raising capability. Asset Stripping – Shaw Wallace). Reduction in risk. Acquiring assets or capabilities (Eg.MOTIVES Increased market / conglomerate power. Mittal – Arcelor). Ulterior motives – (Eg. Avoiding risk of new product development. Access to newer segments (Eg. Reduced gestation (i. scale and scope.MERGERS & ACQUISITION . Global image (Eg. Tax benefits (Eg. ITC Bhadrachalam). quick access).e. 246 . Tata Steel – Corus). ICICI –ITC Classic).
Overvaluation is often as a result of an ego drive and substantially affects future returns. their initial offer was around 420 pence/share. while the ultimate acquisition was made at 607 pence/share).MERGERS & ACQUISITIONS PITFALLS Cultural differences (Eg. Managing size. neglecting core business. Overvaluation of buying firms (Eg. When Tata Steel started negotiations with Corus. 247 . Merging of organisational structures. Tata – Corus). Managing over-diversification. Inability to achieve synergy. Top management overtly focused on due diligence exercise and negotiations.
Maturity – A larger firm acquires a smaller firm with an objective to achieve economies of scale and experience curve effects (Eg. Decline – Horizontal mergers are undertaken to ensure survival. 248 .MERGER TYPE & PLC Introduction – A larger firm may acquire a newly formed entity with an objective to preempt new competition or acquire its license (Eg. Kingfisher – Air Deccan). vertical to save transactions costs. Tata Steel – Corus). Growth – This stage may witness parallel merger of two firms of similar size. Brooke Bond – Lipton). with an objective to reinforce its growth trajectory or to take on the might of a comparatively larger player (Eg.
249 . Strong differences may stifle plans and its execution.FRAMEWORK Positive contribution to the acquired company. Blanket promotions across entities and confidence building exercises needs to be practiced. active top management intervention in phases. A common shared vision.INTERNATIONAL M&A . Immediate attempts to super impose structure and culture may cause bottle necks. Left alone syndrome. An acquisition just for the sake of it or reputation yields very little value in the long term. A concern of respect and trust for the business of the acquired company.
It will enable focus on customers and key people. Decide upon management control systems. Decide on the new hierarchy.BLUEPRINT Take the media into confidence. Redefine responsibilities and authority. . promptly. 250 Do not ignore the “people factor”. They can carry the message to the various stake holders. Shift attention from business portfolio to people and processes.INTEGRATION . Integrating work processes. Determine business strategy.
M&A . While under valuation may be a significant opportunity. – Synergy – Potential value gain from combining operations (i.VALUATION The process of valuation is central to M&A. operational & financial). – Market for corporate control. Valuation decisions are arrived through a due diligence process when the prospective acquirer gets access to the books of accounts of acquiring company. over valuation can become a curse.e. Financial motives – Undervaluation relative to true value. The process takes (6-12) months. – Unstated reasons – Personal self interest and hubris. 251 .
when the “fit” between the two entities is very poor. 252 . Synergy can be negative as well.VALUING OPERATIONAL SYNERGY Synergy – It refers to the potential value gain where the whole is greater than the sum of the parts. – Conglomerate Synergy – Gains come when one firm complements the resources or capabilities of another (Eg. Innovative product – Good distribution network). or from increased market power which increases sales and margins. – Vertical Synergy – Gains come from controlling the supplychain and savings in transaction costs. Sources of operational synergy – Horizontal Synergy – Gains come from economies of scale which reduces costs.
Cash Slack – It reduces asymmetry between cash starved firms with deserving projects and cash cows with no investment opportunities. ITC – Bhadrachalam Paper). However.VALUING FINANCIAL SYNERGY Diversification – Reduce variability in earnings by diversifying into unrelated industries. but availed after being merged with a profitable firm (Eg. Hotmail). Synergy comes from projects which would not have been undertaken if the two firms stayed apart (Eg. shareholders can accomplish the same at a much lesser cost. and without paying take-over premiums. 253 . Tax Benefits – Tax benefits may accrue from tax entitlements and depreciation benefits unutilized by a loss making firm.
higher leverage. It relates to the concept of diversification. The likelihood of default decreases when two firms' assets and liabilities are combined through a M&A compared to the likelihood of default in the individual companies. – Coupon rates may also be negotiated at lower rates. 254 .VALUING FINANCIAL SYNERGY Co-Insurance Effect – If the cash flows of the two firms are less than perfectly correlated. – Default risk comes down and credit rating improves. as risky debt is spread across the new firm's operations. the cash flow the merged firm will be less variable than the individual firms. hence better performance. This will induce higher debt capacity.
Assessment of perceived quality is critical. While value of corporate control is negligible for firms that are operating close to their optimal value.VALUING CORPORATE CONTROL Premium of M&A are often justified to control the management of the firm. since a restructuring can lead to significant increase in value. 255 . The value of wrestling control is inversely proportional to the perceived quality of that management. – – Value of Control = Value of firm after restructuring Value of firm before restructuring. The value of control can be substantial for firms that are operating well below optimal value.
LEVERAGE BUYOUT (LBO) The basic difference between a take-over and a LBO is the high inherent leverage (i. Confidence of investment bankers and the international financial community is essential. 256 .e. The assets of the acquired company are used as collateral for the borrowed capital. debt component) at the time of buyout and rapid changes in capital structure over time. sometimes in combination with the assets of the acquiring company. It is a very costly and risky proposition. LBO facilitates a relatively smaller firm to bid for a comparatively larger firm in the bid for management control.
– Increased information needs. 257 . – The need to satisfy analysts and shareholders. on-going valuation. However. The increased benefit showed in the following way – reduced costs and increased revenue.TO GO PUBLIC OR NOT? However. A research study showed that 30% of the publicly listed firms reported above average returns after going private.access to financial markets. the advantages of going public includes . – Separation of ownership from management. liquidity. off-late many publicly traded firms have gone private keeping in mind the following – – The fear of LBO.
258 . which disappears once assets are liquidated and significant portion of debt is paid off. – Managers cannot be trusted to invest free cash flows wisely. – It is a temporary phenomenon.RATIONALE FOR HIGH LEVERAGE The high leverage in a LBO can be justified by – – If the target firm has too little debt (relative to its optimal capital structure). – Debts repaid off from increased value after successful restructuring and wresting management control.e. – Cost of debt coming down (i. co-insurance effect). – Cash trapped company unable to utilize opportunities.
EFFECT OF HIGH LEVERAGE Increases the riskiness of dividend flows to shareholders by increasing the interest cost to debt holders. Therefore. leverage is expected to decrease over time. As the firm liquidates / pledges assets and pays off debt. – Increase equity valuation. Lack of sufficient cash flows to repay costly debts resulting in a possible debt trap. initial rise in leverage is anticipated. Any discounting has to reflect these changing cost of capital. 259 . A LBO has to pass two tests to be viable – – Restructuring to pay-off increased debt.
small in size but having a promising business. Objectives – – Traditional route of filing prospectus and undergoing an IPO is costly.REVERSE MERGER Reverse Merger – The acquisition of a public company. – Prevents dilution of equity. shell company) by a private company. or costly. which has discontinued its operations (i. 260 . – Facilitates better valuation and forthcoming offerings. – Tax shelter.e. time-barred. allowing the private company to bypass the usually lengthy and complex process of going public. – Automatic listing in major exchanges.
and 35% during bullish periods. Most target firms are taken over within (6090) days. Initial anomaly in stock prices usually normalizes over a period of time (6-12) months. takeover failures have only initial negative effects on stock prices. Excess returns also vary across time periods. 261 . – Takeover announcements reported 30% excess returns. – Merger announcements reported 20% excess returns.EFFECT OF TAKE-OVER ANNOUNCEMENT The shareholders of target firms are the clear winners. During bearish periods excess returns were 19%. However.
1983. over time. and Netter. Desai. – However. – However.EFFECT OF TAKE-OVER ANNOUNCEMENT The effect of take-over announcement on bidder firm’s stock prices are not clear cut. and Kim. in the event of take-over failure negative returns to the extent of 5% on bidder firm stock prices is reflected. 1983. Bradley. 1988 . 262 Jarrel. Brickley. – Most studies reported insignificant excess returns around take-over offers or merger announcements. as stock markets become more and more perfect such anomalies would reduce Source: Jensen and Ruback.
so that nothing is left for the raider to strip off.DEFENSIVE STRATEGIES Golden Parachute – An employment contract that compensates top managers for loss of jobs as a result of change in management control. 263 . Poison Put – Premature retirement of bonds at attractive rates to pour surplus cash and make target investment unattractive. Poison Pill – An offer to existing shareholders to buy shares at a substantial discount to increase their voting rights (Eg. Asset Stripping – The targeted company hives off its key assets to another subsidiary. Rights).
264 . But often the White Knight turns a betrayer himself (Eg. Gray Knight – The target company takes the help of friendly company to buy the shares of the raiding company. East India Hotels – Reliance Industries – ITC).DEFENSIVE STRATEGIES White Knight – It is the placing of stocks to a cash rich investor and bargaining for protection in return. Pac Man – The target company makes a counter bid to take over the raider company. thus thwarting the raider company’s attention. Green Mail – The targeted company buys large blocks from holders either through premium or through pressure tactics (Eg. Shapoorji Pallonji).
COMPETING FOR THE FUTURE 265 .
GETTING OFF THE TREADMILL Canon overpowering Xerox. Honda overpowering GM. Wal-Mart overpowering Sears. What went wrong???? What were they doing with the present? What were they pre-occupied with? 266 . British Air overpowering Pan Am. Nokia overpowering Motorola. Honda overpowering Volkswagen. Most companies were too preoccupied with the present than the future? 99% of the companies overpowered. were spending 99% of their precious time dealing with present. Compaq overpowering IBM. Hitachi overpowering Westinghouse. The reverse was true for the companies overpowering.
decluttering. Thus efficiency was grievously hurt.THE PAST OF COMPETITION Beyond Restructuring – When a competitiveness become inescapable problem (stagnant growth. declining margins. CEO’s brutally pick up the knife and ruthlessly carve away layers of corporate flab (delayering. These denominator based managers stuck to their restructuring strategies (like building pyramids) and didn't know what to do next? Thus they became history? (like the pharaohs) 267 . most often they ended up cutting corporate muscle as well and became anorexic. Not knowing when to stop. falling market share). downsizing).
A poll in circa 2000 revealed that 80% of the U. but forging ahead in competition. 268 . On the contrary only 20% of Japanese managers believed that quality will be a source of competitive advantage of the future. However.THE PRESENT OF COMPETITION Beyond Reengineering – Numerator based managers (innovation) at least offers some hope. but not of the future.S. The future is not about catching up with competition. incrementalism or nominal innovation has almost reached a plateau. ensuring only survival of the present. top managers believed that quality will be a source of competitive advantage of the future.
269 . reinvent its industry. Companies need to fundamentally reconcieve itself. not the other way. aspirations and resources. Creating the future requires industry foresight. and regenerate its strategies (breaking its – managerial frames). not just the organization.THE FUTURE OF COMPETITION Regenerating – Leaner. Create a potential gap. It involves Dream about the company’s future. faster. demographics and lifestyles. It is based on deep insights into trends in technology. don’t predict. as important as these may be. Transform the industry. they are not enough to get a company to the future. better. Empower from bottom to top.
ABOUT THE DREAM Which customers will you be serving? What will the potential customer look like? Who will be your future competitors? What will be the basis of your competitive advantage? Where would your margins come from? What will be your future competencies? Which end product markets would you cater? 270 .
Create entirely new industries (i. It drives a hunger and a passion to transform. Redraw the boundaries between industries. It is about deliberately creating a strategic misfit.ABOUT THE TRANSFORMATION The future does not belong to those who take the industry for granted. they do not need to restructure. blue oceans).e. Successful companies have a complete grip over the industry. 271 . hence do not fall sick in the first place. by converging technologies complex. Change in at least one fundamental way the rules of engagement in an industry. Therefore.
272 .ABOUT THE EMPOWERMENT Bring about a revolution (a paradigm shift) in the organization. A revolution that is thrust upon from the top seldom sustains. the revolution must start at the bottom and spread in all directions of the organization. Transformational leaders merely lead the way. The middle management plays a strong moderating role. More importantly. Most successful revolutions (Gandhi to Mandela) rose from the dispossessed. Such a process is called institutionalization (from people centric to organisational centric).
Get to the future first. A process for finding and gaining insight into tomorrows opportunities (Eg. It requires a lot of common sense and a little bit of out of the box thinking. Apple – iphone). Apply the 40 – 30 – 20 principle. Companies need to strategize (think ahead of times). What does it take to get to the future first? Understanding how competition for the future is different. An ability to energize the company. South West Airlines – LCC.THE FUTURE OF STRATEGY A company must get to the future not only first but also for less. 273 . without taking undue risk. Toshiba – LCD.
What distinguishes a leader from a laggard. As there is no one future. 274 . We are in the midst of a 3600 vacuum. the farther it will be away from competition. is the ability to imagine in a different way what the future could be. each point in space represents a unique business opportunity. Companies of the future will be not based so much on the strength of their resources. greatness from mediocrity. as on their aspirations. but hundreds. The farther one can see in this endless space.HOW DOES THE FUTURE LOOK LIKE? There is no rule which says that for every leader there will be a follower.
THE EMERGING STRATEGY PARADIGM Not Only Reengineering Processes But Also Regenerating Strategy The Competitive Challenge Organizational Transformation Industry Transformation Competing for Market Share Competing for Opportunity Share Finding the Future Strategy as Learning Strategy as Positioning Strategy as Engineering Strategy as Unlearning Strategy as Dream Strategy as Architecture 275 .
THE EMERGING STRATEGY PARADIGM Not Only But Also Mobilising for the Future Strategic Fit Resource Allocation Strategic Misfit Resource Stretch & Leverage Getting to the Future First Existing Industry Structure Product Leadership Single Entity Product Hits & Timing Future Industry Structure Competency Leadership Dominant Coalitions / Co-option Market Learning & Preemption 276 .
Learning Curve t1 t2 t3 Time t4 t5 277 .LEARNING TO FORGET P1: The degree of learning in current period is directly proportional to the degree of unlearning in the previous period. Degree of Learning Unlearning Curve P2: Unlearning in previous period does not necessarily ensure learning in the current period.
It cannot be matched even by its closest competitors. Leverage – They are the gateways to future markets. Inimitable & Insubstitutable – A high degree causal ambiguity between these skills yield sustainable competitive advantage.CORE COMPETENCE A core competence relates to a bundle of skills (not an asset or a business) that revolves around activities or processes and critically underpins a firm’s competitive advantage. 278 . It is characterized by the following – Unique – It provides unimaginable customer value ahead of its times. It represents the collective learning's of an organization centering around diverse streams of technologies.
at the most three to four. leaders have one. Nike – designing. Although a core competence may lose value over time. Toyota – lean manufacturing. Most companies around the world do not possess one.MORE ABOUT CORE COMPETENCE Sony – miniaturization. it gets more refined and valuable through use. Honda – engines. Coca Cola – brand. Wal-Mart – logistics. A core competency cannot be outsourced. SKF – antifriction and precision. Core competencies are the roots of the organization. 279 . Toshiba – flat screen displays. Canon – imaging. it is deeply embedded in the heart of the organization. Intel – nano-electronics.
ROOTS OF COMPETITIVENESS End Products 1 2 3 4 5 6 7 8 9 10 Core Businesses Core Business 1 Core Business 2 Core Business 3 Core Business 4 Core Product 2 Core Products Core Competencies Core Product 1 Competence 1 Competence 2 Competence 3 Competence 4 280 .
RESOURCE STRETCH & LEVERAGE
Initial resource position is a very poor indicator of future performance. It leads to atrophy and stagnation. Successful companies consciously create a potential gap between aspirations and resources. Resource crunch is a common factor among firms that faces a wealthy rival, and outperforms them. Leveraging what a company already has, rather than allocating it is a more creative response to scarcity. – By concentrating existing resources. – By accumulating existing resources. – By complementing existing resources. – By conserving existing resources. – By recovering existing resources.
Concentrating – It involves effectively directing portfolio of resources on key strategic goals in which individual efforts converge over time. It is a balance between individual mediocrity and collective brilliance. It is achieved through – Converging – Redirecting multiple diverging (i.e. fragmented) short term goals into one long term goal. It is then resources can be stretched over time. Focusing – Making trade-offs and preventing dilution of resources at a particular point of time. Targeting – Focusing on the right innovations that are likely to have the biggest impact on customer value.
Accumulating – Using existing reservoir of resources to build new resources. Each and every individual is a rich & potential source of learning, discover better ways of doing things. It is achieved through Mining – Extracting learning experiences from existing body of each additional experience (i.e. success or failure). It is an attitude that can be acquired, but never learnt. It leads to a substantial jump in the experience curve. Borrowing – Utilizing resources outside the firm through licensing, alliances, joint ventures. A firms absorptive capacity is as important as its inventive capacity.
Complementing – Using resources of one type with another that aligns smoothly to create higher order value. In a way it produces an accelerating effect on each individual resource. It is achieved through – Blending – Interweaving discrete capabilities to create world class technologies (GM – Honda) through integration and imagination. Different functional skills can also be blended to create a world class end products (Yamaha – Keyboard). Balancing – An ability to exploit excellence in one area is never imperiled by mediocrity in another (GE acquiring the CT scanning rights from EMI because of its inadequate market reach).
Conserving – Sustaining competencies over time through frequent usage. Resources are never abandoned; they are always preserved for future use. Recycling – Increasing the velocity of use of a competencies over time. As a result core competencies can be leveraged across an array of products (Sony - Betamax). It includes brand extensions as well. Co-Opting – Enticing resources of potential competitors to exercise influence in an industry (Fujitsu – IBM). Shielding – It involves identifying competitors blind spots and then attacking without having the fear of retaliation.
Recovering - It is the process of reducing the elapsed time between investing in resources and the recovery of those resources in the form of revenues via the market. Speeding – Prior to the 1980’s Detroit’s majors took an average of 8 years to develop an entirely new model; the Japanese reduced it to less than 4.5 years, with major new variants in 2 years. This envisaged Japanese players in giving customers more opportunities to switch allegiance and loyalty (Toyota). Protecting – It uses competitors strength to one’s own advantage, by deflecting it, rather than absorbing it as practiced in Judo.
INTERNATIONAL BUSINESS ENVIRONMENT 287 .
institutional gaps. Therefore focused strategies based on core competence may not be suitable for emerging markets (Khanna & Palepu. high levels of market imperfection). and high transaction costs. Chile) provide a different context (i. Emerging markets are characterised by infrastructural bottlenecks. Therefore.EMERGING MARKETS Emerging markets (India. Korea. 288 .e. China. Diversified groups in operating in emerging markets therefore benefit from unrelated diversification. 1997). strategies suited for the developed markets may not be appropriate for emerging markets.
Concentric. Synergy. subsequently negatively related across developed markets.PERFORMANCE (I) Diversity attempts to measure the degree and extent of diversification (Herfindahl. Entropy). (2000) 289 . Experience Strategic Fit Diversity Palich. et al. Optimum level of diversification Performance Diversity is initially positively related with performance.DIVERSITY . Size & Scale.
conglomerate power Threshold level of diversification Performance Diversity (Khanna & Palepu. subsequently positively related across emerging markets.PERFORMANCE (II) Diversity is initially negatively related with performance. Huge initial investment. brand building Risk diversification. 2001) 290 .DIVERSITY .
HSBC). It should have a spread of manufacturing facilities. It should have a spread of assets. 291 .INTERNATIONAL IDENTITY MNC’s consciously engage in FDI in different parts of the globe to forge resource diversity as a distinct competitive advantage. revenues and profits. It should have a spread of interest groups / stake holders. It should think globally. act locally (Eg. Characteristics – It should have a spread of affiliates or subsidiaries.
Feminity Index . low risk profile in developed markets and vice versa for emerging markets). low power distance in developed markets and vice versa for emerging markets). low group scale in developed markets and vice versa for emerging markets).GLOBAL BUSINESS ENVIRONMENT Power Distance – It reflects the disparities in income and intellectual development (Eg.It reflects the relative role of team building (Eg. Risk Profile – It reflects the risk attitude of the top management (Eg. high feminity index in developed markets and vice versa for emerging markets). Group Scale .It reflects the disparities in women in workforce (Eg. 292 .
currency. Country Risk – It reflects the political and economic risk (Eg. flexibility (Eg. low country risk in developed markets and vice versa for emerging markets). high cultural adaptability in developed markets and vice versa for emerging markets). way of life. judiciary) of doing business in a particular country (Eg. corruption. terrorism (9/11). 293 . FOREX reserves. interest rates. political stability.GLOBAL BUSINESS ENVIRONMENT Cultural Adaptability – It reflects the adaptive ability to a changing environment . customs. time value. credit rating. dress sense. inflation. code of conduct.culture. attitude.
Ethnocentrism – Developed country managers tend to regard their own culture as superior. in most emerging markets meetings are delayed and lasts unusually long. and vice-versa.GLOBAL BUSINESS ENVIRONMENT Time Sensitiveness – Developed country managers regard time as precious. Other factors – local celebrations. however. 294 . High levels of ethnocentrism usually has a negative effect on business. time-zones. Language Barriers – Developed country managers expect foreign partners to communicate in their languages. in most emerging markets use of an interpreter may be a standard protocol.
295 . The 2001 (Doha Round) focused on power blocks (NAFTA. ASEAN. The 1999 (Seattle Round) saw a lot of protest amidst bringing agriculture under the purview of TRIPS. In 1995 (Uruguay Round) GATT was renamed to WTO. BRIC). copyrights. It also initiated provisions on anti-dumping. It also highlighted the nexus between US & WTO. trademarks). It a multi-lateral treaty with 143 (as on 2002) member countries to reduce tariff and non-tariff (quota) barriers. It focused largely on TRIPS (patents.GATT GATT was a bi-lateral treaty initiated between US and some member countries in 1947 to promote free trade.
However with current recession in the US 2002 onwards. Euro). The notable exception was Great Britain which still continues with its local currency (i.Pound).e. However. the Dollar still remains the most preferred currency globally. three countries joined in 2002 increasing it to fifteen members as of 2008.e. The Euro was significantly devalued against the Dollar till 2002. 296 . Sterling .EURO – SINGLE CURRENCY In 1999 twelve member countries in Europe joined hands to move over to a single currency (i. the Euro slowly started outperforming the Dollar. primarily the OPEC countries.
a multiple currency is preferable where the business cycles of member nations are different. it helps avoiding transaction costs associated with a multiple currency. but it may have spill-over effects. Transparency – A single currency is transparent and competitive. However. 297 . Rate Uncertainty – A single currency eliminates the risk of competitive devaluations. Trade Block – It will strengthen the EU identity which would not have been possible otherwise.SINGLE Vs MULTIPLE CURRENCY Transaction Costs – Though the initial cost of introduction of a single currency is very complicated and costly.
the gain of one country is loss of another). It is long term with high levels of commitment. Neo classical economists believe that foreign investment may in fact be a win-win game. – FDI (transfer of tangible resources) is slow but steady for the purpose of economic growth. – FII (transfer of intangible resources) is fast but may have strong repercussions (i. hot money).FII Vs FDI INVESTMENT Classical economists believed that foreign investment (in any form) is basically a zero sum game (i. 298 .e.e. It is short-medium term with comparatively low levels of commitment.
customer awareness (microwaves). technology (microchip). economic (middle class buying power).INTERNATION MARKETING Product – The various attributes of a product may receive different degrees of emphasis depending on differences in . Distribution – It depends on the market characteristics (fragmented – concentrated). buying patterns (spread). usage (talk time).culture (food habits). lifestyle (petroleum 299 outlets – departmental stores). promotion (surrogate advertising). Pricing – It depends on the competitive structure (PLC – Kellogg's). .
debt is cheap in US. equity is cheap in India). Leverage – The leverage may vary across countries depending upon money and capital market conditions (Eg. Accounting Norms – The accounting norms of one country (AS .India) may be different from that another trading country (US – GAAP or IRS). .INTERNATION FINANCE Currency Risk – Many Indian IT companies (Rs) having business in US (Dollar) are asking for quotes in (Euro) or are shifting bases out of US to avoid risk of devaluation of Dollar. Cost Structure – Companies in India need to investment in fixed costs due to poor infra-structure 300 compared to developed markets.
Recruitment – In local recruitment. labour laws. social security. double taxation. Compensation – Differential pay packages exists because of differences in purchasing power. technology (convergence. Training – It is a pre-requisite for international business to reduce language. shortened life cycles). and cultural barriers (language) vis-à-vis emerging markets. however. 301 . in most cases it is not desirable nor practiced. skills are more important that cultural fit and vice-versa.INTERNATIONAL HR An uniform HR policy is idealistic to enable parity in performance appraisal.
Technology – The cost to be evaluated in terms of latest technology (Euro VI) vis-à-vis effective cost of appropriate technology (Euro II).INTERNATIONAL OPERATIONS Location Incentives – FDI in emerging markets should explore options for SEZ’s to explore benefits (tax holidays. SCM – Use of ERP to network the extended enterprise 302 across the globe. Outsourcing – A company having a core competence may be the source of global outsourcing (Eg. reduce power costs) vis-à-vis infrastructural bottlenecks. . Bosch spark plugs are used by car manufacturers worldwide).
CONTEMPORARY TOPICS 303 .
Innovations typically paves the way for more secured and improved lifestyle for consumers in general. it has destructive effects as well. innovation is the first attempt to carry it out in practice. Innovation is all about staying ahead of competition. Innovation is the most preferred strategy today to maintain competitive advantage in the present turbulent business environment. 304 .INNOVATION An invention is the first occurrence of an idea for a new product or process. While innovation typically adds value for organizations. but has inherent risks involved as well.
process innovations are organizational driven.TYPES OF INNOVATION A key challenge is maintaining a balance between process and product innovations. However. Strategic innovation has the potential to change the rules of the game. Tangible impact of product innovation on performance is significantly higher than process innovation. Process innovation usually follows product innovation. process innovation is necessary to sustain the competitive advantage of product innovation. While product innovations are typically customer driven. 305 .
Drug Development (Bio Chemicals). Telecom (CDMA Technology). Data Storage (Pen Drives).e.e. 306 . Disruptive business models brings in a new frame of reference (i. a paradigm shift). It leads to a shift in the price – performance envelope. Processors (Pentium).BUSINESS MODEL It is a simplified description and representation of a complex real world. putting an idea into practice). Medical Surgery (Lasik). about how an organization makes money (i. Innovations are the back-bone of successful business models .
NINE BUILDING BLOCKS Value proposition offered to the market. 307 . The segment(s) of clients to be addressed. The channels to reach out to the clients. The key resources and capabilities required. The revenue streams generated by the activities. The key partners involved in the activities. The proposed relationships established with clients. The key activities / processes necessary for execution. The cost structure resulting from the business model.
BUSINESS MODEL FRAMEWORK 308 .
309 . Real Estate) companies need to untangle and understand the intricacies of their business model. The revenue model described here are the means to generate revenues. innovative companies to carve out unique business models to fend off competition.REVENUE MODEL Positioning is just not sufficient. With the rapid erosion of certain industries (IT. It involves – Product Visualization – Product Prototype – Product Test – Capacity – Pricing – Distribution. It is just one piece of the puzzle. Investment Banking.
Promote the grape-vine. A favourable intellectual property (IP) climate. Provide reasonable incentives (not necessarily monetary). Allow the management sufficient slack to be future oriented. Have a lean and a flat organization structure. Promote the culture of experimentation.HOW TO MAKE INNOVATIVE CO’S Innovative company’s are a matter of culture and aspirations rather than tangible resources. Allow the workforce idiosyncrasies for their errors. 310 .
Collusion with the judiciary is also another distinct possibility in emerging markets. 311 311 .HOW TO PROTECT INNOVATION? Without adequate protection (external or otherwise) the effects of innovation does not translate to performance. In most emerging markets where the IP climate is not so favorable. companies are increasingly relying on internal protection to sustain innovation effects. however that possibility is slowly atrophying. The most preferred strategy of internal protection includes imbibing “causal ambiguity” in the production process to make reverse engineering difficult.
Corporate governance aims to reduce the principal-agent problem present in most professional managed organizations through appropriate forms of accountability and control mechanisms. In fact the principles of corporate governance implies that managers go beyond in satisfying the stated and unstated needs of the multiple stakeholders. 312 312 .CORPORATE GOVERNANCE The basic theme of corporate governance is to ensure that professional managers are identified and made accountable in terms of clear business processes or activities and held responsible through adequate mechanisms & control systems for channelizing their decisions for the benefit of stakeholders at large.
However. This exposes the shareholders to additional risks and higher costs. According to the agency theory top managers and shareholders interests are usually conflicting in nature and tend to pull in opposite directions. From the strategic point of view managers tend to diversify into unrelated businesses as it provides higher returns hence a more favourable appraisal. shareholders can diversify their portfolio at a much lesser risk and cost. not present in portfolio diversifications. 313 .AGENCY THEORY The root of Corporate Governance goes back to the Agency Theory. also known as the principal-agent problem or agency dilemma.
ORIGIN & CONTEXT Since the early 20th century since a large part of public funds were held by publicly traded firms in the US. SEBI Report – 2005. After the Enron downfall. the US government passed the Sarbanes – Oxley Act. various laws were enacted to ensure proper usage of these funds. . 2002 to restore public confidence in corporate governance. defines corporate governance (headed by Kumar Mangalam Birla) as the acceptance by management of the inalienable rights of shareholders as the true owners of the corporation and of their own role as trustees on behalf of the 314 shareholders.
GOVERNANCE PRINCIPLES Rights and equitable treatment of shareholders: Help shareholders exercise their rights by effectively communicating information in transparent ways that is understandable and accessible and encouraging shareholders to participate in general meetings. The key roles of chairperson and CEO should not be held by the same person and their offices be clearly separated. 315 . Role and responsibilities of the board: It deals with issues about an appropriate mix of executive and nonexecutive directors. including the society at large. Interests of other stakeholders: Recognize the legal and other obligations of all legitimate stakeholders.
assessment and mitigation of risks and retirement by rotation over a fixed period of time. Independence of the entity's auditors: Identification. Disclosure and transparency: Disclosure of information should be timely and balanced to ensure that investors have clear access to data and facts. 316 316 . They should also implement systems to independently verify and safeguard the integrity of the company's financial reporting.GOVERNANCE PRINCIPLES Integrity and ethical behaviour: Organizations should develop a code of conduct for their top management that promotes ethical and responsible decision making..
with its legal authority to hire. Remuneration: Performance-based remuneration is designed to relate some proportion of salary to individual performance. a person benefitting from a decision should abstain from it.GOVERNANCE STRATEGIES Monitoring by the board of directors: The board of directors. discussed and resolved. fire and compensate top management. However. 317 . Balance of power: The simplest balance of power is very common. they should provide no mechanism or scope for opportunistic behaviour. Regular board meetings allow potential problems to be identified. safeguards invested capital.
318 .GOVERNANCE & PERFORMANCE In its “Global Investor Opinion Survey” of over 200 institutional investors in 2002. from 10% for companies where the regulatory backdrop was least certain (those in Morocco. Egypt and Russia) to around 40% for Canadian & European companies. The size of the premium varied by market. McKinsey found that 80% of the respondents would pay a premium for wellgoverned companies. undertook formal evaluation of its directors. who had no management ties. They defined a well-governed company as one that had mostly out-side directors. and was responsive to investors' requests for information on governance issues.
The basic premise is that firms cannot exist in vacuum. corporate philanthropy should be a part of every corporate mission.SHAREHODER – STAKE HOLDER THEORY Till the early part of the 20th the basic objective of modern organizations was to provide goods and services for public consumption for profit maximisation. today economic institutions are considered as a major drivers of improvement in quality of life in general and therefore needs to include multiple stakeholders. 319 . However. the short-term view of profit maximisation gave way to a more broader and mediumterm view wealth maximisation of the shareholders. Therefore. Over a period of time.
giving a very important message that one cannot exist without the other.CORPORATE SOCIAL RESPONSIBILITY As Peter Drucker rightly pointed out that. Therefore. in fact a large part of it is significantly overlapping. the debate on CRS still continues whether firms should detract its focus from its business? 320 . However. “an enterprises decisions and actions being taken for reasons at least partially beyond its immediate economic interests”. Therefore. CSR can be defined as. economic and social responsibilities cannot be mutually exclusive. “a healthy business cannot exist in a sick and impoverished society”.
The role of media: The media and various consumer organizations have come up in protecting consumer rights and exposing mal-practices. Public image: Entrepreneurs are increasingly relying on public image as a source of competitive advantage and a higher financial discounting. people are becoming increasingly aware of their right to a decent and healthy life. MRTP).GROWING CONCERN FOR CSR Awareness due to education: With growing literacy. 321 . Fear of government interference: Excessive quench for profits may lead to build up of adverse public opinion compelling the government to intervene (Eg.
CSR STRATEGIES Green Supply Chain Management: It includes environmentally preferable purchasing. and extended producer responsibility (Eg.Paper packaging. designing eco-friendly products. Exide – Product take back). Literacy & Training Programs – (Eg. Health & Hygiene – Attending the health hazards due to wastes and by-products to employees and society in proximity (Eg. Aditya Birla Research Centre – LBS). Education. Cement . Refrigerators – CFC. eco efficiency. 322 . Tata Steel – Life Line Express).
Prahalad notes that future markets exist collectively. In turn companies by serving these markets. They represent an enormous opportunity for companies who learn how to serve them. Strategic innovations leading to disruptive business models can show the way out.BOTTOM OF THE PYRAMID With the market across most developed markets including the US getting saturated. K. 323 . they're helping millions of the world's poorest people to escape poverty. across the world's billions of poor people having immense untapped buying power. C.
BLUE OCEAN STRATEGY 324 .
MARKETSPACE .TWO WORLDS 325 .
battled over market-share.WHAT IS RED OCEAN? Companies have long engaged in head-to-head competition in search of sustained. profitable growth. and struggled for differentiation (cost or product). where most industries are saturated. In today’s red oceans. Yet in today’s overcrowded industries. . one companies gain is always at the 326 cost of another companies loss. They have fought for profits. competing head on results in nothing but a bloody red ocean of rivals fighting over a shrinking profit pool.
It helps in creating powerful leaps in value for both the firm and its buyers. rendering rivals obsolete and unleashing new demand. Blue Ocean’s have existed in the past. It is only the frames of the .WHAT IS BLUE OCEAN? Tomorrow’s leading companies will succeed not by battling in red oceans. Such strategic moves are possible through the pursuit of product differentiation and low cost simultaneously. but by creating blue oceans of uncontested market space ripe for growth . it will exist 327 in the future as well.
RED OCEAN Vs BLUE OCEAN Compete in existing markets Compete in uncontested markets Beat the competition Exploit existing demand Make the competition irrelevant Create and capture demand Make the value-cost trade off Break the value-cost trade off Demand is the limiting factor Supply is the limiting factor 328 .
As trade barriers between nations & regions fall. Niche markets & monopoly havens are continuing to disappear. Population shrinkage across a no. Technological advances have substantially 329 improved industrial productivity. Demand across developed markets reaching a plateau.BLUE OCEAN STRATEGY IMPERATIVES Prospects in most established market spaces – red oceans – are shrinking steadily. . of European nations. information imperfections atrophy instantly.
CONCEPTUAL UNDERPINNINGS Blue oceans have existed in the past and will exist in the future as well. They are not necessarily about technology. . managerial moves are. Company & industry are the wrong units of 330 strategic analysis. Incumbents often create blue oceans within the ambit of their core business. History indicates that blue oceans exist in three basic industries – automobiles (how people get to work) – computers (what people use at work) – entertainment (what people do after work). the underlying technology was often already in existence.
IMPLEMENTATION Reduce Which factors to be reduced below the industry standard Eliminate Which of the industry factors that the industry takes for granted should be eliminated Create VI Which factors should be created that the industry has not offered Raise Which of the factors should be raised above the industry’s standard 331 .BLUE OCEAN .
IMPLEMENTATION SEQUENCE Buyer Utility (1) Is there exceptional buyer utility in your business idea? Price (2) Is your price easily accessible to the mass of buyers? Blue Ocean Strategy Adoption (4) What are the adoption hurdles in actualizing your business idea? Are you addressing them up front? Cost (3) Can you attain your cost target to profit at your strategic price? 332 .
SOME GLARING EXAMPLES In the last century authors Kim and Mauborgne have documented the creation of more than 150 blue ocean creations across 30 industries – Virgin Atlantic: Fractional jet ownership or travel to space. Southwest Airlines: Pioneering the concept of LCC. . Citibank – Automated teller machines & credit 333 cards. Sony Play Station: Redefining machine-human interface in entertainment and targeting an altogether new user base.
According to this view managers need not be constrained to act within the confines of their industry.WHAT THEN IS THE HANDICAP? Most of the traditional views in strategy having its origin in (Economic Theory) led to what is called the – structuralist paradigm. All they need to do is change their managerial frames. companies & managers are largely at the mercy of economic forces. greater than themselves. 334 . Off late emerging views in strategy having its origin in (Organization Theory) led to a paradigm shift to what is called the – reconstructionist view. According to this view.
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