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Course Code: 611 & 612 Dr. Subir Sen – Faculty Member, IBS
E-Mail: firstname.lastname@example.org, 9830697368 1) Crafting & Executing Strategy – Thompson & Strickland. 2) Strategic Management – Pearce & Robinson. 3) Strategic Management – Fred. R. David. 4) Exploring Corporate Strategy – Johnson & Scholes. 5) Competitive Advantage – Michael E. Porter. 6) HBR – Articles & Case Studies.
STRATEGY - DEFINITION
Strategy is all about making trade-offs between what to do and more importantly what not to do; consciously choosing to differentiate. It reflects a congruence between external opportunities and internal capabilities. Types of strategies – Corporate Strategies – It is all about making choices across various businesses and allocating resources among them. Business Strategies – It is all about developing leveraging and sustaining competitive advantage. Functional Strategies – It is all about finding newer ways to perform existing processes, or 3 better still adopting new processes altogether.
STRATEGIC MANAGEMENT DEFINITION
Strategic management attempts to integrate the traditional management functions and align the organization as a whole with the broader environment to make resource allocations in a way to achieve the strategic intent of the organization. This alignment is called strategic fit. It serves as a road-map for the organization in its growth trajectory. It provides the direction – extent – pace – timing. It depends on the turbulence of the environment and the aggressiveness of the organization. It distinguishes the winners from the losers.
PILLARS OF STRATEGIC MANAGEMENT
Differentiation – Differentiation of key inputs and technologies helps a firm to consciously move away from homogeneous to heterogeneous markets enabling them to earn super-normal profits from normal profits. Integration – Whenever dealing with a complex task of managing a business (i.e. involving a no. of variables with cross linkages) it is in the interest of simplicity that the task be broken up in smaller components. However, for effective control, integration is essential. Alignment – Since differentiation is prone to replication, it is in the interest of the firm to differentiate continuously by aligning the resources with environmental opportunities.
STRATEGIC MANAGEMENT FRAMEWORK
Economic al Strategic Finance Fit Political Strategic Intent Fit Political Marketin g Manageme nt Social & Cultural
It involves substantial resource outlay. It is about adaptation and response to the same. It is a holistic and integrated approach.STRATEGIC MANAGEMENT . It requires full commitment of the top management.FEATURES It forms the core activity of the top management. 7 . It provides broad guidelines. It is long-term in nature. It is irreversible. It is all about creativity and innovation.
It brings instant success. It is fool-proof in nature. It about mere data and facts.STRATEGIC MANAGEMENT – MYTHS It involves short-cuts. It involves nitty-gritty's. It is about a definite formula. It involves only the top management. 8 . It attempts to minimize risk. It is about forecasting. It is rocket science. It a bundle of techniques or even tricks.
To be future oriented. To assimilate change faster. To gain expertise in technologies. To be proactive. To innovate. rather than reactive. To leverage size. 9 To develop core–competencies. .STRATEGIC MANAGEMENT IMPERATIVES To be continuously alert. again and again ……. To tap markets across boundaries. To generate large resource pool. To be insulated against environmental threats. scale and scope.
but with a lot a rigour and robustness. and more importantly . In the ancient days battles were won not by virtue of size of the army or armory. today's battles are fought over markets. Even in today’s markets.ORIGIN The word strategy has its origin from the Greek word strategia meaning Military Commander.STRATEGY .strategies. but by virtue of their courage. It is an old wine in a new bottle. obsession. 10 . 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. whose origin can be traced to some of the greatest battles fought in the ancient days. In contrast.
US attack of Morocco to capture Germany – Strategy: Pin-hole strategy – Wal-Mart challenging Sears by entering small towns. 11 .SOME PARALLELS Japan’s attack on Pearl Harbour – Strategy: Attack where it hurts the most. – Yahoo and Microsoft challenging Google. Allied Forces Vs Germany (WW-II) – Strategy: Forging alliances. challenging GM and Ford. – Toyota’s entry in the US. Napoleon’s attack on Russia – Strategy: Waiting for the right time. – Reliance’s entry into telecom.
a radical change in the business environment brings about discontinuity. – Mass Production Organization Size – Complicated Processes – Complex Structures Evolving of an emerging paradigm – survival of the fittest (Fayol & Taylor. The things happening around the firm when totally disconnected from the past leads to a paradigm shift. A paradigm is a dominant belief about how the business and its environment operates. 12 .Industrial Revolution. 1910).EVOLUTION OF MANAGEMENT As Peter Drucker refers to it. The first major discontinuity in the history of global business environment was the .
e. Efficiency and effectiveness are no longer sufficient. The question of outperforming the benchmark became the new buzzword. Survival of the most adaptable becomes a new management paradigm (Ansoff. push to pull).EVOLUTION OF STRATEGIC MANAGEMENT The second major discontinuity in the history of global economic environment – World War II. – Affluence of the new customer (i. – Homogeneous to heterogeneous products. 13 . – Global market place. – Changes in the technology fore-front. performance across firms became differentiated. From uniform performance. 1960).
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. 15 . Learning always begin on a clean sheet of paper. – The choice of product-market mix is based on conscious evaluation of risk – return factors. – Biases and prejudices has a very little role to play in strategic choices pursued by managers.APPROACHES TO STRATEGY Analytical Approach – Igor H. – It is primarily the top management’s prerogative. Ansoff (1960) – Strategy can be segregated into certain mutually exclusive and inter-related components aimed at managing the growth of an organization.
who will be the top managers.APPROACHES TO STRATEGY Design Approach – Alfred Chandler (1970) – Structure follows strategy. how it will compete. – Management control systems has a dominating role in influencing firm performance. 16 . everything else follows. – Organization structure will precede and cause changes in strategy. – The top managers then decide on the type of organization structure & systems to be in place. Once the control systems are in place. The organization initially decides which industry to enter. Successful organizations align authority and responsibility of various departments in way to reach overall objectives.
– A firms performance is inversely related with the bargaining power of environmental forces to which it is exposed. – 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. 17 . substitutes. new entrant. competitors. – The environmental forces comprises of – supplier. customer. Porter (1980) – Choose a consumer segment and position your product accordingly.APPROACHES TO STRATEGY Positioning Approach – Michael E.
– It enables a firm to deliver unimaginable value ahead of time. K. 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. 18 . – Organizations can significantly alter the way an industry functions. locating in most attractive industries and pursuing the same strategy. They are complex resources and undermines a firms competitive advantage. but exploiting the resource differences among them.
STRATEGIC MANAGEMENT PROCESS Strategic Intent Strategic Planning Strategic Gap – Environmental Scanning – Internal Appraisal of the Firm Strategy Formulation – Corporate Strategy – Business Strategy Strategic Choices – Functional Strategy Strategy Implementation Strategy Performance Strategy Evaluation & Control 19 .
TOP MANAGEMENT PERSPECTIVE 20 .
It is the cornerstone of an organizations strategic architecture reflecting its desired future state or its aspirations. A strategic intent is a statement of purpose of existence.STRATEGIC INTENT If you cannot see the future. It involves an obsession to be the best or outperform the best. It implies a significant stretch. It’s a philosophy that distinguishes it from its competitors. A substantial gap between its resources and aspirations. you cannot reach there. It provides a sense of direction and destiny. 21 . A gap that consciously manages between stagnation and atrophy.
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 .
23 .e. To put it more simply. when radical changes in the internal and external environment (i. It is core to the strategic intent of the firm. 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 can be perceived as a set of working rules (similar to thumb rules) that enables the top management to decide what can be done and more importantly what cannot be done.
– It stands for the unchanging core values of the company. 24 . It is a combination of three basic elements – – An organizations fundamental reason for existence. It enables the top management to remain focused. It provides an unity of purpose amidst diversity of personal goals. 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 represents the company’s audacious. beyond just making money. but achievable aspirations.
not an utopian dream. Brevity – It should be short. Reachable – It should be within a reasonable target in the known future. 25 . clear. Empathy – It should reflect the company’s beliefs to which it is sensitive. In Reliance when a new project becomes operational top managers hand over charge to the SBU heads and move on to a new project. and memorizable. Clarity – Vividly descriptive image of what the company wants to be known for in the future. Sharing – The company across all hierarchies should have faith in it.CHARACTERISTICS Reliance – Where growth is a way of life.VISION .
It lends integrity and genuineness. It gives the impression of a forward-looking organisation.VISION . 26 .ADVANTAGES To stay focused on the right track. It fosters risk taking and experimentation. To prevent the fall in a activity trap. It provides a holistic picture. It gives enlightment. It facilitates development of skills & capabilities. It gives a shared platform. It makes strategic alignment easier.
It enables the firm to define its business landscape and identify its competitive forces. 27 . A broad mission statement helps in fending competitors. It is intuitive for managers to conceive their business in terms of the customer needs they are serving – What business are we in? – Which customer needs are we serving? It should be broad based and relevant to all stake-holders.MISSION Mission defines the space that a business wants to create for itself in a competitive terrain. It serves as a road map to reach the vision. its reason for existence. Although the purpose may change over time.
All the businesses of the company are strongly integrated with their main business. We offer comfort. – We do not offer insurance. …………………. though some may seem unrelated in nature. We offer security. – We do not offer steel.MISSION – SOME IDEAS Reliance – We are in the business of integration. 28 . …………………. Some other examples – We do not offer shoes. We offer strength. …………………. – We do not offer software's. We offer solutions. ………………….
– It keeps the mid management pre-occupied.100K crore company by the year 2005. – It adds legitimacy and motivation. 29 . – It provides a benchmark for evaluation. It provides a quantitative feel to an abstract proposition. – It prevents deviation. – It helps identifying key success factors. It is an end result (quantifiable) something a firm aims and tries to reach in a time bound frame. – It lends direction – time frame in the medium term.GOALS & OBJECTIVES Reliance – We want to become a Rs. – It is based on Management by Objectives (MBO).
– Compress project times. and gaining access to desired markets to achieve the desired goals and objectives. – Acquire a market share of indomitable position. It is the process of garnering necessary inputs. 30 . – Use price-elasticity to break market barriers.PLANS Reliance – Desire to invest 25K crore in telecom business by circa 2010. It is specific to a particular business. – Leverage economies of size and scale. coordinating appropriate technologies. The details of the plan Reliance Telecom adopted were – Backward integrate process technologies.
Historical studies have shown that most organizations tend to continue with their existing strategies. equilibrium is maintained.STRATEGIC DRIFT Due to top management commitment. radical change may lead to disequilibrium. It often leads to an organizational crisis. This tendency to restore continuity is known as inertia (resistance to change). This state of affairs is known as strategic drift. In such a context. However. strategies lose touch with the emerging realities. When changes in the environment is incremental. 31 . past strategies tend to have a bearing on future strategies.
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 .
– Developing a platform of support. 33 . Some instances of organizational politics – Formation of powerful groups or coteries. – Hiding vulnerability. – Creating a favourable image. Organizational politics involves intentional acts of influence to enhance or protect the self-interest of individuals or groups over organizational goals. – Distorting information to gain mileage. – Using covert tactics to pursue self interests. – Creating obligations of reciprocity.ORGANIZATIONAL POLITICS Strategic drift often leads to organizational politics.
Other causes – – The plans are unworkable and utopian. A realized strategy is what the top management actually translates into practice. – Persons responsible for strategy conceptualization and implementation are34 divergent. . – The environment context has changed. – Influential stake-holders back out.INTENDED & REALISED STRATEGIES An intended strategy is an expression of interest of a desired strategic direction. Usually there is wide gap between the two when organizational politics is evident.
Learning is an integral part of logical incrementalism. 35 . this is not to be treated as “muddling”. but the master scheme of the rational comprehensive scheme is not apparent. They simply unfold the particulars of the sub-system in stages. However. Strategy formulation and implementation are linked together in a continuous improvement cycle.LOGICAL INCREMENTALISM According to the incrementalism approach (contrary to integrated approach) practitioners simply do not arrive at goals and announce them in crafted and well defined packages. but as a defensible response to the complexities of a large organization that mitigate against publicizing goals.
The broader objective should serve the overall interest of the organization. Agent of Change – Formal ratification of a change plan through MBO. Macro Broadcasting – The broad idea is floated without details to invite pros and cons leading to finer refinements.IMPLEMENTING INCREMENTALISM General Concern – A vaguely felt awareness of an issue or opportunity. 36 . Leveraging Crisis – A sudden crisis or an opportunity should be used as a trigger to facilitate acceptance and implementation of change. Adaptation – As implementation progresses.
Dominant logic’s are very rigid and sticky and prone to inertia. It creates blinders.STRATEGIC TRANSFORMATION Strategic transformation (a complete overhauling of the strategic architecture) becomes inevitable whenever a strategic drift takes place. Dominant logic’s are the cornerstones of change when strategic transformation is apparent. . Tampering with surface level factors often leads to atrophy. Strategic transformation becomes smooth through a change in top leadership. As it brings 37 with it a different dominant logic.
– Organisational Slack – Enough free space. experience. A learning organization must continuously focus on unlearning as well. – Constructive Bargaining – Agree to disagree. – Informal Networks – Emerging of new ideas.LEARNING ORGANIZATION A learning organization is capable of continual regeneration from knowledge. Factors that fosters a learning organization – Pluralistic – An environment where different and even conflicting ideas are welcome. and skills that fosters experimentation and questioning and challenge around a shared purpose. 38 . It helps prevent a strategic drift from occurring at the first place. – Experimentation – Fosters a culture of risk taking.
ENVIRONMENTAL CONDITIONS Dynamic Scenario Planning Learning Organization Static Forecasting Decentralization Simple Complex 39 .
ANALYZING BUSINESS ENVIRONMENT 40 .
It points to a position of superiority with relation to competition. Strategic planning is a function of discounting the future. It is based on the assumption of radical change. It is pro-active in nature. gap analysis). It is reactive in nature. It is based on the assumption of incremental change. 41 . Strategic gap basically points towards a vacuum of where the organisation wants to be and where it is.e. Competitive advantage provides the surest way to fulfill the strategic gap. It requires a quantum leap (i.PLANNING & STRATEGIC PLANNING Formal planning is a function of extrapolating the past.
not guided by any boundaries. A manager has to continuously scan the environment to ensure alignment of the strategies with the radically changing environment. events.ENVIRONMENTAL SCANNING The environment is defined as the aggregate of conditions. and influences that affect an organizations way of doing things. Environmental factors can be external as well as internal to the organization. resources and ideas move unhindered. 42 . It is exploratory in nature. Environmental scanning is very important component of strategic planning. The segments of the environment a top manager scans selectively depends upon his dominant logics. The world is flat.
It is important not only to identify the structural drivers of change. for which a holistic picture is required. It is not intended to be used as an exhaustive list. It is particularly important that PESTEL be used to look at the future impact of environmental factors. 43 . which may be different from the past impact. but also to analyze the complex linkages across them. Understanding the composite effect is critical.PESTEL PESTEL attempts to provide a broad framework on how the broader environmental forces affects an organization and influences the way it practices strategy.
Currency Stability. Economic Model. Inflation & Interest Rates. Central – State Co-alignment. Monsoon & Food Grains Reserves. Economic Cycles. FDI Inflows. Income & Age Distribution. Licensing & Quotas. Economic – GDP. Religious Sentiments. Infra-Structural Investments. Subsidies & Protection. Savings & Investment. Fiscal Deficit. Government Attitude. Social Values.PESTEL FRAMEWORK Political – Government Stability. Language Barriers. Capital Market & Forex Reserves. Social – Population Diversity. 44 . Literacy Levels.
Environmental – Global Warming & CSR. Obsolescence Rate. Product Safety & Health Hazards. Non-Fossil & Alternative Fuels. Waste Disposal & Emissions.PESTEL FRAMEWORK Technological – Innovation. Direct & Indirect Taxes. Research & Development. Patents. Extended Producer Responsibility. Environmentally Preferable Purchasing. Carbon Credits. Legal – Monopolies Legislation. Product Design. Pollution Control Laws. Employment Laws. Patent Laws. ERP. Technological Convergence. Consumer Protection Laws. 45 .
Structural Adjustments – Phasing out subsidies. Economic Reforms – Fiscal & Monetary Reforms. PSU Disinvestments. Capital Market Reforms. Dismantling price controls. Exit Policy. Rupee convertibility. Encouraging exports. Banking Sector Reforms.VRS. 46 . New Trade Policy (NTP) – Lowering import tariffs.ECONOMIC LIBERALISATION New Industrial Policy (NIP) – Liberalizing industrial licensing. FERA Liberalization. Encouraging FDI. Abolition of import licenses. Curtailment of PSU’s. MRTP Liberalization.
Survival of the fittest MNC Onslaught – Enhancing stakes – Power Equation – Joint Ventures – Technological Alliances – Take-over threat. Mergers & Acquisitions 47 .DISCONTINUITY Destabilization due to entrepreneurial freedom – Cocoon of protection disappears – Diversification spree – Existing notions of size shaken – Industry structures change radically – Economic Darwinism .
DISCONTINUITY Hyper Competition – MNC’s . Consumerism Challenges on the technology front – Competencies become technology based – Investment in R&D become inescapable 48 .Globalization – Cheap Imports & Dumping – Push to Pull Marketing Buyers exacting demands – Shortage to surplus – Price competition – Life-style changes – Stress on quality.
DISCONTINUITY Compulsion to find export markets – Identifying competitive advantage – Technological gap – Global presence – Depreciating currency – Exports Corporate vulnerability – It is no longer business as usual – Capital inadequacy – Lack of product clout and brand power – One product syndrome – Loss of monopoly 49 .
PORTER Threat of New Entrants Bargainin g power of Suppliers Competition from Existing Players Bargainin gBargainin power g of power of Suppliers Customer s Threat of Substitutes 50 .FIVE FORCES MODEL .
The model should not be used as a snapshot in time. incremental or otherwise.e.FIVE FORCES MODEL ASSUMPTIONS The model is to be used at the SBU level and not at the industry level. but also used to understand how they can be countered and overcome. profit potential) per se. It depicts the attractiveness of an industry (i. 51 . It should not only be used to understand the forces. The five forces have strong cross-linkages. the forces are subject to changes. It is even wiser to apply the same at the product – market level.
Threat of Customers – Buyer concentration and volumes. Low customer switching costs. Capital requirements. Learning curve advantages. Product differentiation through proprietary technology or brand power. High switching costs. Industry stagnation. Low margins & stagnancy. Government policy. Low relative importance of the segment. Unimportance of product quality. Presence of substitutes or unorganized sector. Access to distribution channels. 52 . Resource profile & fear of retaliation.PORTERS FIVE FORCES ANALYSIS Threat to Entry – Economies of size and scale. Scope for backward integration. Undifferentiated product.
Buyer’s propensity to substitute. Low level of differentiation. Diversity of players. Differentiated inputs. High exit barriers. Piracy and counterfeits. Produced by industries earning high profits. Threat of Substitutes – Improvement in price -performance trade-off. Low relative importance of the segment. Product perishability. 53 . Industry stagnancy. Lack of substitute inputs. Scope for forward integration. High customer switching costs. Intermittent overcapacity.PORTERS FIVE FORCES ANALYSIS Threat of Suppliers – Supplier monopoly. Unorganised sector. Jockeying for position – Fragmented market.
Inertia – Excessive commitment to past strategies prevents firms from tapping emerging opportunities. dominant or related diversified or unrelated diversified businesses (Infosys.FIRM ENVIRONMENT Size and Scale of Operations – It is a very important component of competitiveness in today's global context (Bharti – MTN. Tata). Business Scope – The intention whether the firm wants to be in a single. Cohesiveness – Degree of bonding existing across affiliated firms. Resource Profile – It highlights the capabilities (generic) or competencies (business specific) of the firm. Reliance). 54 .
experience teaches better and more effective way of doing things. and with lower prices it can increase its sales volume. Experience curve has strong linkages with performance. leverage it as a competitive advantage. it can price its products more competitively. 55 . However. an E-Curve can prove to be futile during discontinuity. The E-Curve thus enables organisations to build entry barriers.EXPERIENCE CURVE The cost of performing an activity declines on per-unit basis as a firm becomes more efficient. With lower costs. Matured firms will always be positioned advantageously on the ECurve than new entrants. which further reduces costs.
EXPERIENCE CURVE Cost per unit of output Decreases at an increasing rate Point of inflexion Decreases at a constant rate Decreases at a decreasing rate Production / Volume 56 .
EXPERIENCE CURVE .TRADITIONAL VIEW Efficiency = Lower Costs 2 3 1 Experience = Efficiency Lower Costs = Higher Sales Entry Barrier = Better Performance 4 6 5 Higher Sales = Lower Costs Lower Costs = Entry Barrier 57 .
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 .
Observation. Interviews. Case Studies – Structured Questionnaires. Customers. 59 Analysts. It helps an organisation to capitalize on the opportunities by maximizing its strengths and neutralizing the threats minimizing the weaknesses.VULNERABILITY ANALYSIS . Press Clippings & Interviews. Suppliers. A SWOT audit involves – Company Records – Annual Reports. Business Intelligence – Bankers. Websites. Competitors. 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.
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 .
Economies of scale – Eg. Volkswagen. Motivated employees & cordial industrial relations – Eg. Engineering Skills – Eg. Ranbaxy. Infosys.SOURCES OF STRENGTH Strong brand identity – Eg. Sony. Aditya Birla. Caterpillar. Siemens. SBI. Excellent penetration – Eg. Tata Steel. Tata. ITC. Reddy’s. Large resource pool – Eg. 61 . High quality products – Eg. Strong after sales & service network – Eg. Honda. Biocon. Reliance. HUL. Dr. Infosys. Toyota. Strong R&D base – Eg. Good credit rating – Eg. Reliance.
Raymond. Ballarpur Inds. CMC (Tata Group) 62 . Excess manpower – Eg. Procter & Gamble.SOURCES OF WEAKNESSES Outdated technology – Eg. Organizational Politics – Eg. K. Single product syndrome – Eg. Lack of product / brand clout – Eg. Group . Tatas. Modi Group. Inertia – Eg. Hindustan Motors. Nirma. CESC. Inefficient top management – Eg. K. Bijoligrill. Lacking experimentation culture – Eg. J. Strategic myopia – Eg. Narrow business scope – Eg. SAIL. Excessive diversification – Eg. B.
Insurance. Free pricing – Eg. GDR’s. Fertilizer. Exit Policy – Eg. Banking. ECB’s. 63 . Middle-class buying power. Growing population – Eg.SOURCES OF OPPORTUNITIES Delicensing of Industries – Eg. Market driven Pricing – Eg. Retailing. Abolishing MRTP – Eg. Life style changes – Eg. VRS. Collaborations & Joint Ventures – Bharti & WalMart. Capital market reforms – Eg. Globalization – Eg. Market driven Interest rates – Eg. Abolishing CCI. Fertilizers. Maruti.Tata Motors. Sugar. Sugar. Telecom.
Satyam. (1985–1990). Terrorist attacks – Eg. Reliance. Economic recession – Eg. (2008). Foreign Direct Investment (FDI) – Eg. Group disintegration – Eg. Tata Steel. 64 . Dumping from China. Natural disaster – Eg. Land acquisition . Lack of Corporate Governance – Eg. Singur SEZ. Onida. Hostile take-over – Eg. 11/9. Tsunami.SOURCES OF THREATS Political instability – Eg. Earth Quake. Import relaxation – Eg.Social activism – Eg. 26/11. Bajoria – Bombay Dyeing. Nationalisation – Eg.
time series. Assess the extent of impact of the factors. Holistic view – Prepare a complete overall picture.ETOP Acronym for Environment – Threat – Opportunity – Profile. scenario analysis). Delphi's technique.e. Stages in ETOP analysis – List the aspects of the environment that has a bearing on the organization. 65 . Forecasting – Predict the future (i. It represents a summary picture of the external environmental factors and their likely impact on the organization. Strategic responses (including adaptation) to opportunities and threats is critical for survival and success.
An organization can draw upon the experience of its peers in similar situations. . Relative attractiveness of the market.PROFIT IMPACT OF MARKET STRATEGY PIMS is a database model developed by GE and later extended by HBS to examine the impact of a wide range of strategy variables on business performance. 66 Vertical integration is a powerful strategy. Some key findings on major performance drivers that explains 75% deviations in performance – Product quality and relative market share. selectively. It is also a form of assessing vulnerability through longitudinal analysis. High investment intensity acts as a drag.
therefore 67 validity may be a question. Authenticity of data is of prime importance – Contexts drawn across one organization may not be applicable to another. – Contexts may vary across countries. .PIMS . As every organization is unique in its own way.LIMITATIONS The analysis is based on historical data and it does not take care of future challenges. when radical changes in the economy takes place. Managers should be particularly cautious while referring to such data during times of discontinuity as it makes past patterns futile. – Contexts may vary over time.
KEY SUCCESS FACTORS (KSF) KSF relates to identification and putting concentrated effort on a particular activity or process which forms the very basis of competitive advantage. It enables the top management to draw focus. 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 .
GRAND STRATEGY It is concerned with the overall business scope (single. It determines the locus a firm encounters with internal and external environment. unrelated) and geographical scope (local. It reflects the customer needs it intends to satisfy. A corporate strategy identifies and fixes the strategic gap it proposes to fill. 70 . It provides broad direction to the groups vision and mission. global) of a firm and deals with choices of allocating resources across them.CORPORATE . related. It indicates the quality of growth an organization is looking for. dominant. national.
CORPORATE STRATEGY MATRIX Corporate Strategy Stability Stability Growth Growth Combination Diversification Divestment Intensification Market Penetration Related Vertical Market Development Product Development Unrelated Horizontal 71 .
(Eg. Citibank). 72 .STABILITY It involves maintaining status-quo or growing in a slow and selective manner. – Why disturb the existing equilibrium set up? – Limited resource position. Even during adverse times firms need to adopt a strategy to sustain current performance levels. Stability however. The scale and scope of present operations remains almost intact. Hindustan Motors). – The firm may not be willing to take additional risk associated with new projects. The reasons for stability strategy – – Lack of attractive opportunities. – To stop for a while and assess past records. erosion of capabilities. does not relate to do-nothing (Eg.
73 .GROWTH .ANSOFF’S MODEL New Product Existing Product Existing Market Market Penetration (+) Product Development (++) New Market Market Development (++) Diversificatio n (+++) Note: (+) indicates degree of growth and risk involved.
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. 74 . Ujjala. – Elongated product life-cycle. convert competitors customers. – Helps firms which are not comfortable with unfamiliar terrain. – Suitable for industries where scope for technological breakthrough is limited. within a well defined market segment. Nirma. Market penetration can be achieved by – increasing sales to current customers. – The company carries a risk of product obsolescence. direct non-users to users. (Eg. Britannia).
Du Pont – Nylon: parachutes. tyres. (Eg.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. – Creativity and innovation – thinking out of the box. fabrics. 75 . – Immense customer reach & flexible advertising. – Unconventional and flexible distribution channels. upholstery.…… or Teflon: aircraft technologies to cutlery to paints or Raytheon Corp – Microwaves: radars to kitchen appliances). carpets. – Moves across geographical boundaries. socks & stockings. – Stretches product life cycles.
aesthetics. serviceability. perception. – Leverage on customer and brand loyalty. Refills) 76 . – Deliverable through – redesigning or reengineering. – Leveraging through – innovation. features.Strolleys). conformance. – Substitutes that serve the same needs (Eg. durability. – Areas of product improvement – performance. Close Up: Fluoride – Gel toothpaste or VIP .PRODUCT DEVELOPMENT It is a strategy where a firm tries to achieve growth through a radical new product (Eg. reliability. Microsoft: DOS to Windows) or a substantial improved version (incremental) of an existing product to repeatedly enter the same market (Eg.
From the modern point of view they are strategically dissimilar.DIVERSIFICATION It marks the entry of a firm into newer markets with new products.e. licenses (i. From the traditional point of view. Why do firms diversify in the Indian context? – Shift the growth trajectory or opportunistic. dominance). – High transaction costs and institutional gaps. industrial embassies). the new business is distinct from the existing business in terms of – inputs – technologies – markets. 77 . – Internal capital market.e. – Permits: quotas. thereby creating a new business. – Risk reduction. – Conglomerate or market power (i.
If the hot wave dominates the planet. If on the other hand. What would be your ideal diversification strategy through optimization? 78 .HOW DIVERSIFICATION REDUCES RISK? Consider a hypothetical planet. Let us assume that there are two businesses constituting the entire market – coffee and icecream. the ice-cream business would register a return of 30%. either of which is equally likely to prevail. in which a given year is either under hot or cold wave. while the coffee business would register a return of 30%. while the coffee business would register a return of 10%. cold wave dominates the planet. ice-cream business would register a return of 10%.
If we diversified in either of the two businesses, our expected return will be 20%, with a possible risk of 10%. If, we split our investment between the two businesses in equal proportion, half of our investment will earn a return of 30%, while the other half would earn 10%, so our expected return would still be 20%. But in the second instance there is no possibility of deviation of returns (i.e. risk). Diversification results in 20% expected return with zero risk, whereas investing in individual businesses was yielding an expected return of 20% with a risk factor of 10%. The pivotal point is that the two businesses are negatively correlated. 79
It takes place when a company increases the breadth of a firms business or geographical scope by getting into product – market segments which compliments its existing businesses (Eg. Reliance). Alternatively, existing business may recreate new businesses, which are distinct, but supplements its existing business (Eg. Bajaj – scooters to motorcycles, Dove – soaps to shampoo). – It results in increased market power. – Leveraging existing capabilities. – Resources can be shared for mutual benefit. – Reduces economic risk (i.e. business cycles). – Enables brand or product line extension.
It increases the depth of its business scope either in a backward business process or in a forward one. Backward integration occurs when the company starts manufacturing its inputs or catalysts. In forward integration a firm moves into marketing of its products and services. Advantages of backward integration – – Cost competitiveness – entry barrier. – Better operational control – timely supplies, quality control, coordination – JIT, savings in indirect taxes. Disadvantages of backward integration – – It may spark of a chain reaction - contagion effect. – Long gestation & break even - investment in CAPEX.
Oil & Gas exploration Naptha-cracking Acetic Acid Paraxylene (PX)
Purified tetra-pthalic acid
Polyester Filament Polyester Staple Fibre (PSF) Yarn (PFY) Textiles 83
DIVERSIFICATION SUCCESS ?
While diversifying into new businesses, the scope of relatedness or unrelatedness should not be judged from the traditional static view, but from the modern dynamic view which incorporates strategic factors like capabilities and dominant logic. Countermanding reasons – Potential to reap economies of scope across SBU’s that can share the same strategic asset. Potential to use an existing capability to help improve the quality of a strategic asset in another business. Potential to use an existing capability to create a new strategic asset in another business. Potential to expand the existing pool of capabilities. Dominant logic ensures timely & appropriate response.
A firm produces part of its own requirements and buys the rest from outside suppliers with a variable degree of ownership and control.QUASI & TAPERED INTEGRATION Full Integration . Reliance). Ranbaxy. Quasi-integration . Tapered integration . 85 . Reddy’s). Dr.Where one firm has full ownership and control over all the stages of a value-chain in the manufacturing of a product (Eg.A firm gets most of its requirements from one or more outside suppliers that is under its partial control through value chain partnerships (Eg. and out-sources the noncore activities (Eg. Maruti – Sona Steering). Usually the firm concentrates on its core activities.
A CASE OF TAPERED INTEGRATION Partial Ownershi p Transmission Engine Design Electricals Steering 86 Seats & Carpets Windscreen Ordinary Components Zero Ownership Very Critical Component s Full Ownership Critical Component s .
lack of strategic intent. Drawbacks of unrelated diversification – – Cost of failure (i. – Cost of ignorance (i.CONGLOMERATE DIVERSIFICATION It relates to entry of firms into businesses which are distinct in terms of – inputs – technologies – markets. – Cost of dysynergy (i.e.e. – Cost of neglect (i. core business). synergies pulling in opposite directions).e. Firms usually engage in conglomerate diversification when emerging opportunities are very attractive and offers potential growth opportunities. lack of knowledge of competitive forces). 87 . and are also strategically dissimilar.e. myopia).
CONGLOMERATE DIVERSIFICATION Paper & Packaging Edible Oils Tobacco Hotels Food & Confectionary 88 .
89 . Tatas sale of Goodlass Nerolac.DIVESTMENT Divestment is a defensive strategy involving the sale of entire stake (Eg. In strategy there is no scope for sentimentality with divestment. It is may also be a pro-active strategy. ACC) in full to an independent entity. Tata Pharma. where a company simply exits because the business no longer contribute to or fit its dominant logic. (Eg. L&TCement Division to Aditya Birla Group) technically known as divestiture or a product (Eg. Glaxo’s “Glucon-D” to Heinz). It taken into account when performance is disappointing (i.e. It may also involve a SBU (Eg. Tata Press). reactive) and survival is at stake and the firm does not have resources to fend off competitive forces.
where the equity is allotted amongst the existing shareholders on a pro-rata basis. Tatas buy-out of Corus for US $ 11. involving 608 pence per share). (Eg.DIVESTMENT . Sale of Diamond Beverages to Coca-Cola for US $ 40 million). However.3 billion. Hive-Off – A hive off is the creation of a new entity followed by transfer of assets. the Companies Act. (Eg. 1956 does not permit this mode.ROUTES Outright Sale – Popularly known as the asset route. 90 . Leveraged Buy-Out (LBO) – Here the company’s shareholders are bought out through a negotiated deal using borrowed funds. where 100% of the assets (including intangibles) are valued and paid for.
e. because every business has its own unique external and internal environment. There can be no ideal strategy for every business.e. 91 . 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. A combination strategy can be implemented through green-field projects (i. and divestment strategies applied simultaneously or sequentially for a portfolio of businesses. joint ventures). mergers and acquisition.COMBINATION STRATEGY It is a mixture of stability.
STRATEGY CHOICE & PORTFOLIO ANALYSIS 92 .
It attempts to answer the following questions – How effective has the existing strategy been? How effective will that strategy be in the future? What will be the effectiveness of alternative strategies? It is impossible for a manager to assess all the alternatives.STRATEGIC CHOICE A strategic choice seeks to determine the alternative courses of action available before top managers to achieve its strategic intent. In most cases the trade-off is between resources and opportunities. Dominant logic enables top managers to selectively scan the environment and make trade-offs. What then is the magical number? 93 .
if addressed. managers need to ask the right questions.SELECTIVITY IS THE KEY The role of a top manager is not to solve a problem. To identify the right problems. The key task before a top manager is to identify the right problems. will help the firm achieve its intent. 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 . They must choose problems which will lead to the right kind of opportunities.
BUSINESS GROUP .DEFINITION A business group is known by various names in various countries – guanxique in China. Resource sharing. High degree of centralized control (GEO. chaebols in Korea. Their origins can be traced back to market imperfections existing in an economy (MRTP Laws. Proximity to the corridors of power (i. Licenses & Quotas.e. BRC). keiretsus in Japan. . Managing Agency). business houses in India. Their roots can be traced to a single family or clan and share broad similarities. embassies). 95 Succession planning is critical to continuity. formal and informal ties.
RESOURCE SHARING ACROSS FIRMS Parent Company Firm 1 Firm 5 Firm 3 Firm 2 Firm 4 96 .
STRATEGIC CHOICE – MACRO TIMING Recession (Stability) Prosperity (Diversificatio n) Depression (Divestmen t) Recovery (Intensification ) 97 .
STRATEGIC CHOICE – MICRO TIMING ReEngineering Growth (%) Maturity Stability Growth Diversification Decline .Divestment Duration (Yrs) Inception Intensification 98 .
99 . therefore. Redeployment of resources upsets the established power bases of a group. sometimes impossible. next only to choice of business. Power and resources often goes hand in hand. Rules of the game are different. Relatedness across resources are difficult to realize. there are high costs associated with entry and exit. Investing in emerging businesses may not actually be so simple as it appears to be.PORTFOLIO ANALYSIS Resource allocation across a portfolio of businesses is an important strategic choice. Why? Businesses are not about liquid assets.
BCG GROWTH MODEL Relative Market Share (%) Industry Growth (%) Low High High Low Stars Question Mark ? Cash Cow Dogs 100 .
Tata Steel).e. These businesses are also net users of resources (Eg. product development). Tata-AIG). which remains a big? These businesses are net users of resources. 101 . market penetration. TCS. and their risk profile is high (Eg. Tata Telecom. diversification). but to larger extent than a question mark. Stars – They achievers in the near term. Trent. provided the company is able to build up on its market-share (i.BUSINESS ANALYSIS – TATA GROUP Question Marks – They have potentials in the long term. market development.e. provided the industry growth rate continues and the company is able to maintain its growth (i.
Tata Pharma. divest) as achieving a dominant position in these businesses is a difficult task. Tata Tea. Indian Hotels. Tata Press). Nelco. and they lack on competencies to take on competition and are basically cash traps (Eg.e. Tata Chemicals). cash cows may also need to invest provided the industry takes an upswing (Eg. Tata Motors. Dogs – They are a drag on the group. However. 102 . they are generators of resources. and the company dominates the industry ahead of competition (i. harvest.BUSINESS ANALYSIS – TATA GROUP Cash Cow – These are matured businesses. stability).e. Given that the growth potential in the business is low. Groups prefer to dispose off such businesses (i.
The terminologies used are somewhat prohibitive. Armani).BCG . niche – Rolex. 103 .e. factors are limited.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. The model does not provide specific solutions within a particular category. Cartier. Cash cows may actually need substantial investments to retain their market position (Eg. HUL). neither in high or low. Data may be prohibitive.
-) 104 .GE .MATRIX Distinctive Capabilities Strong High Medium Weak Stability Industry Attractiveness Diversify (++) Intensify (+) Med Intensify(+) Stability Harvest (-) Low Stability Harvest (-) Divest (.
ARTHUR’ D. LITTLE Inception Dominant Strong Favourable Tenable Weak Growth Maturity Decline Improve Selective Niche Abandon Industry Life-Cycle Divest Harvest 105 Competitive Position Invest Consolidate Hold .
SHELL – DIRECTIONAL POLICY MATRIX Business Sector Prospects Attractive Average Unattractive Generate Cash Phased Withdrawal Distinctive Capabilities Strong Market Leadership Try Harder Double Or Quit Growth Average Custodial Weak Phased Expand Withdrawal Divest 106 .
Gap Analysis – It emphasizes what a firm wants to achieve. Divest – Selling a part or the entire business at one go. BCG – Boston Consulting Group. Portfolio – An organization is perceived as a portfolio of businesses.TERMINOLOGIES Harvest – It entails minimizing investments while trying to maximize short-run profits and cash flow with the intention to exit the business in the near future. SBU – A business unit which is strategically different from another and also shares a different SIC code. 107 . Disinvestment involves selling in phases.
BUSINESS STRATEGY & COMPETITION 108 .
e. 109 . rent).COMPETITIVE STRATEGY A competitive strategy deals with how a firm competes in a particular business or product-market segment. building market-share. The principal focus is on meeting competition. Competitive advantage refers to a firms resources or activities in which it is way ahead of competition. The strength of a firm in a particular business usually stems from its competitive advantage. Competitive advantage is the back-bone of strategy. and earning super-normal profits (i. Such resources or activities should be distinctive and sustainable over time.
Resource Based View – Obsession with competence building.BUSINESS STRATEGY FRAMEWORKS How to be distinctive and yet sustainable – Differentiation – Understanding of the dynamics of competition. 110 . identifying critical success factors. preventing new entry and/or competition (Hax & Wilde). Blue Ocean – Consciously moving away from overcrowded industries to uncharted territories and making competition irrelevant (Kim & Mauborgne). Delta Lock In – Two dominant players co-opt to selfreinforce and create or escalate an entry barrier. developing competitive advantage (Porter). leveraging (Prahalad). involving harmonizing and integrating multiple streams of technologies.
Sources of cost advantage are varied and depends on the structure of the industry – Economies of size. Compress project duration through crashing. Reliance) or may pass it to customers to increase market-share (Eg. preferential access to raw materials. Nirma.PORTERS – COST LEADERSHIP Cost Leadership – It is a strategy that focuses on making a firm more competitive by producing its products more cheaply than its competitors. The firm may retain the benefits of cost advantage by enjoying higher margins (Eg. Locational or early entry advantage. backward integration. proprietary technology. 111 . T-Series). Steep experience curve effects. Ayur.
avoiding brand dilution. innovation and out of the box thinking.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. Culture of experimentation. Sony. (Eg. undeterred attention to quality. Intel. Focus on brand loyalty. It selects one or more attributes that buyers perceive as important. 112 . Successful product differentiation is often followed by premium pricing. Rayban). and sufficient slack. Creativity. Feeling the pulse of the customer. Means of product differentiation are peculiar to each industry.
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. Sub optimization alone may not be a source of superior performance. Rolex. They are poorly served by mainstream players. Mont-Blanc. coupled with fear of structural erosion. though it may not possess an overall competitive advantage. The target segment must have unusual needs or the delivery system catering to this segment must be unique. A focuser seeks to achieve a competitive advantage in its target segment. Cartier. Armani). Maybach. 113 .
COMPETITIVE POSITIONS Competitive Advantage Cost Differentiation Product Differentiation Competitive Scope Broad Cost Leadership (Toyota) Product Differentiation (General Motors) Narrow Cost Focus (Hyundai) Differentiation Focus (Mercedes) 114 .
Reducing cost does not always involve a sacrifice in differentiation. similarly differentiation may not always lead to rising costs (i. Tata Nano). 115 .HYBRID STRATEGY A hybrid strategy is the simultaneous pursuit of cost leadership and differentiation. and usually outperforms a stand alone generic strategy. Though cost leadership and differentiation are inconsistent.e. in a hyper competitive context the two strategies need not be mutually exclusive. jugaad or frugal engineering). Firms focusing on a hybrid strategy typically aim at shifting the productivity frontier and recreating a new product-market segment altogether (Eg.
The positioning therefore gets – blurred. leading to what is called – straddling. unless such a player is capable of discovering a profitable segment.stuck in the middle. but achieves none. Industry maturity will usually widen the gap. It will have a competitive disadvantage vis-à-vis a clearly positioned generic player. 116 .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 . It is usually the result of a firm not willing to make trade offs. It tries to compete through every means.
Nano technology.radical environmental changes. ending in a differential cost economics.EMERGING INDUSTRY Emerging Industry – An evolving industry characterized by . Consumer behaviour pattern unstable and evolving. changing customer needs. technological innovations. 3D imaging. Market segmentation not well defined. Speech recognition software's. There is a lot of scope to define the rules of competition. coupled with low penetration levels. Artificial intelligence).) Excessive turbulence in the dynamics of the environment. leading to a blurred productivity frontier and steep learning curve. First-time buyers. It is characterized by – High level of technological uncertainty. 117 . (Eg. Eg.
IT. Consumer durables. Scope for players to change the rules of the game. Diverse customer needs.GROWTH / FRAGMENTED INDUSTRY Growth Industry – An industry characterized by high growth potential in the long run and where no firm has a significant market share (an edge over another). Eg. High exit barriers because of huge investment in CAPEX. because of lack of economies of size and scale. Paints. Government regulations in the form Eg. Retail and telecom. MRTP may also cause fragmentation. Air Conditioning. leading to clear fragmentation. Eg. 118 . Eg. It is characterized by – Low entry barriers.
distribution networks. Firms are rule takers in the segment as productivity frontier is well defined. technological maturity.technological maturity. Cartel among existing players through collusion. established industry dynamics. well defined consumer behavioral patterns and imperfect competition leading to near monopoly. Strong entry barriers. early entry and location advantages. 119 .MATURED INDUSTRY Matured Industry – An industry characterized by saturation in growth rates. because of economies of size and learning curve effects. Limited scope for innovation . collaboration and co-option.
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. dot-matrix printers). Learning abilities have been stunted and firms adverse to investment in R&D and make fresh investments. Exit barriers are extremely high because of limited prospective buyers. Nature of competition extremely high. with little or no signs of recovery. scooters. backed by corporate espionage. (Eg. and costly price wars. Typewriters. Firms facing a declining phase are characterized by inertia and slow to react to environmental changes. 120 .
regenerate. strike alliances. process innovation. assess and overcome fragmentation. focus more on product differentiation or even a hybrid one. recreate new markets. reengineer. strictly cost differentiation. 121 . move beyond boundaries. Fragmented Industry – Identify. mergers and acquisition. or else exit the segment. Locate a defendable position. Matured Industry – Sophisticated cost analysis.COMPETITIVE STRATEGIES Emerging Industry – Set benchmarks. premium pricing. increasing scope. aggressive building of distribution networks. strictly product differentiation and not standardization. Declining Industry – Redesign. branding and promotion.
patents. hence very rarely confer competitive advantage as can be easily acquired or replicated. A firms resources can be classified into – Tangible – These refer to real assets. and complex learning experiences in integrating and harmonizing technologies (distinctive capabilities) that play an important role in delivering competitive advantage through “causal ambiguity”. 122 . Intangible – These refer to goodwill.RESOURCE BASED VIEW Differentiation based on cost or products saturates and ceases to exist beyond the medium term. However. brands. positions based on resources which are unique and inimitable are far more sustainable even in the long term. They are a standard in nature.
they are woven around technologies. Typically. but not necessarily. differentiation based on capabilities can be sustained even in the long run. There is a high degree of internal and external causal ambiguity involved in it. 123 . Therefore firms should concentrate on developing complex resources that forms the very basis of differentiation.e. can be leveraged across businesses) or specific to a particular business. Hence. They play a very critical role in shaping competitive advantage.CAPABILITIES & COPMPETENCIES These include a complex combinations of tangible and intangible resources that organizations use to convert inputs to outputs. Capabilities can be generic (i.
COMPETITIVE ADVANTAGE 124 .
COMPETITIVE ADVANTAGE A competitive advantage is a position of superiority relative (i. and results in well springs of new business development. Success of a strategy critically depends on SAP. It results in a distinct differentiation advantage or a cost advantage or hybrid as well. Strategy drives competitive advantage. competitive advantage subsequently becomes the back bone for a competitive strategy. not absolute) to competition. 125 .e. It enlarges the scope of an organization. A portfolio of competitive advantage comprises strategic advantage profile (SAP).
126 .STRATEGIC ADVANTAGE PROFILE (SAP) Organizations have to systematically and continuously conduct exercises to identify its SAP. Internal strategic fit between its strategy and dominant logics is essential for the top management to stretch and leverage SAP. Most successful organizations around the world have a well balanced SAP. In most cases SAP is hidden and dormant. Identification of SAP is critical for and stretching and leveraging of resources. In today's world of discontinuity. SAP changes from time to time.
Today SCM is integrated with greening the environment as CSR practices. A VC is often compared with a relay team. and enhanced customer tracking – higher market share. each of the players need to be efficient backed by sufficient coordination at the contact points (i. Competitive advantage arises not from an individual activity but a stream of inter-related activities. Inventory Mgt to Logistics Mgt to Supply Chain Mgt (SCM). Substantial cost reductions also follow. kaizen or internal customer). VC pay-offs: better product availability.e.VALUE CHAIN ANALYSIS A value-chain segregates a firm into strategically relevant activities to understand its composite behaviour. 127 . faster product launches.
THE VALUE CHAIN Support Infrastructure n gi ar M Human Resource Management Technology Development Procurement Out Logistics Mktg & Sales In Logistics Operations Primary Service M ar gi n 128 .
STRATEGIC FIT – THE PORTER WAY The sustainability of the value chain depends on the degree of fit between the activities. A high fit involving a complex chain of activities drives both competitive advantage and its sustainability. Operational effectiveness is not strategy. – First order fit refers to simple consistency between each activity and the overall strategy. 129 . A learning organization helps create strategic fit. – Third order fit refers to optimization of effort. – 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.
– Can be leveraged across businesses.CORE COMPETENCE A core competence represents the collective learning's of an organization around diverse streams of technologies. . Core competence has a high degree of external and 130 internal causal ambiguity embedded in it. – Can be sustained even in the long run. A core competence usually has its roots in technology. It forms the very basis of competitive advantage. – Cannot be easily imitated or substituted. These skills results in distinctive activities and processes. It should satisfy the following conditions – Contributes significantly to customer benefits. but not necessarily.
131 . A competitive advantage manifests from a function. A competitive advantage may or may not lead to superior performance. A competitive advantage is sustainable in the shortmedium term. a core competence always implies a competitive advantage. 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.CORE COMPETENCE A competitive advantage does not necessarily imply a core competence. Majority of the firms have competitive advantage.
This is known as a zero-sum game. However. In fact there are no. the stringent assumptions of game theory and difficulty in ascertaining of pay-offs makes game theory application difficult in business. each of whom wants to win. A game is a contest involving two or more players. In a game (similar to a business) one players win is always another's loss. Subsequent work on game theory by John Nash led him to win the Nobel prize in 1994.GAME THEORY The game theory was developed in 1944 by Oscar Morgenstern. Here the magnitude of gain offsets the magnitude of loss equally. 132 . illustrations depicting a win-win situation.
Firm Y’s Strategy Use Radio Use Radio +2 +6 Use Newspaper +7 -4 133 Firm X’s Strategy Use Newspaper Firm X’s Pay-Off Matrix . An unbiased game is one where both the players have equal chances of winning.BIASED AND UNBIASED GAME A game is said to be biased when one of the players have a disproportionate chance of winning.
PURE STRATEGY GAME The strategy each player follows will always be the same regardless of the other players strategy. Firm Y’s Strategy Use Radio +3 +1 Use Newspaper +7 -2 134 Firm X’s Strategy Saddle Point Use Radio Use Newspaper Firm X’s Pay-Off Matrix . A saddle point is a situation where both the players are facing pure strategies.
Repeated Games – In this situation the players interact repeatedly with each other sub-optimizing the outcome possibilities.TYPES OF GAMES Simultaneous Games – This is a situation where the players have an option to choose to cooperate or not through collusion. 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.e. collaboration or cooption. Coke Vs Pepsi). 135 . It represents the classical “prisoner’s dilemma”. This is usually through learning by “experience or observation” (i.g. Yahoo Vs Microsoft). However. iteration) rather than through collusion (E.
It results in a shift in the productivity frontier. but 136 players do not always behave rationally. – 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. Game theory relies on the principle of rationality. – Building incentives for customer loyalty. .
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.
143 . While external strategic fit (strategy – environment) is relevant for strategy formulation. – Unlearning & learning of new skill sets. – Changing the rules of the game. – Better strategic and operational control. – Development of capabilities & competencies.IMPORTANCE OF STRATEGIC FIT Strategic fit has a central role to play in strategic management. – Resource commitment from top management. A high strategic fit (co alignment) is useful because it enables – – Appropriate and timely response. internal strategic fit (strategy – dominant logic) is critical to strategy implementation.
In such a situation. learning levels are very low.FORMULATION Vs IMPLEMENTATION Traditionally. strategy formulation and implementation has been perceived to be distinct & independent. 144 . Some of the key strategic learning's exists at the contact point between the organization and its customer. In such a situation. According to Mintzberg.e. effective strategies are better crafted when there is a subtle overlapping between the two (i. In fact. while control is very effective. at the cost of sacrificing a lesser degree of control. emergent strategy vis-à-vis intended & realized). learning levels are very high. formulation & implementation can occur simultaneously.
In contrast.ROLE OF TOP MANAGEMENT To bring about change and to implement strategies successfully. companies depend more on transformational leaders than transactional leaders. He should be an agent of change. shift from compliance to commitment. Install a system of shared beliefs and values. A transactional leader is usually confined to allocating tasks & responsibilities and extracting performance. transformational leaders go one step beyond – Design a well crafted and designed strategic intent of the organization. bring about transparency. Pragmatism is the ability to make things happen. 145 .
minimum requirement). Zero Based Budget – In this case the budget of a SBU has to be worked out right from the scratch. patents.e. 146 . Intangible resources (Eg. labour. brands. The various methods of resource allocation includes Historical Budget – The budgets framed by HQ for a particular SBU keeping in mind past trends.RESOURCE ALLOCATION Resources allocation includes tangible resources (Eg. Performance Budget – SBU managers need to justify the distinctive resources in terms of the opportunity it is pursuing yields the highest possible pay-offs. skills) also includes complex resources like capabilities and competencies. machines) referred to as threshold resources (i. land.
Moreover. Flat Screen Displays. these capabilities are sustainable even in the medium to long term. Distinctive capabilities helps in stretching and leveraging resources thereby overcoming two major constraints involved in strategy implementation – times & costs. Mobiles). 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. though not necessarily in the case of emerging markets. Due to causal ambiguity (complexity). Distinctive capabilities are complex set of skills woven around technologies. 147 .
A firm in several unrelated businesses usually employs a SBU structure. 148 .STRATEGY & STRUCTURE It is a framework within which individual efforts are coordinated to bring synergy. processes become people independent. A single product or a dominant business firm usually employs a functional structure. An appropriate organization structure & adequate control systems are essential to implement strategies and achieve stated goals. Once the structure is in place. The level of centralization and decentralization is decisive. A firm in several related businesses usually employs a divisional structure.
Output).Technology. or geographical locations. Virtual Structure – A boundary less or hollow organization. Team Structure – An informal group formed for a crisis. processes.TYPES OF STRUCTURES Functional Structure – Activities grouped together by a common function (Eg. Marketing. based on skills and competencies. Project / Matrix Structure – A formal but temporary framework initiated for the completion of a particular project/crisis. Inputs . SBU Structure – Businesses segregated in terms of strategic dissimilarities (Eg. Finance). 149 . with team members having dual line of control. Divisional Structure – Units grouped together in terms of products. disbanded subsequently.
facing challenges & crises. It includes the desire for independence. 150 . leading to a tall structure. structures are becoming flatter and more simpler. assuming responsibility. Environment & People – Economic and political conditions have a major bearing on structure coupled with the attitude and aspirations of the people in the organization. Technology – With more and more convergence of technologies in business. as span is broader.FACTORS INFLUENCING STRUCTURE Size – As an organizations size increases there is more specialization and differentiation leading to the top management moving away from operational issues and control.
Inertia is a characteristic of a firm that endures status quo (i. Most firms undergo periods of strategic continuity rather than strategic discontinuity. Inertia acts as an impediment in strategy implementation. Top managers resist change. there is a tendency to continue along the same lines. co0ntinuity). . Changes in top management and unlearning helps overcome inertia. Common sources of 151 inertia – complacency with past successes.INERTIA When a firm has been operating in a certain fashion for a long time.e. irrespective whether it is from worse to good or good to worse.
firms should move beyond financial performance to strategic performance as organization systems are becoming complex. Deviation of fit is detrimental to performance and may lead to strategic failure. To prevent deviation of fit. strategies need to be evaluated on an ongoing basis to prevent deviations of fit. .STRATEGY EVALUATION Strategy evaluation centers around assessment of strategic fit. Since the internal and external environment is in a state of continuous flux. certain authors propose misfit as a source of superior 152 performance. However.
detecting changes in the external and internal environment and taking corrective action wherever necessary. competitive advantages becoming disadvantages? Has the company acquired any new competency? Has the company been able to overcome the 153 environmental threats. It attempts to answer the following questions – Is the strategic intent appropriate to the changing context? Are the organizations capabilities still holding good.STRATEGY CONTROL It is concerned with trafficking a strategy as it is being implemented. .
Premise Control – Checking the validity of the assumptions on which a strategy was based. checking every premise is costly as well as difficult. It involves assessing – strategic thrusts and milestones. Special Alert Control – It intends to uncover unanticipated information having critical impact 154 on strategies. Implementation Control – It aims at assessing whether key activities are proceeding as per schedule.STRATEGY CONTROL IMPLEMENTATION It involves steering the company towards its original growth trajectory & stated goals. It is open-ended as well as . However.
BARRIERS TO STRATEGY EXECUTION Vision and strategy not actionable – Utopian ideas. “If you cannot . low strategic fit due to consultants intervention. Performance measures are defective – What to evaluate against? How to measure the 155 construct? As a saying goes. Strategy not linked to resource allocation & capabilities – Lacking commitment of top management. difficult to translate into practice. 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.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. this may effect all others as well. to be sure of successful implementation of a strategy. the relative importance of each factor may vary over time and context. Managers should take into account all seven of these factors. On top of that. Together these factors determine the way in which a corporation operates. Large or small. 156 . so if one fails to pay proper attention to one of them. Today it is considered one of the most powerful tools for strategy implementation determining success or failure.
At around the same time in the US Tom Peters and Robert Waterman were exploring what made a company excellent.BACKGROUND & ORIGIN The 7-S Framework was first mentioned in "The Art Of Japanese Management" by Richard Pascale and Anthony Athos in 1981. They had been investigating how Japanese industry had been so successful. It appeared also in "In Search of Excellence" by Peters and Waterman. 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. The 7-S model was born at a meeting of these four authors in 1982. 157 .
to reach identified & stated goals. processes and routines that characterize how work should be done. 158 . Skills – An organizations capabilities and competencies. over time. formal & informal .THE 7’S Shared Values – It represents what the organization stands for and what the top management believes in. Staff – Human inter-relationships. Style – The way in which the top management influences the functioning of an organization. Systems – The procedures. Strategy – Trade-offs for the allocation of a firms scarce resources. Structure – The way in which the organization's units relate to each other in terms of their commonalities.
STRATEGIC FIT Strategy Structure Shared Values Systems Skills Staff Style 1st Order Fit 2nd Order Fit 3rd Order Fit 159 .
Consider the 4P’s of marketing or 3R’s of SCM. 160 . structure. style. Ineffective in case of a virtual company. because most often they are culturally embedded and often neglected. A choice of an alphabet often limits the scope and skews the interpretation of a model.A CRITIC OF THE 7S MODEL While the hard S’s (strategy. While the American co’s focuses on the hard S’s. In contrast. shared values) are very malleable and comparatively more difficult to identify & influence. staff. their Japanese counterparts focus more on the soft S’s for their early success and sustainability. systems) are comparatively easy to identify and influence. the soft S’s (skill.
STRATEGY IMPLEMENTATION ROUTES Strategic Fit .High Organic Growth Strategic Alliance Joint Venture Mergers & Acquisition Strategic Fit .Low Take Overs 161 .
SEZ’s. It has complete control over inputs. (Eg. and markets. the entire value chain.ORGANIC GROWTH Here a firm builds up its facilities right from the scratch and continues to do so without any external participation. . Reliance Industries). Govt. i. technologies. concessions are available for green-field projects. tax holidays. Long gestation leads to delayed market entry. i.e.e. 162 Risk of cost and time overruns. soft loans. The entire infra-structural facilities are set up afresh having its own gestation and break-even. (Eg. subsidized power). green-field projects.
163 It is a form of competitive collaboration. . It touches upon a limited aspects of a firms value chain. There is no funding or equity participation from the alliance partner & both the firms continue to operate independently. It has limited intervention power and usually lacks holistic commitment from the alliance partner.STRATEGIC ALLIANCE It involves a pro-active collaboration between two or more firms on a particular domain or function for mutual gain. Tata Motors & Fiat). Alliances are usually in the areas of technologies or markets (Eg. Alliances are usually short-lived and disbanded once the purpose is achieved.
Hero . (Eg. leaving minimum scope of overlapping. It is a win-win situation for both the companies. Tata – AIG.Honda). A comprehensive MOU is essential.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. Dominant logic of both the companies should be complimentary. Degree and extent of management control must be clearly 164 laid down. . Selecting the right partner is critical for success.
ITC Tribeni Tissues. Integrated distribution channel leads to better market penetration and overall synergy. Economies in scale leading to lowering of costs. Coca Cola – Thums Up).MERGERS & ACQUISITION It refers to the fusion of two or more firms into a single entity. Acquisition is an outright purchase of a firm assets by another independent entity (Eg. Integration of assets and other financial resources. . Brooke Bond & Lipton). with the individual firms ceasing to exist any more (Eg. Revival of a sick-unit through better management practices is a major motive behind an acquisition 165 strategy.
Inform SEBI / Stock Exchange after 5% stake is 166 acquired. Most countries have stringent laws that prevents hostile take over. often the new firm is “left alone”. Consolidation in a fragmented industry. Instant access to capacities and markets. Make a public offer of not less than . Tata Steel . Integration of organization structure & cultures is difficult.Corus).TAKE OVERS It refers to the acquisition of significant management control by buying out majority stake in a firm through due diligence or hostility (Eg. Larger geo-graphical diversity.
MANAGEMENT TOOLS IN STRATEGY 167 .
WHY MANAGEMENT TOOLS? Change is becoming pertinent in the business environment. 168 . every time. Balanced Scorecard – Tracking strategy 3600. Companies therefore need to ensure competitive advantages doesn’t become competitive disadvantages. Some tools to ensure that – Benchmarking – Adopt certain best practices. TQM – Doing the right thing the first time. it is also a source of potential threat. Radical change is superseding incremental change. The past is ceasing to be an indication of the future. Change provides enormous opportunities. or better still create next practices Reengineering – Redesigning work processes right from the scratch.
A best practice is defined as an activity performed by a company in a particular domain or function which distinguishes it from others and making them world-class. These exemplary practices involves the stakeholders of the company and helps achieve its strategic intent. Best practices centers around looking at a different way to satisfy various stakeholders. Benchmarking involves the identification, understanding and adapting of certain best practices and implementing them to enhance performance. Firms are moving towards next practices as best practices make firms look more and more homogeneous.
SOME BEST PRACTICES
Dell: Customized configuration of computers. Caterpillar: 48 hours delivery anywhere in the world. Citi Bank : Priority banking services. Maruti: Certified “true value” pre-owned cars. Microsoft: ESOP to employees. Infosys: Customized work-stations. TCS: Referencing potential new recruits. ITC: Shareholders factory visit. AmEx: Outsourcing data warehousing mining. MARG: Set-top box to study viewing patterns. Honda: CEO’s visit to dealers.
TYPES OF BENCHMARKING
Functional – Used by companies to improve a particular management activity. Eg. Motorola learnt delivery scheduling from Domino’s. Process – Improving specific key processes and operations from experiences in similar businesses. Eg. Ford adopting assembly lay-out plan of Toyota. Competitive – It involves assessing the sources of competitive advantage and imitating them. Eg. Samsung leveraging miniaturization skills of Sony. Strategic – It involves assessing business models and replicating them in a different market. Eg. Reliance replicating AT&T business model.
HOW TO BENCHMARK?
Phase 1: Planning – What to benchmark? Whom to benchmark? – Identify key performance indicators & Data source. Phase 2: Analysis – Assessment of performance gaps. – Predict future performance levels. Phase 3: Integration – Communicate findings and gain acceptance. – Establish functional goals and its implementation. Phase 4: Action – Implement and monitor progress. – Measure results against stakeholder wants and needs. – Recalibrate or outperform benchmarks.
WHOM TO BENCHMARK?
Selecting the benchmarking partner is critical to solving the problem. Firms should generally avoid selecting the industry leader, because it may not always adopt the best practices for every process or activity. Benchmarking partners may also be from different industries. Types – – Internal – It involves benchmarking against its own branches, divisions, SBU’s. Proximity to data and cooperation is taken care of automatically. – External – It involves benchmarking against firms that succeeded on account of their best practices. It may also involve benchmarking against world-class firms. Friction may arise due to presence in competing industries.
BENCHMARKING - ADVANTAGES
Finding better ways of meeting stakeholder needs. Organizational learning comes from internal as well as external sources. Establishing goals based on formal assessment of external conditions. Defining effective measure of indicators, facilitate comparison, adopt from other organizations. Ensuring a continuous learning organization. Reducing competitive disadvantage. Organizational turnaround, especially effective in case of a wide strategic drift when differentiation strategies fail to work. 174
the more similar they end up looking. Benchmarking merely reorients profits in the hands of few to profits in the hands in the hands of many (i.BENCHMARKING . . While strategy is all about differentiation and not looking alike. but it cannot be used as a strategic decision making tool. Benchmarking is useful for bringing about operational efficiency. Strategy is more of creating best practices rather than copying them.e. clustering).LIMITATIONS More and more companies benchmark. It can at best complement it. It does not shifts the growth 175 trajectory of the industry as a whole.
g. process mapping) and eliminating or improving them (E.RE-ENGINEERING Redesigning leads to identification of superfluous activities or product features (i. clean sheet). for achieving performance improvement (E.e. Windows 95 to 97). Re-engineering attempts to radically change an organizational products or process by challenging the basic assumptions surrounding it. DOS to Windows). The task demands a total change in organisational 176 culture and mindset. Re-engineering involves complete reconstruction and overhauling of job descriptions from the scratch (i.e.g. .
REENGINEERING – KEY TENETS Ambition Focus Attitude Enabler Performance Large scale improvement by questioning basic assumptions about how work is done Micro Vs Macro Business Processes Vs Organisational Processes Starting right from the scratch Not historical More IT driven. than people driven Innovative Vs Traditional Customer centric Vs Organisational centric 177 .
REENGINEERING . BPR).LEVELS Reengineering can be successfully leveraged at all levels of an organization with varying degree of results. processes.e.e. customers and suppliers and protects the organization from the future (i. etc) and supports the organization for the present. Strategic – It looks into the process of strategic planning. products. resource allocation and prepares the organization for the future through a reorientation of the entire strategic architecture. structures. It can be of the following types – Functional – It looks into the flow of operations (i. Business – It looks into markets. 178 . .
While traditional manufacturing is a bottom-up approach. reverse engineering is a top-bottom approach. It generally acts as a threat to innovation. – High cost and time acts as a deterrent. learning curve advantage. However. protection can be had in the following ways – – Patenting. 179 . with an intention to copy it (Eg. Indonesia). Cheaper versions of Intel chips and mother-boards manufactured in Taiwan.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. – Early entry advantages. – Causal Ambiguity.
designing facilities. Implementation – Developing of a prototype. Actualization – Obtaining and dismantling of the product to assess how it functions. 180 .e. nano-technology). Inaccurate assessment at this stage may lead to a failure of the entire project. Usually in such cases segmentation and pricing is different from the original innovator.STAGES IN REVERSE ENGINEERING Awareness – Recognizing whether the product is found to be worth the time. Introduction – Launching the product in the market. cost and effort necessary for the purpose of reverse engineering. machine tools to convert ideas into a marketable product (i.
– Aesthetics – Appeal in design. – Features – Anti-lock braking systems. More and more companies are moving towards meeting implied rather than stated needs. It has eight dimensions (Eg. Air bags. – Conformance – Emission standards . Car) – – Performance – Mileage of 14 kms to a litre of fuel. – Reliability – Consistency in mileage. – Perception – Customer notions.Euro IV.WHAT IS QUALITY? It involves the totality of a product or service in meeting certain stated or implied needs. – Serviceability – Large no. of service stations. – Durability – 1980 manufactured cars still on road. 181 .
. touching upon a limited aspect of a value chain. TQM is a way of creating an organization culture committed to the continuous improvement of work processes – Deming. zero defects.fix it in nature. It is deeply embedded as an aspect of 182 organisational life & culture. Management of quality was traditionally inspect it .TOTAL QUALITY MANAGEMENT Objective – Management of quality ensures conformance to certain pre-set standards. It had little impact on improving overall productivity. which ensures good market standing.
Looking at quality as an endless journey. fully involved in decision-making and fairly rewarded for results. Kaizen – Make continuous improvement a way of life. Be customer centric – Generate the concept of internal customer (Ishikawa). not a final destination. the first time – From reactively fixing error in products to proactively preventing errors from occurring at the first place (Juran).TQM – KEY TENETS Do it right. provided with all relevant information and best possible tools. Empowerment – It takes place when employees are properly trained. 183 .
saving precious top management time. 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. 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. Quality Circles – It a small group of shop-floor employees who meet periodically to take decisions regarding operational problems and crises.e. It is based on the principles of MBO (i.TQM . equal participation). of units meet preset standards (Eg. 6-Sigma). 184 .
.. – Efficiency and effectiveness is passé. – In the majority of failures – we estimate 70% – the real problem isn’t (bad strategy) ....BALANCED SCORE CARD Some interesting comments . it’s bad execution... – Less than 10% of strategies effectively formulated are effectively executed. Source: Fortune Magazine Why CEO’s fail? 185 ... strategy implementation has never been more important....
Focus more on causes. 186 . Most managers tend to rely on traditional measures of performance having its origin in finance as they are well tried and tested. rather than effects. In today’s context when organizational systems have become complex and multi-directional we need to have a holistic view of performance to cut the lag effects.CONCEPTUALISATION A company’s performance depends on how it measures performance. These measures worked well when organizational systems were simple and unidirectional and more importantly the environment was static.BSC . Organizations need to move from financial to strategic performance.
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. The most critical element of a BSC is to measure these four dimensions. and distinguish strategic problems from operational ones.
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. ageing schedule) % of key customer transactions Ranking of key customer accounts No.e. of visits or calls made % of NPA’s 188 .
of new product launches Vs competition Product pricing Vs competition 189 .BUSINESS PERSPECTIVE GOALS Skills Excellence Exposure Introduction MEASURES New capabilities and competencies Implementation & gestation period Bank and supplier credit limits & PLR Unit Costs / Conversion Ratio / Defect Ratio No. of times covered in media No.
of product innovations 190 .LEARNING PERSPECTIVE GOALS Technology Manufacturing Focus Timing MEASURES No. of new patents registered Time to develop next generation products Average and spread in operating cycle % of products that equal 2/3 sales No.
FINANCIAL PERSPECTIVE GOALS Survival Success Prosper Divestment MEASURES Cash flows Growth in Sales and Profits EPS. Return on Investment Market Capitalization / PE ratio 191 .
STRATEGY MAPPING 192 .
BSC .IMPLEMENTATION 2 Translate strategy into operational terms 1 Mobilize change through effective leadership 5 STRATEGY Make strategy a continual process 3 Align the organization to the strategy 4 Make strategy everyone’s job 193 .
e. The BSC brings together the different elements of a company’s strategy at a glance. doing right things instead of doing things right). sharing of vision).e. 194 performance will automatically follow.ADVANTAGES Most often top managers face information overload. Shift from control to strategy (i.BSC . It helps translating strategy into practice (i. Seek excellence.what they don’t know. Modern managers should be poised to ask the right questions. Focus on cause not effects. they don’t know . As a result. .
EFFICIENCY Vs EFFECTIVENESS Ineffective Effective Inefficient Goes out of Business quickly Survives Efficient Dies Slowly Thrives 195 .
EFFECTIVENESS + STRATEGY A company which is effective as well as strategic.Michael E. but also sustains it. not only thrives. . Porter 196 .
CORPORATE RESTRUCTURING 197 .
To adapt to the changing environment. Strategic variety brings paradigm shift. Strategic variety may be caused by changes in the as external well as internal environment... As Peter Drucker pointed out.” 198 . from survival of the fittest .. Tata Group). to survival of the most adaptable.. Radical change brings about strategic variety. firms use restructuring strategies. “every organization must be prepared to abandon everything it does. Restructuring involves consciously driving significant changes in the way an organizations thinks and looks (Eg..CORPORATE RESTRUCTURING The only thing constant in today's business environment is change..
RESTRUCTURING – BASIC TENETS Customer Focus – Restructuring ideally begins and ends with the customer.e. Fax. Internal customers should also not be neglected. Walkman.e. Instead. ATM. and dividing the core businesses into SBU’s (i. they should strive to provide unimaginable value ahead of its time (Eg. . Structural Changes – Conventional hierarchical structures should be disbanded in favour of more 199 flexible ones (i. downsizing or rightsizing). Company’s should go beyond just asking what he expects. etc). downscoping). Core Business – Company’s should introspect – What business are we in? Business evolved out of opportunism or myopia should be divested.
Restructuring also requires cultural reorientation... During the times of JRD.... started focusing on their capabilities. Kumar Birla today is more dependent on professionals.... the Tatas were considered a benevolent and charitable organization.) The Aditya Birla group typically relied on the “marwari” community for key management positions .. It is created and institutionalized by the top management.. . 200 .) Reliance dismantled their industrial embassies .RESTRUCTURING – BASIC TENETS Cultural Changes – A culture represents the values and beliefs of the people about the organization... Ratan Tata now drives the point the group means business.
they tend to move away from the customer. Publicizing welfare projects to demonstrate CSR. Communicating to the media about organization efforts to deliver quality products. Use the reach of networking technologies.MOVING CLOSER TO THE CUSTOMER As companies evolve. Restructuring provides a platform to close this gap. Honda’s ad says. Getting feedback & addressing customer complaints.” 201 . “ … one reason our customers are satisfied is that we aren’t. Carry out PR campaigns. Organizing customer and supplier meets.
spin-off and equity carve. 202 . it may be smooth (Eg. Asset Swaps – It entails divesting and acquisition simultaneously by two companies. including its intangibles – Mergers – It may be vertical. It can have two forms. Further. where the difference in valuation is settled off through cash or equity (Eg. Glaxo – Heinz).ASSET RESTRUCTURING Asset Restructuring – The asset composition of a firm undergoes a major change. horizontal. Further spin-off can be classified as split-off and split-up. or conglo-merate. Mittal – Arcelor) and can take various forms. Hive Off – It involves siphoning of assets under control. Tata – Corus) or hostile (Eg. It may include brands as well.
the entire parent company loses its identity after being split into a number of subsidiaries. Reliance Ent). Tata Industries selling 20% stake to Jardine Matheson). – Split-Off – In a split-off. Most of these practices are not in consonance with Indian laws. in which the equity is allotted amongst the existing shareholders on a pro-rata basis (Eg. Equity Carve – It involves selling a minority stake to a third party while retaining control (Eg. 203 .HIVE OFF Spin-Off – A spin off is the creation of a new entity. – Split-Up – In a split-up. the existing shareholders receive equity in the subsidiary in exchange for the stocks of the parent company.
204 . In 2005. A complete sell-out is known as divestment (TOMCO). Selling out in phases is called disinvestment (IPCL). strategic misfit. In 1995. Generic motives include – – Raise working capital. – Poor performance. Parle sold its Thums Up brand to Coke for $40 million apprehending fierce competition. for a specified market or in general with full management control. but retained its engineering division. repay long-term debts. L&T sold its cements division to Aditya Birla group.DIVESTITURE It involves the sale of a brand or a division of a company to a third party.
Share Buyback – It is a process of cancellation of shares out of free reserves to the extent of 25% of paid-up capital (Eg.The internal & external liability composition undergoes a major change – LBO – Acquiring control over a substantially larger company through borrowed funds (Eg. involving 608 pence per share).3 billion. Conversion – Replacing debt with equity or vice-versa or costlier with cheaper debt or cross currency debt. 205 . It provides greater leverage as well as management control.CAPITAL RESTRUCTURING Capital Restructuring . Wipro). Tatas take-over of Corus for US $11.
1170 cr Goodlass Nerolac – Rs.Rs.BUSINESS RESTRUCTURING – TATAS Divestments Lakme – Rs. 950 cr Merind .Rs. 42 cr Voltas . 99 cr Tata Power – Rs. 1890 cr CMC – Rs. 120 cr Tata AIG – Rs. 150 cr VSNL – Rs. 1700 cr Trent – Rs. 1439 cr 206 Tata Timken – Rs 120 cr Tata Telecom – Rs. 256 cr ACC – Rs. 250 cr Tata Tetley – Rs. 230 cr Diversifications Tata Motors – Rs. 1860 cr .
It can be carried out in the following ways – Downsizing – It is a systematic one-time reduction in the no. keeping the composition of business intact (Jet Airways). Survival is the primary motive. of operating units. Rightsizing – It is phasing of excess and redundant employees resulted out of faulty internal planning (SAIL). Turnaround is the primary motive. Downscoping – It involves reducing the business and/or geographical scope of a firm (Aditya Birla group). of a firm’s employees and sometimes in the no.ORGANIZATIONAL RESTRUCTURING Organizational structure and systems calls for a change when strategic variety is apparent. 207 . usually as a result external turbulence.
The longer the period.e. as strategies are based on such beliefs and biases. the more difficult it becomes to uproot the paradigm (i. Dominant logic becomes deep-rooted in organizational contexts depending on the period it is in place (tenure of the CEO).e. inertia). The dominant logic represents the perceptions and biases (i. 208 . Strategy change is unviable without a preceding change in its dominant logics. thumb rules) of the top management.STRATEGIC CHANGE One of the most difficult components of organization restructuring is the mindset of the top management represented through its dominant logic and its shared values reflected in cultural orientation.
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. Companies achieve real agility only when people at every level rise above the ordinary to face the challenges – revitalization or transformation. 209 .e. 20% of the people carry out 80% of the changes).FORCES AGAINST STRATEGIC CHANGE The problem with strategic change is that the whole burden typically rests on few people (i. In most organizations. the factor that stifled change & performance was – culture.
Encourage uncompromising straight talk. never take no for an answer. Create relentless discomfort with the status quo. process ownership. Promote inventive accountability. Manage from the future. it is not about winning but about learning. The best way is to alter the institutional point of view. Harness setbacks. Questioning every basic action of the organization.SUCCESSFUL TRANSFORMATION Build an intricate understanding of the business model at all levels of the organization. Understand and deliver the quid pro quo. 210 .
also known as cultural-web. It involves diagnosing a change situation – systems & structures. 211 . that can be both enablers and blockages to change and restructuring. It involves identifying – Aspects of current culture which needs to be reinforced.FORCE-FIELD ANALYSIS A force-field analysis provides an initial overview of change problems that needs to tackled. by identifying forces for and against change. Culture and style of management are two main impediments in force-field analysis. Identify and implement facilitators of cultural change. Aspects of current culture which needs to be overcome.
RESTRUCTURING .Term Reduced labour costs Reduced debt costs Emphasis on strategic control Business High debt costs Higher risk 212 Long .Term Loss of human capital Lower performance Higher performance Capital .OUTCOMES Alternatives Organizational Short .
NUMERATOR & DENOMINATOR MGT Most firms across emerging markets undergo strategic discontinuity and as a result are forced to restructure their businesses. reverse engineering and regenerating. hence go in for downsizing. focuses on reengineering. While the first strategy produces results instantaneously. down-scoping or asset stripping. Numerator – It assumes that turnover is not a barrier or constraint. the second one is a more viable strategy and sustainable option in the long run. 213 . In order to put back the company on the right track they are resort to – Denominator – It assumes that turnover cannot be increased.
TURNAROUND MANAGEMENT 214 .
. Source: Why do firms atrophy? (Business Today. – Only seven of the first fifty Indian business groups in 1947 were even in business by the turn of this century.. . still exist as on 2005... January 1997).WHY TURN AROUND MANAGEMENT? Some interesting insights . and that the thirty-two of the country’s largest business groups in 1969 are no longer among the top fifty today.. – Less than 10% of the Fortune 500 companies as first published in 1955. 215 (Govindarajan and Trimble..
ends the threat with a combination of strategies. skills.e. systems. While content focuses on endogenous and exogenous variables. 216 . and capabilities. Both content (what) and process (how) are equally important for a successful turnaround.TURN AROUND MANAGEMENT A turnaround is said to occur when a firm perseveres through an existence threatening performance decline. Stage Theory). As a sequence of events describing how things change and why they change (i. process focuses on – A logic to explain a causal relationship between intervening variables. A category of underlying principles and concepts. and achieves sustainable performance recovery.
suppliers and bankers. Low stakeholder confidence. leading to lack of acceptability from distributors and customers. especially in key positions. 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. unavailability or radical lowering of substitute costs or technological obsolescence. Substantial shifts in consumer preferences. 217 . Uncompetitive products or services.TURNAROUND INDICATORS Most firms atrophy simply because they fail to diagnose the indicators that acts as threat to organizational existence. Rising input costs.
Product redesigning or reengineering. “all is not well”. focus on power brands. prune work-force. 218 . consider extension. Common approaches adopted Change in key positions. Revamp product portfolio. Emphasis on advertising and market penetration. Extending work hours. Recalibrate prices. which most top managers fail to appreciate. Hence. based on elasticity.TURNAROUND ILLUSION The first step to a successful turnaround is the basic acceptance of the fact that …. they adopt surface level measures (disprin popping) which most often fail. liquidating dead assets. be more customer centric..
TURNAROUND STAGE THEORY Stage 1 Decline Stage 2 Stage 3 Stage 4 Outcome Response Transition Performance Equilibrium Line Success Failure Indeterminate Nadir Time 219 .
R-Extinction – It suggests that organization factors. It has its origin in “resource led stretch” and subscribes to the view that a firm has substantial power to override the context. primarily dwindling resources and capabilities are responsible for decline. It involves the identification of the theoretical perspectives that explains performance decline – K-Extinction – It suggests that macro economic and industry wide factors are responsible for decline. Identification of the stimulus leads to the arrest of the downfall. It has its origin in “environment led fit” that subscribes to the view that a firm has little control over external factors. 220 .DECLINE Decline is the first stage in the turnaround process.
221 . The response must match the cause of the decline. Strategic responses focus on changing or adjusting the business the firm is engaged in through long term moves such as – integration. the response should be strategic. If the underlying cause is internal efficiency. new market initiatives.RESPONSE INITIATION Turnaround responses are typically categorized as operating or strategic. asset reduction. Operating responses typically focuses on the way the firm conducts business and involves tactics geared towards – cost cutting and process redesigning (BPR). If the decline stems from structural shifts. the response should be operational. diversification.
which may be unavailable to a focused firm.RESPONSE DICHOTOMY The response initiation is somewhat dichotomous and cannot be universally applicable. Similarly new market initiatives is feasible only for multi-product firms. Contour – It is easier to reverse decline in the earlier stages through operational measures. 222 . when decline deepens shifts in strategic position becomes essential. Scope – A diversified conglomerate may acquire a distressed business to turn it around and gain valuable synergies. Untangling this question brings into focus three events – Domain – Many of the strategic cures have limited applicability for an affiliated firm.
lead – lag). many a times early signs of recovery fades out. transparency.e. role model. confidence building measures. The top management has a key role to play through empowerment. Support from all the stake holders through resource commitment. substantial amount of time usually passes before results begin to show (i.TRANSITION Transition usually reflects the first signs of recovery. However. Sustenance is the key factor in this stage. 223 . Effective levers of transition. participative management (i. Empirical studies show that average time is 7. However. consensus).7 years with a range of (4-16) years.e.
224 . Supplier and banker confidence. Cut off points must be unequivocal. Instead of focusing on financial parameters alone. Failure is an indication that initial momentum was not sustainable characterized by irreversibility.OUTCOME Outcome is said to be successful when a firm breaches the equilibrium performance level. Share price indications and media coverage. Commanding a premium in the market. Revival of key customers and new product launches. Regaining lost market share and distributor confidence. it should adopt a holistic approach.
COOPERATIVE STRATEGIES & ALLIANCES 225 .
technology. supply-chain partnership. 226 . In the cooperative strategy continuum as firms move up the value order. licensing.COOPERATIVE STRATEGIES Cooperative strategies are a logical and timely response to changes in business dynamics. the commitment and the involvement between the firms increases manifold. Any cooperative strategy maybe between firms within the same country or cross border as well. consortia. More and more companies worldwide are moving away from competition to co-option to leverage their resources and enhance bargaining power. strategic alliance. or joint venture. and globalization . It can assume any of the following forms – franchising.
Titan Inds. 227 . owners of the brand Monginis allows its franchisees to sell its confectionary products. Switz Foods. It is an effective strategy to penetrate markets in a shortest possible time at a minimum cost. Branding is critical to franchising. owners of the brand Tanishq allows its franchisees to sell its jewellery products.FRANCHISING Franchising – It is a contractual agreement between two legally independent firms whereby the franchiser grants the right to the franchisee to sell the franchisor’s product or service or do business under its brand-name in a given location for a specified period of time for a consideration.
228 . Develop a product through its crude stage. HM manufacturing GM range of cars in India with a buy-back arrangement is a perfect example of CBU. as in Tata Indica. 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. Different levels of licensing Manufacturing without embracing any technology (CBU). Become a systems integrator (CKD).
CONSORTIA Consortia – They are defined as large inter-locking relationships & cross holdings between businesses in a similar industry. leverage upon size to preempt competition by escalating entry barriers (Eg. It can be of the following types – Multipartner – Intends to share an underlying technology or asset. Cross Holdings – A maze of equity holdings through centralised control to ensure earnings stability & threshold resources for critical mass (Eg. enabling them to increase prices (Eg. Tata. Hyundai). 229 . Airbus – Boeing). Coke – Pepsi). Collusion – Few firms in a matured industry collude to reduce industry output below the equilibrium level.
otherwise it 230 becomes routine outsourcing.SUPPLY CHAIN PARTNERSHIP It is a pro-active & collaborative arrangement between supplier and customer aimed at achieving better control over the value chain (Eg. Companies in different industries with different but complimentary skills. . It usually provides a platform to sort out differences between conceptualization and implementation to suit local market needs. link their capabilities to create value for end users. Continuous sharing of knowledge is critical to the success of a supply chain partnership. Tata Motors – IDEA).
learning organization. to gain knowledge and to obtain access to new markets (Eg.STRATEGIC ALLIANCE It is an short to medium term understanding between two or more firms to share knowledge and risk. Tata Motors – Fiat. preempt competition. enter newer markets. effective R&D management. Partner selection is one of the critical success factors. Despite their popularity (50-60)% of the alliances fail to accomplish their stated objectives. Firm’s should undertake a long courtship with potential partners. 231 . Reliance – Du Pont). instead of hurrying into a relationship. enhance credibility. design next generation products. Generic motives involved are .
Complementary Equals – Two firms mutually promoting each others complimentary products (Eg.TYPES Collusion – Tacit top management understanding to neutralize price wars (Eg. 232 . Alliances of the Weak – An alliance is entered into to preempt competition (Eg. Airbus – Boeing). Coke – Pepsi). Maruti). Backward – An alliance (quasi or tapered) with a supplier of critical components seeking commitment (Eg. Bajaj – Castrol). Bootstrap – An alliance between a weak and a strong company with an intention to acquire it.STRATEGIC ALLIANCE . Whirlpool – Tide.
Too much stress on financials & structure be avoided. Firms from developed markets seek access to markets and firms from emerging markets seeking access to technology. – Japan Vs US). 233 . Cultural orientation has been found to have a profound effect on top management’s strategic orientation (Eg. Differences in level of economic development can produce differences in alliances motives.PARTNER SELECTION CRITERIA It is likely that partners will not have complete consent on alliance objectives because the institutional context in which the alliance embedded varies from country to country.
Willingness to share knowledge and skills. Experience related to previous alliances. Partner’s ability to acquire fresh skills. Managerial capabilities. Unique Resources – Abilities or skills which cannot be easily duplicated.PARTNER CHARACTERISTICS Complimentarity of Capabilities – The degree to which partners resources can be used in conjunction. Intangible Assets – Move beyond the financials of the firm. Dominant Logic’s – Similarity in beliefs & biases. including ability to provide quality products and services. 234 .
Changing within. understanding the chemistry. incorporating clear signs of continuing independence for all partners. differences not anticipated earlier. 235 . degree of compatibility. operational & cultural integration. Getting Engaged – It should incorporate a specific joint activity. the value chain.MANAGING ALLIANCES Alliances are more than just a deal. Learning to collaborate – strategic. instead of focusing controlling the relationship. vows to include commitment to expand the relationship. Setting up the housekeeping. partners should nurture it. Selection & Courtship – It involves self analyzing.
synergy) rather than mere exchange (i. separation is very 236 bitter.JOINT VENTURE A joint venture is a long term association between two equal partners to create an independent firm (SPV) by complementing their resources and capabilities to explore newer businesses or markets for achieving a shared vision. .e. It aims at creating new value (i. There are substantial linkages in the value-chain.e. Conceptually. It lasts till the vision is reached. combining parts). a joint venture is a selection among modes by which two or more firms can transact. whilst the partners continue to operate independently.
237 . The market fails as sellers are unwilling to reveal their technology and buyers are unwilling to purchase in the absence of inspection.JOINT VENTURE – GENERIC MOTIVES Transaction Cost – The situational characteristics best suited for a JV are high performance uncertainty. Strategic Behaviour – Firms may override transaction costs. though more profitable alternative to other choices. in addition to a high degree of asset specificity. 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.
Sharing of resources. Learning new technologies. – Eg. – Eg. Daimler – Chrysler (Premium Cars) 238 . – Eg. – Eg. Maruti – Suzuki. – Eg. Essar – Hutch (Vodafone). Yamaha – Escorts. Renault – Nissan (Minivans – Cars).OTHER MOTIVES Entry into newer markets. – Eg. Define future industry standards. TVS – Suzuki (4-Stroke Engines) Fill gaps in existing product lines. Eli Lily – Ranbaxy. Endorsement from government authorities.
– Maruti – Suzuki. PAL – Fiat If the cost of continuing exceeds the exit costs? – Eg.RISKS INVOLVED Incompatibility – Differences in cultural background. – Eg. – Eg. Tata – Aditya Birla in Idea Cellular 239 . Risk of brain (i. technology) drain.e. Modi – Telstra What after exit (parenting disadvantage)? – Eg. Century . LML – Piaggio Differences in size and resource base. – Godrej – Procter & Gamble. Risk of over dependence.Enka.
time sharing. Equality – Lack of dominance. Focus – Avoid strategic myopia. Incompatibility – Performance expectations. Partner – Avoid duplication of skills and capabilities. Flexibility – Sufficient space to breathe and adjust. Costs – Other modes of transaction becomes cheaper. respect. Inertia – Differences in age and evolution patterns. Objectives – Shared vision. 240 . Agreement – Clarity on operational control. Culture – Reconcile gaps.PRE-REQUISITES FOR SUCCESS Commitment – Mutual trust.
MERGERS & ACQUISITION 241 .
Most countries have stringent laws that prevents hostile takeovers (Eg. reverses are also taking place through LBO) with a view to acquire conglomerate power and induce synergy (Eg. An acquisition is said be smooth if it is with the consent of the management (Eg.MERGERS & ACQUISITION A merger is a mutually beneficial consent between two or more firms (usually of similar size) to form a newly evolved entity by absolving their individual entities to preempt competition (Eg. An acquisition is the purchase of a firm by a firm (of larger size. Mittal Arcelor). The larger objective is to leverage on size. Brooke Bond – Lipton). however. SEBI Takeover Code.Daichi) and hostile if it is without the consent of the management (Eg. Ranbaxy . 2002). HLL – Tomco). 242 .
creeping acquisition).SEBI TAKEOVER CODE.e. Preferential – A preferential allottee ending up acquiring 5% stake also comes under its purview. Hike – An acquirer who has already picked up a 5% has to make a mandatory disclosure for every additional 1% stake that it acquires. 2002 Promoter – A person who has a clear control of atleast 51% of the voting rights of the company and confidence of all the major stakeholders. Control – A special resolution of 75% of the share 243 holders approving the change of guard. . Acquirer – Someone (individual or firm) who picks up an atleast 5% stake without mandatory disclosure having an intention to wrest management control (i.
and/or does not enjoy the confidence of the different stake holders.e. 2002 Pricing – Acquirers will have to offer minority shareholders (at least 20%) the past 26 weeks or past 2 weeks average price. Disclosure – All acquirers have to inform the respective stock exchanges where it is listed and SEBI upon acquiring the basic limit and upon every incremental limit thereon. 244 . whichever is higher as an exit route (Eg. Gujarat Ambuja – ACC). SEBI – In case of a hostile take over.SEBI TAKEOVER CODE. credentials or track record is at stake. Grasim – L&T Cement. asset stripping). the SEBI can intervene and block share transfers if: the acquirer has ulterior motives (i.
Conglomerate – It involves integration of two distinctly unrelated businesses. ITC). usually opportunistic (Eg. The type of merger is depends on the degree of relatedness (strategic) between the two businesses. Electrolux . Reliance). 245 .TYPES OF MERGERS A business is an activity that involves procuring of desired inputs to transform it to an output by using appropriate technologies and thereby creating value for its stake holders in the process. Godrej.Kelvinator). Vertical – It involves complimentarily (partially related) in terms of supply of inputs or marketing activities (Eg. Horizontal – It involves integration of two highly related businesses (Eg.
ITC Bhadrachalam). Asset Stripping – Shaw Wallace). quick access).e. Reduction in risk. Access to newer segments (Eg. Overcoming entry barriers (Eg. Tax benefits (Eg.MOTIVES Increased market / conglomerate power. 246 . Economies of size. Acquiring assets or capabilities (Eg. Mittal – Arcelor). Reduced gestation (i.MERGERS & ACQUISITION . scale and scope. Coinsurance effect – Higher debt raising capability. Ulterior motives – (Eg. ICICI –ITC Classic). Tata Steel – Corus). Ranbaxy – Crosslands). Avoiding risk of new product development. Global image (Eg.
Merging of organisational structures. Top management overtly focused on due diligence exercise and negotiations. 247 . When Tata Steel started negotiations with Corus. while the ultimate acquisition was made at 607 pence/share). Managing over-diversification. neglecting core business. Overvaluation is often as a result of an ego drive and substantially affects future returns. Inability to achieve synergy.MERGERS & ACQUISITIONS PITFALLS Cultural differences (Eg. their initial offer was around 420 pence/share. Tata – Corus). Managing size. Overvaluation of buying firms (Eg.
Decline – Horizontal mergers are undertaken to ensure survival. Brooke Bond – Lipton). 248 . Tata Steel – Corus). Kingfisher – Air Deccan). with an objective to reinforce its growth trajectory or to take on the might of a comparatively larger player (Eg. Growth – This stage may witness parallel merger of two firms of similar size. vertical to save transactions costs.MERGER TYPE & PLC Introduction – A larger firm may acquire a newly formed entity with an objective to preempt new competition or acquire its license (Eg. Maturity – A larger firm acquires a smaller firm with an objective to achieve economies of scale and experience curve effects (Eg.
active top management intervention in phases. Blanket promotions across entities and confidence building exercises needs to be practiced. Left alone syndrome. Immediate attempts to super impose structure and culture may cause bottle necks.FRAMEWORK Positive contribution to the acquired company. A common shared vision. A concern of respect and trust for the business of the acquired company. 249 .INTERNATIONAL M&A . An acquisition just for the sake of it or reputation yields very little value in the long term. Strong differences may stifle plans and its execution.
Redefine responsibilities and authority. 250 Do not ignore the “people factor”. Decide upon management control systems. Integrating work processes.BLUEPRINT Take the media into confidence. They can carry the message to the various stake holders.INTEGRATION . . Decide on the new hierarchy. It will enable focus on customers and key people. promptly. Determine business strategy. Shift attention from business portfolio to people and processes.
– Market for corporate control.e. 251 . Valuation decisions are arrived through a due diligence process when the prospective acquirer gets access to the books of accounts of acquiring company. over valuation can become a curse. – Unstated reasons – Personal self interest and hubris.M&A . Financial motives – Undervaluation relative to true value.VALUATION The process of valuation is central to M&A. While under valuation may be a significant opportunity. operational & financial). The process takes (6-12) months. – Synergy – Potential value gain from combining operations (i.
VALUING OPERATIONAL SYNERGY Synergy – It refers to the potential value gain where the whole is greater than the sum of the parts. when the “fit” between the two entities is very poor. Synergy can be negative as well. or from increased market power which increases sales and margins. Sources of operational synergy – Horizontal Synergy – Gains come from economies of scale which reduces costs. Innovative product – Good distribution network). – Conglomerate Synergy – Gains come when one firm complements the resources or capabilities of another (Eg. – Vertical Synergy – Gains come from controlling the supplychain and savings in transaction costs. 252 .
VALUING FINANCIAL SYNERGY Diversification – Reduce variability in earnings by diversifying into unrelated industries. However. Tax Benefits – Tax benefits may accrue from tax entitlements and depreciation benefits unutilized by a loss making firm. shareholders can accomplish the same at a much lesser cost. Cash Slack – It reduces asymmetry between cash starved firms with deserving projects and cash cows with no investment opportunities. ITC – Bhadrachalam Paper). but availed after being merged with a profitable firm (Eg. Hotmail). Synergy comes from projects which would not have been undertaken if the two firms stayed apart (Eg. and without paying take-over premiums. 253 .
VALUING FINANCIAL SYNERGY Co-Insurance Effect – If the cash flows of the two firms are less than perfectly correlated. – Coupon rates may also be negotiated at lower rates. higher leverage. It relates to the concept of diversification. – Default risk comes down and credit rating improves. 254 . hence better performance. the cash flow the merged firm will be less variable than the individual firms. The likelihood of default decreases when two firms' assets and liabilities are combined through a M&A compared to the likelihood of default in the individual companies. This will induce higher debt capacity. as risky debt is spread across the new firm's operations.
VALUING CORPORATE CONTROL Premium of M&A are often justified to control the management of the firm. The value of wrestling control is inversely proportional to the perceived quality of that management. Assessment of perceived quality is critical. The value of control can be substantial for firms that are operating well below optimal value. 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.
Confidence of investment bankers and the international financial community is essential. sometimes in combination with the assets of the acquiring company. LBO facilitates a relatively smaller firm to bid for a comparatively larger firm in the bid for management control. The assets of the acquired company are used as collateral for the borrowed capital.e.LEVERAGE BUYOUT (LBO) The basic difference between a take-over and a LBO is the high inherent leverage (i. It is a very costly and risky proposition. debt component) at the time of buyout and rapid changes in capital structure over time. 256 .
on-going valuation. the advantages of going public includes . – Increased information needs. liquidity. – Separation of ownership from management. 257 . However. A research study showed that 30% of the publicly listed firms reported above average returns after going private. The increased benefit showed in the following way – reduced costs and increased revenue. – The need to satisfy analysts and shareholders.access to financial markets. off-late many publicly traded firms have gone private keeping in mind the following – – The fear of LBO.TO GO PUBLIC OR NOT? However.
co-insurance effect).e. which disappears once assets are liquidated and significant portion of debt is paid off. – Cost of debt coming down (i. – Cash trapped company unable to utilize opportunities. – Debts repaid off from increased value after successful restructuring and wresting management control.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). 258 . – It is a temporary phenomenon. – Managers cannot be trusted to invest free cash flows wisely.
leverage is expected to decrease over time. A LBO has to pass two tests to be viable – – Restructuring to pay-off increased debt. 259 . Any discounting has to reflect these changing cost of capital. initial rise in leverage is anticipated. As the firm liquidates / pledges assets and pays off debt. – Increase equity valuation. Lack of sufficient cash flows to repay costly debts resulting in a possible debt trap. Therefore.EFFECT OF HIGH LEVERAGE Increases the riskiness of dividend flows to shareholders by increasing the interest cost to debt holders.
– Automatic listing in major exchanges. Objectives – – Traditional route of filing prospectus and undergoing an IPO is costly. which has discontinued its operations (i. – Tax shelter. – Facilitates better valuation and forthcoming offerings.e.REVERSE MERGER Reverse Merger – The acquisition of a public company. – Prevents dilution of equity. small in size but having a promising business. allowing the private company to bypass the usually lengthy and complex process of going public. 260 . shell company) by a private company. time-barred. or costly.
Most target firms are taken over within (6090) days. During bearish periods excess returns were 19%.EFFECT OF TAKE-OVER ANNOUNCEMENT The shareholders of target firms are the clear winners. – Merger announcements reported 20% excess returns. Initial anomaly in stock prices usually normalizes over a period of time (6-12) months. – Takeover announcements reported 30% excess returns. Excess returns also vary across time periods. takeover failures have only initial negative effects on stock prices. 261 . and 35% during bullish periods. However.
– However. – However. Brickley. over time. 1983. – Most studies reported insignificant excess returns around take-over offers or merger announcements. 1983. 1988 . Desai. and Kim. Bradley. and Netter. 262 Jarrel. in the event of take-over failure negative returns to the extent of 5% on bidder firm stock prices is reflected. as stock markets become more and more perfect such anomalies would reduce Source: Jensen and Ruback.EFFECT OF TAKE-OVER ANNOUNCEMENT The effect of take-over announcement on bidder firm’s stock prices are not clear cut.
Poison Pill – An offer to existing shareholders to buy shares at a substantial discount to increase their voting rights (Eg. 263 . so that nothing is left for the raider to strip off. Poison Put – Premature retirement of bonds at attractive rates to pour surplus cash and make target investment unattractive. Asset Stripping – The targeted company hives off its key assets to another subsidiary.DEFENSIVE STRATEGIES Golden Parachute – An employment contract that compensates top managers for loss of jobs as a result of change in management control. Rights).
But often the White Knight turns a betrayer himself (Eg.DEFENSIVE STRATEGIES White Knight – It is the placing of stocks to a cash rich investor and bargaining for protection in return. 264 . thus thwarting the raider company’s attention. Pac Man – The target company makes a counter bid to take over the raider company. Shapoorji Pallonji). East India Hotels – Reliance Industries – ITC). Green Mail – The targeted company buys large blocks from holders either through premium or through pressure tactics (Eg. Gray Knight – The target company takes the help of friendly company to buy the shares of the raiding company.
COMPETING FOR THE FUTURE 265 .
Hitachi overpowering Westinghouse. Nokia overpowering Motorola. Most companies were too preoccupied with the present than the future? 99% of the companies overpowered.GETTING OFF THE TREADMILL Canon overpowering Xerox. Compaq overpowering IBM. The reverse was true for the companies overpowering. Honda overpowering GM. What went wrong???? What were they doing with the present? What were they pre-occupied with? 266 . Wal-Mart overpowering Sears. were spending 99% of their precious time dealing with present. British Air overpowering Pan Am. Honda overpowering Volkswagen.
Not knowing when to stop. decluttering.THE PAST OF COMPETITION Beyond Restructuring – When a competitiveness become inescapable problem (stagnant growth. falling market share). CEO’s brutally pick up the knife and ruthlessly carve away layers of corporate flab (delayering. most often they ended up cutting corporate muscle as well and became anorexic. downsizing). declining margins. Thus efficiency was grievously hurt. 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 .
incrementalism or nominal innovation has almost reached a plateau. A poll in circa 2000 revealed that 80% of the U.THE PRESENT OF COMPETITION Beyond Reengineering – Numerator based managers (innovation) at least offers some hope. but not of the future. The future is not about catching up with competition. but forging ahead in competition. However. ensuring only survival of the present. top managers believed that quality will be a source of competitive advantage of the future.S. 268 . On the contrary only 20% of Japanese managers believed that quality will be a source of competitive advantage of the future.
Creating the future requires industry foresight.THE FUTURE OF COMPETITION Regenerating – Leaner. Empower from bottom to top. don’t predict. better. as important as these may be. not the other way. 269 . Transform the industry. Create a potential gap. It involves Dream about the company’s future. faster. Companies need to fundamentally reconcieve itself. aspirations and resources. and regenerate its strategies (breaking its – managerial frames). reinvent its industry. they are not enough to get a company to the future. It is based on deep insights into trends in technology. not just the organization. demographics and lifestyles.
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 .
Create entirely new industries (i. Successful companies have a complete grip over the industry. It drives a hunger and a passion to transform. Therefore. It is about deliberately creating a strategic misfit. by converging technologies complex. blue oceans). Redraw the boundaries between industries.e. hence do not fall sick in the first place. 271 . Change in at least one fundamental way the rules of engagement in an industry.ABOUT THE TRANSFORMATION The future does not belong to those who take the industry for granted. they do not need to restructure.
ABOUT THE EMPOWERMENT Bring about a revolution (a paradigm shift) in the organization. The middle management plays a strong moderating role. Most successful revolutions (Gandhi to Mandela) rose from the dispossessed. Transformational leaders merely lead the way. More importantly. A revolution that is thrust upon from the top seldom sustains. Such a process is called institutionalization (from people centric to organisational centric). the revolution must start at the bottom and spread in all directions of the organization. 272 .
A process for finding and gaining insight into tomorrows opportunities (Eg. What does it take to get to the future first? Understanding how competition for the future is different. without taking undue risk. Apple – iphone). An ability to energize the company. 273 . Get to the future first. South West Airlines – LCC.THE FUTURE OF STRATEGY A company must get to the future not only first but also for less. Companies need to strategize (think ahead of times). Apply the 40 – 30 – 20 principle. It requires a lot of common sense and a little bit of out of the box thinking. Toshiba – LCD.
the farther it will be away from competition. greatness from mediocrity. as on their aspirations. each point in space represents a unique business opportunity. The farther one can see in this endless space.HOW DOES THE FUTURE LOOK LIKE? There is no rule which says that for every leader there will be a follower. Companies of the future will be not based so much on the strength of their resources. We are in the midst of a 3600 vacuum. 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. but hundreds.
THE EMERGING STRATEGY PARADIGM Not Only Reengineering Processes But Also Regenerating Strategy The Competitive Challenge Organizational Transformation Industry Transformation Competing for Market Share Competing for Opportunity Share Finding the Future Strategy as Learning Strategy as Positioning Strategy as Engineering Strategy as Unlearning Strategy as Dream Strategy as Architecture 275 .
THE EMERGING STRATEGY PARADIGM Not Only But Also Mobilising for the Future Strategic Fit Resource Allocation Strategic Misfit Resource Stretch & Leverage Getting to the Future First Existing Industry Structure Product Leadership Single Entity Product Hits & Timing Future Industry Structure Competency Leadership Dominant Coalitions / Co-option Market Learning & Preemption 276 .
LEARNING TO FORGET P1: The degree of learning in current period is directly proportional to the degree of unlearning in the previous period. Degree of Learning Unlearning Curve P2: Unlearning in previous period does not necessarily ensure learning in the current period. Learning Curve t1 t2 t3 Time t4 t5 277 .
CORE COMPETENCE A core competence relates to a bundle of skills (not an asset or a business) that revolves around activities or processes and critically underpins a firm’s competitive advantage. It is characterized by the following – Unique – It provides unimaginable customer value ahead of its times. 278 . Inimitable & Insubstitutable – A high degree causal ambiguity between these skills yield sustainable competitive advantage. It cannot be matched even by its closest competitors. Leverage – They are the gateways to future markets. It represents the collective learning's of an organization centering around diverse streams of technologies.
SKF – antifriction and precision. at the most three to four. it gets more refined and valuable through use. Wal-Mart – logistics. Although a core competence may lose value over time. 279 . Nike – designing. Toshiba – flat screen displays. it is deeply embedded in the heart of the organization. Toyota – lean manufacturing. Most companies around the world do not possess one. Core competencies are the roots of the organization.MORE ABOUT CORE COMPETENCE Sony – miniaturization. leaders have one. Coca Cola – brand. Intel – nano-electronics. A core competency cannot be outsourced. Canon – imaging. Honda – engines.
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 .
institutional gaps. strategies suited for the developed markets may not be appropriate for emerging markets. China. Diversified groups in operating in emerging markets therefore benefit from unrelated diversification. Chile) provide a different context (i. 288 . Emerging markets are characterised by infrastructural bottlenecks. 1997).EMERGING MARKETS Emerging markets (India. Korea. high levels of market imperfection). and high transaction costs. Therefore.e. Therefore focused strategies based on core competence may not be suitable for emerging markets (Khanna & Palepu.
PERFORMANCE (I) Diversity attempts to measure the degree and extent of diversification (Herfindahl. Synergy. et al. subsequently negatively related across developed markets. Concentric. Size & Scale. Experience Strategic Fit Diversity Palich. Entropy). (2000) 289 .DIVERSITY . Optimum level of diversification Performance Diversity is initially positively related with performance.
DIVERSITY . Huge initial investment. 2001) 290 . brand building Risk diversification.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.
It should have a spread of interest groups / stake holders. Characteristics – It should have a spread of affiliates or subsidiaries. It should think globally. 291 . It should have a spread of manufacturing facilities.INTERNATIONAL IDENTITY MNC’s consciously engage in FDI in different parts of the globe to forge resource diversity as a distinct competitive advantage. act locally (Eg. revenues and profits. HSBC). It should have a spread of assets.
low power distance in developed markets and vice versa for emerging markets). low group scale in developed markets and vice versa for emerging markets). 292 . Group Scale .GLOBAL BUSINESS ENVIRONMENT Power Distance – It reflects the disparities in income and intellectual development (Eg. low risk profile in developed markets and vice versa for emerging markets).It reflects the relative role of team building (Eg. Risk Profile – It reflects the risk attitude of the top management (Eg. Feminity Index . high feminity index in developed markets and vice versa for emerging markets).It reflects the disparities in women in workforce (Eg.
judiciary) of doing business in a particular country (Eg. credit rating. high cultural adaptability in developed markets and vice versa for emerging markets). corruption. political stability. terrorism (9/11). 293 . customs. way of life.GLOBAL BUSINESS ENVIRONMENT Cultural Adaptability – It reflects the adaptive ability to a changing environment . flexibility (Eg. attitude. inflation. currency.culture. FOREX reserves. Country Risk – It reflects the political and economic risk (Eg. dress sense. code of conduct. low country risk in developed markets and vice versa for emerging markets). time value. interest rates.
in most emerging markets use of an interpreter may be a standard protocol. High levels of ethnocentrism usually has a negative effect on business. 294 . time-zones.GLOBAL BUSINESS ENVIRONMENT Time Sensitiveness – Developed country managers regard time as precious. Ethnocentrism – Developed country managers tend to regard their own culture as superior. in most emerging markets meetings are delayed and lasts unusually long. and vice-versa. however. Other factors – local celebrations. Language Barriers – Developed country managers expect foreign partners to communicate in their languages.
It also initiated provisions on anti-dumping. ASEAN. The 1999 (Seattle Round) saw a lot of protest amidst bringing agriculture under the purview of TRIPS. The 2001 (Doha Round) focused on power blocks (NAFTA. BRIC).GATT GATT was a bi-lateral treaty initiated between US and some member countries in 1947 to promote free trade. trademarks). 295 . It focused largely on TRIPS (patents. It a multi-lateral treaty with 143 (as on 2002) member countries to reduce tariff and non-tariff (quota) barriers. It also highlighted the nexus between US & WTO. copyrights. In 1995 (Uruguay Round) GATT was renamed to WTO.
three countries joined in 2002 increasing it to fifteen members as of 2008. The notable exception was Great Britain which still continues with its local currency (i. However.e. the Dollar still remains the most preferred currency globally. However with current recession in the US 2002 onwards. Euro). 296 . The Euro was significantly devalued against the Dollar till 2002.EURO – SINGLE CURRENCY In 1999 twelve member countries in Europe joined hands to move over to a single currency (i.Pound). primarily the OPEC countries. the Euro slowly started outperforming the Dollar. Sterling .e.
Rate Uncertainty – A single currency eliminates the risk of competitive devaluations. However. Trade Block – It will strengthen the EU identity which would not have been possible otherwise. a multiple currency is preferable where the business cycles of member nations are different. but it may have spill-over effects. 297 . it helps avoiding transaction costs associated with a multiple currency. Transparency – A single currency is transparent and competitive.SINGLE Vs MULTIPLE CURRENCY Transaction Costs – Though the initial cost of introduction of a single currency is very complicated and costly.
hot money).e. Neo classical economists believe that foreign investment may in fact be a win-win game.e. – FII (transfer of intangible resources) is fast but may have strong repercussions (i. It is short-medium term with comparatively low levels of commitment. 298 .FII Vs FDI INVESTMENT Classical economists believed that foreign investment (in any form) is basically a zero sum game (i. – FDI (transfer of tangible resources) is slow but steady for the purpose of economic growth. the gain of one country is loss of another). It is long term with high levels of commitment.
customer awareness (microwaves). economic (middle class buying power). usage (talk time). buying patterns (spread).culture (food habits). Pricing – It depends on the competitive structure (PLC – Kellogg's). . technology (microchip).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). Distribution – It depends on the market characteristics (fragmented – concentrated). promotion (surrogate advertising).
Cost Structure – Companies in India need to investment in fixed costs due to poor infra-structure 300 compared to developed markets.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. . Leverage – The leverage may vary across countries depending upon money and capital market conditions (Eg. equity is cheap in India). Accounting Norms – The accounting norms of one country (AS . debt is cheap in US.
labour laws. in most cases it is not desirable nor practiced. Recruitment – In local recruitment. Training – It is a pre-requisite for international business to reduce language. 301 . and cultural barriers (language) vis-à-vis emerging markets. social security. skills are more important that cultural fit and vice-versa. however. Compensation – Differential pay packages exists because of differences in purchasing power. double taxation. shortened life cycles). technology (convergence.INTERNATIONAL HR An uniform HR policy is idealistic to enable parity in performance appraisal.
. SCM – Use of ERP to network the extended enterprise 302 across the globe. reduce power costs) vis-à-vis infrastructural bottlenecks.INTERNATIONAL OPERATIONS Location Incentives – FDI in emerging markets should explore options for SEZ’s to explore benefits (tax holidays. Bosch spark plugs are used by car manufacturers worldwide). Outsourcing – A company having a core competence may be the source of global outsourcing (Eg. 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 .
Innovations typically paves the way for more secured and improved lifestyle for consumers in general.INNOVATION An invention is the first occurrence of an idea for a new product or process. innovation is the first attempt to carry it out in practice. Innovation is the most preferred strategy today to maintain competitive advantage in the present turbulent business environment. 304 . it has destructive effects as well. but has inherent risks involved as well. While innovation typically adds value for organizations. Innovation is all about staying ahead of competition.
TYPES OF INNOVATION A key challenge is maintaining a balance between process and product innovations. Process innovation usually follows product innovation. process innovations are organizational driven. 305 . Tangible impact of product innovation on performance is significantly higher than process innovation. process innovation is necessary to sustain the competitive advantage of product innovation. However. While product innovations are typically customer driven. Strategic innovation has the potential to change the rules of the game.
Disruptive business models brings in a new frame of reference (i.e. about how an organization makes money (i. Innovations are the back-bone of successful business models . 306 .e. Drug Development (Bio Chemicals). a paradigm shift). It leads to a shift in the price – performance envelope. Telecom (CDMA Technology). Data Storage (Pen Drives). Medical Surgery (Lasik). putting an idea into practice).BUSINESS MODEL It is a simplified description and representation of a complex real world. Processors (Pentium).
The revenue streams generated by the activities. The key partners involved in the activities. 307 . The channels to reach out to the clients. The cost structure resulting from the business model. The key resources and capabilities required. The segment(s) of clients to be addressed. The proposed relationships established with clients. The key activities / processes necessary for execution.NINE BUILDING BLOCKS Value proposition offered to the market.
BUSINESS MODEL FRAMEWORK 308 .
REVENUE MODEL Positioning is just not sufficient. It is just one piece of the puzzle. Investment Banking. The revenue model described here are the means to generate revenues. 309 . With the rapid erosion of certain industries (IT. 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. It involves – Product Visualization – Product Prototype – Product Test – Capacity – Pricing – Distribution.
Provide reasonable incentives (not necessarily monetary). Promote the grape-vine. A favourable intellectual property (IP) climate. Promote the culture of experimentation. 310 . Allow the management sufficient slack to be future oriented. Allow the workforce idiosyncrasies for their errors.HOW TO MAKE INNOVATIVE CO’S Innovative company’s are a matter of culture and aspirations rather than tangible resources. Have a lean and a flat organization structure.
Collusion with the judiciary is also another distinct possibility in emerging markets. In most emerging markets where the IP climate is not so favorable. however that possibility is slowly atrophying. 311 311 . The most preferred strategy of internal protection includes imbibing “causal ambiguity” in the production process to make reverse engineering difficult. companies are increasingly relying on internal protection to sustain innovation effects.HOW TO PROTECT INNOVATION? Without adequate protection (external or otherwise) the effects of innovation does not translate to performance.
Corporate governance aims to reduce the principal-agent problem present in most professional managed organizations through appropriate forms of accountability and control mechanisms.CORPORATE GOVERNANCE The basic theme of corporate governance is to ensure that professional managers are identified and made accountable in terms of clear business processes or activities and held responsible through adequate mechanisms & control systems for channelizing their decisions for the benefit of stakeholders at large. 312 312 . In fact the principles of corporate governance implies that managers go beyond in satisfying the stated and unstated needs of the multiple stakeholders.
However. shareholders can diversify their portfolio at a much lesser risk and cost. From the strategic point of view managers tend to diversify into unrelated businesses as it provides higher returns hence a more favourable appraisal. not present in portfolio diversifications. This exposes the shareholders to additional risks and higher costs. According to the agency theory top managers and shareholders interests are usually conflicting in nature and tend to pull in opposite directions. 313 .AGENCY THEORY The root of Corporate Governance goes back to the Agency Theory. also known as the principal-agent problem or agency dilemma.
. defines corporate governance (headed by Kumar Mangalam Birla) as the acceptance by management of the inalienable rights of shareholders as the true owners of the corporation and of their own role as trustees on behalf of the 314 shareholders. the US government passed the Sarbanes – Oxley Act. various laws were enacted to ensure proper usage of these funds.ORIGIN & CONTEXT Since the early 20th century since a large part of public funds were held by publicly traded firms in the US. SEBI Report – 2005. After the Enron downfall. 2002 to restore public confidence in corporate governance.
315 . Interests of other stakeholders: Recognize the legal and other obligations of all legitimate stakeholders.GOVERNANCE PRINCIPLES Rights and equitable treatment of shareholders: Help shareholders exercise their rights by effectively communicating information in transparent ways that is understandable and accessible and encouraging shareholders to participate in general meetings. Role and responsibilities of the board: It deals with issues about an appropriate mix of executive and nonexecutive directors. The key roles of chairperson and CEO should not be held by the same person and their offices be clearly separated. including the society at large.
GOVERNANCE PRINCIPLES Integrity and ethical behaviour: Organizations should develop a code of conduct for their top management that promotes ethical and responsible decision making. assessment and mitigation of risks and retirement by rotation over a fixed period of time.. Independence of the entity's auditors: Identification. They should also implement systems to independently verify and safeguard the integrity of the company's financial reporting. Disclosure and transparency: Disclosure of information should be timely and balanced to ensure that investors have clear access to data and facts. 316 316 .
discussed and resolved. with its legal authority to hire. safeguards invested capital.GOVERNANCE STRATEGIES Monitoring by the board of directors: The board of directors. a person benefitting from a decision should abstain from it. Remuneration: Performance-based remuneration is designed to relate some proportion of salary to individual performance. fire and compensate top management. Balance of power: The simplest balance of power is very common. they should provide no mechanism or scope for opportunistic behaviour. 317 . Regular board meetings allow potential problems to be identified. However.
from 10% for companies where the regulatory backdrop was least certain (those in Morocco. and was responsive to investors' requests for information on governance issues. They defined a well-governed company as one that had mostly out-side directors. 318 . The size of the premium varied by market. McKinsey found that 80% of the respondents would pay a premium for wellgoverned companies.GOVERNANCE & PERFORMANCE In its “Global Investor Opinion Survey” of over 200 institutional investors in 2002. who had no management ties. Egypt and Russia) to around 40% for Canadian & European companies. undertook formal evaluation of its directors.
However. 319 . Therefore. The basic premise is that firms cannot exist in vacuum.SHAREHODER – STAKE HOLDER THEORY Till the early part of the 20th the basic objective of modern organizations was to provide goods and services for public consumption for profit maximisation. the short-term view of profit maximisation gave way to a more broader and mediumterm view wealth maximisation of the shareholders. Over a period of time. today economic institutions are considered as a major drivers of improvement in quality of life in general and therefore needs to include multiple stakeholders. corporate philanthropy should be a part of every corporate mission.
CSR can be defined as. “a healthy business cannot exist in a sick and impoverished society”. economic and social responsibilities cannot be mutually exclusive. Therefore. “an enterprises decisions and actions being taken for reasons at least partially beyond its immediate economic interests”. the debate on CRS still continues whether firms should detract its focus from its business? 320 . in fact a large part of it is significantly overlapping.CORPORATE SOCIAL RESPONSIBILITY As Peter Drucker rightly pointed out that. Therefore. giving a very important message that one cannot exist without the other. However.
Fear of government interference: Excessive quench for profits may lead to build up of adverse public opinion compelling the government to intervene (Eg. MRTP). Public image: Entrepreneurs are increasingly relying on public image as a source of competitive advantage and a higher financial discounting.GROWING CONCERN FOR CSR Awareness due to education: With growing literacy. The role of media: The media and various consumer organizations have come up in protecting consumer rights and exposing mal-practices. people are becoming increasingly aware of their right to a decent and healthy life. 321 .
Paper packaging. and extended producer responsibility (Eg. Cement .CSR STRATEGIES Green Supply Chain Management: It includes environmentally preferable purchasing. Health & Hygiene – Attending the health hazards due to wastes and by-products to employees and society in proximity (Eg. Education. designing eco-friendly products. Literacy & Training Programs – (Eg. 322 . Refrigerators – CFC. Aditya Birla Research Centre – LBS). Exide – Product take back). eco efficiency. Tata Steel – Life Line Express).
C. Prahalad notes that future markets exist collectively. across the world's billions of poor people having immense untapped buying power. They represent an enormous opportunity for companies who learn how to serve them. Strategic innovations leading to disruptive business models can show the way out. 323 . K. In turn companies by serving these markets. they're helping millions of the world's poorest people to escape poverty.BOTTOM OF THE PYRAMID With the market across most developed markets including the US getting saturated.
BLUE OCEAN STRATEGY 324 .
MARKETSPACE .TWO WORLDS 325 .
one companies gain is always at the 326 cost of another companies loss. Yet in today’s overcrowded industries. In today’s red oceans. where most industries are saturated.WHAT IS RED OCEAN? Companies have long engaged in head-to-head competition in search of sustained. They have fought for profits. . competing head on results in nothing but a bloody red ocean of rivals fighting over a shrinking profit pool. battled over market-share. and struggled for differentiation (cost or product). profitable growth.
rendering rivals obsolete and unleashing new demand. but by creating blue oceans of uncontested market space ripe for growth . Blue Ocean’s have existed in the past. it will exist 327 in the future as well. It helps in creating powerful leaps in value for both the firm and its buyers. Such strategic moves are possible through the pursuit of product differentiation and low cost simultaneously. It is only the frames of the .WHAT IS BLUE OCEAN? Tomorrow’s leading companies will succeed not by battling in red oceans.
RED OCEAN Vs BLUE OCEAN Compete in existing markets Compete in uncontested markets Beat the competition Exploit existing demand Make the competition irrelevant Create and capture demand Make the value-cost trade off Break the value-cost trade off Demand is the limiting factor Supply is the limiting factor 328 .
BLUE OCEAN STRATEGY IMPERATIVES Prospects in most established market spaces – red oceans – are shrinking steadily. Demand across developed markets reaching a plateau. Technological advances have substantially 329 improved industrial productivity. Population shrinkage across a no. Niche markets & monopoly havens are continuing to disappear. information imperfections atrophy instantly. . As trade barriers between nations & regions fall. of European nations.
Company & industry are the wrong units of 330 strategic analysis. managerial moves are. History indicates that blue oceans exist in three basic industries – automobiles (how people get to work) – computers (what people use at work) – entertainment (what people do after work).CONCEPTUAL UNDERPINNINGS Blue oceans have existed in the past and will exist in the future as well. the underlying technology was often already in existence. . Incumbents often create blue oceans within the ambit of their core business. They are not necessarily about technology.
BLUE OCEAN .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 .
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 .
Southwest Airlines: Pioneering the concept of LCC. Sony Play Station: Redefining machine-human interface in entertainment and targeting an altogether new user base. . Citibank – Automated teller machines & credit 333 cards.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.
According to this view managers need not be constrained to act within the confines of their industry. Off late emerging views in strategy having its origin in (Organization Theory) led to a paradigm shift to what is called the – reconstructionist view. All they need to do is change their managerial frames.WHAT THEN IS THE HANDICAP? Most of the traditional views in strategy having its origin in (Economic Theory) led to what is called the – structuralist paradigm. greater than themselves. According to this view. 334 . companies & managers are largely at the mercy of economic forces.