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