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