BUSINESS STRATEGY

Course Code: 611 & 612 Dr. Subir Sen – Faculty Member, IBS
E-Mail: subir@ibsindia.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.
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INTRODUCTION

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STRATEGY - DEFINITION

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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

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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.
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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.
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STRATEGIC MANAGEMENT FRAMEWORK

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Economic al Strategic Finance Fit Political Strategic Intent Fit Political Marketin g Manageme nt Social & Cultural

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Management

Technological

Strategic

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Political

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It is irreversible.          7 . It is a holistic and integrated approach. It involves substantial resource outlay. It is long-term in nature. It provides broad guidelines. It is all about creativity and innovation.FEATURES It forms the core activity of the top management. It is about adaptation and response to the same.STRATEGIC MANAGEMENT . It requires full commitment of the top management.

It is fool-proof in nature. It involves nitty-gritty's. It brings instant success. It involves only the top management. It is rocket science.STRATEGIC MANAGEMENT – MYTHS It involves short-cuts. It is about forecasting.            8 . It about mere data and facts. It a bundle of techniques or even tricks. It attempts to minimize risk. It is about a definite formula.

scale and scope. To assimilate change faster. . again and again ……. To be proactive. To tap markets across boundaries. To leverage size. To generate large resource pool. rather than reactive. To gain expertise in technologies. To be insulated against environmental threats. To be future oriented.STRATEGIC MANAGEMENT IMPERATIVES            To be continuously alert. To innovate. 9 To develop core–competencies.

ORIGIN     The word strategy has its origin from the Greek word strategia meaning Military Commander. In contrast. whose origin can be traced to some of the greatest battles fought in the ancient days. In the ancient days battles were fought over land. today's battles are fought over markets. Even in today’s markets. obsession. 10 .strategies. but with a lot a rigour and robustness. In the ancient days battles were won not by virtue of size of the army or armory.STRATEGY . It is an old wine in a new bottle. but by virtue of their courage. and more importantly . battles fought on the market front are won by companies by virtue of their obsession & strategies.

challenging GM and Ford. – Reliance’s entry into telecom. US attack of Morocco to capture Germany – Strategy: Pin-hole strategy – Wal-Mart challenging Sears by entering small towns. – Toyota’s entry in the US. Napoleon’s attack on Russia – Strategy: Waiting for the right time. Allied Forces Vs Germany (WW-II) – Strategy: Forging alliances. 11 . – Yahoo and Microsoft challenging Google.SOME PARALLELS     Japan’s attack on Pearl Harbour – Strategy: Attack where it hurts the most.

12 .EVOLUTION OF MANAGEMENT     As Peter Drucker refers to it. The things happening around the firm when totally disconnected from the past leads to a paradigm shift. The first major discontinuity in the history of global business environment was the . – Mass Production Organization Size – Complicated Processes – Complex Structures Evolving of an emerging paradigm – survival of the fittest (Fayol & Taylor. 1910). A paradigm is a dominant belief about how the business and its environment operates.Industrial Revolution. a radical change in the business environment brings about discontinuity.

1960). From uniform performance. The question of outperforming the benchmark became the new buzzword. 13 .EVOLUTION OF STRATEGIC MANAGEMENT    The second major discontinuity in the history of global economic environment – World War II. Efficiency and effectiveness are no longer sufficient. – Changes in the technology fore-front. – Global market place. Survival of the most adaptable becomes a new management paradigm (Ansoff. – Homogeneous to heterogeneous products. push to pull). – Affluence of the new customer (i.e. performance across firms became differentiated.

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 .

Learning always begin on a clean sheet of paper. Ansoff (1960) – Strategy can be segregated into certain mutually exclusive and inter-related components aimed at managing the growth of an organization. – The choice of product-market mix is based on conscious evaluation of risk – return factors. – The choice of strategy is primarily concerned with external ones rather than internal ones. – It is primarily the top management’s prerogative.APPROACHES TO STRATEGY  Analytical Approach – Igor H. 15 . – Biases and prejudices has a very little role to play in strategic choices pursued by managers.

– Organization structure will precede and cause changes in strategy. everything else follows. how it will compete. The organization initially decides which industry to enter. Successful organizations align authority and responsibility of various departments in way to reach overall objectives. 16 . Once the control systems are in place. who will be the top managers. – The top managers then decide on the type of organization structure & systems to be in place.APPROACHES TO STRATEGY  Design Approach – Alfred Chandler (1970) – Structure follows strategy. – Management control systems has a dominating role in influencing firm performance.

– A firms performance is inversely related with the bargaining power of environmental forces to which it is exposed. competitors.APPROACHES TO STRATEGY  Positioning Approach – Michael E. Porter (1980) – Choose a consumer segment and position your product accordingly. customer. – An organization is seldom in a position to influence the larger business environment. substitutes. – The organization will outperform the industry where environmental forces are weak and vice-versa. new entrant. 17 . – The environmental forces comprises of – supplier.

K.APPROACHES TO STRATEGY  Core Competence – C. locating in most attractive industries and pursuing the same strategy. – Organizations can significantly alter the way an industry functions. 18 . – Core competencies are a set of skills that are unique and can be leveraged. – It enables a firm to deliver unimaginable value ahead of time. Prahalad (1990) – The key to superior performance is not doing the same as other organizations. but exploiting the resource differences among them. They are complex resources and undermines a firms competitive advantage.

STRATEGIC MANAGEMENT PROCESS       Strategic Intent Strategic Planning Strategic Gap – Environmental Scanning – Internal Appraisal of the Firm Strategy Formulation – Corporate Strategy – Business Strategy Strategic Choices – Functional Strategy Strategy Implementation Strategy Performance Strategy Evaluation & Control 19 .

TOP MANAGEMENT PERSPECTIVE 20 .

It implies a significant stretch. A gap that consciously manages between stagnation and atrophy. 21 . you cannot reach there. It’s a philosophy that distinguishes it from its competitors. A strategic intent is a statement of purpose of existence.STRATEGIC INTENT      If you cannot see the future. A substantial gap between its resources and aspirations. It is the cornerstone of an organizations strategic architecture reflecting its desired future state or its aspirations. It involves an obsession to be the best or outperform the best. It provides a sense of direction and destiny.

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 .

e. It is core to the strategic intent of the firm. 23 . Dominant logic changes. strategic variety) is apparent.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. 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. To put it more simply. when radical changes in the internal and external environment (i.

 It is a combination of three basic elements – – An organizations fundamental reason for existence. – It represents the company’s audacious. It provides an unity of purpose amidst diversity of personal goals.VISION It is a dream (not a forecast) about what the company wants to become in the foreseeable future.  24 . beyond just making money. It ensures that the company does not wander off into unrelated zones or fall into an activity trap. – It stands for the unchanging core values of the company. but achievable aspirations. It enables the top management to remain focused.

Brevity – It should be short. In Reliance when a new project becomes operational top managers hand over charge to the SBU heads and move on to a new project. Clarity – Vividly descriptive image of what the company wants to be known for in the future. Reachable – It should be within a reasonable target in the known future. 25 . not an utopian dream. and memorizable. Empathy – It should reflect the company’s beliefs to which it is sensitive.CHARACTERISTICS       Reliance – Where growth is a way of life. Sharing – The company across all hierarchies should have faith in it. clear.VISION .

It facilitates development of skills & capabilities. To prevent the fall in a activity trap. It gives a shared platform. 26 . It gives the impression of a forward-looking organisation.VISION . It gives enlightment. It makes strategic alignment easier. It provides a holistic picture. It fosters risk taking and experimentation.ADVANTAGES           To stay focused on the right track. It lends integrity and genuineness.

its reason for existence.  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. A broad mission statement helps in fending competitors.  27 .  It serves as a road map to reach the vision. Although the purpose may change over time.MISSION Mission defines the space that a business wants to create for itself in a competitive terrain. It enables the firm to define its business landscape and identify its competitive forces.

– We do not offer software's. We offer strength. All the businesses of the company are strongly integrated with their main business. – We do not offer steel. …………………. We offer solutions.MISSION – SOME IDEAS  Reliance – We are in the business of integration. …………………. though some may seem unrelated in nature. We offer security. We offer comfort. – We do not offer insurance. …………………. Some other examples – We do not offer shoes. 28 . ………………….

GOALS & OBJECTIVES  Reliance – We want to become a Rs. – It adds legitimacy and motivation. It is an end result (quantifiable) something a firm aims and tries to reach in a time bound frame. – It prevents deviation. 29 . – It is based on Management by Objectives (MBO). It provides a quantitative feel to an abstract proposition. – It keeps the mid management pre-occupied. – It lends direction – time frame in the medium term. – It helps identifying key success factors.100K crore company by the year 2005. – It provides a benchmark for evaluation.

– Use price-elasticity to break market barriers.  30 . It is the process of garnering necessary inputs. coordinating appropriate technologies. – Leverage economies of size and scale. – Compress project times.PLANS Reliance – Desire to invest 25K crore in telecom business by circa 2010. It is specific to a particular business. – Acquire a market share of indomitable position. The details of the plan Reliance Telecom adopted were – Backward integrate process technologies. and gaining access to desired markets to achieve the desired goals and objectives.

radical change may lead to disequilibrium. 31 . This tendency to restore continuity is known as inertia (resistance to change). It often leads to an organizational crisis.STRATEGIC DRIFT    Due to top management commitment. However. equilibrium is maintained. This state of affairs is known as strategic drift. When changes in the environment is incremental. strategies lose touch with the emerging realities. Historical studies have shown that most organizations tend to continue with their existing strategies. past strategies tend to have a bearing on future strategies. In such a context.

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. 33 . – Creating obligations of reciprocity.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. – Developing a platform of support. – Distorting information to gain mileage. – Hiding vulnerability. – Using covert tactics to pursue self interests.

INTENDED & REALISED STRATEGIES  An intended strategy is an expression of interest of a desired strategic direction. – Persons responsible for strategy conceptualization and implementation are34 divergent. Other causes – – The plans are unworkable and utopian. – Influential stake-holders back out. – The environment context has changed. Usually there is wide gap between the two when organizational politics is evident. A realized strategy is what the top management actually translates into practice. .

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. They simply unfold the particulars of the sub-system in stages. but as a defensible response to the complexities of a large organization that mitigate against publicizing goals. Learning is an integral part of logical incrementalism. this is not to be treated as “muddling”. However. 35 . but the master scheme of the rational comprehensive scheme is not apparent. Strategy formulation and implementation are linked together in a continuous improvement cycle.

36 . Macro Broadcasting – The broad idea is floated without details to invite pros and cons leading to finer refinements. Agent of Change – Formal ratification of a change plan through MBO.IMPLEMENTING INCREMENTALISM      General Concern – A vaguely felt awareness of an issue or opportunity. 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. The broader objective should serve the overall interest of the organization.

Strategic transformation becomes smooth through a change in top leadership. As it brings 37 with it a different dominant logic.STRATEGIC TRANSFORMATION     Strategic transformation (a complete overhauling of the strategic architecture) becomes inevitable whenever a strategic drift takes place. . Dominant logic’s are the cornerstones of change when strategic transformation is apparent. Tampering with surface level factors often leads to atrophy. It creates blinders. Dominant logic’s are very rigid and sticky and prone to inertia.

It helps prevent a strategic drift from occurring at the first place. – Organisational Slack – Enough free space. 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. 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. – Constructive Bargaining – Agree to disagree. experience. – Informal Networks – Emerging of new ideas. 38 .

ENVIRONMENTAL CONDITIONS Dynamic Scenario Planning Learning Organization Static Forecasting Decentralization Simple Complex 39 .

ANALYZING BUSINESS ENVIRONMENT 40 .

It requires a quantum leap (i. gap analysis). Strategic planning is a function of discounting the future. It is reactive in nature. 41 . It points to a position of superiority with relation to competition. It is based on the assumption of radical change. Strategic gap basically points towards a vacuum of where the organisation wants to be and where it is. It is pro-active in nature.e. It is based on the assumption of incremental change.PLANNING & STRATEGIC PLANNING     Formal planning is a function of extrapolating the past. Competitive advantage provides the surest way to fulfill the strategic gap.

42 . 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. resources and ideas move unhindered. It is exploratory in nature. not guided by any boundaries. A manager has to continuously scan the environment to ensure alignment of the strategies with the radically changing environment. Environmental factors can be external as well as internal to the organization. Environmental scanning is very important component of strategic planning. events. The world is flat. and influences that affect an organizations way of doing things.

Understanding the composite effect is critical. 43 . for which a holistic picture is required.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. It is not intended to be used as an exhaustive list. 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. which may be different from the past impact.

FDI Inflows. Savings & Investment. Economic – GDP. Subsidies & Protection. Capital Market & Forex Reserves. Religious Sentiments. Literacy Levels. Economic Cycles. Currency Stability. Social Values. Government Attitude. Inflation & Interest Rates.PESTEL FRAMEWORK  Political – Government Stability. Language Barriers. Economic Model. Infra-Structural Investments. Monsoon & Food Grains Reserves. Income & Age Distribution. Licensing & Quotas.   44 . Social – Population Diversity. Fiscal Deficit. Central – State Co-alignment.

Patent Laws. Non-Fossil & Alternative Fuels. Environmentally Preferable Purchasing. Research & Development. Consumer Protection Laws. Environmental – Global Warming & CSR. Product Design. Patents. Obsolescence Rate. Carbon Credits. Direct & Indirect Taxes. Waste Disposal & Emissions.PESTEL FRAMEWORK  Technological – Innovation. Extended Producer Responsibility. Legal – Monopolies Legislation. 45   . ERP. Product Safety & Health Hazards. Employment Laws. Technological Convergence. Pollution Control Laws.

Abolition of import licenses. FERA Liberalization. New Trade Policy (NTP) – Lowering import tariffs. Curtailment of PSU’s.ECONOMIC LIBERALISATION     New Industrial Policy (NIP) – Liberalizing industrial licensing. Encouraging FDI.VRS. PSU Disinvestments. Rupee convertibility. Structural Adjustments – Phasing out subsidies. MRTP Liberalization. Encouraging exports. Banking Sector Reforms. Dismantling price controls. Economic Reforms – Fiscal & Monetary Reforms. Exit Policy. Capital Market Reforms. 46 .

Survival of the fittest MNC Onslaught – Enhancing stakes – Power Equation – Joint Ventures – Technological Alliances – Take-over threat.DISCONTINUITY Destabilization due to entrepreneurial freedom – Cocoon of protection disappears – Diversification spree – Existing notions of size shaken – Industry structures change radically – Economic Darwinism . Mergers & Acquisitions 47   .

Consumerism Challenges on the technology front – Competencies become technology based – Investment in R&D become inescapable 48 .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.

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 .

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 .FIVE FORCES MODEL .

It is even wiser to apply the same at the product – market level. The five forces have strong cross-linkages. the forces are subject to changes. profit potential) per se.e. The model should not be used as a snapshot in time.FIVE FORCES MODEL ASSUMPTIONS      The model is to be used at the SBU level and not at the industry level. It should not only be used to understand the forces. 51 . incremental or otherwise. It depicts the attractiveness of an industry (i. but also used to understand how they can be countered and overcome.

Resource profile & fear of retaliation. Access to distribution channels. Undifferentiated product. Capital requirements. Low relative importance of the segment. Product differentiation through proprietary technology or brand power. Government policy.PORTERS FIVE FORCES ANALYSIS Threat to Entry – Economies of size and scale. Presence of substitutes or unorganized sector. Industry stagnation.   52 . Scope for backward integration. High switching costs. Unimportance of product quality. Learning curve advantages. Low customer switching costs. Low margins & stagnancy. Threat of Customers – Buyer concentration and volumes.

Scope for forward integration. Unorganised sector. Product perishability. Differentiated inputs. Intermittent overcapacity. Low relative importance of the segment. Piracy and counterfeits. Threat of Substitutes – Improvement in price -performance trade-off. High customer switching costs. Diversity of players. Lack of substitute inputs. Industry stagnancy. High exit barriers. Low level of differentiation. Buyer’s propensity to substitute. Produced by industries earning high profits.PORTERS FIVE FORCES ANALYSIS    Threat of Suppliers – Supplier monopoly. 53 . Jockeying for position – Fragmented market.

Tata). Resource Profile – It highlights the capabilities (generic) or competencies (business specific) of the firm. Reliance). Inertia – Excessive commitment to past strategies prevents firms from tapping emerging opportunities.FIRM ENVIRONMENT      Size and Scale of Operations – It is a very important component of competitiveness in today's global context (Bharti – MTN. Cohesiveness – Degree of bonding existing across affiliated firms. dominant or related diversified or unrelated diversified businesses (Infosys. Business Scope – The intention whether the firm wants to be in a single. 54 .

The E-Curve thus enables organisations to build entry barriers. With lower costs. However. an E-Curve can prove to be futile during discontinuity.EXPERIENCE CURVE      The cost of performing an activity declines on per-unit basis as a firm becomes more efficient. experience teaches better and more effective way of doing things. 55 . it can price its products more competitively. Experience curve has strong linkages with performance. which further reduces costs. Matured firms will always be positioned advantageously on the ECurve than new entrants. and with lower prices it can increase its sales volume. leverage it as a competitive advantage.

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 .

TRADITIONAL VIEW Efficiency = Lower Costs 2 3 1 Experience = Efficiency Lower Costs = Higher Sales Entry Barrier = Better Performance 4 6 5 Higher Sales = Lower Costs Lower Costs = Entry Barrier 57 .EXPERIENCE CURVE .

STRATEGIC VIEW Inertia = Limited Growth Experience = Inertia 2 3 1 Limited Growth = Diversification Strategic Failure = Poor Performance 6 5 4 Diversification = New Experience New Experience ≠ Old Experience 58 .EXPERIENCE CURVE .

Observation.SWOT     The framework was originally conceptualized by Kenneth Andrews in 1970. Suppliers. 59 Analysts. 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. Case Studies – Structured Questionnaires. . Acronym for Strengths – Weaknesses – Opportunities – Threats. A SWOT audit involves – Company Records – Annual Reports. Press Clippings & Interviews. Websites.VULNERABILITY ANALYSIS . Customers. Business Intelligence – Bankers. Interviews. Competitors.

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 .

Infosys. Engineering Skills – Eg. Good credit rating – Eg. High quality products – Eg. Infosys. Aditya Birla. Tata Steel. Reliance. Volkswagen. SBI. Caterpillar. HUL. Biocon. Dr. Reddy’s. Sony. Strong R&D base – Eg. ITC. Toyota. Large resource pool – Eg. Ranbaxy. 61 . Excellent penetration – Eg. Tata. Siemens.SOURCES OF STRENGTH           Strong brand identity – Eg. Strong after sales & service network – Eg. Honda. Motivated employees & cordial industrial relations – Eg. Reliance. Economies of scale – Eg.

K. Procter & Gamble. Inertia – Eg.Raymond. Organizational Politics – Eg. SAIL. Excess manpower – Eg. Nirma. Tatas. Narrow business scope – Eg. Hindustan Motors. Ballarpur Inds. CESC. Inefficient top management – Eg. K. Strategic myopia – Eg. Single product syndrome – Eg. Modi Group. Excessive diversification – Eg. CMC (Tata Group) 62 .SOURCES OF WEAKNESSES            Outdated technology – Eg. Lacking experimentation culture – Eg. Lack of product / brand clout – Eg. Bijoligrill. B. Group . J.

Life style changes – Eg. GDR’s. Collaborations & Joint Ventures – Bharti & WalMart. Growing population – Eg. Retailing. Sugar. Middle-class buying power. Exit Policy – Eg. Fertilizers. 63 . Maruti. Capital market reforms – Eg. Market driven Interest rates – Eg. Sugar. Market driven Pricing – Eg. Fertilizer. Globalization – Eg.SOURCES OF OPPORTUNITIES            Delicensing of Industries – Eg. Telecom. Abolishing CCI. Banking. ECB’s. Abolishing MRTP – Eg. Insurance. VRS. Free pricing – Eg.Tata Motors.

Earth Quake. Bajoria – Bombay Dyeing. Natural disaster – Eg. Tsunami. Foreign Direct Investment (FDI) – Eg. 26/11. Nationalisation – Eg. Import relaxation – Eg. Onida. Land acquisition . Economic recession – Eg. Terrorist attacks – Eg. Lack of Corporate Governance – Eg. 64 .Social activism – Eg. Group disintegration – Eg. Dumping from China. (2008). Hostile take-over – Eg. Singur SEZ. (1985–1990). 11/9.SOURCES OF THREATS            Political instability – Eg. Satyam. Tata Steel. Reliance.

ETOP       Acronym for Environment – Threat – Opportunity – Profile. Holistic view – Prepare a complete overall picture. Stages in ETOP analysis – List the aspects of the environment that has a bearing on the organization. 65 .e. It represents a summary picture of the external environmental factors and their likely impact on the organization. Strategic responses (including adaptation) to opportunities and threats is critical for survival and success. scenario analysis). Forecasting – Predict the future (i. Delphi's technique. Assess the extent of impact of the factors. time series.

selectively. 66 Vertical integration is a powerful strategy. An organization can draw upon the experience of its peers in similar situations. It is also a form of assessing vulnerability through longitudinal analysis. . High investment intensity acts as a drag. Relative attractiveness of the market.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. Some key findings on major performance drivers that explains 75% deviations in performance – Product quality and relative market share.

. – Contexts may vary across countries. 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. Managers should be particularly cautious while referring to such data during times of discontinuity as it makes past patterns futile. therefore 67 validity may be a question. Authenticity of data is of prime importance – Contexts drawn across one organization may not be applicable to another.PIMS . when radical changes in the economy takes place. – Contexts may vary over time.

KEY SUCCESS FACTORS (KSF)     KSF relates to identification and putting concentrated effort on a particular activity or process which forms the very basis of competitive advantage. It enables the top management to draw focus. KSF helps organizations spot early opportunities and convert them into value adding business propositions. 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 .

A corporate strategy identifies and fixes the strategic gap it proposes to fill. It reflects the customer needs it intends to satisfy. related. unrelated) and geographical scope (local. It provides broad direction to the groups vision and mission.GRAND STRATEGY       It is concerned with the overall business scope (single. It determines the locus a firm encounters with internal and external environment. global) of a firm and deals with choices of allocating resources across them. national. dominant. It indicates the quality of growth an organization is looking for. 70 .CORPORATE .

CORPORATE STRATEGY MATRIX Corporate Strategy Stability Stability Growth Growth Combination Diversification Divestment Intensification Market Penetration Related Vertical Market Development Product Development Unrelated Horizontal 71 .

Stability however. Citibank). 72 .STABILITY  It involves maintaining status-quo or growing in a slow and selective manner. erosion of capabilities. The scale and scope of present operations remains almost intact. Hindustan Motors). does not relate to do-nothing (Eg. – To stop for a while and assess past records. – Why disturb the existing equilibrium set up? – Limited resource position. The reasons for stability strategy – – Lack of attractive opportunities. – The firm may not be willing to take additional risk associated with new projects. (Eg. Even during adverse times firms need to adopt a strategy to sustain current performance levels.

GROWTH . 73 .ANSOFF’S MODEL New Product Existing Product Existing Market Market Penetration (+) Product Development (++) New Market Market Development (++) Diversificatio n (+++) Note: (+) indicates degree of growth and risk involved.

Ujjala. convert competitors customers. – The company carries a risk of product obsolescence. within a well defined market segment. – Suitable for industries where scope for technological breakthrough is limited. – Elongated product life-cycle.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. – Helps firms which are not comfortable with unfamiliar terrain. Market penetration can be achieved by – increasing sales to current customers. 74 . Britannia). direct non-users to users. (Eg. Nirma.

– Stretches product life cycles. – Unconventional and flexible distribution channels. – Creativity and innovation – thinking out of the box. Du Pont – Nylon: parachutes.…… or Teflon: aircraft technologies to cutlery to paints or Raytheon Corp – Microwaves: radars to kitchen appliances). carpets. upholstery. – Immense customer reach & flexible advertising. (Eg. socks & stockings. 75 .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. fabrics. tyres. – Moves across geographical boundaries.

– Substitutes that serve the same needs (Eg. perception. aesthetics. Refills) 76 . serviceability. Microsoft: DOS to Windows) or a substantial improved version (incremental) of an existing product to repeatedly enter the same market (Eg. features. reliability.PRODUCT DEVELOPMENT  It is a strategy where a firm tries to achieve growth through a radical new product (Eg. – Leveraging through – innovation. – Areas of product improvement – performance. conformance. durability.Strolleys). – Deliverable through – redesigning or reengineering. Close Up: Fluoride – Gel toothpaste or VIP . – Leverage on customer and brand loyalty.

– High transaction costs and institutional gaps. dominance). thereby creating a new business. From the traditional point of view.e. – Permits: quotas. From the modern point of view they are strategically dissimilar. industrial embassies). 77 . Why do firms diversify in the Indian context? – Shift the growth trajectory or opportunistic. licenses (i. the new business is distinct from the existing business in terms of – inputs – technologies – markets.DIVERSIFICATION  It marks the entry of a firm into newer markets with new products. – Risk reduction. – Internal capital market. – Conglomerate or market power (i.e.

If on the other hand. What would be your ideal diversification strategy through optimization? 78 . either of which is equally likely to prevail. in which a given year is either under hot or cold wave. If the hot wave dominates the planet.HOW DIVERSIFICATION REDUCES RISK? Consider a hypothetical planet. Let us assume that there are two businesses constituting the entire market – coffee and icecream. the ice-cream business would register a return of 30%. while the coffee business would register a return of 30%. ice-cream business would register a return of 10%. while the coffee business would register a return of 10%. cold wave dominates the planet.

DIVERSIFICATION STRATEGY
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
79

HORIZONTAL INTEGRATION

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.

80

HORIZONTAL INTEGRATION

Reliance Capital

Reliance Infrastructure

Reliance Industries

Reliance Ports

Reliance Power
81

VERTICAL INTEGRATION

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.
82

VERTICAL INTEGRATION
Oil & Gas exploration Naptha-cracking Acetic Acid Paraxylene (PX)
(PTA) (MEG)

Purified tetra-pthalic acid

Mono-ethylene glycol

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.
84

Reddy’s). and out-sources the noncore activities (Eg. Reliance). Ranbaxy. 85 .Where one firm has full ownership and control over all the stages of a value-chain in the manufacturing of a product (Eg.A firm gets most of its requirements from one or more outside suppliers that is under its partial control through value chain partnerships (Eg. Maruti – Sona Steering).QUASI & TAPERED INTEGRATION    Full Integration . Dr. Quasi-integration . Tapered integration .A firm produces part of its own requirements and buys the rest from outside suppliers with a variable degree of ownership and control. Usually the firm concentrates on its core activities.

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 .

e. and are also strategically dissimilar.e. synergies pulling in opposite directions).CONGLOMERATE DIVERSIFICATION  It relates to entry of firms into businesses which are distinct in terms of – inputs – technologies – markets. 87 .e. – Cost of neglect (i. core business). myopia). – Cost of dysynergy (i. lack of strategic intent.e. Firms usually engage in conglomerate diversification when emerging opportunities are very attractive and offers potential growth opportunities. – Cost of ignorance (i. Drawbacks of unrelated diversification – – Cost of failure (i. lack of knowledge of competitive forces).

CONGLOMERATE DIVERSIFICATION Paper & Packaging Edible Oils Tobacco Hotels Food & Confectionary 88 .

reactive) and survival is at stake and the firm does not have resources to fend off competitive forces. It taken into account when performance is disappointing (i. Tata Press).e. In strategy there is no scope for sentimentality with divestment. L&TCement Division to Aditya Birla Group) technically known as divestiture or a product (Eg. ACC) in full to an independent entity. Tata Pharma. It may also involve a SBU (Eg. Glaxo’s “Glucon-D” to Heinz). It is may also be a pro-active strategy. where a company simply exits because the business no longer contribute to or fit its dominant logic. Tatas sale of Goodlass Nerolac.DIVESTMENT   Divestment is a defensive strategy involving the sale of entire stake (Eg. (Eg. 89 .

where 100% of the assets (including intangibles) are valued and paid for. Hive-Off – A hive off is the creation of a new entity followed by transfer of assets. involving 608 pence per share). (Eg. However. 90 .ROUTES    Outright Sale – Popularly known as the asset route. Leveraged Buy-Out (LBO) – Here the company’s shareholders are bought out through a negotiated deal using borrowed funds. (Eg. Sale of Diamond Beverages to Coca-Cola for US $ 40 million). where the equity is allotted amongst the existing shareholders on a pro-rata basis.3 billion. 1956 does not permit this mode. Tatas buy-out of Corus for US $ 11.DIVESTMENT . the Companies Act.

growth.e.COMBINATION STRATEGY     It is a mixture of stability. mergers and acquisition. and divestment strategies applied simultaneously or sequentially for a portfolio of businesses.e. It is usually pursued by a business group with diverse interests across multiple industries. 91 . developing facilities right from the scratch) or through brown-field projects (i. joint ventures). because every business has its own unique external and internal environment. There can be no ideal strategy for every business. A combination strategy can be implemented through green-field projects (i.

STRATEGY CHOICE & PORTFOLIO ANALYSIS 92 .

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. 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.

They must choose problems which will lead to the right kind of opportunities.SELECTIVITY IS THE KEY       The role of a top manager is not to solve a problem. The key task before a top manager is to identify the right problems. nor is to a define a problem for others to solve. To identify the right problems. will help the firm achieve its intent. managers need to ask the right questions. if addressed. 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 .

Managing Agency). Proximity to the corridors of power (i. . Resource sharing. High degree of centralized control (GEO. keiretsus in Japan. 95 Succession planning is critical to continuity. Their roots can be traced to a single family or clan and share broad similarities. embassies).DEFINITION       A business group is known by various names in various countries – guanxique in China.BUSINESS GROUP . chaebols in Korea. Their origins can be traced back to market imperfections existing in an economy (MRTP Laws. BRC). business houses in India.e. Licenses & Quotas. formal and informal ties.

RESOURCE SHARING ACROSS FIRMS Parent Company Firm 1 Firm 5 Firm 3 Firm 2 Firm 4 96 .

STRATEGIC CHOICE – MACRO TIMING Recession (Stability) Prosperity (Diversificatio n) Depression (Divestmen t) Recovery (Intensification ) 97 .

Divestment Duration (Yrs) Inception Intensification 98 .STRATEGIC CHOICE – MICRO TIMING ReEngineering Growth (%) Maturity Stability Growth Diversification Decline .

Rules of the game are different. Relatedness across resources are difficult to realize. next only to choice of business. sometimes impossible. 99 . Investing in emerging businesses may not actually be so simple as it appears to be. Power and resources often goes hand in hand.PORTFOLIO ANALYSIS      Resource allocation across a portfolio of businesses is an important strategic choice. Redeployment of resources upsets the established power bases of a group. there are high costs associated with entry and exit. Why? Businesses are not about liquid assets. therefore.

BCG GROWTH MODEL Relative Market Share (%) Industry Growth (%) Low High High Low Stars Question Mark ? Cash Cow Dogs 100 .

These businesses are also net users of resources (Eg.e. Tata Steel). 101 . Trent. TCS. product development).e. provided the industry growth rate continues and the company is able to maintain its growth (i. but to larger extent than a question mark. diversification). market penetration. Tata Telecom. Stars – They achievers in the near term. which remains a big? These businesses are net users of resources. Tata-AIG). provided the company is able to build up on its market-share (i. and their risk profile is high (Eg. market development.BUSINESS ANALYSIS – TATA GROUP   Question Marks – They have potentials in the long term.

Tata Tea. stability). Tata Press). harvest. and the company dominates the industry ahead of competition (i. divest) as achieving a dominant position in these businesses is a difficult task. Tata Motors. cash cows may also need to invest provided the industry takes an upswing (Eg. Dogs – They are a drag on the group. 102 . Indian Hotels. Groups prefer to dispose off such businesses (i. and they lack on competencies to take on competition and are basically cash traps (Eg. However.BUSINESS ANALYSIS – TATA GROUP   Cash Cow – These are matured businesses.e. Given that the growth potential in the business is low. Tata Pharma. Nelco. Tata Chemicals).e. they are generators of resources.

103 . niche – Rolex.LIMITATIONS       It does not address the concerns of a business which is in the average category (usually the majority). Cash cows may actually need substantial investments to retain their market position (Eg. Armani). The terminologies used are somewhat prohibitive. Certain businesses in the low market share category may be the result of a conscious strategy (i. neither in high or low. Cartier. HUL). factors are limited. Data may be prohibitive. Mercedes Benz. The model does not provide specific solutions within a particular category.e.BCG .

MATRIX Distinctive Capabilities Strong High Medium Weak Stability Industry Attractiveness Diversify (++) Intensify (+) Med Intensify(+) Stability Harvest (-) Low Stability Harvest (-) Divest (.GE .-) 104 .

ARTHUR’ D. 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 .

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 .

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. Divest – Selling a part or the entire business at one go. Disinvestment involves selling in phases. BCG – Boston Consulting Group. Gap Analysis – It emphasizes what a firm wants to achieve. 107 . Portfolio – An organization is perceived as a portfolio of businesses. SBU – A business unit which is strategically different from another and also shares a different SIC code.

BUSINESS STRATEGY & COMPETITION 108 .

Competitive advantage is the back-bone of strategy. 109 . The principal focus is on meeting competition. building market-share. Such resources or activities should be distinctive and sustainable over time. rent). The strength of a firm in a particular business usually stems from its competitive advantage. Competitive advantage refers to a firms resources or activities in which it is way ahead of competition.e.COMPETITIVE STRATEGY     A competitive strategy deals with how a firm competes in a particular business or product-market segment. and earning super-normal profits (i.

identifying critical success factors. developing competitive advantage (Porter). Blue Ocean – Consciously moving away from overcrowded industries to uncharted territories and making competition irrelevant (Kim & Mauborgne). Resource Based View – Obsession with competence building. preventing new entry and/or competition (Hax & Wilde). leveraging (Prahalad). 110 .BUSINESS STRATEGY FRAMEWORKS      How to be distinctive and yet sustainable – Differentiation – Understanding of the dynamics of competition. involving harmonizing and integrating multiple streams of technologies. Delta Lock In – Two dominant players co-opt to selfreinforce and create or escalate an entry barrier.

Ayur. proprietary technology. Steep experience curve effects.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. T-Series). preferential access to raw materials. Nirma. The firm may retain the benefits of cost advantage by enjoying higher margins (Eg. Reliance) or may pass it to customers to increase market-share (Eg. backward integration. 111 . Compress project duration through crashing. Locational or early entry advantage. Sources of cost advantage are varied and depends on the structure of the industry – Economies of size.

It selects one or more attributes that buyers perceive as important. Culture of experimentation. Creativity. (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. and sufficient slack. Sony. Means of product differentiation are peculiar to each industry. innovation and out of the box thinking. 112 . Focus on brand loyalty. Rayban). Feeling the pulse of the customer. Intel. Successful product differentiation is often followed by premium pricing. avoiding brand dilution. undeterred attention to quality.

Cartier. They are poorly served by mainstream players. Mont-Blanc. coupled with fear of structural erosion. Rolex. Maybach. 113 . The target segment must have unusual needs or the delivery system catering to this segment must be unique. Sub optimization alone may not be a source of superior performance.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). though it may not possess an overall competitive advantage. 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. Firms focusing on a hybrid strategy typically aim at shifting the productivity frontier and recreating a new product-market segment altogether (Eg. 115 . Tata Nano).HYBRID STRATEGY     A hybrid strategy is the simultaneous pursuit of cost leadership and differentiation. in a hyper competitive context the two strategies need not be mutually exclusive. Though cost leadership and differentiation are inconsistent. jugaad or frugal engineering).e. Reducing cost does not always involve a sacrifice in differentiation. and usually outperforms a stand alone generic strategy.

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 . The positioning therefore gets – blurred. unless such a player is capable of discovering a profitable segment. leading to what is called – straddling. Industry maturity will usually widen the gap. It will have a competitive disadvantage vis-à-vis a clearly positioned generic player.stuck in the middle. It is usually the result of a firm not willing to make trade offs. It tries to compete through every means. 116 . but achieves none.

EMERGING INDUSTRY      Emerging Industry – An evolving industry characterized by . ending in a differential cost economics. Artificial intelligence). Consumer behaviour pattern unstable and evolving. leading to a blurred productivity frontier and steep learning curve. (Eg. 117 . Speech recognition software's. Eg. It is characterized by – High level of technological uncertainty. coupled with low penetration levels. Nano technology. There is a lot of scope to define the rules of competition. First-time buyers. 3D imaging. changing customer needs.) Excessive turbulence in the dynamics of the environment.radical environmental changes. technological innovations. Market segmentation not well defined.

Eg. because of lack of economies of size and scale. Government regulations in the form Eg. Retail and telecom. Scope for players to change the rules of the game. MRTP may also cause fragmentation. leading to clear fragmentation. It is characterized by – Low entry barriers.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). Eg. IT. Consumer durables. Air Conditioning. 118 . High exit barriers because of huge investment in CAPEX. Eg. Diverse customer needs. Paints.

well defined consumer behavioral patterns and imperfect competition leading to near monopoly.technological maturity. collaboration and co-option. because of economies of size and learning curve effects. technological maturity. Limited scope for innovation . established industry dynamics. Strong entry barriers. 119 . distribution networks. early entry and location advantages. Firms are rule takers in the segment as productivity frontier is well defined.MATURED INDUSTRY      Matured Industry – An industry characterized by saturation in growth rates. Cartel among existing players through collusion.

(Eg. Typewriters. with little or no signs of recovery. 120 . Exit barriers are extremely high because of limited prospective buyers. dot-matrix printers). and costly price wars. Learning abilities have been stunted and firms adverse to investment in R&D and make fresh investments.DECLINING INDUSTRY      Declining Industry – An industry which has outlived its utility due to the entry of close substitutes and or radical product innovations which results in a shift of the productivity frontier. Firms facing a declining phase are characterized by inertia and slow to react to environmental changes. Nature of competition extremely high. backed by corporate espionage. scooters.

focus more on product differentiation or even a hybrid one. Matured Industry – Sophisticated cost analysis. premium pricing. assess and overcome fragmentation. regenerate. reengineer. Declining Industry – Redesign. Fragmented Industry – Identify. 121 . increasing scope.COMPETITIVE STRATEGIES     Emerging Industry – Set benchmarks. strictly product differentiation and not standardization. recreate new markets. Locate a defendable position. move beyond boundaries. process innovation. aggressive building of distribution networks. strike alliances. branding and promotion. strictly cost differentiation. mergers and acquisition. or else exit the segment.

122 . patents. A firms resources can be classified into – Tangible – These refer to real assets. brands. However. and complex learning experiences in integrating and harmonizing technologies (distinctive capabilities) that play an important role in delivering competitive advantage through “causal ambiguity”. positions based on resources which are unique and inimitable are far more sustainable even in the long term. Intangible – These refer to goodwill. hence very rarely confer competitive advantage as can be easily acquired or replicated.RESOURCE BASED VIEW    Differentiation based on cost or products saturates and ceases to exist beyond the medium term. They are a standard in nature.

Capabilities can be generic (i. Typically. They play a very critical role in shaping competitive advantage. differentiation based on capabilities can be sustained even in the long run.CAPABILITIES & COPMPETENCIES   These include a complex combinations of tangible and intangible resources that organizations use to convert inputs to outputs. Hence.e. they are woven around technologies. Therefore firms should concentrate on developing complex resources that forms the very basis of differentiation. but not necessarily. There is a high degree of internal and external causal ambiguity involved in it. can be leveraged across businesses) or specific to a particular business. 123 .

COMPETITIVE ADVANTAGE 124 .

125 .COMPETITIVE ADVANTAGE       A competitive advantage is a position of superiority relative (i. It results in a distinct differentiation advantage or a cost advantage or hybrid as well.e. A portfolio of competitive advantage comprises strategic advantage profile (SAP). not absolute) to competition. competitive advantage subsequently becomes the back bone for a competitive strategy. and results in well springs of new business development. It enlarges the scope of an organization. Success of a strategy critically depends on SAP. Strategy drives competitive advantage.

STRATEGIC ADVANTAGE PROFILE (SAP)       Organizations have to systematically and continuously conduct exercises to identify its SAP. Most successful organizations around the world have a well balanced SAP. SAP changes from time to time. Internal strategic fit between its strategy and dominant logics is essential for the top management to stretch and leverage SAP. Identification of SAP is critical for and stretching and leveraging of resources. In most cases SAP is hidden and dormant. In today's world of discontinuity. 126 .

each of the players need to be efficient backed by sufficient coordination at the contact points (i.VALUE CHAIN ANALYSIS    A value-chain segregates a firm into strategically relevant activities to understand its composite behaviour. VC pay-offs: better product availability. Inventory Mgt to Logistics Mgt to Supply Chain Mgt (SCM). and enhanced customer tracking – higher market share.e. Competitive advantage arises not from an individual activity but a stream of inter-related activities. Substantial cost reductions also follow. Today SCM is integrated with greening the environment as CSR practices. faster product launches. kaizen or internal customer). A VC is often compared with a relay team. 127 .

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 .

– Third order fit refers to optimization of effort. Operational effectiveness is not strategy. – Second order fit occurs when activities are reinforcing amongst them. A learning organization helps create strategic fit. 129 . Fit is important because discrete activities result in negative synergy and can also be easily copied by competitors. A high fit involving a complex chain of activities drives both competitive advantage and its sustainability. – First order fit refers to simple consistency between each activity and the overall strategy.STRATEGIC FIT – THE PORTER WAY   The sustainability of the value chain depends on the degree of fit between the activities.

A core competence usually has its roots in technology.CORE COMPETENCE    A core competence represents the collective learning's of an organization around diverse streams of technologies. These skills results in distinctive activities and processes. but not necessarily. . Core competence has a high degree of external and 130 internal causal ambiguity embedded in it. It should satisfy the following conditions – Contributes significantly to customer benefits. – Can be leveraged across businesses. – Cannot be easily imitated or substituted. – Can be sustained even in the long run. It forms the very basis of competitive advantage.

a core competence always implies a competitive advantage. only global leaders possess a core competence. A competitive advantage is sustainable in the shortmedium term. A competitive advantage may or may not lead to superior performance. A competitive advantage manifests from a function. 131      . a core competence has its roots in a set of skills. Majority of the firms have competitive advantage. a core competence usually does.CORE COMPETENCE A competitive advantage does not necessarily imply a core competence. a core competence is sustainable even in the long-term.

GAME THEORY     The game theory was developed in 1944 by Oscar Morgenstern. However. illustrations depicting a win-win situation. In fact there are no. This is known as a zero-sum game. A game is a contest involving two or more players. In a game (similar to a business) one players win is always another's loss. each of whom wants to win. the stringent assumptions of game theory and difficulty in ascertaining of pay-offs makes game theory application difficult in business. Here the magnitude of gain offsets the magnitude of loss equally. 132 . Subsequent work on game theory by John Nash led him to win the Nobel prize in 1994.

An unbiased game is one where both the players have equal chances of winning.BIASED AND UNBIASED GAME  A game is said to be biased when one of the players have a disproportionate chance of winning. 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 .

Firm Y’s Strategy Use Radio +3 +1 Use Newspaper +7 -2 134 Firm X’s Strategy Saddle Point Use Radio Use Newspaper Firm X’s Pay-Off Matrix .PURE STRATEGY GAME  The strategy each player follows will always be the same regardless of the other players strategy. A saddle point is a situation where both the players are facing pure strategies.

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. However. iteration) rather than through collusion (E. Coke Vs Pepsi).e. Yahoo Vs Microsoft). collaboration or cooption.g. 135 .TYPES OF GAMES   Simultaneous Games – This is a situation where the players have an option to choose to cooperate or not through collusion. This is usually through learning by “experience or observation” (i. It represents the classical “prisoner’s dilemma”. Repeated Games – In this situation the players interact repeatedly with each other sub-optimizing the outcome possibilities.

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. It results in a shift in the productivity frontier. 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. but 136 players do not always behave rationally. – Building incentives for customer loyalty. Game theory relies on the principle of rationality. . – Making pricing more transparent.

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).
137

THE THREE STRATEGIC POSITIONS

System Lock-In
System Economics Market Dominance Complementary Share

Enabled through effective use of technology

Total Customer Solutions
Customer Economics Cooperation Customer Share

Proprietary Product
Product Economics Rivalry Product Share 138

138

LOCK-IN PAYOFFS

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.

LOCK-IN SUSTAINABILITY

 

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.

STRATEGY IMPLEMENTATION

141

STRATEGY IMPLEMENTATION

   

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.

142

– Resource commitment from top management.IMPORTANCE OF STRATEGIC FIT  Strategic fit has a central role to play in strategic management. While external strategic fit (strategy – environment) is relevant for strategy formulation. internal strategic fit (strategy – dominant logic) is critical to strategy implementation. – Better strategic and operational control. – Changing the rules of the game. A high strategic fit (co alignment) is useful because it enables – – Appropriate and timely response. – Development of capabilities & competencies. 143 . – Unlearning & learning of new skill sets.

e. learning levels are very high. effective strategies are better crafted when there is a subtle overlapping between the two (i. In such a situation. at the cost of sacrificing a lesser degree of control. 144 . formulation & implementation can occur simultaneously. According to Mintzberg. Some of the key strategic learning's exists at the contact point between the organization and its customer. learning levels are very low. In fact.FORMULATION Vs IMPLEMENTATION      Traditionally. emergent strategy vis-à-vis intended & realized). In such a situation. strategy formulation and implementation has been perceived to be distinct & independent. while control is very effective.

transformational leaders go one step beyond – Design a well crafted and designed strategic intent of the organization.ROLE OF TOP MANAGEMENT     To bring about change and to implement strategies successfully. Install a system of shared beliefs and values. shift from compliance to commitment. In contrast. A transactional leader is usually confined to allocating tasks & responsibilities and extracting performance. bring about transparency. 145 . He should be an agent of change. companies depend more on transformational leaders than transactional leaders. Pragmatism is the ability to make things happen.

patents. skills) also includes complex resources like capabilities and competencies. machines) referred to as threshold resources (i. minimum requirement). Zero Based Budget – In this case the budget of a SBU has to be worked out right from the scratch. 146 .RESOURCE ALLOCATION     Resources allocation includes tangible resources (Eg. brands. labour. Performance Budget – SBU managers need to justify the distinctive resources in terms of the opportunity it is pursuing yields the highest possible pay-offs. land. Intangible resources (Eg. The various methods of resource allocation includes Historical Budget – The budgets framed by HQ for a particular SBU keeping in mind past trends.e.

CAPABILITIES & COMPETENCIES     Technology and business are slowly becoming in – separable. Mobiles). Due to causal ambiguity (complexity). convergence of multiple streams of technologies at the product – market level is becoming increasingly evident (Eg. Moreover. these capabilities are sustainable even in the medium to long term. though not necessarily in the case of emerging markets. Flat Screen Displays. Distinctive capabilities are complex set of skills woven around technologies. 147 . Distinctive capabilities helps in stretching and leveraging resources thereby overcoming two major constraints involved in strategy implementation – times & costs.

Once the structure is in place. 148 . processes become people independent. An appropriate organization structure & adequate control systems are essential to implement strategies and achieve stated goals. A firm in several related businesses usually employs a divisional structure.STRATEGY & STRUCTURE     It is a framework within which individual efforts are coordinated to bring synergy. The level of centralization and decentralization is decisive. A firm in several unrelated businesses usually employs a SBU structure. A single product or a dominant business firm usually employs a functional structure.

Inputs .Technology. disbanded subsequently.TYPES OF STRUCTURES       Functional Structure – Activities grouped together by a common function (Eg. SBU Structure – Businesses segregated in terms of strategic dissimilarities (Eg. Team Structure – An informal group formed for a crisis. with team members having dual line of control. or geographical locations. Project / Matrix Structure – A formal but temporary framework initiated for the completion of a particular project/crisis. Virtual Structure – A boundary less or hollow organization. Marketing. Output). 149 . processes. Finance). Divisional Structure – Units grouped together in terms of products. based on skills and competencies.

It includes the desire for independence. Environment & People – Economic and political conditions have a major bearing on structure coupled with the attitude and aspirations of the people in the organization. as span is broader. 150 . facing challenges & crises. leading to a tall structure. Technology – With more and more convergence of technologies in business.FACTORS INFLUENCING STRUCTURE    Size – As an organizations size increases there is more specialization and differentiation leading to the top management moving away from operational issues and control. assuming responsibility. structures are becoming flatter and more simpler.

co0ntinuity). Common sources of 151 inertia – complacency with past successes. there is a tendency to continue along the same lines.e. irrespective whether it is from worse to good or good to worse.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. Top managers resist change. Changes in top management and unlearning helps overcome inertia.  . Inertia acts as an impediment in strategy implementation. Inertia is a characteristic of a firm that endures status quo (i.

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.  . certain authors propose misfit as a source of superior 152 performance.STRATEGY EVALUATION    Strategy evaluation centers around assessment of strategic fit. However. firms should move beyond financial performance to strategic performance as organization systems are becoming complex. Deviation of fit is detrimental to performance and may lead to strategic failure.

competitive advantages becoming disadvantages? Has the company acquired any new competency? Has the company been able to overcome the 153 environmental threats. .STRATEGY CONTROL      It is concerned with trafficking a strategy as it is being implemented. detecting changes in the external and internal environment and taking corrective action wherever necessary. It attempts to answer the following questions – Is the strategic intent appropriate to the changing context? Are the organizations capabilities still holding good.

STRATEGY CONTROL IMPLEMENTATION     It involves steering the company towards its original growth trajectory & stated goals. Special Alert Control – It intends to uncover unanticipated information having critical impact 154 on strategies. However. Premise Control – Checking the validity of the assumptions on which a strategy was based. Implementation Control – It aims at assessing whether key activities are proceeding as per schedule. It is open-ended as well as . checking every premise is costly as well as difficult. It involves assessing – strategic thrusts and milestones.

BARRIERS TO STRATEGY EXECUTION     Vision and strategy not actionable – Utopian ideas. Strategy not linked to resource allocation & capabilities – Lacking commitment of top management. “If you cannot . Performance measures are defective – What to evaluate against? How to measure the 155 construct? As a saying goes. difficult to translate into practice. low strategic fit due to consultants intervention. Strategy intent not linked with goals and objectives – Lack of coordination at lower levels leading to negative synergy.

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. the relative importance of each factor may vary over time and context. Together these factors determine the way in which a corporation operates. Large or small. Today it is considered one of the most powerful tools for strategy implementation determining success or failure. important or not they're all interdependent. to be sure of successful implementation of a strategy. 156 . so if one fails to pay proper attention to one of them. Managers should take into account all seven of these factors. this may effect all others as well. On top of that.

157 . At around the same time in the US Tom Peters and Robert Waterman were exploring what made a company excellent. 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.BACKGROUND & ORIGIN  The 7-S Framework was first mentioned in "The Art Of Japanese Management" by Richard Pascale and Anthony Athos in 1981. Since then it is known as their 7-S model and is extensively used by corporations worldwide to implement their strategies. They had been investigating how Japanese industry had been so successful. and was taken up as a basic tool by the global management consultancy company McKinsey.

to reach identified & stated goals. Structure – The way in which the organization's units relate to each other in terms of their commonalities.THE 7’S        Shared Values – It represents what the organization stands for and what the top management believes in. Systems – The procedures. Style – The way in which the top management influences the functioning of an organization. over time. Staff – Human inter-relationships. processes and routines that characterize how work should be done. Strategy – Trade-offs for the allocation of a firms scarce resources. Skills – An organizations capabilities and competencies. 158 . formal & informal .

STRATEGIC FIT Strategy Structure Shared Values Systems Skills Staff Style 1st Order Fit 2nd Order Fit 3rd Order Fit 159 .

While the American co’s focuses on the hard S’s. In contrast. because most often they are culturally embedded and often neglected. Ineffective in case of a virtual company. their Japanese counterparts focus more on the soft S’s for their early success and sustainability. systems) are comparatively easy to identify and influence. staff. A choice of an alphabet often limits the scope and skews the interpretation of a model. structure. Consider the 4P’s of marketing or 3R’s of SCM. style. 160 .A CRITIC OF THE 7S MODEL     While the hard S’s (strategy. shared values) are very malleable and comparatively more difficult to identify & influence. the soft S’s (skill.

Low Take Overs 161 .STRATEGY IMPLEMENTATION ROUTES Strategic Fit .High Organic Growth Strategic Alliance Joint Venture Mergers & Acquisition Strategic Fit .

It has complete control over inputs. The entire infra-structural facilities are set up afresh having its own gestation and break-even. (Eg. tax holidays. subsidized power). SEZ’s. soft loans.e. concessions are available for green-field projects. technologies. green-field projects. 162 Risk of cost and time overruns. Long gestation leads to delayed market entry. i.ORGANIC GROWTH      Here a firm builds up its facilities right from the scratch and continues to do so without any external participation. and markets. Reliance Industries). (Eg. .e. Govt. the entire value chain. i.

There is no funding or equity participation from the alliance partner & both the firms continue to operate independently.STRATEGIC ALLIANCE     It involves a pro-active collaboration between two or more firms on a particular domain or function for mutual gain. It touches upon a limited aspects of a firms value chain. Tata Motors & Fiat). . Alliances are usually in the areas of technologies or markets (Eg. Alliances are usually short-lived and disbanded once the purpose is achieved. 163 It is a form of competitive collaboration. It has limited intervention power and usually lacks holistic commitment from the alliance partner.

leaving minimum scope of overlapping. (Eg.Honda). It is a win-win situation for both the companies. Dominant logic of both the companies should be complimentary. A comprehensive MOU is essential. 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. . Hero . Tata – AIG. Selecting the right partner is critical for success.

Integrated distribution channel leads to better market penetration and overall synergy. Brooke Bond & Lipton). Acquisition is an outright purchase of a firm assets by another independent entity (Eg. Coca Cola – Thums Up). Revival of a sick-unit through better management practices is a major motive behind an acquisition 165 strategy. with the individual firms ceasing to exist any more (Eg. Integration of assets and other financial resources.MERGERS & ACQUISITION      It refers to the fusion of two or more firms into a single entity. . Economies in scale leading to lowering of costs. ITC Tribeni Tissues.

Integration of organization structure & cultures is difficult. often the new firm is “left alone”. Larger geo-graphical diversity. Consolidation in a fragmented industry. Most countries have stringent laws that prevents hostile take over.Corus). Make a public offer of not less than .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. Inform SEBI / Stock Exchange after 5% stake is 166 acquired. Tata Steel . Instant access to capacities and markets.

MANAGEMENT TOOLS IN STRATEGY 167 .

WHY MANAGEMENT TOOLS?      Change is becoming pertinent in the business environment. Companies therefore need to ensure competitive advantages doesn’t become competitive disadvantages. Change provides enormous opportunities. Some tools to ensure that – Benchmarking – Adopt certain best practices. TQM – Doing the right thing the first time. every time. or better still create next practices Reengineering – Redesigning work processes right from the scratch. The past is ceasing to be an indication of the future. 168 . it is also a source of potential threat. Radical change is superseding incremental change. Balanced Scorecard – Tracking strategy 3600.

BENCHMARKING

  

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.

169

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.
170

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.
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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.
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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.
173

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

LIMITATIONS     More and more companies benchmark. While strategy is all about differentiation and not looking alike. but it cannot be used as a strategic decision making tool. clustering).BENCHMARKING . It does not shifts the growth 175 trajectory of the industry as a whole.e. Strategy is more of creating best practices rather than copying them. Benchmarking is useful for bringing about operational efficiency. the more similar they end up looking. Benchmarking merely reorients profits in the hands of few to profits in the hands in the hands of many (i. It can at best complement it. .

The task demands a total change in organisational 176 culture and mindset. Re-engineering attempts to radically change an organizational products or process by challenging the basic assumptions surrounding it.e. for achieving performance improvement (E.RE-ENGINEERING     Redesigning leads to identification of superfluous activities or product features (i.e. DOS to Windows). Re-engineering involves complete reconstruction and overhauling of job descriptions from the scratch (i.g. Windows 95 to 97). process mapping) and eliminating or improving them (E. .g. clean sheet).

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.

structures. Business – It looks into markets. It can be of the following types – Functional – It looks into the flow of operations (i. processes. customers and suppliers and protects the organization from the future (i. 178 .e. etc) and supports the organization for the present.LEVELS     Reengineering can be successfully leveraged at all levels of an organization with varying degree of results. resource allocation and prepares the organization for the future through a reorientation of the entire strategic architecture.e. BPR). .REENGINEERING . Strategic – It looks into the process of strategic planning. products.

– Causal Ambiguity.REVERSE ENGINEERING    It is a process by which a product is dismantled and analyzed in order to understand how the product was designed and manufactured. Cheaper versions of Intel chips and mother-boards manufactured in Taiwan. with an intention to copy it (Eg. protection can be had in the following ways – – Patenting. It generally acts as a threat to innovation. learning curve advantage. reverse engineering is a top-bottom approach. – Early entry advantages. Indonesia). While traditional manufacturing is a bottom-up approach. 179 . However. – High cost and time acts as a deterrent.

cost and effort necessary for the purpose of reverse engineering. 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. Actualization – Obtaining and dismantling of the product to assess how it functions.STAGES IN REVERSE ENGINEERING     Awareness – Recognizing whether the product is found to be worth the time. Introduction – Launching the product in the market. designing facilities. Usually in such cases segmentation and pricing is different from the original innovator. Implementation – Developing of a prototype. nano-technology).e.

More and more companies are moving towards meeting implied rather than stated needs. – Serviceability – Large no. – Durability – 1980 manufactured cars still on road. – Perception – Customer notions.Euro IV. – Features – Anti-lock braking systems.WHAT IS QUALITY?  It involves the totality of a product or service in meeting certain stated or implied needs. – Reliability – Consistency in mileage. – Aesthetics – Appeal in design. – Conformance – Emission standards . It has eight dimensions (Eg. of service stations. 181 . Air bags. Car) – – Performance – Mileage of 14 kms to a litre of fuel.

which ensures good market standing. It is deeply embedded as an aspect of 182 organisational life & culture.TOTAL QUALITY MANAGEMENT     Objective – Management of quality ensures conformance to certain pre-set standards. TQM is a way of creating an organization culture committed to the continuous improvement of work processes – Deming. Management of quality was traditionally inspect it . touching upon a limited aspect of a value chain.fix it in nature. zero defects. . It had little impact on improving overall productivity.

provided with all relevant information and best possible tools. 183 . the first time – From reactively fixing error in products to proactively preventing errors from occurring at the first place (Juran). Be customer centric – Generate the concept of internal customer (Ishikawa).TQM – KEY TENETS     Do it right. not a final destination. Empowerment – It takes place when employees are properly trained. fully involved in decision-making and fairly rewarded for results. Kaizen – Make continuous improvement a way of life. Looking at quality as an endless journey.

184 . saving precious top management time.e. of units meet preset standards (Eg. It is based on the principles of MBO (i. equal participation). 6-Sigma). 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.STRATEGIES    Outsourcing – It is the process of self-contracting services and operations which are routine and mundane. Quality Circles – It a small group of shop-floor employees who meet periodically to take decisions regarding operational problems and crises. enabling the firm to concentrate on core activities essential to customer satisfaction.TQM .

. Source: Fortune Magazine Why CEO’s fail? 185 .....BALANCED SCORE CARD  Some interesting comments ... – Efficiency and effectiveness is passé..... strategy implementation has never been more important.. – Less than 10% of strategies effectively formulated are effectively executed. it’s bad execution. – In the majority of failures – we estimate 70% – the real problem isn’t (bad strategy) .

BSC . 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. Focus more on causes.CONCEPTUALISATION     A company’s performance depends on how it measures performance. 186 . These measures worked well when organizational systems were simple and unidirectional and more importantly the environment was static. rather than effects. Organizations need to move from financial to strategic performance.

BSC – KAPLAN & NORTON (1992)  A BSC helps a manager to track and communicate the different elements of company’s strategy. and distinguish strategic problems from operational ones. It has four dimensions – – How do customers see us? – What must we excel at? – Can we continue to improve and create value? – How do we look to shareholders?  Firms more often have problems. 187 .  The most critical element of a BSC is to measure these four dimensions. because they have too many.

ageing schedule) % of key customer transactions Ranking of key customer accounts No.e.CUSTOMER PERSPECTIVE GOALS Products Supply Preference Relationship MEASURES Relative market share (%) % of sales from new Vs proprietary products Timely deliveries and service Customer credit analysis (i. of visits or calls made % of NPA’s 188 .

of times covered in media No. of new product launches Vs competition Product pricing Vs competition 189 .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.

LEARNING PERSPECTIVE GOALS Technology Manufacturing Focus Timing MEASURES No. of product innovations 190 . of new patents registered Time to develop next generation products Average and spread in operating cycle % of products that equal 2/3 sales No.

FINANCIAL PERSPECTIVE GOALS Survival Success Prosper Divestment MEASURES Cash flows Growth in Sales and Profits EPS. Return on Investment Market Capitalization / PE ratio 191 .

STRATEGY MAPPING 192 .

BSC .IMPLEMENTATION 2 Translate strategy into operational terms 1 Mobilize change through effective leadership 5 STRATEGY Make strategy a continual process 3 Align the organization to the strategy 4 Make strategy everyone’s job 193 .

It helps translating strategy into practice (i.what they don’t know. . Focus on cause not effects. Seek excellence. doing right things instead of doing things right).ADVANTAGES      Most often top managers face information overload. 194 performance will automatically follow. they don’t know . As a result.BSC . The BSC brings together the different elements of a company’s strategy at a glance. Modern managers should be poised to ask the right questions.e. Shift from control to strategy (i. sharing of vision).e.

EFFICIENCY Vs EFFECTIVENESS Ineffective Effective Inefficient Goes out of Business quickly Survives Efficient Dies Slowly Thrives 195 .

not only thrives. but also sustains it. Porter 196 .EFFECTIVENESS + STRATEGY  A company which is effective as well as strategic. .Michael E.

CORPORATE RESTRUCTURING 197 .

Tata Group). Strategic variety may be caused by changes in the as external well as internal environment.. Restructuring involves consciously driving significant changes in the way an organizations thinks and looks (Eg... from survival of the fittest . Radical change brings about strategic variety.. to survival of the most adaptable. firms use restructuring strategies.. To adapt to the changing environment. Strategic variety brings paradigm shift..CORPORATE RESTRUCTURING      The only thing constant in today's business environment is change. “every organization must be prepared to abandon everything it does. As Peter Drucker pointed out.” 198 .

downsizing or rightsizing). Fax.RESTRUCTURING – BASIC TENETS    Customer Focus – Restructuring ideally begins and ends with the customer. Core Business – Company’s should introspect – What business are we in? Business evolved out of opportunism or myopia should be divested. they should strive to provide unimaginable value ahead of its time (Eg. Company’s should go beyond just asking what he expects. and dividing the core businesses into SBU’s (i. Internal customers should also not be neglected. Instead. ATM. Walkman. Structural Changes – Conventional hierarchical structures should be disbanded in favour of more 199 flexible ones (i. . etc).e. downscoping).e.

) Reliance dismantled their industrial embassies .. . the Tatas were considered a benevolent and charitable organization... During the times of JRD.... 200 .) The Aditya Birla group typically relied on the “marwari” community for key management positions . Restructuring also requires cultural reorientation. Kumar Birla today is more dependent on professionals.. It is created and institutionalized by the top management..... started focusing on their capabilities.RESTRUCTURING – BASIC TENETS     Cultural Changes – A culture represents the values and beliefs of the people about the organization.. Ratan Tata now drives the point the group means business.

Use the reach of networking technologies. Getting feedback & addressing customer complaints. Organizing customer and supplier meets. Publicizing welfare projects to demonstrate CSR. they tend to move away from the customer.” 201 .MOVING CLOSER TO THE CUSTOMER         As companies evolve. “ … one reason our customers are satisfied is that we aren’t. Honda’s ad says. Carry out PR campaigns. Communicating to the media about organization efforts to deliver quality products. Restructuring provides a platform to close this gap.

it may be smooth (Eg. Further. horizontal. Mittal – Arcelor) and can take various forms. Tata – Corus) or hostile (Eg. or conglo-merate. Glaxo – Heinz). Asset Swaps – It entails divesting and acquisition simultaneously by two companies. where the difference in valuation is settled off through cash or equity (Eg. 202 . Further spin-off can be classified as split-off and split-up. including its intangibles – Mergers – It may be vertical. It can have two forms. It may include brands as well. Hive Off – It involves siphoning of assets under control. spin-off and equity carve.ASSET RESTRUCTURING     Asset Restructuring – The asset composition of a firm undergoes a major change.

– Split-Up – In a split-up. Most of these practices are not in consonance with Indian laws. 203 . in which the equity is allotted amongst the existing shareholders on a pro-rata basis (Eg. – Split-Off – In a split-off. Tata Industries selling 20% stake to Jardine Matheson).HIVE OFF   Spin-Off – A spin off is the creation of a new entity. the existing shareholders receive equity in the subsidiary in exchange for the stocks of the parent company. Reliance Ent). Equity Carve – It involves selling a minority stake to a third party while retaining control (Eg. the entire parent company loses its identity after being split into a number of subsidiaries.

L&T sold its cements division to Aditya Birla group.DIVESTITURE      It involves the sale of a brand or a division of a company to a third party. Selling out in phases is called disinvestment (IPCL). In 2005. for a specified market or in general with full management control. 204 . Generic motives include – – Raise working capital. repay long-term debts. Parle sold its Thums Up brand to Coke for $40 million apprehending fierce competition. but retained its engineering division. In 1995. strategic misfit. – Poor performance. A complete sell-out is known as divestment (TOMCO).

205 .3 billion. Wipro).The internal & external liability composition undergoes a major change – LBO – Acquiring control over a substantially larger company through borrowed funds (Eg.CAPITAL RESTRUCTURING     Capital Restructuring . Conversion – Replacing debt with equity or vice-versa or costlier with cheaper debt or cross currency debt. It provides greater leverage as well as management control. Tatas take-over of Corus for US $11. 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.

250 cr Tata Tetley – Rs. 1700 cr Trent – Rs. 42 cr Voltas . 1170 cr Goodlass Nerolac – Rs. 1439 cr 206 Tata Timken – Rs 120 cr Tata Telecom – Rs. 256 cr ACC – Rs.BUSINESS RESTRUCTURING – TATAS Divestments Lakme – Rs. 950 cr Merind . 120 cr Tata AIG – Rs.Rs. 150 cr VSNL – Rs. 1860 cr . 99 cr Tata Power – Rs.Rs. 1890 cr CMC – Rs. 230 cr Diversifications Tata Motors – Rs.

Survival is the primary motive. of operating units.ORGANIZATIONAL RESTRUCTURING     Organizational structure and systems calls for a change when strategic variety is apparent. 207 . keeping the composition of business intact (Jet Airways). It can be carried out in the following ways – Downsizing – It is a systematic one-time reduction in the no. of a firm’s employees and sometimes in the no. usually as a result external turbulence. Turnaround is the primary motive. Downscoping – It involves reducing the business and/or geographical scope of a firm (Aditya Birla group). Rightsizing – It is phasing of excess and redundant employees resulted out of faulty internal planning (SAIL).

The longer the period. The dominant logic represents the perceptions and biases (i. thumb rules) of the top management.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. 208 . the more difficult it becomes to uproot the paradigm (i. as strategies are based on such beliefs and biases. Dominant logic becomes deep-rooted in organizational contexts depending on the period it is in place (tenure of the CEO).e. Strategy change is unviable without a preceding change in its dominant logics. inertia).e.

the factor that stifled change & performance was – culture. Successful transformation requires – incorporating employees fully into the process – leading from a different place so as to maintain employee involvement – instill mental disciplines that will enable employees to behave differently.FORCES AGAINST STRATEGIC CHANGE     The problem with strategic change is that the whole burden typically rests on few people (i. In most organizations. 209 . 20% of the people carry out 80% of the changes). Companies achieve real agility only when people at every level rise above the ordinary to face the challenges – revitalization or transformation.e.

210 . process ownership. Manage from the future.SUCCESSFUL TRANSFORMATION        Build an intricate understanding of the business model at all levels of the organization. Encourage uncompromising straight talk. Create relentless discomfort with the status quo. Harness setbacks. never take no for an answer. 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. Questioning every basic action of the organization.

that can be both enablers and blockages to change and restructuring. by identifying forces for and against change. Identify and implement facilitators of cultural change. Aspects of current culture which needs to be overcome. also known as cultural-web.FORCE-FIELD ANALYSIS       A force-field analysis provides an initial overview of change problems that needs to tackled. Culture and style of management are two main impediments in force-field analysis. It involves diagnosing a change situation – systems & structures. It involves identifying – Aspects of current culture which needs to be reinforced. 211 .

Term Reduced labour costs Reduced debt costs Emphasis on strategic control Business High debt costs Higher risk 212 Long .Term Loss of human capital Lower performance Higher performance Capital .RESTRUCTURING .OUTCOMES Alternatives Organizational Short .

the second one is a more viable strategy and sustainable option in the long run. While the first strategy produces results instantaneously. focuses on reengineering. In order to put back the company on the right track they are resort to – Denominator – It assumes that turnover cannot be increased. down-scoping or asset stripping. hence go in for downsizing. reverse engineering and regenerating. 213 . Numerator – It assumes that turnover is not a barrier or constraint.NUMERATOR & DENOMINATOR MGT     Most firms across emerging markets undergo strategic discontinuity and as a result are forced to restructure their businesses.

TURNAROUND MANAGEMENT 214 .

Source:  Why do firms atrophy? (Business Today.WHY TURN AROUND MANAGEMENT?  Some interesting insights .... . – Less than 10% of the Fortune 500 companies as first published in 1955. January 1997). 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... still exist as on 2005. – Only seven of the first fifty Indian business groups in 1947 were even in business by the turn of this century..

systems.TURN AROUND MANAGEMENT      A turnaround is said to occur when a firm perseveres through an existence threatening performance decline. and capabilities.e. As a sequence of events describing how things change and why they change (i. ends the threat with a combination of strategies. and achieves sustainable performance recovery. Both content (what) and process (how) are equally important for a successful turnaround. Stage Theory). While content focuses on endogenous and exogenous variables. skills. 216 . A category of underlying principles and concepts. process focuses on – A logic to explain a causal relationship between intervening variables.

suppliers and bankers. especially in key positions. Rising input costs. Low stakeholder confidence. Substantial shifts in consumer preferences. 217 . Uncompetitive products or services. Some indicators Continuous cash flow crises as a result of dwindling market-share and profits. unavailability or radical lowering of substitute costs or technological obsolescence. Low employee morale leading to high employee attrition at all levels.TURNAROUND INDICATORS        Most firms atrophy simply because they fail to diagnose the indicators that acts as threat to organizational existence. leading to lack of acceptability from distributors and customers.

Hence. 218 . focus on power brands.TURNAROUND ILLUSION        The first step to a successful turnaround is the basic acceptance of the fact that …. “all is not well”. Revamp product portfolio. Extending work hours. which most top managers fail to appreciate. they adopt surface level measures (disprin popping) which most often fail. Common approaches adopted Change in key positions. prune work-force. based on elasticity. Emphasis on advertising and market penetration. liquidating dead assets. consider extension. be more customer centric. Recalibrate prices.. Product redesigning or reengineering.

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.DECLINE    Decline is the first stage in the turnaround process. 220 . It has its origin in “resource led stretch” and subscribes to the view that a firm has substantial power to override the context. R-Extinction – It suggests that organization factors. 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. primarily dwindling resources and capabilities are responsible for decline.

diversification. If the underlying cause is internal efficiency. asset reduction. The response must match the cause of the decline. new market initiatives. Strategic responses focus on changing or adjusting the business the firm is engaged in through long term moves such as – integration. the response should be strategic. 221 .RESPONSE INITIATION    Turnaround responses are typically categorized as operating or strategic. If the decline stems from structural shifts. Operating responses typically focuses on the way the firm conducts business and involves tactics geared towards – cost cutting and process redesigning (BPR). the response should be operational.

which may be unavailable to a focused firm. 222 . when decline deepens shifts in strategic position becomes essential. Scope – A diversified conglomerate may acquire a distressed business to turn it around and gain valuable synergies. Contour – It is easier to reverse decline in the earlier stages through operational measures.RESPONSE DICHOTOMY     The response initiation is somewhat dichotomous and cannot be universally applicable. Untangling this question brings into focus three events – Domain – Many of the strategic cures have limited applicability for an affiliated firm. Similarly new market initiatives is feasible only for multi-product firms.

participative management (i. Sustenance is the key factor in this stage.e. Support from all the stake holders through resource commitment.e. However. many a times early signs of recovery fades out. lead – lag). confidence building measures.7 years with a range of (4-16) years. substantial amount of time usually passes before results begin to show (i. consensus).TRANSITION     Transition usually reflects the first signs of recovery. Effective levers of transition. transparency. The top management has a key role to play through empowerment. role model. 223 . However. Empirical studies show that average time is 7.

Supplier and banker confidence. Revival of key customers and new product launches. 224 . it should adopt a holistic approach. Failure is an indication that initial momentum was not sustainable characterized by irreversibility. Regaining lost market share and distributor confidence. Share price indications and media coverage. Commanding a premium in the market.OUTCOME        Outcome is said to be successful when a firm breaches the equilibrium performance level. Cut off points must be unequivocal. Instead of focusing on financial parameters alone.

COOPERATIVE STRATEGIES & ALLIANCES 225 .

or joint venture.COOPERATIVE STRATEGIES     Cooperative strategies are a logical and timely response to changes in business dynamics. More and more companies worldwide are moving away from competition to co-option to leverage their resources and enhance bargaining power. the commitment and the involvement between the firms increases manifold. 226 . Any cooperative strategy maybe between firms within the same country or cross border as well. consortia. supply-chain partnership. and globalization . It can assume any of the following forms – franchising. technology. In the cooperative strategy continuum as firms move up the value order. strategic alliance. licensing.

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. Titan Inds. Branding is critical to franchising. owners of the brand Monginis allows its franchisees to sell its confectionary products. 227 . Switz Foods. owners of the brand Tanishq allows its franchisees to sell its jewellery products. It is an effective strategy to penetrate markets in a shortest possible time at a minimum cost.

Different levels of licensing Manufacturing without embracing any technology (CBU). 228 . refine processes and adopt necessary technologies (SKD). HM manufacturing GM range of cars in India with a buy-back arrangement is a perfect example of CBU.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. as in Tata Indica. Become a systems integrator (CKD). Develop a product through its crude stage.

leverage upon size to preempt competition by escalating entry barriers (Eg. Tata. Coke – Pepsi). 229 . Collusion – Few firms in a matured industry collude to reduce industry output below the equilibrium level.CONSORTIA     Consortia – They are defined as large inter-locking relationships & cross holdings between businesses in a similar industry. Cross Holdings – A maze of equity holdings through centralised control to ensure earnings stability & threshold resources for critical mass (Eg. Airbus – Boeing). enabling them to increase prices (Eg. It can be of the following types – Multipartner – Intends to share an underlying technology or asset. Hyundai).

Continuous sharing of knowledge is critical to the success of a supply chain partnership. . It usually provides a platform to sort out differences between conceptualization and implementation to suit local market needs. Tata Motors – IDEA). link their capabilities to create value for end users. Companies in different industries with different but complimentary skills. otherwise it 230 becomes routine outsourcing.SUPPLY CHAIN PARTNERSHIP     It is a pro-active & collaborative arrangement between supplier and customer aimed at achieving better control over the value chain (Eg.

Generic motives involved are .learning organization. Despite their popularity (50-60)% of the alliances fail to accomplish their stated objectives. effective R&D management. Firm’s should undertake a long courtship with potential partners. design next generation products.STRATEGIC ALLIANCE     It is an short to medium term understanding between two or more firms to share knowledge and risk. Tata Motors – Fiat. Partner selection is one of the critical success factors. to gain knowledge and to obtain access to new markets (Eg. instead of hurrying into a relationship. enter newer markets. enhance credibility. Reliance – Du Pont). preempt competition. 231 .

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. Coke – Pepsi). Maruti). Complementary Equals – Two firms mutually promoting each others complimentary products (Eg. Whirlpool – Tide. Bajaj – Castrol).STRATEGIC ALLIANCE . Alliances of the Weak – An alliance is entered into to preempt competition (Eg. Airbus – Boeing). Bootstrap – An alliance between a weak and a strong company with an intention to acquire it. 232 .

Too much stress on financials & structure be avoided. – Japan Vs US).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. Firms from developed markets seek access to markets and firms from emerging markets seeking access to technology. Differences in level of economic development can produce differences in alliances motives. 233 . Cultural orientation has been found to have a profound effect on top management’s strategic orientation (Eg.

Managerial capabilities. Dominant Logic’s – Similarity in beliefs & biases. Experience related to previous alliances.PARTNER CHARACTERISTICS         Complimentarity of Capabilities – The degree to which partners resources can be used in conjunction. Unique Resources – Abilities or skills which cannot be easily duplicated. including ability to provide quality products and services. Willingness to share knowledge and skills. 234 . Partner’s ability to acquire fresh skills. Intangible Assets – Move beyond the financials of the firm.

235 . Selection & Courtship – It involves self analyzing. vows to include commitment to expand the relationship. understanding the chemistry. Learning to collaborate – strategic. instead of focusing controlling the relationship. the value chain. Changing within.MANAGING ALLIANCES       Alliances are more than just a deal. operational & cultural integration. incorporating clear signs of continuing independence for all partners. partners should nurture it. degree of compatibility. differences not anticipated earlier. Getting Engaged – It should incorporate a specific joint activity. Setting up the housekeeping.

e. . synergy) rather than mere exchange (i. It aims at creating new value (i. whilst the partners continue to operate independently. There are substantial linkages in the value-chain.e. a joint venture is a selection among modes by which two or more firms can transact. separation is very 236 bitter. Conceptually. It lasts till the vision is reached.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. combining parts).

The market fails as sellers are unwilling to reveal their technology and buyers are unwilling to purchase in the absence of inspection. 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. though more profitable alternative to other choices. Strategic Behaviour – Firms may override transaction costs. 237 . Organizational Learning – It is a means through which a firm learns or seeks to retain their capabilities. in addition to a high degree of asset specificity.

TVS – Suzuki (4-Stroke Engines) Fill gaps in existing product lines. Daimler – Chrysler (Premium Cars) 238 . – Eg. Essar – Hutch (Vodafone). – Eg.OTHER MOTIVES       Entry into newer markets. Renault – Nissan (Minivans – Cars). Sharing of resources. – Eg. Yamaha – Escorts. – Eg. Maruti – Suzuki. Learning new technologies. Eli Lily – Ranbaxy. Endorsement from government authorities. Define future industry standards. – Eg. – Eg.

Enka. Modi – Telstra What after exit (parenting disadvantage)? – Eg. – Eg. – Godrej – Procter & Gamble. Century . technology) drain.RISKS INVOLVED       Incompatibility – Differences in cultural background. – Eg. Tata – Aditya Birla in Idea Cellular 239 . Risk of over dependence.e. PAL – Fiat If the cost of continuing exceeds the exit costs? – Eg. LML – Piaggio Differences in size and resource base. Risk of brain (i. – Maruti – Suzuki.

Agreement – Clarity on operational control. time sharing. Partner – Avoid duplication of skills and capabilities. Equality – Lack of dominance. 240 .PRE-REQUISITES FOR SUCCESS            Commitment – Mutual trust. Culture – Reconcile gaps. Inertia – Differences in age and evolution patterns. Objectives – Shared vision. Costs – Other modes of transaction becomes cheaper. Incompatibility – Performance expectations. Focus – Avoid strategic myopia. Flexibility – Sufficient space to breathe and adjust. respect.

MERGERS & ACQUISITION 241 .

An acquisition is the purchase of a firm by a firm (of larger size. Mittal Arcelor).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.Daichi) and hostile if it is without the consent of the management (Eg. SEBI Takeover Code. 2002). Ranbaxy . HLL – Tomco). Brooke Bond – Lipton). reverses are also taking place through LBO) with a view to acquire conglomerate power and induce synergy (Eg. Most countries have stringent laws that prevents hostile takeovers (Eg. An acquisition is said be smooth if it is with the consent of the management (Eg. however. 242 . The larger objective is to leverage on size.

Preferential – A preferential allottee ending up acquiring 5% stake also comes under its purview.SEBI TAKEOVER CODE. Hike – An acquirer who has already picked up a 5% has to make a mandatory disclosure for every additional 1% stake that it acquires. Acquirer – Someone (individual or firm) who picks up an atleast 5% stake without mandatory disclosure having an intention to wrest management control (i. creeping acquisition). . Control – A special resolution of 75% of the share 243 holders approving the change of guard. 2002      Promoter – A person who has a clear control of atleast 51% of the voting rights of the company and confidence of all the major stakeholders.e.

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. Grasim – L&T Cement. Gujarat Ambuja – ACC). 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.e. asset stripping). whichever is higher as an exit route (Eg. SEBI – In case of a hostile take over. 244 .SEBI TAKEOVER CODE. credentials or track record is at stake. and/or does not enjoy the confidence of the different stake holders.

Kelvinator). Reliance).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. Godrej. Conglomerate – It involves integration of two distinctly unrelated businesses. Electrolux . Horizontal – It involves integration of two highly related businesses (Eg. Vertical – It involves complimentarily (partially related) in terms of supply of inputs or marketing activities (Eg. 245 . ITC). The type of merger is depends on the degree of relatedness (strategic) between the two businesses. usually opportunistic (Eg.

quick access). scale and scope.MOTIVES             Increased market / conglomerate power. Ranbaxy – Crosslands). Acquiring assets or capabilities (Eg. ICICI –ITC Classic). Tax benefits (Eg. Asset Stripping – Shaw Wallace). Coinsurance effect – Higher debt raising capability. 246 . Ulterior motives – (Eg. Overcoming entry barriers (Eg.e. Avoiding risk of new product development. Tata Steel – Corus). Global image (Eg. Reduced gestation (i. Mittal – Arcelor).MERGERS & ACQUISITION . Economies of size. Reduction in risk. Access to newer segments (Eg. ITC Bhadrachalam).

neglecting core business. while the ultimate acquisition was made at 607 pence/share). Top management overtly focused on due diligence exercise and negotiations. Merging of organisational structures. Managing over-diversification.MERGERS & ACQUISITIONS PITFALLS        Cultural differences (Eg. 247 . Inability to achieve synergy. When Tata Steel started negotiations with Corus. Managing size. Overvaluation is often as a result of an ego drive and substantially affects future returns. their initial offer was around 420 pence/share. Tata – Corus). Overvaluation of buying firms (Eg.

Growth – This stage may witness parallel merger of two firms of similar size. Decline – Horizontal mergers are undertaken to ensure survival. Kingfisher – Air Deccan). Maturity – A larger firm acquires a smaller firm with an objective to achieve economies of scale and experience curve effects (Eg. Brooke Bond – Lipton). Tata Steel – Corus). vertical to save transactions costs. with an objective to reinforce its growth trajectory or to take on the might of a comparatively larger player (Eg.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. 248 .

active top management intervention in phases. A common shared vision.FRAMEWORK      Positive contribution to the acquired company. Left alone syndrome. 249 . Strong differences may stifle plans and its execution. Immediate attempts to super impose structure and culture may cause bottle necks. Blanket promotions across entities and confidence building exercises needs to be practiced. An acquisition just for the sake of it or reputation yields very little value in the long term.INTERNATIONAL M&A . A concern of respect and trust for the business of the acquired company.

They can carry the message to the various stake holders. It will enable focus on customers and key people. Decide upon management control systems. Integrating work processes. Redefine responsibilities and authority. Shift attention from business portfolio to people and processes.BLUEPRINT         Take the media into confidence. Decide on the new hierarchy. 250 Do not ignore the “people factor”. Determine business strategy.INTEGRATION . promptly. .

e. – Synergy – Potential value gain from combining operations (i. over valuation can become a curse. 251 . The process takes (6-12) months. operational & financial).VALUATION   The process of valuation is central to M&A. – Unstated reasons – Personal self interest and hubris. – Market for corporate control. Valuation decisions are arrived through a due diligence process when the prospective acquirer gets access to the books of accounts of acquiring company.M&A . While under valuation may be a significant opportunity. Financial motives – Undervaluation relative to true value.

– Vertical Synergy – Gains come from controlling the supplychain and savings in transaction costs. when the “fit” between the two entities is very poor. Synergy can be negative as well. Innovative product – Good distribution network).VALUING OPERATIONAL SYNERGY  Synergy – It refers to the potential value gain where the whole is greater than the sum of the parts. 252 . 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. Sources of operational synergy – Horizontal Synergy – Gains come from economies of scale which reduces costs.

However. and without paying take-over premiums. but availed after being merged with a profitable firm (Eg. 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. Cash Slack – It reduces asymmetry between cash starved firms with deserving projects and cash cows with no investment opportunities. 253 . ITC – Bhadrachalam Paper). Synergy comes from projects which would not have been undertaken if the two firms stayed apart (Eg.VALUING FINANCIAL SYNERGY    Diversification – Reduce variability in earnings by diversifying into unrelated industries. Hotmail).

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. as risky debt is spread across the new firm's operations. – Coupon rates may also be negotiated at lower rates. This will induce higher debt capacity. 254 . It relates to the concept of diversification. higher leverage. the cash flow the merged firm will be less variable than the individual firms. hence better performance.

– – 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. Assessment of perceived quality is critical. The value of wrestling control is inversely proportional to the perceived quality of that management. While value of corporate control is negligible for firms that are operating close to their optimal value. since a restructuring can lead to significant increase in value. The value of control can be substantial for firms that are operating well below optimal value. 255 .

The assets of the acquired company are used as collateral for the borrowed capital. sometimes in combination with the assets of the acquiring company. LBO facilitates a relatively smaller firm to bid for a comparatively larger firm in the bid for management control. It is a very costly and risky proposition. 256 . Confidence of investment bankers and the international financial community is essential.LEVERAGE BUYOUT (LBO)     The basic difference between a take-over and a LBO is the high inherent leverage (i.e. debt component) at the time of buyout and rapid changes in capital structure over time.

A research study showed that 30% of the publicly listed firms reported above average returns after going private.access to financial markets. – Increased information needs. off-late many publicly traded firms have gone private keeping in mind the following – – The fear of LBO. – The need to satisfy analysts and shareholders. liquidity.TO GO PUBLIC OR NOT?   However. 257 .  However. the advantages of going public includes . on-going valuation. – Separation of ownership from management. The increased benefit showed in the following way – reduced costs and increased revenue.

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). – Cost of debt coming down (i. – It is a temporary phenomenon. which disappears once assets are liquidated and significant portion of debt is paid off. – Debts repaid off from increased value after successful restructuring and wresting management control. co-insurance effect). 258 .e. – Cash trapped company unable to utilize opportunities. – Managers cannot be trusted to invest free cash flows wisely.

As the firm liquidates / pledges assets and pays off debt. A LBO has to pass two tests to be viable – – Restructuring to pay-off increased debt. – Increase equity valuation. Therefore. 259 . Lack of sufficient cash flows to repay costly debts resulting in a possible debt trap. initial rise in leverage is anticipated. Any discounting has to reflect these changing cost of capital. leverage is expected to decrease over time.EFFECT OF HIGH LEVERAGE      Increases the riskiness of dividend flows to shareholders by increasing the interest cost to debt holders.

allowing the private company to bypass the usually lengthy and complex process of going public. – Tax shelter. time-barred.REVERSE MERGER  Reverse Merger – The acquisition of a public company. which has discontinued its operations (i. Objectives – – Traditional route of filing prospectus and undergoing an IPO is costly.e. or costly. – Automatic listing in major exchanges. small in size but having a promising business. shell company) by a private company. – Prevents dilution of equity. 260 . – Facilitates better valuation and forthcoming offerings.

EFFECT OF TAKE-OVER ANNOUNCEMENT     The shareholders of target firms are the clear winners. Initial anomaly in stock prices usually normalizes over a period of time (6-12) months. Excess returns also vary across time periods. – Merger announcements reported 20% excess returns. During bearish periods excess returns were 19%. – Takeover announcements reported 30% excess returns. Most target firms are taken over within (6090) days. 261 . takeover failures have only initial negative effects on stock prices. However. and 35% during bullish periods.

and Netter. – However. and Kim.EFFECT OF TAKE-OVER ANNOUNCEMENT  The effect of take-over announcement on bidder firm’s stock prices are not clear cut. 1983. Brickley. Desai. – However. 1988 . Bradley. in the event of take-over failure negative returns to the extent of 5% on bidder firm stock prices is reflected. 262 Jarrel. as stock markets become more and more perfect such anomalies would reduce Source: Jensen and Ruback. 1983. over time. – Most studies reported insignificant excess returns around take-over offers or merger announcements.

Poison Put – Premature retirement of bonds at attractive rates to pour surplus cash and make target investment unattractive. 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. so that nothing is left for the raider to strip off. Rights).

thus thwarting the raider company’s attention. Green Mail – The targeted company buys large blocks from holders either through premium or through pressure tactics (Eg.DEFENSIVE STRATEGIES     White Knight – It is the placing of stocks to a cash rich investor and bargaining for protection in return. Pac Man – The target company makes a counter bid to take over the raider company. Gray Knight – The target company takes the help of friendly company to buy the shares of the raiding company. Shapoorji Pallonji). East India Hotels – Reliance Industries – ITC). But often the White Knight turns a betrayer himself (Eg. 264 .

COMPETING FOR THE FUTURE 265 .

Most companies were too preoccupied with the present than the future? 99% of the companies overpowered.GETTING OFF THE TREADMILL    Canon overpowering Xerox. What went wrong???? What were they doing with the present? What were they pre-occupied with? 266 . Compaq overpowering IBM. Hitachi overpowering Westinghouse. British Air overpowering Pan Am. were spending 99% of their precious time dealing with present. Honda overpowering Volkswagen. Nokia overpowering Motorola. The reverse was true for the companies overpowering. Wal-Mart overpowering Sears. Honda overpowering GM.

downsizing). 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 . declining margins. Not knowing when to stop. CEO’s brutally pick up the knife and ruthlessly carve away layers of corporate flab (delayering. decluttering. Thus efficiency was grievously hurt.THE PAST OF COMPETITION     Beyond Restructuring – When a competitiveness become inescapable problem (stagnant growth. most often they ended up cutting corporate muscle as well and became anorexic. falling market share).

The future is not about catching up with competition.THE PRESENT OF COMPETITION    Beyond Reengineering – Numerator based managers (innovation) at least offers some hope. ensuring only survival of the present. However. but forging ahead in competition. incrementalism or nominal innovation has almost reached a plateau. On the contrary only 20% of Japanese managers believed that quality will be a source of competitive advantage of the future.S. but not of the future. top managers believed that quality will be a source of competitive advantage of the future. 268 . A poll in circa 2000 revealed that 80% of the U.

not the other way. It is based on deep insights into trends in technology. faster. 269 . not just the organization. as important as these may be. they are not enough to get a company to the future. Companies need to fundamentally reconcieve itself. reinvent its industry. Transform the industry. Creating the future requires industry foresight. Empower from bottom to top. better. Create a potential gap. demographics and lifestyles. It involves Dream about the company’s future. don’t predict. aspirations and resources.THE FUTURE OF COMPETITION       Regenerating – Leaner. and regenerate its strategies (breaking its – managerial frames).

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 .

e. It drives a hunger and a passion to transform. 271      . blue oceans).ABOUT THE TRANSFORMATION The future does not belong to those who take the industry for granted. Therefore. Redraw the boundaries between industries. Successful companies have a complete grip over the industry. hence do not fall sick in the first place. Create entirely new industries (i. Change in at least one fundamental way the rules of engagement in an industry. they do not need to restructure. by converging technologies complex. It is about deliberately creating a strategic misfit.

Most successful revolutions (Gandhi to Mandela) rose from the dispossessed.ABOUT THE EMPOWERMENT      Bring about a revolution (a paradigm shift) in the organization. the revolution must start at the bottom and spread in all directions of the organization. A revolution that is thrust upon from the top seldom sustains. 272 . Such a process is called institutionalization (from people centric to organisational centric). Transformational leaders merely lead the way. The middle management plays a strong moderating role. More importantly.

without taking undue risk. Apple – iphone). Apply the 40 – 30 – 20 principle. Toshiba – LCD. South West Airlines – LCC. Get to the future first. Companies need to strategize (think ahead of times). What does it take to get to the future first? Understanding how competition for the future is different. It requires a lot of common sense and a little bit of out of the box thinking.THE FUTURE OF STRATEGY       A company must get to the future not only first but also for less. A process for finding and gaining insight into tomorrows opportunities (Eg. 273 . An ability to energize the company.

each point in space represents a unique business opportunity. but hundreds. the farther it will be away from competition. as on their aspirations. 274 . greatness from mediocrity. The farther one can see in this endless space. is the ability to imagine in a different way what the future could be. We are in the midst of a 3600 vacuum.HOW DOES THE FUTURE LOOK LIKE?     There is no rule which says that for every leader there will be a follower. As there is no one future. Companies of the future will be not based so much on the strength of their resources. What distinguishes a leader from a laggard.

THE EMERGING STRATEGY PARADIGM Not Only Reengineering Processes But Also Regenerating Strategy The Competitive Challenge Organizational Transformation Industry Transformation Competing for Market Share Competing for Opportunity Share Finding the Future Strategy as Learning Strategy as Positioning Strategy as Engineering Strategy as Unlearning Strategy as Dream Strategy as Architecture 275 .

THE EMERGING STRATEGY PARADIGM Not Only But Also Mobilising for the Future Strategic Fit Resource Allocation Strategic Misfit Resource Stretch & Leverage Getting to the Future First Existing Industry Structure Product Leadership Single Entity Product Hits & Timing Future Industry Structure Competency Leadership Dominant Coalitions / Co-option Market Learning & Preemption 276 .

Learning Curve t1 t2 t3 Time t4 t5 277 .LEARNING TO FORGET P1: The degree of learning in current period is directly proportional to the degree of unlearning in the previous period. Degree of Learning Unlearning Curve P2: Unlearning in previous period does not necessarily ensure learning in the current period.

Inimitable & Insubstitutable – A high degree causal ambiguity between these skills yield sustainable competitive advantage. 278 . Leverage – They are the gateways to future markets. It is characterized by the following – Unique – It provides unimaginable customer value ahead of its times. It represents the collective learning's of an organization centering around diverse streams of technologies.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.

Core competencies are the roots of the organization. Toshiba – flat screen displays. Honda – engines. Toyota – lean manufacturing. leaders have one. Canon – imaging. SKF – antifriction and precision. Coca Cola – brand. it is deeply embedded in the heart of the organization. Wal-Mart – logistics.MORE ABOUT CORE COMPETENCE      Sony – miniaturization. Intel – nano-electronics. Although a core competence may lose value over time. 279 . Most companies around the world do not possess one. A core competency cannot be outsourced. it gets more refined and valuable through use. at the most three to four. Nike – designing.

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.
281

CONCENTRATING 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.

282

ACCUMULATING RESOURCES

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.

283

COMPLEMENTING RESOURCES

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).

284

CONSERVING RESOURCES

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.

285

RECOVERING RESOURCES

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.
286

INTERNATIONAL BUSINESS ENVIRONMENT 287 .

China. strategies suited for the developed markets may not be appropriate for emerging markets. 288 . Therefore.e. 1997). Therefore focused strategies based on core competence may not be suitable for emerging markets (Khanna & Palepu. Diversified groups in operating in emerging markets therefore benefit from unrelated diversification. Chile) provide a different context (i. high levels of market imperfection). and high transaction costs.EMERGING MARKETS    Emerging markets (India. Emerging markets are characterised by infrastructural bottlenecks. institutional gaps. Korea.

DIVERSITY . Size & Scale.PERFORMANCE (I) Diversity attempts to measure the degree and extent of diversification (Herfindahl. et al. Synergy. Entropy). subsequently negatively related across developed markets. (2000) 289 . Optimum level of diversification Performance Diversity is initially positively related with performance. Concentric. Experience Strategic Fit Diversity Palich.

subsequently positively related across emerging markets. brand building Risk diversification. conglomerate power Threshold level of diversification Performance Diversity (Khanna & Palepu. 2001) 290 . Huge initial investment.DIVERSITY .PERFORMANCE (II) Diversity is initially negatively related with performance.

Characteristics – It should have a spread of affiliates or subsidiaries. 291 . It should have a spread of manufacturing facilities. revenues and profits. HSBC). act locally (Eg. It should have a spread of assets. It should have a spread of interest groups / stake holders.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 think globally.

low group scale in developed markets and vice versa for emerging markets). Group Scale .GLOBAL BUSINESS ENVIRONMENT     Power Distance – It reflects the disparities in income and intellectual development (Eg.It reflects the disparities in women in workforce (Eg. Feminity Index . 292 . low power distance in developed markets and vice versa for emerging markets). Risk Profile – It reflects the risk attitude of the top management (Eg. high feminity index in developed markets and vice versa for emerging markets).It reflects the relative role of team building (Eg. low risk profile in developed markets and vice versa for emerging markets).

corruption. inflation. currency. terrorism (9/11). attitude. Country Risk – It reflects the political and economic risk (Eg. way of life. FOREX reserves.GLOBAL BUSINESS ENVIRONMENT   Cultural Adaptability – It reflects the adaptive ability to a changing environment . code of conduct. 293 . time value.culture. flexibility (Eg. political stability. dress sense. low country risk in developed markets and vice versa for emerging markets). judiciary) of doing business in a particular country (Eg. interest rates. customs. credit rating. high cultural adaptability in developed markets and vice versa for emerging markets).

Ethnocentrism – Developed country managers tend to regard their own culture as superior. Other factors – local celebrations. in most emerging markets meetings are delayed and lasts unusually long. Language Barriers – Developed country managers expect foreign partners to communicate in their languages. High levels of ethnocentrism usually has a negative effect on business. 294 .GLOBAL BUSINESS ENVIRONMENT    Time Sensitiveness – Developed country managers regard time as precious. however. in most emerging markets use of an interpreter may be a standard protocol. time-zones. and vice-versa.

The 1999 (Seattle Round) saw a lot of protest amidst bringing agriculture under the purview of TRIPS. BRIC). It also highlighted the nexus between US & WTO. ASEAN. 295 . It focused largely on TRIPS (patents. copyrights.GATT    GATT was a bi-lateral treaty initiated between US and some member countries in 1947 to promote free trade. It a multi-lateral treaty with 143 (as on 2002) member countries to reduce tariff and non-tariff (quota) barriers. It also initiated provisions on anti-dumping. The 2001 (Doha Round) focused on power blocks (NAFTA. trademarks). In 1995 (Uruguay Round) GATT was renamed to WTO.

However.e. the Dollar still remains the most preferred currency globally. Euro). The Euro was significantly devalued against the Dollar till 2002. primarily the OPEC countries. The notable exception was Great Britain which still continues with its local currency (i. However with current recession in the US 2002 onwards. the Euro slowly started outperforming the Dollar.EURO – SINGLE CURRENCY    In 1999 twelve member countries in Europe joined hands to move over to a single currency (i.Pound).e. 296 . Sterling . three countries joined in 2002 increasing it to fifteen members as of 2008.

However. 297 . a multiple currency is preferable where the business cycles of member nations are different. Trade Block – It will strengthen the EU identity which would not have been possible otherwise. it helps avoiding transaction costs associated with a multiple currency.SINGLE Vs MULTIPLE CURRENCY     Transaction Costs – Though the initial cost of introduction of a single currency is very complicated and costly. Rate Uncertainty – A single currency eliminates the risk of competitive devaluations. but it may have spill-over effects. Transparency – A single currency is transparent and competitive.

Neo classical economists believe that foreign investment may in fact be a win-win game. – 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).e.FII Vs FDI INVESTMENT  Classical economists believed that foreign investment (in any form) is basically a zero sum game (i.e. It is short-medium term with comparatively low levels of commitment. It is long term with high levels of commitment. 298 . the gain of one country is loss of another).

Distribution – It depends on the market characteristics (fragmented – concentrated).culture (food habits). technology (microchip). economic (middle class buying power). . customer awareness (microwaves).INTERNATION MARKETING    Product – The various attributes of a product may receive different degrees of emphasis depending on differences in . lifestyle (petroleum 299 outlets – departmental stores). usage (talk time). buying patterns (spread). promotion (surrogate advertising). Pricing – It depends on the competitive structure (PLC – Kellogg's).

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). equity is cheap in India).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. . Leverage – The leverage may vary across countries depending upon money and capital market conditions (Eg. debt is cheap in US.

shortened life cycles). 301 . Compensation – Differential pay packages exists because of differences in purchasing power. skills are more important that cultural fit and vice-versa. labour laws. Training – It is a pre-requisite for international business to reduce language. and cultural barriers (language) vis-à-vis emerging markets.INTERNATIONAL HR     An uniform HR policy is idealistic to enable parity in performance appraisal. however. Recruitment – In local recruitment. double taxation. in most cases it is not desirable nor practiced. social security. technology (convergence.

Outsourcing – A company having a core competence may be the source of global outsourcing (Eg. SCM – Use of ERP to network the extended enterprise 302 across the globe. Technology – The cost to be evaluated in terms of latest technology (Euro VI) vis-à-vis effective cost of appropriate technology (Euro II).INTERNATIONAL OPERATIONS     Location Incentives – FDI in emerging markets should explore options for SEZ’s to explore benefits (tax holidays. . Bosch spark plugs are used by car manufacturers worldwide). reduce power costs) vis-à-vis infrastructural bottlenecks.

CONTEMPORARY TOPICS 303 .

Innovation is all about staying ahead of competition. 304 .INNOVATION      An invention is the first occurrence of an idea for a new product or process. but has inherent risks involved as well. While innovation typically adds value for organizations. innovation is the first attempt to carry it out in practice. Innovations typically paves the way for more secured and improved lifestyle for consumers in general. it has destructive effects as well. Innovation is the most preferred strategy today to maintain competitive advantage in the present turbulent business environment.

Process innovation usually follows product innovation. process innovation is necessary to sustain the competitive advantage of product innovation. While product innovations are typically customer driven. However.      305 . Tangible impact of product innovation on performance is significantly higher than process innovation.TYPES OF INNOVATION A key challenge is maintaining a balance between process and product innovations. Strategic innovation has the potential to change the rules of the game. process innovations are organizational driven.

Data Storage (Pen Drives). Innovations are the back-bone of successful business models .e. Disruptive business models brings in a new frame of reference (i. a paradigm shift). Drug Development (Bio Chemicals). Processors (Pentium).  306 .e. It leads to a shift in the price – performance envelope.BUSINESS MODEL    It is a simplified description and representation of a complex real world. Telecom (CDMA Technology). putting an idea into practice). about how an organization makes money (i. Medical Surgery (Lasik).

The revenue streams generated by the activities. The segment(s) of clients to be addressed. The channels to reach out to the clients. 307 . The proposed relationships established with clients. The key resources and capabilities required. The key partners involved in the activities.NINE BUILDING BLOCKS          Value proposition offered to the market. The key activities / processes necessary for execution. The cost structure resulting from the business model.

BUSINESS MODEL FRAMEWORK 308 .

It is just one piece of the puzzle. Real Estate) companies need to untangle and understand the intricacies of their business model. 309 . innovative companies to carve out unique business models to fend off competition. The revenue model described here are the means to generate revenues. It involves – Product Visualization – Product Prototype – Product Test – Capacity – Pricing – Distribution.REVENUE MODEL     Positioning is just not sufficient. Investment Banking. With the rapid erosion of certain industries (IT.

310 .HOW TO MAKE INNOVATIVE CO’S         Innovative company’s are a matter of culture and aspirations rather than tangible resources. Allow the management sufficient slack to be future oriented. Promote the culture of experimentation. Provide reasonable incentives (not necessarily monetary). Promote the grape-vine. Have a lean and a flat organization structure. Allow the workforce idiosyncrasies for their errors. A favourable intellectual property (IP) climate.

companies are increasingly relying on internal protection to sustain innovation effects.HOW TO PROTECT INNOVATION?     Without adequate protection (external or otherwise) the effects of innovation does not translate to performance. Collusion with the judiciary is also another distinct possibility in emerging markets. The most preferred strategy of internal protection includes imbibing “causal ambiguity” in the production process to make reverse engineering difficult. In most emerging markets where the IP climate is not so favorable. 311 311 . however that possibility is slowly atrophying.

Corporate governance aims to reduce the principal-agent problem present in most professional managed organizations through appropriate forms of accountability and control mechanisms.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. 312 312 . In fact the principles of corporate governance implies that managers go beyond in satisfying the stated and unstated needs of the multiple stakeholders.

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.AGENCY THEORY     The root of Corporate Governance goes back to the Agency Theory. However. 313 . From the strategic point of view managers tend to diversify into unrelated businesses as it provides higher returns hence a more favourable appraisal. also known as the principal-agent problem or agency dilemma. not present in portfolio diversifications. This exposes the shareholders to additional risks and higher costs.

various laws were enacted to ensure proper usage of these funds. SEBI Report – 2005. After the Enron downfall. 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. 2002 to restore public confidence in corporate governance. .ORIGIN & CONTEXT    Since the early 20th century since a large part of public funds were held by publicly traded firms in the US. the US government passed the Sarbanes – Oxley Act.

Interests of other stakeholders: Recognize the legal and other obligations of all legitimate stakeholders. 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. 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.

.GOVERNANCE PRINCIPLES    Integrity and ethical behaviour: Organizations should develop a code of conduct for their top management that promotes ethical and responsible decision making. They should also implement systems to independently verify and safeguard the integrity of the company's financial reporting. Disclosure and transparency: Disclosure of information should be timely and balanced to ensure that investors have clear access to data and facts. Independence of the entity's auditors: Identification. assessment and mitigation of risks and retirement by rotation over a fixed period of time. 316 316 .

317 . However. fire and compensate top management.GOVERNANCE STRATEGIES    Monitoring by the board of directors: The board of directors. Balance of power: The simplest balance of power is very common. Regular board meetings allow potential problems to be identified. Remuneration: Performance-based remuneration is designed to relate some proportion of salary to individual performance. a person benefitting from a decision should abstain from it. they should provide no mechanism or scope for opportunistic behaviour. discussed and resolved. with its legal authority to hire. safeguards invested capital.

GOVERNANCE & PERFORMANCE In its “Global Investor Opinion Survey” of over 200 institutional investors in 2002. and was responsive to investors' requests for information on governance issues. undertook formal evaluation of its directors. from 10% for companies where the regulatory backdrop was least certain (those in Morocco. 318  . They defined a well-governed company as one that had mostly out-side directors. McKinsey found that 80% of the respondents would pay a premium for wellgoverned companies. The size of the premium varied by market. who had no management ties. Egypt and Russia) to around 40% for Canadian & European companies.

Over a period of time. Therefore. the short-term view of profit maximisation gave way to a more broader and mediumterm view wealth maximisation of the shareholders. today economic institutions are considered as a major drivers of improvement in quality of life in general and therefore needs to include multiple stakeholders. The basic premise is that firms cannot exist in vacuum.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. 319 . However. corporate philanthropy should be a part of every corporate mission.

giving a very important message that one cannot exist without the other.CORPORATE SOCIAL RESPONSIBILITY     As Peter Drucker rightly pointed out that. Therefore. “a healthy business cannot exist in a sick and impoverished society”. However. economic and social responsibilities cannot be mutually exclusive. the debate on CRS still continues whether firms should detract its focus from its business? 320 . “an enterprises decisions and actions being taken for reasons at least partially beyond its immediate economic interests”. in fact a large part of it is significantly overlapping. Therefore. CSR can be defined as.

people are becoming increasingly aware of their right to a decent and healthy life. Public image: Entrepreneurs are increasingly relying on public image as a source of competitive advantage and a higher financial discounting. MRTP). 321 . The role of media: The media and various consumer organizations have come up in protecting consumer rights and exposing mal-practices.GROWING CONCERN FOR CSR     Awareness due to education: With growing literacy. Fear of government interference: Excessive quench for profits may lead to build up of adverse public opinion compelling the government to intervene (Eg.

  322 . Tata Steel – Life Line Express). Health & Hygiene – Attending the health hazards due to wastes and by-products to employees and society in proximity (Eg. Aditya Birla Research Centre – LBS). designing eco-friendly products.CSR STRATEGIES  Green Supply Chain Management: It includes environmentally preferable purchasing. Exide – Product take back).Paper packaging. Education. and extended producer responsibility (Eg. Refrigerators – CFC. eco efficiency. Cement . Literacy & Training Programs – (Eg.

K. In turn companies by serving these markets. they're helping millions of the world's poorest people to escape poverty. Prahalad notes that future markets exist collectively. C. across the world's billions of poor people having immense untapped buying power. 323 .BOTTOM OF THE PYRAMID    With the market across most developed markets including the US getting saturated. They represent an enormous opportunity for companies who learn how to serve them. Strategic innovations leading to disruptive business models can show the way out.

BLUE OCEAN STRATEGY 324 .

TWO WORLDS 325 .MARKETSPACE .

where most industries are saturated. In today’s red oceans. . one companies gain is always at the 326 cost of another companies loss.WHAT IS RED OCEAN?    Companies have long engaged in head-to-head competition in search of sustained. They have fought for profits. competing head on results in nothing but a bloody red ocean of rivals fighting over a shrinking profit pool. battled over market-share. profitable growth. and struggled for differentiation (cost or product). Yet in today’s overcrowded industries.

WHAT IS BLUE OCEAN?    Tomorrow’s leading companies will succeed not by battling in red oceans. Blue Ocean’s have existed in the past. It helps in creating powerful leaps in value for both the firm and its buyers. it will exist 327 in the future as well. It is only the frames of the . Such strategic moves are possible through the pursuit of product differentiation and low cost simultaneously. but by creating blue oceans of uncontested market space ripe for growth . rendering rivals obsolete and unleashing new demand.

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 .

Demand across developed markets reaching a plateau. Technological advances have substantially 329 improved industrial productivity. of European nations. Niche markets & monopoly havens are continuing to disappear. As trade barriers between nations & regions fall.BLUE OCEAN STRATEGY IMPERATIVES       Prospects in most established market spaces – red oceans – are shrinking steadily. Population shrinkage across a no. . information imperfections atrophy instantly.

.CONCEPTUAL UNDERPINNINGS       Blue oceans have existed in the past and will exist in the future as well. Incumbents often create blue oceans within the ambit of their core business. They are not necessarily about technology. Company & industry are the wrong units of 330 strategic analysis. the underlying technology was often already in existence. managerial moves are. 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).

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 .

Citibank – Automated teller machines & credit 333 cards. Southwest Airlines: Pioneering the concept of LCC.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.

All they need to do is change their managerial frames. According to this view managers need not be constrained to act within the confines of their industry. greater than themselves. 334 . Off late emerging views in strategy having its origin in (Organization Theory) led to a paradigm shift to what is called the – reconstructionist view.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. companies & managers are largely at the mercy of economic forces. According to this view.

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