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