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