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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
STRATEGIC MANAGEMENT .FEATURES It forms the core activity of the top management. It is long-term in nature. It is a holistic and integrated approach. It is all about creativity and innovation. It provides broad guidelines. It is irreversible. It is about adaptation and response to the same. 7 . It requires full commitment of the top management. It involves substantial resource outlay.
It a bundle of techniques or even tricks. 8 . It is fool-proof in nature. It involves only the top management. It is about forecasting. It attempts to minimize risk.STRATEGIC MANAGEMENT – MYTHS It involves short-cuts. It involves nitty-gritty's. It about mere data and facts. It is about a definite formula. It brings instant success. It is rocket science.
scale and scope. To be insulated against environmental threats. again and again ……. To leverage size. To be proactive. To be future oriented. To assimilate change faster. To tap markets across boundaries. To innovate. To generate large resource pool. . rather than reactive.STRATEGIC MANAGEMENT IMPERATIVES To be continuously alert. 9 To develop core–competencies. To gain expertise in technologies.
but by virtue of their courage.STRATEGY . 10 . but with a lot a rigour and robustness. 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.strategies. In the ancient days battles were fought over land. today's battles are fought over markets. It is an old wine in a new bottle.ORIGIN The word strategy has its origin from the Greek word strategia meaning Military Commander. In contrast. Even in today’s markets. In the ancient days battles were won not by virtue of size of the army or armory. obsession. and more importantly .
– Reliance’s entry into telecom. US attack of Morocco to capture Germany – Strategy: Pin-hole strategy – Wal-Mart challenging Sears by entering small towns. Napoleon’s attack on Russia – Strategy: Waiting for the right time. Allied Forces Vs Germany (WW-II) – Strategy: Forging alliances. 11 . challenging GM and Ford. – Yahoo and Microsoft challenging Google.SOME PARALLELS Japan’s attack on Pearl Harbour – Strategy: Attack where it hurts the most. – Toyota’s entry in the US.
The things happening around the firm when totally disconnected from the past leads to a paradigm shift.EVOLUTION OF MANAGEMENT As Peter Drucker refers to it.Industrial Revolution. 12 . – Mass Production Organization Size – Complicated Processes – Complex Structures Evolving of an emerging paradigm – survival of the fittest (Fayol & Taylor. The first major discontinuity in the history of global business environment was the . A paradigm is a dominant belief about how the business and its environment operates. 1910). a radical change in the business environment brings about discontinuity.
13 . Survival of the most adaptable becomes a new management paradigm (Ansoff. – Changes in the technology fore-front. 1960). Efficiency and effectiveness are no longer sufficient. The question of outperforming the benchmark became the new buzzword. – Global market place. – Affluence of the new customer (i. push to pull).e. – Homogeneous to heterogeneous products.EVOLUTION OF STRATEGIC MANAGEMENT The second major discontinuity in the history of global economic environment – World War II. performance across firms became differentiated. From uniform performance.
ENVIRONMENTAL CHANGE Phase IV: Horizon of Scenarios 2 1 Phase I: Extrapolation of the past 1 3 1990 onwards 1 2 1 3 1A 1B 2A Prior to 1950 Phase II: Discrete Scenarios Phase III: Range of Scenarios 1970 to 1990 2 2B 1950 to 1970 14 .
– The choice of 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. Learning always begin on a clean sheet of paper.APPROACHES TO STRATEGY Analytical Approach – Igor H. 15 . – It is primarily the top management’s prerogative. – The choice of strategy is primarily concerned with external ones rather than internal ones. Ansoff (1960) – Strategy can be segregated into certain mutually exclusive and inter-related components aimed at managing the growth of an organization.
everything else follows. 16 . – Management control systems has a dominating role in influencing firm performance.APPROACHES TO STRATEGY Design Approach – Alfred Chandler (1970) – Structure follows strategy. Successful organizations align authority and responsibility of various departments in way to reach overall objectives. – Organization structure will precede and cause changes in strategy. how it will compete. The organization initially decides which industry to enter. – The top managers then decide on the type of organization structure & systems to be in place. who will be the top managers. Once the control systems are in place.
substitutes. Porter (1980) – Choose a consumer segment and position your product accordingly. customer. competitors. 17 . new entrant. – The organization will outperform the industry where environmental forces are weak and vice-versa. – An organization is seldom in a position to influence the larger business environment. – The environmental forces comprises of – supplier.APPROACHES TO STRATEGY Positioning Approach – Michael E. – A firms performance is inversely related with the bargaining power of environmental forces to which it is exposed.
Prahalad (1990) – The key to superior performance is not doing the same as other organizations. locating in most attractive industries and pursuing the same strategy. – It enables a firm to deliver unimaginable value ahead of time. 18 . – Core competencies are a set of skills that are unique and can be leveraged. They are complex resources and undermines a firms competitive advantage.APPROACHES TO STRATEGY Core Competence – C. K. – Organizations can significantly alter the way an industry functions. 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’s a philosophy that distinguishes it from its competitors.STRATEGIC INTENT If you cannot see the future. you cannot reach there. It is the cornerstone of an organizations strategic architecture reflecting its desired future state or its aspirations. It involves an obsession to be the best or outperform the best. A gap that consciously manages between stagnation and atrophy. It provides a sense of direction and destiny. It implies a significant stretch. A strategic intent is a statement of purpose of existence. A substantial gap between its resources and aspirations. 21 .
STRATEGIC INTENT .HIERARCHY Integrativ e m Do an in Visio n Mission Dominant Objective s Goal s Plans Lo g ic Single Specifi c Man y 22 t .
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.e. It is core to the strategic intent of the firm. it can be perceived as a set of working rules (similar to thumb rules) that enables the top management to decide what can be done and more importantly what cannot be done. To put it more simply. 23 . when radical changes in the internal and external environment (i. Dominant logic changes.
It enables the top management to remain focused. – It stands for the unchanging core values of the company. but achievable aspirations. It provides an unity of purpose amidst diversity of personal goals.VISION It is a dream (not a forecast) about what the company wants to become in the foreseeable future. 24 . It ensures that the company does not wander off into unrelated zones or fall into an activity trap. beyond just making money. It is a combination of three basic elements – – An organizations fundamental reason for existence. – It represents the company’s audacious.
In Reliance when a new project becomes operational top managers hand over charge to the SBU heads and move on to a new project. not an utopian dream.CHARACTERISTICS Reliance – Where growth is a way of life. Sharing – The company across all hierarchies should have faith in it. and memorizable. Clarity – Vividly descriptive image of what the company wants to be known for in the future.VISION . Empathy – It should reflect the company’s beliefs to which it is sensitive. 25 . Reachable – It should be within a reasonable target in the known future. clear. Brevity – It should be short.
It facilitates development of skills & capabilities. It gives the impression of a forward-looking organisation. It lends integrity and genuineness. To prevent the fall in a activity trap.VISION . It makes strategic alignment easier. It gives enlightment. It gives a shared platform. It provides a holistic picture. It fosters risk taking and experimentation.ADVANTAGES To stay focused on the right track. 26 .
It serves as a road map to reach the vision. 27 .MISSION Mission defines the space that a business wants to create for itself in a competitive terrain. A broad mission statement helps in fending competitors. It enables the firm to define its business landscape and identify its competitive forces. its reason for existence. Although the purpose may change over time. 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.
though some may seem unrelated in nature. …………………. 28 . …………………. We offer solutions. …………………. Some other examples – We do not offer shoes. We offer security. All the businesses of the company are strongly integrated with their main business. – We do not offer steel. ………………….MISSION – SOME IDEAS Reliance – We are in the business of integration. – We do not offer insurance. We offer strength. We offer comfort. – We do not offer software's.
– It prevents deviation. – It adds legitimacy and motivation. It provides a quantitative feel to an abstract proposition. – It is based on Management by Objectives (MBO).GOALS & OBJECTIVES Reliance – We want to become a Rs.100K crore company by the year 2005. It is an end result (quantifiable) something a firm aims and tries to reach in a time bound frame. – It helps identifying key success factors. – It keeps the mid management pre-occupied. – It provides a benchmark for evaluation. 29 . – It lends direction – time frame in the medium term.
– Leverage economies of size and scale. The details of the plan Reliance Telecom adopted were – Backward integrate process technologies. It is the process of garnering necessary inputs.PLANS Reliance – Desire to invest 25K crore in telecom business by circa 2010. It is specific to a particular business. – Compress project times. – Acquire a market share of indomitable position. coordinating appropriate technologies. 30 . and gaining access to desired markets to achieve the desired goals and objectives. – Use price-elasticity to break market barriers.
This state of affairs is known as strategic drift.STRATEGIC DRIFT Due to top management commitment. radical change may lead to disequilibrium. This tendency to restore continuity is known as inertia (resistance to change). equilibrium is maintained. However. strategies lose touch with the emerging realities. past strategies tend to have a bearing on future strategies. In such a context. 31 . When changes in the environment is incremental. Historical studies have shown that most organizations tend to continue with their existing strategies. It often leads to an organizational crisis.
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 .
– Hiding vulnerability. 33 . – Distorting information to gain mileage. Some instances of organizational politics – Formation of powerful groups or coteries. – Developing a platform of support.ORGANIZATIONAL POLITICS Strategic drift often leads to organizational politics. – Using covert tactics to pursue self interests. – Creating obligations of reciprocity. Organizational politics involves intentional acts of influence to enhance or protect the self-interest of individuals or groups over organizational goals. – Creating a favourable image.
– Influential stake-holders back out. Usually there is wide gap between the two when organizational politics is evident. Other causes – – The plans are unworkable and utopian. . – The environment context has changed. – Persons responsible for strategy conceptualization and implementation are34 divergent.INTENDED & REALISED STRATEGIES An intended strategy is an expression of interest of a desired strategic direction. A realized strategy is what the top management actually translates into practice.
They simply unfold the particulars of the sub-system in stages. this is not to be treated as “muddling”. 35 . Strategy formulation and implementation are linked together in a continuous improvement cycle. but as a defensible response to the complexities of a large organization that mitigate against publicizing goals.LOGICAL INCREMENTALISM According to the incrementalism approach (contrary to integrated approach) practitioners simply do not arrive at goals and announce them in crafted and well defined packages. but the master scheme of the rational comprehensive scheme is not apparent. Learning is an integral part of logical incrementalism. However.
36 . Adaptation – As implementation progresses. Leveraging Crisis – A sudden crisis or an opportunity should be used as a trigger to facilitate acceptance and implementation of change.IMPLEMENTING INCREMENTALISM General Concern – A vaguely felt awareness of an issue or opportunity. 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.
Tampering with surface level factors often leads to atrophy. Dominant logic’s are the cornerstones of change when strategic transformation is apparent. As it brings 37 with it a different dominant logic. . Strategic transformation becomes smooth through a change in top leadership. It creates blinders. Dominant logic’s are very rigid and sticky and prone to inertia.STRATEGIC TRANSFORMATION Strategic transformation (a complete overhauling of the strategic architecture) becomes inevitable whenever a strategic drift takes place.
Factors that fosters a learning organization – Pluralistic – An environment where different and even conflicting ideas are welcome. – Experimentation – Fosters a culture of risk taking. A learning organization must continuously focus on unlearning as well. experience. – Informal Networks – Emerging of new ideas. 38 .LEARNING ORGANIZATION A learning organization is capable of continual regeneration from knowledge. – Organisational Slack – Enough free space. It helps prevent a strategic drift from occurring at the first place. and skills that fosters experimentation and questioning and challenge around a shared purpose. – Constructive Bargaining – Agree to disagree.
ENVIRONMENTAL CONDITIONS Dynamic Scenario Planning Learning Organization Static Forecasting Decentralization Simple Complex 39 .
ANALYZING BUSINESS ENVIRONMENT 40 .
PLANNING & STRATEGIC PLANNING Formal planning is a function of extrapolating the past. It is based on the assumption of radical change. It is based on the assumption of incremental change. 41 . gap analysis). Strategic gap basically points towards a vacuum of where the organisation wants to be and where it is. Competitive advantage provides the surest way to fulfill the strategic gap. It points to a position of superiority with relation to competition. It requires a quantum leap (i. Strategic planning is a function of discounting the future. It is pro-active in nature. It is reactive in nature.e.
Environmental scanning is very important component of strategic planning. not guided by any boundaries. events. A manager has to continuously scan the environment to ensure alignment of the strategies with the radically changing environment. The segments of the environment a top manager scans selectively depends upon his dominant logics. The world is flat. and influences that affect an organizations way of doing things. 42 .ENVIRONMENTAL SCANNING The environment is defined as the aggregate of conditions. It is exploratory in nature. Environmental factors can be external as well as internal to the organization. resources and ideas move unhindered.
It is particularly important that PESTEL be used to look at the future impact of environmental factors. but also to analyze the complex linkages across them. It is important not only to identify the structural drivers of change.PESTEL PESTEL attempts to provide a broad framework on how the broader environmental forces affects an organization and influences the way it practices strategy. It is not intended to be used as an exhaustive list. which may be different from the past impact. for which a holistic picture is required. Understanding the composite effect is critical. 43 .
Subsidies & Protection. Social – Population Diversity. Capital Market & Forex Reserves. Monsoon & Food Grains Reserves. Economic Model.PESTEL FRAMEWORK Political – Government Stability. Economic Cycles. Economic – GDP. Literacy Levels. Infra-Structural Investments. Licensing & Quotas. Religious Sentiments. Fiscal Deficit. 44 . Government Attitude. Savings & Investment. FDI Inflows. Currency Stability. Social Values. Inflation & Interest Rates. Income & Age Distribution. Language Barriers. Central – State Co-alignment.
Research & Development. Non-Fossil & Alternative Fuels. Waste Disposal & Emissions. Environmentally Preferable Purchasing. Pollution Control Laws. 45 . ERP. Patents. Product Design. Patent Laws. Environmental – Global Warming & CSR. Product Safety & Health Hazards. Direct & Indirect Taxes. Legal – Monopolies Legislation.PESTEL FRAMEWORK Technological – Innovation. Carbon Credits. Technological Convergence. Consumer Protection Laws. Obsolescence Rate. Extended Producer Responsibility. Employment Laws.
Structural Adjustments – Phasing out subsidies. PSU Disinvestments. Curtailment of PSU’s. FERA Liberalization. Economic Reforms – Fiscal & Monetary Reforms.VRS. Dismantling price controls. Encouraging FDI. Exit Policy. Rupee convertibility. New Trade Policy (NTP) – Lowering import tariffs.ECONOMIC LIBERALISATION New Industrial Policy (NIP) – Liberalizing industrial licensing. Abolition of import licenses. Capital Market Reforms. 46 . MRTP Liberalization. Encouraging exports. Banking Sector Reforms.
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 .Survival of the fittest MNC Onslaught – Enhancing stakes – Power Equation – Joint Ventures – Technological Alliances – Take-over threat.
Globalization – Cheap Imports & Dumping – Push to Pull Marketing Buyers exacting demands – Shortage to surplus – Price competition – Life-style changes – Stress on quality.DISCONTINUITY Hyper Competition – MNC’s . Consumerism Challenges on the technology front – Competencies become technology based – Investment in R&D become inescapable 48 .
DISCONTINUITY Compulsion to find export markets – Identifying competitive advantage – Technological gap – Global presence – Depreciating currency – Exports Corporate vulnerability – It is no longer business as usual – Capital inadequacy – Lack of product clout and brand power – One product syndrome – Loss of monopoly 49 .
FIVE FORCES MODEL .PORTER Threat of New Entrants Bargainin g power of Suppliers Competition from Existing Players Bargainin gBargainin power g of power of Suppliers Customer s Threat of Substitutes 50 .
e. profit potential) per se. It is even wiser to apply the same at the product – market level. It should not only be used to understand the forces. but also used to understand how they can be countered and overcome.FIVE FORCES MODEL ASSUMPTIONS The model is to be used at the SBU level and not at the industry level. incremental or otherwise. The five forces have strong cross-linkages. The model should not be used as a snapshot in time. 51 . It depicts the attractiveness of an industry (i. the forces are subject to changes.
Low margins & stagnancy. Undifferentiated product. Access to distribution channels. Low relative importance of the segment. Presence of substitutes or unorganized sector. Product differentiation through proprietary technology or brand power. High switching costs. Unimportance of product quality. Low customer switching costs. Scope for backward integration. Threat of Customers – Buyer concentration and volumes. Resource profile & fear of retaliation. 52 .PORTERS FIVE FORCES ANALYSIS Threat to Entry – Economies of size and scale. Industry stagnation. Capital requirements. Learning curve advantages. Government policy.
High customer switching costs. Unorganised sector. Low level of differentiation. Threat of Substitutes – Improvement in price -performance trade-off. Intermittent overcapacity. Scope for forward integration. Product perishability. Piracy and counterfeits. Lack of substitute inputs. Produced by industries earning high profits. Buyer’s propensity to substitute. Diversity of players. Low relative importance of the segment. Jockeying for position – Fragmented market. 53 . Differentiated inputs. Industry stagnancy. High exit barriers.PORTERS FIVE FORCES ANALYSIS Threat of Suppliers – Supplier monopoly.
Tata). Cohesiveness – Degree of bonding existing across affiliated firms. Business Scope – The intention whether the firm wants to be in a single. 54 .FIRM ENVIRONMENT Size and Scale of Operations – It is a very important component of competitiveness in today's global context (Bharti – MTN. Inertia – Excessive commitment to past strategies prevents firms from tapping emerging opportunities. dominant or related diversified or unrelated diversified businesses (Infosys. Reliance). Resource Profile – It highlights the capabilities (generic) or competencies (business specific) of the firm.
The E-Curve thus enables organisations to build entry barriers. it can price its products more competitively. However. an E-Curve can prove to be futile during discontinuity. leverage it as a competitive advantage. and with lower prices it can increase its sales volume. With lower costs.EXPERIENCE CURVE The cost of performing an activity declines on per-unit basis as a firm becomes more efficient. experience teaches better and more effective way of doing things. which further reduces costs. Experience curve has strong linkages with performance. Matured firms will always be positioned advantageously on the ECurve than new entrants. 55 .
EXPERIENCE CURVE Cost per unit of output Decreases at an increasing rate Point of inflexion Decreases at a constant rate Decreases at a decreasing rate Production / Volume 56 .
TRADITIONAL VIEW Efficiency = Lower Costs 2 3 1 Experience = Efficiency Lower Costs = Higher Sales Entry Barrier = Better Performance 4 6 5 Higher Sales = Lower Costs Lower Costs = Entry Barrier 57 .EXPERIENCE CURVE .
EXPERIENCE CURVE .STRATEGIC VIEW Inertia = Limited Growth Experience = Inertia 2 3 1 Limited Growth = Diversification Strategic Failure = Poor Performance 6 5 4 Diversification = New Experience New Experience ≠ Old Experience 58 .
Customers. It helps an organisation to capitalize on the opportunities by maximizing its strengths and neutralizing the threats minimizing the weaknesses. Acronym for Strengths – Weaknesses – Opportunities – Threats. . A SWOT audit involves – Company Records – Annual Reports. Case Studies – Structured Questionnaires. Observation. Competitors. It is one of the earliest models in environmental scanning.VULNERABILITY ANALYSIS . Websites. 59 Analysts. Business Intelligence – Bankers. Suppliers. Press Clippings & Interviews.SWOT The framework was originally conceptualized by Kenneth Andrews in 1970. Interviews.
FRAMEWORK Opportunities Nullify weaknesses which prevents you from exploiting opportunities Leverage strengths to make use of opportunities Weaknesses Minimize weaknesses which prevents you from countering threats Strengths Threats Utilise strengths to counter threats (?) 60 .SWOT ANALYSIS .
ITC. Infosys. Tata. Economies of scale – Eg. High quality products – Eg. 61 . Siemens. Toyota. Strong R&D base – Eg. Biocon.SOURCES OF STRENGTH Strong brand identity – Eg. Infosys. Motivated employees & cordial industrial relations – Eg. Engineering Skills – Eg. Reliance. Tata Steel. Caterpillar. SBI. Sony. Aditya Birla. Reliance. Honda. Large resource pool – Eg. Dr. Good credit rating – Eg. Volkswagen. HUL. Strong after sales & service network – Eg. Ranbaxy. Excellent penetration – Eg. Reddy’s.
Strategic myopia – Eg.Raymond. Narrow business scope – Eg. CESC. Excess manpower – Eg. Lacking experimentation culture – Eg. Procter & Gamble. Bijoligrill. Single product syndrome – Eg. K. Inefficient top management – Eg. J. Tatas. CMC (Tata Group) 62 . SAIL. Modi Group. Organizational Politics – Eg. Excessive diversification – Eg. K. Group . B. Inertia – Eg. Ballarpur Inds. Nirma.SOURCES OF WEAKNESSES Outdated technology – Eg. Hindustan Motors. Lack of product / brand clout – Eg.
Free pricing – Eg. GDR’s. Globalization – Eg.SOURCES OF OPPORTUNITIES Delicensing of Industries – Eg. Insurance. Fertilizer. Capital market reforms – Eg. Telecom. Middle-class buying power. Exit Policy – Eg. Market driven Pricing – Eg. Abolishing MRTP – Eg. Collaborations & Joint Ventures – Bharti & WalMart. Life style changes – Eg. 63 .Tata Motors. Sugar. Market driven Interest rates – Eg. ECB’s. Sugar. Fertilizers. VRS. Maruti. Banking. Abolishing CCI. Growing population – Eg. Retailing.
Reliance. (1985–1990). Singur SEZ. Onida. Earth Quake. Bajoria – Bombay Dyeing.SOURCES OF THREATS Political instability – Eg. Economic recession – Eg. Dumping from China. Satyam. Import relaxation – Eg. Lack of Corporate Governance – Eg.Social activism – Eg. Group disintegration – Eg. Tata Steel. Foreign Direct Investment (FDI) – Eg. Nationalisation – Eg. (2008). 26/11. Terrorist attacks – Eg. Natural disaster – Eg. Hostile take-over – Eg. Tsunami. Land acquisition . 64 . 11/9.
Holistic view – Prepare a complete overall picture. time series. Forecasting – Predict the future (i. Strategic responses (including adaptation) to opportunities and threats is critical for survival and success. 65 . Delphi's technique. Assess the extent of impact of the factors. It represents a summary picture of the external environmental factors and their likely impact on the organization. scenario analysis).e. Stages in ETOP analysis – List the aspects of the environment that has a bearing on the organization.ETOP Acronym for Environment – Threat – Opportunity – Profile.
. It is also a form of assessing vulnerability through longitudinal analysis. An organization can draw upon the experience of its peers in similar situations.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. High investment intensity acts as a drag. Relative attractiveness of the market. Some key findings on major performance drivers that explains 75% deviations in performance – Product quality and relative market share. selectively.
As every organization is unique in its own way. . – Contexts may vary across countries. – Contexts may vary over time. Managers should be particularly cautious while referring to such data during times of discontinuity as it makes past patterns futile. when radical changes in the economy takes place. therefore 67 validity may be a question.LIMITATIONS The analysis is based on historical data and it does not take care of future challenges.PIMS . Authenticity of data is of prime importance – Contexts drawn across one organization may not be applicable to another.
KSF helps organizations spot early opportunities and convert them into value adding business propositions.KEY SUCCESS FACTORS (KSF) KSF relates to identification and putting concentrated effort on a particular activity or process which forms the very basis of competitive advantage. It involves a three-stage process – Identify KSF – What does it take to be successful in a business? Drawing KSF – What should be the organizations response to the same? Benchmarking KSF – How do we evaluate organization success on this factor? 68 . It enables the top management to draw focus.
IDENTIFYING ALTERNATIVE STRATEGIES 69 .
unrelated) and geographical scope (local. It determines the locus a firm encounters with internal and external environment. related. A corporate strategy identifies and fixes the strategic gap it proposes to fill.CORPORATE . national.GRAND STRATEGY It is concerned with the overall business scope (single. It provides broad direction to the groups vision and mission. It reflects the customer needs it intends to satisfy. global) of a firm and deals with choices of allocating resources across them. It indicates the quality of growth an organization is looking for. 70 . dominant.
CORPORATE STRATEGY MATRIX Corporate Strategy Stability Stability Growth Growth Combination Diversification Divestment Intensification Market Penetration Related Vertical Market Development Product Development Unrelated Horizontal 71 .
The scale and scope of present operations remains almost intact. – Why disturb the existing equilibrium set up? – Limited resource position. (Eg. does not relate to do-nothing (Eg. Hindustan Motors). The reasons for stability strategy – – Lack of attractive opportunities. 72 .STABILITY It involves maintaining status-quo or growing in a slow and selective manner. – To stop for a while and assess past records. erosion of capabilities. – The firm may not be willing to take additional risk associated with new projects. Even during adverse times firms need to adopt a strategy to sustain current performance levels. Citibank). Stability however.
GROWTH . 73 .ANSOFF’S MODEL New Product Existing Product Existing Market Market Penetration (+) Product Development (++) New Market Market Development (++) Diversificatio n (+++) Note: (+) indicates degree of growth and risk involved.
– Helps firms which are not comfortable with unfamiliar terrain. – Elongated product life-cycle. – The company carries a risk of product obsolescence. Nirma. direct non-users to users. (Eg. convert competitors customers. 74 . Ujjala.MARKET PENETRATION It is a strategy where a firm directs its entire resources to the growth of a single product or a closely knit product set. within a well defined market segment. Britannia). – Suitable for industries where scope for technological breakthrough is limited. Market penetration can be achieved by – increasing sales to current customers.
socks & stockings. – Moves across geographical boundaries. fabrics.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. carpets. – Immense customer reach & flexible advertising. – Stretches product life cycles. (Eg. – Unconventional and flexible distribution channels. tyres.…… or Teflon: aircraft technologies to cutlery to paints or Raytheon Corp – Microwaves: radars to kitchen appliances). – Creativity and innovation – thinking out of the box. 75 . Du Pont – Nylon: parachutes. upholstery.
Close Up: Fluoride – Gel toothpaste or VIP . – Areas of product improvement – performance. reliability. aesthetics. Refills) 76 .PRODUCT DEVELOPMENT It is a strategy where a firm tries to achieve growth through a radical new product (Eg. features. – Leverage on customer and brand loyalty. – Deliverable through – redesigning or reengineering. durability.Strolleys). perception. Microsoft: DOS to Windows) or a substantial improved version (incremental) of an existing product to repeatedly enter the same market (Eg. conformance. – Substitutes that serve the same needs (Eg. serviceability. – Leveraging through – innovation.
DIVERSIFICATION It marks the entry of a firm into newer markets with new products. From the traditional point of view. Why do firms diversify in the Indian context? – Shift the growth trajectory or opportunistic.e. – Risk reduction. the new business is distinct from the existing business in terms of – inputs – technologies – markets. – Internal capital market. licenses (i. industrial embassies). 77 . From the modern point of view they are strategically dissimilar. – Permits: quotas. dominance). thereby creating a new business. – High transaction costs and institutional gaps. – Conglomerate or market power (i.e.
while the coffee business would register a return of 10%. the ice-cream business would register a return of 30%.HOW DIVERSIFICATION REDUCES RISK? Consider a hypothetical planet. while the coffee business would register a return of 30%. either of which is equally likely to prevail. If the hot wave dominates the planet. in which a given year is either under hot or cold wave. ice-cream business would register a return of 10%. cold wave dominates the planet. If on the other hand. What would be your ideal diversification strategy through optimization? 78 . Let us assume that there are two businesses constituting the entire market – coffee and icecream.
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.
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 produces part of its own requirements and buys the rest from outside suppliers with a variable degree of ownership and control. Reliance). Reddy’s).A firm gets most of its requirements from one or more outside suppliers that is under its partial control through value chain partnerships (Eg. Dr. and out-sources the noncore activities (Eg. Quasi-integration . Ranbaxy. Usually the firm concentrates on its core activities.QUASI & TAPERED INTEGRATION Full Integration . Maruti – Sona Steering). 85 . Tapered integration .
A CASE OF TAPERED INTEGRATION Partial Ownershi p Transmission Engine Design Electricals Steering 86 Seats & Carpets Windscreen Ordinary Components Zero Ownership Very Critical Component s Full Ownership Critical Component s .
lack of strategic intent.e. synergies pulling in opposite directions).CONGLOMERATE DIVERSIFICATION It relates to entry of firms into businesses which are distinct in terms of – inputs – technologies – markets.e. – Cost of dysynergy (i. and are also strategically dissimilar. – Cost of ignorance (i.e. 87 . – Cost of neglect (i. lack of knowledge of competitive forces). myopia). Drawbacks of unrelated diversification – – Cost of failure (i. core business). Firms usually engage in conglomerate diversification when emerging opportunities are very attractive and offers potential growth opportunities.e.
CONGLOMERATE DIVERSIFICATION Paper & Packaging Edible Oils Tobacco Hotels Food & Confectionary 88 .
In strategy there is no scope for sentimentality with divestment. Tata Press). It is may also be a pro-active strategy. Tatas sale of Goodlass Nerolac. where a company simply exits because the business no longer contribute to or fit its dominant logic. reactive) and survival is at stake and the firm does not have resources to fend off competitive forces. It taken into account when performance is disappointing (i. L&TCement Division to Aditya Birla Group) technically known as divestiture or a product (Eg. Glaxo’s “Glucon-D” to Heinz).e. 89 . ACC) in full to an independent entity. It may also involve a SBU (Eg.DIVESTMENT Divestment is a defensive strategy involving the sale of entire stake (Eg. Tata Pharma. (Eg.
(Eg. Tatas buy-out of Corus for US $ 11.DIVESTMENT . Sale of Diamond Beverages to Coca-Cola for US $ 40 million). where the equity is allotted amongst the existing shareholders on a pro-rata basis.3 billion. involving 608 pence per share). Hive-Off – A hive off is the creation of a new entity followed by transfer of assets. However. 90 . where 100% of the assets (including intangibles) are valued and paid for. (Eg. Leveraged Buy-Out (LBO) – Here the company’s shareholders are bought out through a negotiated deal using borrowed funds. 1956 does not permit this mode. the Companies Act.ROUTES Outright Sale – Popularly known as the asset route.
A combination strategy can be implemented through green-field projects (i.e. developing facilities right from the scratch) or through brown-field projects (i.COMBINATION STRATEGY It is a mixture of stability. 91 . joint ventures).e. because every business has its own unique external and internal environment. There can be no ideal strategy for every business. mergers and acquisition. growth. and divestment strategies applied simultaneously or sequentially for a portfolio of businesses. It is usually pursued by a business group with diverse interests across multiple industries.
STRATEGY CHOICE & PORTFOLIO ANALYSIS 92 .
STRATEGIC CHOICE A strategic choice seeks to determine the alternative courses of action available before top managers to achieve its strategic intent. Dominant logic enables top managers to selectively scan the environment and make trade-offs. In most cases the trade-off is between resources and opportunities. What then is the magical number? 93 . 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.
To identify the right problems.SELECTIVITY IS THE KEY The role of a top manager is not to solve a problem. 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 . The key task before a top manager is to identify the right problems. managers need to ask the right questions. They must choose problems which will lead to the right kind of opportunities. nor is to a define a problem for others to solve. if addressed. will help the firm achieve its intent.
formal and informal ties. Proximity to the corridors of power (i. keiretsus in Japan. Their origins can be traced back to market imperfections existing in an economy (MRTP Laws. 95 Succession planning is critical to continuity.DEFINITION A business group is known by various names in various countries – guanxique in China. BRC). Their roots can be traced to a single family or clan and share broad similarities. .e. High degree of centralized control (GEO. Managing Agency). Licenses & Quotas. Resource sharing. embassies).BUSINESS GROUP . chaebols in Korea. business houses in India.
RESOURCE SHARING ACROSS FIRMS Parent Company Firm 1 Firm 5 Firm 3 Firm 2 Firm 4 96 .
STRATEGIC CHOICE – MACRO TIMING Recession (Stability) Prosperity (Diversificatio n) Depression (Divestmen t) Recovery (Intensification ) 97 .
STRATEGIC CHOICE – MICRO TIMING ReEngineering Growth (%) Maturity Stability Growth Diversification Decline .Divestment Duration (Yrs) Inception Intensification 98 .
Why? Businesses are not about liquid assets. next only to choice of business. Rules of the game are different. there are high costs associated with entry and exit. sometimes impossible. Redeployment of resources upsets the established power bases of a group. 99 . therefore. Relatedness across resources are difficult to realize.PORTFOLIO ANALYSIS Resource allocation across a portfolio of businesses is an important strategic choice. Investing in emerging businesses may not actually be so simple as it appears to be. Power and resources often goes hand in hand.
BCG GROWTH MODEL Relative Market Share (%) Industry Growth (%) Low High High Low Stars Question Mark ? Cash Cow Dogs 100 .
diversification). Tata Steel). Stars – They achievers in the near term. These businesses are also net users of resources (Eg. Trent. Tata-AIG). provided the company is able to build up on its market-share (i. TCS.BUSINESS ANALYSIS – TATA GROUP Question Marks – They have potentials in the long term. provided the industry growth rate continues and the company is able to maintain its growth (i. Tata Telecom. market penetration. which remains a big? These businesses are net users of resources.e. and their risk profile is high (Eg. market development. product development).e. but to larger extent than a question mark. 101 .
However.e. Groups prefer to dispose off such businesses (i. Given that the growth potential in the business is low. Tata Pharma. they are generators of resources. and the company dominates the industry ahead of competition (i.e. cash cows may also need to invest provided the industry takes an upswing (Eg. Dogs – They are a drag on the group. Tata Press). Indian Hotels. harvest. stability). Tata Tea. and they lack on competencies to take on competition and are basically cash traps (Eg.BUSINESS ANALYSIS – TATA GROUP Cash Cow – These are matured businesses. divest) as achieving a dominant position in these businesses is a difficult task. Nelco. Tata Motors. 102 . Tata Chemicals).
LIMITATIONS It does not address the concerns of a business which is in the average category (usually the majority). Data may be prohibitive.BCG . niche – Rolex.e. HUL). Cartier. 103 . Certain businesses in the low market share category may be the result of a conscious strategy (i. The terminologies used are somewhat prohibitive. The model does not provide specific solutions within a particular category. Cash cows may actually need substantial investments to retain their market position (Eg. Mercedes Benz. neither in high or low. factors are limited. Armani).
MATRIX Distinctive Capabilities Strong High Medium Weak Stability Industry Attractiveness Diversify (++) Intensify (+) Med Intensify(+) Stability Harvest (-) Low Stability Harvest (-) Divest (.-) 104 .GE .
LITTLE Inception Dominant Strong Favourable Tenable Weak Growth Maturity Decline Improve Selective Niche Abandon Industry Life-Cycle Divest Harvest 105 Competitive Position Invest Consolidate Hold .ARTHUR’ D.
SHELL – DIRECTIONAL POLICY MATRIX Business Sector Prospects Attractive Average Unattractive Generate Cash Phased Withdrawal Distinctive Capabilities Strong Market Leadership Try Harder Double Or Quit Growth Average Custodial Weak Phased Expand Withdrawal Divest 106 .
Disinvestment involves selling in phases. 107 . BCG – Boston Consulting Group. Divest – Selling a part or the entire business at one go.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. Portfolio – An organization is perceived as a portfolio of businesses. Gap Analysis – It emphasizes what a firm wants to achieve. SBU – A business unit which is strategically different from another and also shares a different SIC code.
BUSINESS STRATEGY & COMPETITION 108 .
The strength of a firm in a particular business usually stems from its competitive advantage. rent).COMPETITIVE STRATEGY A competitive strategy deals with how a firm competes in a particular business or product-market segment.e. and earning super-normal profits (i. Such resources or activities should be distinctive and sustainable over time. building market-share. 109 . Competitive advantage is the back-bone of strategy. The principal focus is on meeting competition. Competitive advantage refers to a firms resources or activities in which it is way ahead of competition.
leveraging (Prahalad).BUSINESS STRATEGY FRAMEWORKS How to be distinctive and yet sustainable – Differentiation – Understanding of the dynamics of competition. Delta Lock In – Two dominant players co-opt to selfreinforce and create or escalate an entry barrier. developing competitive advantage (Porter). Resource Based View – Obsession with competence building. involving harmonizing and integrating multiple streams of technologies. Blue Ocean – Consciously moving away from overcrowded industries to uncharted territories and making competition irrelevant (Kim & Mauborgne). preventing new entry and/or competition (Hax & Wilde). identifying critical success factors. 110 .
T-Series).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. Locational or early entry advantage. 111 . backward integration. Reliance) or may pass it to customers to increase market-share (Eg. proprietary technology. Steep experience curve effects. The firm may retain the benefits of cost advantage by enjoying higher margins (Eg. Compress project duration through crashing. Sources of cost advantage are varied and depends on the structure of the industry – Economies of size. Ayur. Nirma. preferential access to raw materials.
Focus on brand loyalty.PORTERS – PRODUCT DIFFERENTIATION Product Differentiation – It is a strategy that attempts to provide products or services that are differentiated from competitive products in terms of its value proposition and uniqueness. Feeling the pulse of the customer. and sufficient slack. innovation and out of the box thinking. 112 . Creativity. Rayban). Intel. (Eg. Sony. Successful product differentiation is often followed by premium pricing. avoiding brand dilution. undeterred attention to quality. Culture of experimentation. Means of product differentiation are peculiar to each industry. It selects one or more attributes that buyers perceive as important.
113 . 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. Armani). Sub optimization alone may not be a source of superior performance. coupled with fear of structural erosion. They are poorly served by mainstream players. Rolex. Mont-Blanc. Cartier.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. Maybach. A focuser seeks to achieve a competitive advantage in its target segment.
COMPETITIVE POSITIONS Competitive Advantage Cost Differentiation Product Differentiation Competitive Scope Broad Cost Leadership (Toyota) Product Differentiation (General Motors) Narrow Cost Focus (Hyundai) Differentiation Focus (Mercedes) 114 .
jugaad or frugal engineering). Reducing cost does not always involve a sacrifice in differentiation. and usually outperforms a stand alone generic strategy. 115 . Firms focusing on a hybrid strategy typically aim at shifting the productivity frontier and recreating a new product-market segment altogether (Eg. Though cost leadership and differentiation are inconsistent.HYBRID STRATEGY A hybrid strategy is the simultaneous pursuit of cost leadership and differentiation. similarly differentiation may not always lead to rising costs (i. in a hyper competitive context the two strategies need not be mutually exclusive.e. Tata Nano).
It will have a competitive disadvantage vis-à-vis a clearly positioned generic player. The positioning therefore gets – blurred. Industry maturity will usually widen the gap.STUCK IN THE MIDDLE A firm that engages in a hybrid strategy and fails to achieve a competitive advantage because it was ill conceived will be . leading to what is called – straddling. It is usually the result of a firm not willing to make trade offs.stuck in the middle. but achieves none. It tries to compete through every means. 116 . unless such a player is capable of discovering a profitable segment.
Speech recognition software's. Eg. coupled with low penetration levels. It is characterized by – High level of technological uncertainty. Artificial intelligence). Market segmentation not well defined. ending in a differential cost economics. (Eg. 3D imaging. changing customer needs. leading to a blurred productivity frontier and steep learning curve. There is a lot of scope to define the rules of competition.EMERGING INDUSTRY Emerging Industry – An evolving industry characterized by . Consumer behaviour pattern unstable and evolving. First-time buyers. Nano technology. 117 .) Excessive turbulence in the dynamics of the environment. technological innovations.radical environmental changes.
Eg. Paints. Diverse customer needs. Government regulations in the form Eg. IT. It is characterized by – Low entry barriers. 118 . Eg. leading to clear fragmentation. Eg. Air Conditioning. Scope for players to change the rules of the game. MRTP may also cause fragmentation. Retail and telecom.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). High exit barriers because of huge investment in CAPEX. Consumer durables. because of lack of economies of size and scale.
established industry dynamics. Firms are rule takers in the segment as productivity frontier is well defined. because of economies of size and learning curve effects.technological maturity. distribution networks. collaboration and co-option. Limited scope for innovation . well defined consumer behavioral patterns and imperfect competition leading to near monopoly. 119 . technological maturity. Strong entry barriers. Cartel among existing players through collusion.MATURED INDUSTRY Matured Industry – An industry characterized by saturation in growth rates. early entry and location advantages.
Learning abilities have been stunted and firms adverse to investment in R&D and make fresh investments.DECLINING INDUSTRY Declining Industry – An industry which has outlived its utility due to the entry of close substitutes and or radical product innovations which results in a shift of the productivity frontier. Nature of competition extremely high. 120 . (Eg. dot-matrix printers). and costly price wars. scooters. Firms facing a declining phase are characterized by inertia and slow to react to environmental changes. backed by corporate espionage. with little or no signs of recovery. Exit barriers are extremely high because of limited prospective buyers. Typewriters.
strictly product differentiation and not standardization. mergers and acquisition.COMPETITIVE STRATEGIES Emerging Industry – Set benchmarks. Declining Industry – Redesign. recreate new markets. increasing scope. or else exit the segment. Matured Industry – Sophisticated cost analysis. Fragmented Industry – Identify. regenerate. reengineer. move beyond boundaries. process innovation. strictly cost differentiation. Locate a defendable position. branding and promotion. assess and overcome fragmentation. focus more on product differentiation or even a hybrid one. aggressive building of distribution networks. 121 . strike alliances. premium pricing.
However. patents. They are a standard in nature.RESOURCE BASED VIEW Differentiation based on cost or products saturates and ceases to exist beyond the medium term. Intangible – These refer to goodwill. and complex learning experiences in integrating and harmonizing technologies (distinctive capabilities) that play an important role in delivering competitive advantage through “causal ambiguity”. 122 . positions based on resources which are unique and inimitable are far more sustainable even in the long term. hence very rarely confer competitive advantage as can be easily acquired or replicated. brands. A firms resources can be classified into – Tangible – These refer to real assets.
Therefore firms should concentrate on developing complex resources that forms the very basis of differentiation.e. They play a very critical role in shaping competitive advantage. but not necessarily. 123 . they are woven around technologies. can be leveraged across businesses) or specific to a particular business. differentiation based on capabilities can be sustained even in the long run. Capabilities can be generic (i. Hence. There is a high degree of internal and external causal ambiguity involved in it.CAPABILITIES & COPMPETENCIES These include a complex combinations of tangible and intangible resources that organizations use to convert inputs to outputs. Typically.
COMPETITIVE ADVANTAGE 124 .
A portfolio of competitive advantage comprises strategic advantage profile (SAP).e. It enlarges the scope of an organization. Strategy drives competitive advantage.COMPETITIVE ADVANTAGE A competitive advantage is a position of superiority relative (i. Success of a strategy critically depends on SAP. not absolute) to competition. competitive advantage subsequently becomes the back bone for a competitive strategy. 125 . It results in a distinct differentiation advantage or a cost advantage or hybrid as well. and results in well springs of new business development.
Internal strategic fit between its strategy and dominant logics is essential for the top management to stretch and leverage SAP. SAP changes from time to time.STRATEGIC ADVANTAGE PROFILE (SAP) Organizations have to systematically and continuously conduct exercises to identify its SAP. Most successful organizations around the world have a well balanced SAP. 126 . In today's world of discontinuity. Identification of SAP is critical for and stretching and leveraging of resources. In most cases SAP is hidden and dormant.
Substantial cost reductions also follow. faster product launches. VC pay-offs: better product availability. Today SCM is integrated with greening the environment as CSR practices. and enhanced customer tracking – higher market share. Competitive advantage arises not from an individual activity but a stream of inter-related activities. kaizen or internal customer). 127 .e. each of the players need to be efficient backed by sufficient coordination at the contact points (i. A VC is often compared with a relay team. Inventory Mgt to Logistics Mgt to Supply Chain Mgt (SCM).VALUE CHAIN ANALYSIS A value-chain segregates a firm into strategically relevant activities to understand its composite behaviour.
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 .
Operational effectiveness is not strategy. 129 . Fit is important because discrete activities result in negative synergy and can also be easily copied by competitors.STRATEGIC FIT – THE PORTER WAY The sustainability of the value chain depends on the degree of fit between the activities. – First order fit refers to simple consistency between each activity and the overall strategy. – Second order fit occurs when activities are reinforcing amongst them. – Third order fit refers to optimization of effort. A learning organization helps create strategic fit. A high fit involving a complex chain of activities drives both competitive advantage and its sustainability.
– Cannot be easily imitated or substituted. . Core competence has a high degree of external and 130 internal causal ambiguity embedded in it. – Can be leveraged across businesses.CORE COMPETENCE A core competence represents the collective learning's of an organization around diverse streams of technologies. These skills results in distinctive activities and processes. A core competence usually has its roots in technology. – Can be sustained even in the long run. It forms the very basis of competitive advantage. It should satisfy the following conditions – Contributes significantly to customer benefits. but not necessarily.
a core competence is sustainable even in the long-term. 131 . Majority of the firms have competitive advantage. only global leaders possess a core competence. A competitive advantage is sustainable in the shortmedium term.CORE COMPETENCE A competitive advantage does not necessarily imply a core competence. a core competence usually does. a core competence always implies a competitive advantage. A competitive advantage manifests from a function. a core competence has its roots in a set of skills. A competitive advantage may or may not lead to superior performance.
each of whom wants to win. However. Here the magnitude of gain offsets the magnitude of loss equally. This is known as a zero-sum game. illustrations depicting a win-win situation. A game is a contest involving two or more players. In fact there are no. 132 . Subsequent work on game theory by John Nash led him to win the Nobel prize in 1994. the stringent assumptions of game theory and difficulty in ascertaining of pay-offs makes game theory application difficult in business. In a game (similar to a business) one players win is always another's loss.GAME THEORY The game theory was developed in 1944 by Oscar Morgenstern.
An unbiased game is one where both the players have equal chances of winning.BIASED AND UNBIASED GAME A game is said to be biased when one of the players have a disproportionate chance of winning. Firm Y’s Strategy Use Radio Use Radio +2 +6 Use Newspaper +7 -4 133 Firm X’s Strategy Use Newspaper Firm X’s Pay-Off Matrix .
A saddle point is a situation where both the players are facing pure strategies.PURE STRATEGY GAME The strategy each player follows will always be the same regardless of the other players strategy. Firm Y’s Strategy Use Radio +3 +1 Use Newspaper +7 -2 134 Firm X’s Strategy Saddle Point Use Radio Use Newspaper Firm X’s Pay-Off Matrix .
135 . Coke Vs Pepsi). However.g. This is usually through learning by “experience or observation” (i. iteration) rather than through collusion (E. there is likely to be temptation by any of the players to try to steal the advantage over the other by breaking the rules of the game (Eg.TYPES OF GAMES Simultaneous Games – This is a situation where the players have an option to choose to cooperate or not through collusion. collaboration or cooption. Repeated Games – In this situation the players interact repeatedly with each other sub-optimizing the outcome possibilities. Yahoo Vs Microsoft). It represents the classical “prisoner’s dilemma”.e.
Game theory relies on the principle of rationality. In a market dominated by price-based differentiation one may attempt to change the rules of the game by/when – – Bases of differentiation dependent on clear identification of what customer wants or value. but 136 players do not always behave rationally. – 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. . It results in a shift in the productivity frontier. – 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.
– Unlearning & learning of new skill sets.IMPORTANCE OF STRATEGIC FIT Strategic fit has a central role to play in strategic management. A high strategic fit (co alignment) is useful because it enables – – Appropriate and timely response. – Development of capabilities & competencies. – Changing the rules of the game. 143 . internal strategic fit (strategy – dominant logic) is critical to strategy implementation. – Resource commitment from top management. While external strategic fit (strategy – environment) is relevant for strategy formulation. – Better strategic and operational control.
In such a situation. Some of the key strategic learning's exists at the contact point between the organization and its customer. learning levels are very high. formulation & implementation can occur simultaneously. effective strategies are better crafted when there is a subtle overlapping between the two (i. 144 . emergent strategy vis-à-vis intended & realized). According to Mintzberg. learning levels are very low. at the cost of sacrificing a lesser degree of control.e. In fact. strategy formulation and implementation has been perceived to be distinct & independent. In such a situation. while control is very effective.FORMULATION Vs IMPLEMENTATION Traditionally.
transformational leaders go one step beyond – Design a well crafted and designed strategic intent of the organization. shift from compliance to commitment.ROLE OF TOP MANAGEMENT To bring about change and to implement strategies successfully. Install a system of shared beliefs and values. In contrast. A transactional leader is usually confined to allocating tasks & responsibilities and extracting performance. bring about transparency. Pragmatism is the ability to make things happen. companies depend more on transformational leaders than transactional leaders. 145 . He should be an agent of change.
skills) also includes complex resources like capabilities and competencies. patents. 146 . brands. Zero Based Budget – In this case the budget of a SBU has to be worked out right from the scratch. The various methods of resource allocation includes Historical Budget – The budgets framed by HQ for a particular SBU keeping in mind past trends. minimum requirement). Performance Budget – SBU managers need to justify the distinctive resources in terms of the opportunity it is pursuing yields the highest possible pay-offs. land.RESOURCE ALLOCATION Resources allocation includes tangible resources (Eg. labour.e. machines) referred to as threshold resources (i. Intangible resources (Eg.
Flat Screen Displays. Moreover.CAPABILITIES & COMPETENCIES Technology and business are slowly becoming in – separable. 147 . 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. Distinctive capabilities are complex set of skills woven around technologies. Due to causal ambiguity (complexity). convergence of multiple streams of technologies at the product – market level is becoming increasingly evident (Eg. though not necessarily in the case of emerging markets. Mobiles).
The level of centralization and decentralization is decisive. processes become people independent. 148 . An appropriate organization structure & adequate control systems are essential to implement strategies and achieve stated goals.STRATEGY & STRUCTURE It is a framework within which individual efforts are coordinated to bring synergy. A firm in several related businesses usually employs a divisional structure. A firm in several unrelated businesses usually employs a SBU structure. A single product or a dominant business firm usually employs a functional structure. Once the structure is in place.
Project / Matrix Structure – A formal but temporary framework initiated for the completion of a particular project/crisis. Inputs . with team members having dual line of control. Virtual Structure – A boundary less or hollow organization. based on skills and competencies.TYPES OF STRUCTURES Functional Structure – Activities grouped together by a common function (Eg. processes. disbanded subsequently. Divisional Structure – Units grouped together in terms of products. Team Structure – An informal group formed for a crisis.Technology. Output). or geographical locations. SBU Structure – Businesses segregated in terms of strategic dissimilarities (Eg. 149 . Finance). Marketing.
Environment & People – Economic and political conditions have a major bearing on structure coupled with the attitude and aspirations of the people in the organization. It includes the desire for independence. leading to a tall structure. 150 . as span is broader. structures are becoming flatter and more simpler. facing challenges & crises. assuming responsibility.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. Technology – With more and more convergence of technologies in business.
there is a tendency to continue along the same lines. . Top managers resist change. Most firms undergo periods of strategic continuity rather than strategic discontinuity.INERTIA When a firm has been operating in a certain fashion for a long time. irrespective whether it is from worse to good or good to worse.e. Common sources of 151 inertia – complacency with past successes. Inertia is a characteristic of a firm that endures status quo (i. Changes in top management and unlearning helps overcome inertia. co0ntinuity). Inertia acts as an impediment in strategy implementation.
strategies need to be evaluated on an ongoing basis to prevent deviations of fit. Deviation of fit is detrimental to performance and may lead to strategic failure. To prevent deviation of fit. certain authors propose misfit as a source of superior 152 performance. firms should move beyond financial performance to strategic performance as organization systems are becoming complex. However.STRATEGY EVALUATION Strategy evaluation centers around assessment of strategic fit. . Since the internal and external environment is in a state of continuous flux.
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. detecting changes in the external and internal environment and taking corrective action wherever necessary.
STRATEGY CONTROL IMPLEMENTATION It involves steering the company towards its original growth trajectory & stated goals. Special Alert Control – It intends to uncover unanticipated information having critical impact 154 on strategies. However. It is open-ended as well as . Implementation Control – It aims at assessing whether key activities are proceeding as per schedule. It involves assessing – strategic thrusts and milestones. checking every premise is costly as well as difficult. Premise Control – Checking the validity of the assumptions on which a strategy was based.
Performance measures are defective – What to evaluate against? How to measure the 155 construct? As a saying goes. low strategic fit due to consultants intervention. difficult to translate into practice. Strategy not linked to resource allocation & capabilities – Lacking commitment of top management.BARRIERS TO STRATEGY EXECUTION Vision and strategy not actionable – Utopian ideas. “If you cannot . Strategy intent not linked with goals and objectives – Lack of coordination at lower levels leading to negative synergy.
156 . the relative importance of each factor may vary over time and context. Together these factors determine the way in which a corporation operates. important or not they're all interdependent. On top of that. so if one fails to pay proper attention to one of them. this may effect all others as well.7S FRAMEWORK OF Mc KINSEY The 7-S Framework of McKinsey is a management model that describes 7 factors to organize a company in an holistic and effective way. Large or small. Managers should take into account all seven of these factors. Today it is considered one of the most powerful tools for strategy implementation determining success or failure. to be sure of successful implementation of a strategy.
It appeared also in "In Search of Excellence" by Peters and Waterman.BACKGROUND & ORIGIN The 7-S Framework was first mentioned in "The Art Of Japanese Management" by Richard Pascale and Anthony Athos in 1981. and was taken up as a basic tool by the global management consultancy company McKinsey. At around the same time in the US Tom Peters and Robert Waterman were exploring what made a company excellent. 157 . The 7-S model was born at a meeting of these four authors in 1982. They had been investigating how Japanese industry had been so successful. Since then it is known as their 7-S model and is extensively used by corporations worldwide to implement their strategies.
Skills – An organizations capabilities and competencies. 158 . over time. formal & informal . Strategy – Trade-offs for the allocation of a firms scarce resources.THE 7’S Shared Values – It represents what the organization stands for and what the top management believes in. Systems – The procedures. to reach identified & stated goals. Staff – Human inter-relationships. Style – The way in which the top management influences the functioning of an organization. processes and routines that characterize how work should be done. Structure – The way in which the organization's units relate to each other in terms of their commonalities.
STRATEGIC FIT Strategy Structure Shared Values Systems Skills Staff Style 1st Order Fit 2nd Order Fit 3rd Order Fit 159 .
staff. the soft S’s (skill. 160 .A CRITIC OF THE 7S MODEL While the hard S’s (strategy. While the American co’s focuses on the hard S’s. their Japanese counterparts focus more on the soft S’s for their early success and sustainability. because most often they are culturally embedded and often neglected. In contrast. shared values) are very malleable and comparatively more difficult to identify & influence. structure. Consider the 4P’s of marketing or 3R’s of SCM. A choice of an alphabet often limits the scope and skews the interpretation of a model. systems) are comparatively easy to identify and influence. Ineffective in case of a virtual company. style.
High Organic Growth Strategic Alliance Joint Venture Mergers & Acquisition Strategic Fit .Low Take Overs 161 .STRATEGY IMPLEMENTATION ROUTES Strategic Fit .
the entire value chain. 162 Risk of cost and time overruns. Reliance Industries). It has complete control over inputs. tax holidays. The entire infra-structural facilities are set up afresh having its own gestation and break-even. soft loans. technologies. and markets. i.e. Govt. . concessions are available for green-field projects. (Eg.e. (Eg. i. SEZ’s. green-field projects.ORGANIC GROWTH Here a firm builds up its facilities right from the scratch and continues to do so without any external participation. Long gestation leads to delayed market entry. subsidized power).
163 It is a form of competitive collaboration. 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. 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. It touches upon a limited aspects of a firms value chain.STRATEGIC ALLIANCE It involves a pro-active collaboration between two or more firms on a particular domain or function for mutual gain.
(Eg. Hero . It is a win-win situation for both the companies.Honda).JOINT VENTURES A joint venture involves an equivalent equity participation between two firms usually of similar strategic intent and comparable size to enter a particular market through a newly formed entity. Tata – AIG. . A comprehensive MOU is essential. leaving minimum scope of overlapping. Degree and extent of management control must be clearly 164 laid down. Selecting the right partner is critical for success. Dominant logic of both the companies should be complimentary.
ITC Tribeni Tissues. Brooke Bond & Lipton). Integrated distribution channel leads to better market penetration and overall synergy.MERGERS & ACQUISITION It refers to the fusion of two or more firms into a single entity. Economies in scale leading to lowering of costs. 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. Acquisition is an outright purchase of a firm assets by another independent entity (Eg. Integration of assets and other financial resources. . Coca Cola – Thums Up).
Consolidation in a fragmented industry. Most countries have stringent laws that prevents hostile take over. Make a public offer of not less than . often the new firm is “left alone”.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.Corus). Larger geo-graphical diversity. Instant access to capacities and markets. Tata Steel . Integration of organization structure & cultures is difficult. Inform SEBI / Stock Exchange after 5% stake is 166 acquired.
MANAGEMENT TOOLS IN STRATEGY 167 .
or better still create next practices Reengineering – Redesigning work processes right from the scratch. 168 . Radical change is superseding incremental change.WHY MANAGEMENT TOOLS? Change is becoming pertinent in the business environment. every time. Balanced Scorecard – Tracking strategy 3600. it is also a source of potential threat. Companies therefore need to ensure competitive advantages doesn’t become competitive disadvantages. The past is ceasing to be an indication of the future. Change provides enormous opportunities. Some tools to ensure that – Benchmarking – Adopt certain best practices. TQM – Doing the right thing the first time.
A best practice is defined as an activity performed by a company in a particular domain or function which distinguishes it from others and making them world-class. These exemplary practices involves the stakeholders of the company and helps achieve its strategic intent. Best practices centers around looking at a different way to satisfy various stakeholders. Benchmarking involves the identification, understanding and adapting of certain best practices and implementing them to enhance performance. Firms are moving towards next practices as best practices make firms look more and more homogeneous.
SOME BEST PRACTICES
Dell: Customized configuration of computers. Caterpillar: 48 hours delivery anywhere in the world. Citi Bank : Priority banking services. Maruti: Certified “true value” pre-owned cars. Microsoft: ESOP to employees. Infosys: Customized work-stations. TCS: Referencing potential new recruits. ITC: Shareholders factory visit. AmEx: Outsourcing data warehousing mining. MARG: Set-top box to study viewing patterns. Honda: CEO’s visit to dealers.
TYPES OF BENCHMARKING
Functional – Used by companies to improve a particular management activity. Eg. Motorola learnt delivery scheduling from Domino’s. Process – Improving specific key processes and operations from experiences in similar businesses. Eg. Ford adopting assembly lay-out plan of Toyota. Competitive – It involves assessing the sources of competitive advantage and imitating them. Eg. Samsung leveraging miniaturization skills of Sony. Strategic – It involves assessing business models and replicating them in a different market. Eg. Reliance replicating AT&T business model.
HOW TO BENCHMARK?
Phase 1: Planning – What to benchmark? Whom to benchmark? – Identify key performance indicators & Data source. Phase 2: Analysis – Assessment of performance gaps. – Predict future performance levels. Phase 3: Integration – Communicate findings and gain acceptance. – Establish functional goals and its implementation. Phase 4: Action – Implement and monitor progress. – Measure results against stakeholder wants and needs. – Recalibrate or outperform benchmarks.
WHOM TO BENCHMARK?
Selecting the benchmarking partner is critical to solving the problem. Firms should generally avoid selecting the industry leader, because it may not always adopt the best practices for every process or activity. Benchmarking partners may also be from different industries. Types – – Internal – It involves benchmarking against its own branches, divisions, SBU’s. Proximity to data and cooperation is taken care of automatically. – External – It involves benchmarking against firms that succeeded on account of their best practices. It may also involve benchmarking against world-class firms. Friction may arise due to presence in competing industries.
BENCHMARKING - ADVANTAGES
Finding better ways of meeting stakeholder needs. Organizational learning comes from internal as well as external sources. Establishing goals based on formal assessment of external conditions. Defining effective measure of indicators, facilitate comparison, adopt from other organizations. Ensuring a continuous learning organization. Reducing competitive disadvantage. Organizational turnaround, especially effective in case of a wide strategic drift when differentiation strategies fail to work. 174
It can at best complement it. While strategy is all about differentiation and not looking alike.LIMITATIONS More and more companies benchmark. clustering). Benchmarking is useful for bringing about operational efficiency.BENCHMARKING . It does not shifts the growth 175 trajectory of the industry as a whole. . the more similar they end up looking.e. Benchmarking merely reorients profits in the hands of few to profits in the hands in the hands of many (i. but it cannot be used as a strategic decision making tool. Strategy is more of creating best practices rather than copying them.
Re-engineering attempts to radically change an organizational products or process by challenging the basic assumptions surrounding it. for achieving performance improvement (E. Re-engineering involves complete reconstruction and overhauling of job descriptions from the scratch (i.g. . Windows 95 to 97).e.e. The task demands a total change in organisational 176 culture and mindset. process mapping) and eliminating or improving them (E.RE-ENGINEERING Redesigning leads to identification of superfluous activities or product features (i. DOS to Windows).g. clean sheet).
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 .
processes. Business – It looks into markets. customers and suppliers and protects the organization from the future (i.LEVELS Reengineering can be successfully leveraged at all levels of an organization with varying degree of results. .e. It can be of the following types – Functional – It looks into the flow of operations (i. Strategic – It looks into the process of strategic planning. BPR). 178 .e. structures. products. resource allocation and prepares the organization for the future through a reorientation of the entire strategic architecture.REENGINEERING . etc) and supports the organization for the present.
reverse engineering is a top-bottom approach. – High cost and time acts as a deterrent. Cheaper versions of Intel chips and mother-boards manufactured in Taiwan. with an intention to copy it (Eg. protection can be had in the following ways – – Patenting. While traditional manufacturing is a bottom-up approach. Indonesia). – Causal Ambiguity. – Early entry advantages. It generally acts as a threat to innovation. 179 . learning curve advantage.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. However.
180 . designing facilities. Actualization – Obtaining and dismantling of the product to assess how it functions. Usually in such cases segmentation and pricing is different from the original innovator. nano-technology). Inaccurate assessment at this stage may lead to a failure of the entire project.STAGES IN REVERSE ENGINEERING Awareness – Recognizing whether the product is found to be worth the time. cost and effort necessary for the purpose of reverse engineering. Implementation – Developing of a prototype. Introduction – Launching the product in the market.e. machine tools to convert ideas into a marketable product (i.
Car) – – Performance – Mileage of 14 kms to a litre of fuel. – Perception – Customer notions. – Durability – 1980 manufactured cars still on road. 181 .WHAT IS QUALITY? It involves the totality of a product or service in meeting certain stated or implied needs. of service stations. – Conformance – Emission standards . – Aesthetics – Appeal in design. It has eight dimensions (Eg. – Features – Anti-lock braking systems. More and more companies are moving towards meeting implied rather than stated needs. Air bags. – Serviceability – Large no. – Reliability – Consistency in mileage.Euro IV.
Management of quality was traditionally inspect it . touching upon a limited aspect of a value chain. zero defects.TOTAL QUALITY MANAGEMENT Objective – Management of quality ensures conformance to certain pre-set standards. .fix it in nature. which ensures good market standing. TQM is a way of creating an organization culture committed to the continuous improvement of work processes – Deming. It is deeply embedded as an aspect of 182 organisational life & culture. It had little impact on improving overall productivity.
Empowerment – It takes place when employees are properly trained.TQM – KEY TENETS Do it right. 183 . Kaizen – Make continuous improvement a way of life. not a final destination. fully involved in decision-making and fairly rewarded for results. the first time – From reactively fixing error in products to proactively preventing errors from occurring at the first place (Juran). Be customer centric – Generate the concept of internal customer (Ishikawa). Looking at quality as an endless journey. provided with all relevant information and best possible tools.
saving precious top management time. 184 .STRATEGIES Outsourcing – It is the process of self-contracting services and operations which are routine and mundane. Quality Circles – It a small group of shop-floor employees who meet periodically to take decisions regarding operational problems and crises.TQM . 6-Sigma). equal participation). It is based on the principles of MBO (i.e. enabling the firm to concentrate on core activities essential to customer satisfaction. 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. of units meet preset standards (Eg.
– Efficiency and effectiveness is passé.. – Less than 10% of strategies effectively formulated are effectively executed..BALANCED SCORE CARD Some interesting comments .... strategy implementation has never been more important..... – In the majority of failures – we estimate 70% – the real problem isn’t (bad strategy) .... it’s bad execution. Source: Fortune Magazine Why CEO’s fail? 185 .
186 .BSC .CONCEPTUALISATION A company’s performance depends on how it measures performance. Focus more on causes. rather than effects. These measures worked well when organizational systems were simple and unidirectional and more importantly the environment was static. 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. Organizations need to move from financial to strategic performance. Most managers tend to rely on traditional measures of performance having its origin in finance as they are well tried and tested.
187 . and distinguish strategic problems from operational ones. It has four dimensions – – How do customers see us? – What must we excel at? – Can we continue to improve and create value? – How do we look to shareholders? Firms more often have problems. because they have too many.BSC – KAPLAN & NORTON (1992) A BSC helps a manager to track and communicate the different elements of company’s strategy. The most critical element of a BSC is to measure these four dimensions.
ageing schedule) % of key customer transactions Ranking of key customer accounts No. of visits or calls made % of NPA’s 188 .CUSTOMER PERSPECTIVE GOALS Products Supply Preference Relationship MEASURES Relative market share (%) % of sales from new Vs proprietary products Timely deliveries and service Customer credit analysis (i.e.
of times covered in media No. of new product launches Vs competition Product pricing Vs competition 189 .BUSINESS PERSPECTIVE GOALS Skills Excellence Exposure Introduction MEASURES New capabilities and competencies Implementation & gestation period Bank and supplier credit limits & PLR Unit Costs / Conversion Ratio / Defect Ratio No.
LEARNING PERSPECTIVE GOALS Technology Manufacturing Focus Timing MEASURES No. of new patents registered Time to develop next generation products Average and spread in operating cycle % of products that equal 2/3 sales No. of product innovations 190 .
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 .
The BSC brings together the different elements of a company’s strategy at a glance.e. Modern managers should be poised to ask the right questions.BSC . they don’t know . It helps translating strategy into practice (i. As a result. sharing of vision). . 194 performance will automatically follow.e. doing right things instead of doing things right).ADVANTAGES Most often top managers face information overload. Seek excellence. Focus on cause not effects.what they don’t know. Shift from control to strategy (i.
EFFICIENCY Vs EFFECTIVENESS Ineffective Effective Inefficient Goes out of Business quickly Survives Efficient Dies Slowly Thrives 195 .
. not only thrives.EFFECTIVENESS + STRATEGY A company which is effective as well as strategic. Porter 196 .Michael E. but also sustains it.
CORPORATE RESTRUCTURING 197 .
Restructuring involves consciously driving significant changes in the way an organizations thinks and looks (Eg.. “every organization must be prepared to abandon everything it does.CORPORATE RESTRUCTURING The only thing constant in today's business environment is change. from survival of the fittest . firms use restructuring strategies. to survival of the most adaptable... Strategic variety may be caused by changes in the as external well as internal environment..” 198 ... As Peter Drucker pointed out. Tata Group). Strategic variety brings paradigm shift. Radical change brings about strategic variety. To adapt to the changing environment.
RESTRUCTURING – BASIC TENETS Customer Focus – Restructuring ideally begins and ends with the customer. they should strive to provide unimaginable value ahead of its time (Eg. . Company’s should go beyond just asking what he expects. Instead. Internal customers should also not be neglected. ATM. Core Business – Company’s should introspect – What business are we in? Business evolved out of opportunism or myopia should be divested. and dividing the core businesses into SBU’s (i. Structural Changes – Conventional hierarchical structures should be disbanded in favour of more 199 flexible ones (i. downscoping). downsizing or rightsizing).e. Walkman.e. etc). Fax.
) The Aditya Birla group typically relied on the “marwari” community for key management positions . Ratan Tata now drives the point the group means business. ..) Reliance dismantled their industrial embassies ..... It is created and institutionalized by the top management. During the times of JRD. Kumar Birla today is more dependent on professionals.. Restructuring also requires cultural reorientation. 200 ... the Tatas were considered a benevolent and charitable organization..RESTRUCTURING – BASIC TENETS Cultural Changes – A culture represents the values and beliefs of the people about the organization.. started focusing on their capabilities...
Restructuring provides a platform to close this gap. Honda’s ad says. Getting feedback & addressing customer complaints. Use the reach of networking technologies. they tend to move away from the customer.MOVING CLOSER TO THE CUSTOMER As companies evolve. Publicizing welfare projects to demonstrate CSR. Organizing customer and supplier meets. Communicating to the media about organization efforts to deliver quality products. “ … one reason our customers are satisfied is that we aren’t. Carry out PR campaigns.” 201 .
it may be smooth (Eg. Glaxo – Heinz). Hive Off – It involves siphoning of assets under control.ASSET RESTRUCTURING Asset Restructuring – The asset composition of a firm undergoes a major change. 202 . It can have two forms. including its intangibles – Mergers – It may be vertical. Further. horizontal. Further spin-off can be classified as split-off and split-up. Tata – Corus) or hostile (Eg. Mittal – Arcelor) and can take various forms. where the difference in valuation is settled off through cash or equity (Eg. spin-off and equity carve. It may include brands as well. or conglo-merate. Asset Swaps – It entails divesting and acquisition simultaneously by two companies.
– Split-Up – In a split-up.HIVE OFF Spin-Off – A spin off is the creation of a new entity. in which the equity is allotted amongst the existing shareholders on a pro-rata basis (Eg. – Split-Off – In a split-off. Equity Carve – It involves selling a minority stake to a third party while retaining control (Eg. Tata Industries selling 20% stake to Jardine Matheson). 203 . the entire parent company loses its identity after being split into a number of subsidiaries. Reliance Ent). Most of these practices are not in consonance with Indian laws. the existing shareholders receive equity in the subsidiary in exchange for the stocks of the parent company.
Generic motives include – – Raise working capital. 204 . In 1995. Parle sold its Thums Up brand to Coke for $40 million apprehending fierce competition. but retained its engineering division. strategic misfit. – Poor performance. for a specified market or in general with full management control.DIVESTITURE It involves the sale of a brand or a division of a company to a third party. Selling out in phases is called disinvestment (IPCL). A complete sell-out is known as divestment (TOMCO). repay long-term debts. In 2005. L&T sold its cements division to Aditya Birla group.
involving 608 pence per share). Tatas take-over of Corus for US $11. Conversion – Replacing debt with equity or vice-versa or costlier with cheaper debt or cross currency debt.The internal & external liability composition undergoes a major change – LBO – Acquiring control over a substantially larger company through borrowed funds (Eg. It provides greater leverage as well as management control. Share Buyback – It is a process of cancellation of shares out of free reserves to the extent of 25% of paid-up capital (Eg. Wipro). 205 .3 billion.CAPITAL RESTRUCTURING Capital Restructuring .
256 cr ACC – Rs. 99 cr Tata Power – Rs. 230 cr Diversifications Tata Motors – Rs. 1890 cr CMC – Rs. 1860 cr . 950 cr Merind . 120 cr Tata AIG – Rs. 150 cr VSNL – Rs.Rs.Rs. 1439 cr 206 Tata Timken – Rs 120 cr Tata Telecom – Rs. 1170 cr Goodlass Nerolac – Rs. 1700 cr Trent – Rs. 42 cr Voltas . 250 cr Tata Tetley – Rs.BUSINESS RESTRUCTURING – TATAS Divestments Lakme – Rs.
keeping the composition of business intact (Jet Airways).ORGANIZATIONAL RESTRUCTURING Organizational structure and systems calls for a change when strategic variety is apparent. 207 . 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. Turnaround is the primary motive. Survival is the primary motive. It can be carried out in the following ways – Downsizing – It is a systematic one-time reduction in the no. of operating units. usually as a result external turbulence. Rightsizing – It is phasing of excess and redundant employees resulted out of faulty internal planning (SAIL).
STRATEGIC CHANGE One of the most difficult components of organization restructuring is the mindset of the top management represented through its dominant logic and its shared values reflected in cultural orientation.e. inertia). Dominant logic becomes deep-rooted in organizational contexts depending on the period it is in place (tenure of the CEO). thumb rules) of the top management. 208 . as strategies are based on such beliefs and biases. Strategy change is unviable without a preceding change in its dominant logics. the more difficult it becomes to uproot the paradigm (i. The longer the period. The dominant logic represents the perceptions and biases (i.e.
e. 20% of the people carry out 80% of the changes). Companies achieve real agility only when people at every level rise above the ordinary to face the challenges – revitalization or transformation. the factor that stifled change & performance was – culture. In most organizations.FORCES AGAINST STRATEGIC CHANGE The problem with strategic change is that the whole burden typically rests on few people (i. 209 . 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.
it is not about winning but about learning.SUCCESSFUL TRANSFORMATION Build an intricate understanding of the business model at all levels of the organization. 210 . The best way is to alter the institutional point of view. Promote inventive accountability. Create relentless discomfort with the status quo. process ownership. Encourage uncompromising straight talk. Understand and deliver the quid pro quo. Questioning every basic action of the organization. Harness setbacks. Manage from the future. never take no for an answer.
Aspects of current culture which needs to be overcome. that can be both enablers and blockages to change and restructuring. Identify and implement facilitators of cultural change. 211 . It involves diagnosing a change situation – systems & structures. It involves identifying – Aspects of current culture which needs to be reinforced. by identifying forces for and against change. also known as cultural-web. Culture and style of management are two main impediments in force-field analysis.FORCE-FIELD ANALYSIS A force-field analysis provides an initial overview of change problems that needs to tackled.
Term Loss of human capital Lower performance Higher performance Capital .RESTRUCTURING .Term Reduced labour costs Reduced debt costs Emphasis on strategic control Business High debt costs Higher risk 212 Long .OUTCOMES Alternatives Organizational Short .
down-scoping or asset stripping. In order to put back the company on the right track they are resort to – Denominator – It assumes that turnover cannot be increased. 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. reverse engineering and regenerating. While the first strategy produces results instantaneously. hence go in for downsizing.NUMERATOR & DENOMINATOR MGT Most firms across emerging markets undergo strategic discontinuity and as a result are forced to restructure their businesses. 213 . focuses on reengineering.
TURNAROUND MANAGEMENT 214 .
WHY TURN AROUND MANAGEMENT? Some interesting insights . and that the thirty-two of the country’s largest business groups in 1969 are no longer among the top fifty today.. .. Source: Why do firms atrophy? (Business Today.. still exist as on 2005. January 1997).. – Less than 10% of the Fortune 500 companies as first published in 1955. – Only seven of the first fifty Indian business groups in 1947 were even in business by the turn of this century.. 215 (Govindarajan and Trimble..
A category of underlying principles and concepts.TURN AROUND MANAGEMENT A turnaround is said to occur when a firm perseveres through an existence threatening performance decline. skills. process focuses on – A logic to explain a causal relationship between intervening variables. systems. Both content (what) and process (how) are equally important for a successful turnaround.e. While content focuses on endogenous and exogenous variables. and achieves sustainable performance recovery. As a sequence of events describing how things change and why they change (i. Stage Theory). 216 . ends the threat with a combination of strategies. and capabilities.
Uncompetitive products or services. leading to lack of acceptability from distributors and customers. Low employee morale leading to high employee attrition at all levels. especially in key positions. Substantial shifts in consumer preferences. suppliers and bankers.TURNAROUND INDICATORS Most firms atrophy simply because they fail to diagnose the indicators that acts as threat to organizational existence. 217 . Rising input costs. Some indicators Continuous cash flow crises as a result of dwindling market-share and profits. unavailability or radical lowering of substitute costs or technological obsolescence. Low stakeholder confidence.
be more customer centric. Common approaches adopted Change in key positions. Revamp product portfolio.. liquidating dead assets. which most top managers fail to appreciate.TURNAROUND ILLUSION The first step to a successful turnaround is the basic acceptance of the fact that …. 218 . Recalibrate prices. Hence. Product redesigning or reengineering. consider extension. focus on power brands. they adopt surface level measures (disprin popping) which most often fail. Emphasis on advertising and market penetration. prune work-force. based on elasticity. “all is not well”. Extending work hours.
TURNAROUND STAGE THEORY Stage 1 Decline Stage 2 Stage 3 Stage 4 Outcome Response Transition Performance Equilibrium Line Success Failure Indeterminate Nadir Time 219 .
DECLINE Decline is the first stage in the turnaround process. primarily dwindling resources and capabilities are responsible for decline. 220 . It has its origin in “resource led stretch” and subscribes to the view that a firm has substantial power to override the context. It has its origin in “environment led fit” that subscribes to the view that a firm has little control over external factors. Identification of the stimulus leads to the arrest of the downfall. 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. R-Extinction – It suggests that organization factors.
The response must match the cause of the decline.RESPONSE INITIATION Turnaround responses are typically categorized as operating or strategic. new market initiatives. the response should be operational. asset reduction. If the underlying cause is internal efficiency. If the decline stems from structural shifts. 221 . Operating responses typically focuses on the way the firm conducts business and involves tactics geared towards – cost cutting and process redesigning (BPR). diversification. the response should be strategic. Strategic responses focus on changing or adjusting the business the firm is engaged in through long term moves such as – integration.
Scope – A diversified conglomerate may acquire a distressed business to turn it around and gain valuable synergies. Contour – It is easier to reverse decline in the earlier stages through operational measures.RESPONSE DICHOTOMY The response initiation is somewhat dichotomous and cannot be universally applicable. 222 . which may be unavailable to a focused firm. when decline deepens shifts in strategic position becomes essential. Similarly new market initiatives is feasible only for multi-product firms. Untangling this question brings into focus three events – Domain – Many of the strategic cures have limited applicability for an affiliated firm.
transparency. 223 . role model.7 years with a range of (4-16) years. lead – lag). Empirical studies show that average time is 7. many a times early signs of recovery fades out. consensus). However. However. substantial amount of time usually passes before results begin to show (i. Sustenance is the key factor in this stage.e.e. confidence building measures. The top management has a key role to play through empowerment. participative management (i. Support from all the stake holders through resource commitment.TRANSITION Transition usually reflects the first signs of recovery. Effective levers of transition.
Regaining lost market share and distributor confidence. it should adopt a holistic approach. 224 .OUTCOME Outcome is said to be successful when a firm breaches the equilibrium performance level. Supplier and banker confidence. Revival of key customers and new product launches. Cut off points must be unequivocal. Commanding a premium in the market. Instead of focusing on financial parameters alone. Share price indications and media coverage. Failure is an indication that initial momentum was not sustainable characterized by irreversibility.
COOPERATIVE STRATEGIES & ALLIANCES 225 .
licensing. the commitment and the involvement between the firms increases manifold.COOPERATIVE STRATEGIES Cooperative strategies are a logical and timely response to changes in business dynamics. and globalization . It can assume any of the following forms – franchising. supply-chain partnership. 226 . In the cooperative strategy continuum as firms move up the value order. technology. More and more companies worldwide are moving away from competition to co-option to leverage their resources and enhance bargaining power. strategic alliance. consortia. Any cooperative strategy maybe between firms within the same country or cross border as well. or joint venture.
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. 227 . owners of the brand Monginis allows its franchisees to sell its confectionary products. It is an effective strategy to penetrate markets in a shortest possible time at a minimum cost. Switz Foods. owners of the brand Tanishq allows its franchisees to sell its jewellery products. Titan Inds. Branding is critical to franchising.
refine processes and adopt necessary technologies (SKD). Develop a product through its crude stage. Different levels of licensing Manufacturing without embracing any technology (CBU). Become a systems integrator (CKD). as in Tata Indica.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. 228 . HM manufacturing GM range of cars in India with a buy-back arrangement is a perfect example of CBU.
Tata. Coke – Pepsi).CONSORTIA Consortia – They are defined as large inter-locking relationships & cross holdings between businesses in a similar industry. Cross Holdings – A maze of equity holdings through centralised control to ensure earnings stability & threshold resources for critical mass (Eg. 229 . enabling them to increase prices (Eg. Hyundai). 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. Collusion – Few firms in a matured industry collude to reduce industry output below the equilibrium level. Airbus – Boeing).
otherwise it 230 becomes routine outsourcing. Tata Motors – IDEA). link their capabilities to create value for end users. Companies in different industries with different but complimentary skills.SUPPLY CHAIN PARTNERSHIP It is a pro-active & collaborative arrangement between supplier and customer aimed at achieving better control over the value chain (Eg. It usually provides a platform to sort out differences between conceptualization and implementation to suit local market needs. . Continuous sharing of knowledge is critical to the success of a supply chain partnership.
Generic motives involved are . enhance credibility. Partner selection is one of the critical success factors. instead of hurrying into a relationship. Firm’s should undertake a long courtship with potential partners. preempt competition. Despite their popularity (50-60)% of the alliances fail to accomplish their stated objectives. 231 .STRATEGIC ALLIANCE It is an short to medium term understanding between two or more firms to share knowledge and risk. design next generation products. to gain knowledge and to obtain access to new markets (Eg. Reliance – Du Pont). effective R&D management. Tata Motors – Fiat.learning organization. enter newer markets.
STRATEGIC ALLIANCE . Complementary Equals – Two firms mutually promoting each others complimentary products (Eg. 232 . Backward – An alliance (quasi or tapered) with a supplier of critical components seeking commitment (Eg. Airbus – Boeing). Bajaj – Castrol). Maruti). Alliances of the Weak – An alliance is entered into to preempt competition (Eg. Coke – Pepsi).TYPES Collusion – Tacit top management understanding to neutralize price wars (Eg. Bootstrap – An alliance between a weak and a strong company with an intention to acquire it. Whirlpool – Tide.
Too much stress on financials & structure be avoided. Cultural orientation has been found to have a profound effect on top management’s strategic orientation (Eg.PARTNER SELECTION CRITERIA It is likely that partners will not have complete consent on alliance objectives because the institutional context in which the alliance embedded varies from country to country. Differences in level of economic development can produce differences in alliances motives. 233 . – Japan Vs US). Firms from developed markets seek access to markets and firms from emerging markets seeking access to technology.
Dominant Logic’s – Similarity in beliefs & biases. Managerial capabilities. including ability to provide quality products and services. Partner’s ability to acquire fresh skills. 234 . Willingness to share knowledge and skills. Unique Resources – Abilities or skills which cannot be easily duplicated. Experience related to previous alliances. Intangible Assets – Move beyond the financials of the firm.PARTNER CHARACTERISTICS Complimentarity of Capabilities – The degree to which partners resources can be used in conjunction.
understanding the chemistry. 235 . operational & cultural integration. instead of focusing controlling the relationship. differences not anticipated earlier. Changing within. Selection & Courtship – It involves self analyzing. partners should nurture it. Learning to collaborate – strategic.MANAGING ALLIANCES Alliances are more than just a deal. vows to include commitment to expand the relationship. Setting up the housekeeping. Getting Engaged – It should incorporate a specific joint activity. incorporating clear signs of continuing independence for all partners. the value chain. degree of compatibility.
It lasts till the vision is reached. There are substantial linkages in the value-chain.JOINT VENTURE A joint venture is a long term association between two equal partners to create an independent firm (SPV) by complementing their resources and capabilities to explore newer businesses or markets for achieving a shared vision.e. It aims at creating new value (i. Conceptually. combining parts). a joint venture is a selection among modes by which two or more firms can transact.e. whilst the partners continue to operate independently. . separation is very 236 bitter. synergy) rather than mere exchange (i.
237 .JOINT VENTURE – GENERIC MOTIVES Transaction Cost – The situational characteristics best suited for a JV are high performance uncertainty. Organizational Learning – It is a means through which a firm learns or seeks to retain their capabilities. Strategic Behaviour – Firms may override transaction costs. It may also be linked to deterring entry or eroding competitors position. though more profitable alternative to other choices. The market fails as sellers are unwilling to reveal their technology and buyers are unwilling to purchase in the absence of inspection. in addition to a high degree of asset specificity.
Define future industry standards. – Eg. – Eg. Yamaha – Escorts. TVS – Suzuki (4-Stroke Engines) Fill gaps in existing product lines. Endorsement from government authorities. Maruti – Suzuki.OTHER MOTIVES Entry into newer markets. Daimler – Chrysler (Premium Cars) 238 . Learning new technologies. – Eg. Sharing of resources. – Eg. Renault – Nissan (Minivans – Cars). – Eg. Essar – Hutch (Vodafone). – Eg. Eli Lily – Ranbaxy.
PAL – Fiat If the cost of continuing exceeds the exit costs? – Eg.RISKS INVOLVED Incompatibility – Differences in cultural background. Tata – Aditya Birla in Idea Cellular 239 . – Maruti – Suzuki. LML – Piaggio Differences in size and resource base. technology) drain. Century .Enka. – Eg. – Godrej – Procter & Gamble. Risk of brain (i.e. – Eg. Risk of over dependence. Modi – Telstra What after exit (parenting disadvantage)? – Eg.
respect. Inertia – Differences in age and evolution patterns. Focus – Avoid strategic myopia. 240 . time sharing. Culture – Reconcile gaps. Partner – Avoid duplication of skills and capabilities. Objectives – Shared vision. Costs – Other modes of transaction becomes cheaper. Flexibility – Sufficient space to breathe and adjust. Equality – Lack of dominance. Incompatibility – Performance expectations. Agreement – Clarity on operational control.PRE-REQUISITES FOR SUCCESS Commitment – Mutual trust.
MERGERS & ACQUISITION 241 .
HLL – Tomco).Daichi) and hostile if it is without the consent of the management (Eg. An acquisition is the purchase of a firm by a firm (of larger size. Mittal Arcelor). Brooke Bond – Lipton). Ranbaxy . The larger objective is to leverage on size. 242 . SEBI Takeover Code.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. reverses are also taking place through LBO) with a view to acquire conglomerate power and induce synergy (Eg. 2002). An acquisition is said be smooth if it is with the consent of the management (Eg. however. Most countries have stringent laws that prevents hostile takeovers (Eg.
. Preferential – A preferential allottee ending up acquiring 5% stake also comes under its purview.e. Hike – An acquirer who has already picked up a 5% has to make a mandatory disclosure for every additional 1% stake that it acquires.SEBI TAKEOVER CODE. creeping acquisition). Control – A special resolution of 75% of the share 243 holders approving the change of guard. 2002 Promoter – A person who has a clear control of atleast 51% of the voting rights of the company and confidence of all the major stakeholders. Acquirer – Someone (individual or firm) who picks up an atleast 5% stake without mandatory disclosure having an intention to wrest management control (i.
Grasim – L&T Cement. 2002 Pricing – Acquirers will have to offer minority shareholders (at least 20%) the past 26 weeks or past 2 weeks average price. SEBI – In case of a hostile take over.SEBI TAKEOVER CODE. 244 . Gujarat Ambuja – ACC). Disclosure – All acquirers have to inform the respective stock exchanges where it is listed and SEBI upon acquiring the basic limit and upon every incremental limit thereon.e. and/or does not enjoy the confidence of the different stake holders. the SEBI can intervene and block share transfers if: the acquirer has ulterior motives (i. asset stripping). credentials or track record is at stake. whichever is higher as an exit route (Eg.
The type of merger is depends on the degree of relatedness (strategic) between the two businesses.TYPES OF MERGERS A business is an activity that involves procuring of desired inputs to transform it to an output by using appropriate technologies and thereby creating value for its stake holders in the process.Kelvinator). 245 . Electrolux . Godrej. usually opportunistic (Eg. Reliance). Conglomerate – It involves integration of two distinctly unrelated businesses. Horizontal – It involves integration of two highly related businesses (Eg. ITC). Vertical – It involves complimentarily (partially related) in terms of supply of inputs or marketing activities (Eg.
Reduced gestation (i. Ulterior motives – (Eg. ITC Bhadrachalam). quick access). Reduction in risk. Global image (Eg. scale and scope. Mittal – Arcelor). Overcoming entry barriers (Eg.MERGERS & ACQUISITION . Coinsurance effect – Higher debt raising capability. 246 . Avoiding risk of new product development. ICICI –ITC Classic). Economies of size.e. Acquiring assets or capabilities (Eg. Tax benefits (Eg. Asset Stripping – Shaw Wallace).MOTIVES Increased market / conglomerate power. Ranbaxy – Crosslands). Tata Steel – Corus). Access to newer segments (Eg.
Managing size. Tata – Corus). their initial offer was around 420 pence/share.MERGERS & ACQUISITIONS PITFALLS Cultural differences (Eg. When Tata Steel started negotiations with Corus. neglecting core business. 247 . Top management overtly focused on due diligence exercise and negotiations. Managing over-diversification. Merging of organisational structures. while the ultimate acquisition was made at 607 pence/share). Overvaluation of buying firms (Eg. Inability to achieve synergy. Overvaluation is often as a result of an ego drive and substantially affects future returns.
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. Tata Steel – Corus). Growth – This stage may witness parallel merger of two firms of similar size. Brooke Bond – Lipton). 248 . with an objective to reinforce its growth trajectory or to take on the might of a comparatively larger player (Eg. vertical to save transactions costs. Kingfisher – Air Deccan). Decline – Horizontal mergers are undertaken to ensure survival.
INTERNATIONAL M&A . active top management intervention in phases. A concern of respect and trust for the business of the acquired company. Left alone syndrome. Strong differences may stifle plans and its execution. 249 .FRAMEWORK Positive contribution to the acquired company. Blanket promotions across entities and confidence building exercises needs to be practiced. An acquisition just for the sake of it or reputation yields very little value in the long term. A common shared vision. Immediate attempts to super impose structure and culture may cause bottle necks.
Redefine responsibilities and authority. Shift attention from business portfolio to people and processes. Decide upon management control systems.BLUEPRINT Take the media into confidence. Determine business strategy.INTEGRATION . It will enable focus on customers and key people. promptly. Integrating work processes. Decide on the new hierarchy. They can carry the message to the various stake holders. 250 Do not ignore the “people factor”. .
e.VALUATION The process of valuation is central to M&A. While under valuation may be a significant opportunity. The process takes (6-12) months. – Synergy – Potential value gain from combining operations (i. over valuation can become a curse. – Market for corporate control. operational & financial). Valuation decisions are arrived through a due diligence process when the prospective acquirer gets access to the books of accounts of acquiring company. – Unstated reasons – Personal self interest and hubris. 251 .M&A . Financial motives – Undervaluation relative to true value.
Synergy can be negative as well. Innovative product – Good distribution network). Sources of operational synergy – Horizontal Synergy – Gains come from economies of scale which reduces costs. – Vertical Synergy – Gains come from controlling the supplychain and savings in transaction costs. or from increased market power which increases sales and margins.VALUING OPERATIONAL SYNERGY Synergy – It refers to the potential value gain where the whole is greater than the sum of the parts. when the “fit” between the two entities is very poor. 252 . – Conglomerate Synergy – Gains come when one firm complements the resources or capabilities of another (Eg.
shareholders can accomplish the same at a much lesser cost.VALUING FINANCIAL SYNERGY Diversification – Reduce variability in earnings by diversifying into unrelated industries. Cash Slack – It reduces asymmetry between cash starved firms with deserving projects and cash cows with no investment opportunities. but availed after being merged with a profitable firm (Eg. 253 . ITC – Bhadrachalam Paper). Synergy comes from projects which would not have been undertaken if the two firms stayed apart (Eg. However. and without paying take-over premiums. Tax Benefits – Tax benefits may accrue from tax entitlements and depreciation benefits unutilized by a loss making firm. Hotmail).
VALUING FINANCIAL SYNERGY Co-Insurance Effect – If the cash flows of the two firms are less than perfectly correlated. hence better performance. It relates to the concept of diversification. – Default risk comes down and credit rating improves. the cash flow the merged firm will be less variable than the individual firms. This will induce higher debt capacity. higher leverage. 254 . 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. – Coupon rates may also be negotiated at lower rates. as risky debt is spread across the new firm's operations.
Assessment of perceived quality is critical. The value of wrestling control is inversely proportional to the perceived quality of that management. – – Value of Control = Value of firm after restructuring Value of firm before restructuring. 255 . While value of corporate control is negligible for firms that are operating close to their optimal value. since a restructuring can lead to significant increase in value. The value of control can be substantial for firms that are operating well below optimal value.VALUING CORPORATE CONTROL Premium of M&A are often justified to control the management of the firm.
LEVERAGE BUYOUT (LBO) The basic difference between a take-over and a LBO is the high inherent leverage (i. The assets of the acquired company are used as collateral for the borrowed capital.e. LBO facilitates a relatively smaller firm to bid for a comparatively larger firm in the bid for management control. 256 . debt component) at the time of buyout and rapid changes in capital structure over time. It is a very costly and risky proposition. sometimes in combination with the assets of the acquiring company. Confidence of investment bankers and the international financial community is essential.
– Separation of ownership from management. the advantages of going public includes . 257 . – Increased information needs.access to financial markets. on-going valuation. The increased benefit showed in the following way – reduced costs and increased revenue. – The need to satisfy analysts and shareholders. However. liquidity. off-late many publicly traded firms have gone private keeping in mind the following – – The fear of LBO. A research study showed that 30% of the publicly listed firms reported above average returns after going private.TO GO PUBLIC OR NOT? However.
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). – Managers cannot be trusted to invest free cash flows wisely. – It is a temporary phenomenon. 258 .e. – Cash trapped company unable to utilize opportunities. – Cost of debt coming down (i. co-insurance effect). which disappears once assets are liquidated and significant portion of debt is paid off. – Debts repaid off from increased value after successful restructuring and wresting management control.
EFFECT OF HIGH LEVERAGE Increases the riskiness of dividend flows to shareholders by increasing the interest cost to debt holders. – Increase equity valuation. As the firm liquidates / pledges assets and pays off debt. initial rise in leverage is anticipated. 259 . Lack of sufficient cash flows to repay costly debts resulting in a possible debt trap. A LBO has to pass two tests to be viable – – Restructuring to pay-off increased debt. Therefore. leverage is expected to decrease over time. Any discounting has to reflect these changing cost of capital.
shell company) by a private company. which has discontinued its operations (i. small in size but having a promising business.REVERSE MERGER Reverse Merger – The acquisition of a public company. – Automatic listing in major exchanges. or costly. Objectives – – Traditional route of filing prospectus and undergoing an IPO is costly. – Prevents dilution of equity. – Facilitates better valuation and forthcoming offerings. allowing the private company to bypass the usually lengthy and complex process of going public. – Tax shelter.e. 260 . time-barred.
and 35% during bullish periods. Excess returns also vary across time periods. – Merger announcements reported 20% excess returns.EFFECT OF TAKE-OVER ANNOUNCEMENT The shareholders of target firms are the clear winners. Initial anomaly in stock prices usually normalizes over a period of time (6-12) months. 261 . Most target firms are taken over within (6090) days. takeover failures have only initial negative effects on stock prices. However. During bearish periods excess returns were 19%. – Takeover announcements reported 30% excess returns.
Desai. – However. – Most studies reported insignificant excess returns around take-over offers or merger announcements.EFFECT OF TAKE-OVER ANNOUNCEMENT The effect of take-over announcement on bidder firm’s stock prices are not clear cut. – However. Bradley. 1983. as stock markets become more and more perfect such anomalies would reduce Source: Jensen and Ruback. 1988 . over time. in the event of take-over failure negative returns to the extent of 5% on bidder firm stock prices is reflected. 1983. and Netter. 262 Jarrel. and Kim. Brickley.
Poison Pill – An offer to existing shareholders to buy shares at a substantial discount to increase their voting rights (Eg. Rights). Poison Put – Premature retirement of bonds at attractive rates to pour surplus cash and make target investment unattractive. so that nothing is left for the raider to strip off. Asset Stripping – The targeted company hives off its key assets to another subsidiary. 263 .DEFENSIVE STRATEGIES Golden Parachute – An employment contract that compensates top managers for loss of jobs as a result of change in management control.
264 . Pac Man – The target company makes a counter bid to take over the raider company. thus thwarting the raider company’s attention. But often the White Knight turns a betrayer himself (Eg. Gray Knight – The target company takes the help of friendly company to buy the shares of the raiding company. Green Mail – The targeted company buys large blocks from holders either through premium or through pressure tactics (Eg. Shapoorji Pallonji).DEFENSIVE STRATEGIES White Knight – It is the placing of stocks to a cash rich investor and bargaining for protection in return. East India Hotels – Reliance Industries – ITC).
COMPETING FOR THE FUTURE 265 .
Wal-Mart overpowering Sears. Nokia overpowering Motorola.GETTING OFF THE TREADMILL Canon overpowering Xerox. Hitachi overpowering Westinghouse. British Air overpowering Pan Am. Honda overpowering Volkswagen. were spending 99% of their precious time dealing with present. Compaq overpowering IBM. Most companies were too preoccupied with the present than the future? 99% of the companies overpowered. Honda overpowering GM. What went wrong???? What were they doing with the present? What were they pre-occupied with? 266 . The reverse was true for the companies overpowering.
falling market share).THE PAST OF COMPETITION Beyond Restructuring – When a competitiveness become inescapable problem (stagnant growth. Not knowing when to stop. Thus efficiency was grievously hurt. CEO’s brutally pick up the knife and ruthlessly carve away layers of corporate flab (delayering. decluttering. downsizing). most often they ended up cutting corporate muscle as well and became anorexic. declining margins. 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 .
A poll in circa 2000 revealed that 80% of the U. On the contrary only 20% of Japanese managers believed that quality will be a source of competitive advantage of the future. The future is not about catching up with competition. incrementalism or nominal innovation has almost reached a plateau. 268 .S. but not of the future. top managers believed that quality will be a source of competitive advantage of the future. However. ensuring only survival of the present. but forging ahead in competition.THE PRESENT OF COMPETITION Beyond Reengineering – Numerator based managers (innovation) at least offers some hope.
demographics and lifestyles.THE FUTURE OF COMPETITION Regenerating – Leaner. better. Empower from bottom to top. reinvent its industry. as important as these may be. Companies need to fundamentally reconcieve itself. not just the organization. and regenerate its strategies (breaking its – managerial frames). aspirations and resources. It involves Dream about the company’s future. not the other way. Creating the future requires industry foresight. Create a potential gap. Transform the industry. It is based on deep insights into trends in technology. faster. don’t predict. they are not enough to get a company to the future. 269 .
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 .
ABOUT THE TRANSFORMATION The future does not belong to those who take the industry for granted. blue oceans). Redraw the boundaries between industries. Create entirely new industries (i. by converging technologies complex. It is about deliberately creating a strategic misfit. It drives a hunger and a passion to transform.e. Successful companies have a complete grip over the industry. they do not need to restructure. hence do not fall sick in the first place. Therefore. Change in at least one fundamental way the rules of engagement in an industry. 271 .
More importantly. 272 .ABOUT THE EMPOWERMENT Bring about a revolution (a paradigm shift) in the organization. Most successful revolutions (Gandhi to Mandela) rose from the dispossessed. the revolution must start at the bottom and spread in all directions of the organization. Transformational leaders merely lead the way. Such a process is called institutionalization (from people centric to organisational centric). The middle management plays a strong moderating role. A revolution that is thrust upon from the top seldom sustains.
without taking undue risk.THE FUTURE OF STRATEGY A company must get to the future not only first but also for less. Toshiba – LCD. It requires a lot of common sense and a little bit of out of the box thinking. Companies need to strategize (think ahead of times). 273 . Apply the 40 – 30 – 20 principle. What does it take to get to the future first? Understanding how competition for the future is different. An ability to energize the company. A process for finding and gaining insight into tomorrows opportunities (Eg. Apple – iphone). Get to the future first. South West Airlines – LCC.
the farther it will be away from competition. As there is no one future. 274 .HOW DOES THE FUTURE LOOK LIKE? There is no rule which says that for every leader there will be a follower. The farther one can see in this endless space. What distinguishes a leader from a laggard. as on their aspirations. We are in the midst of a 3600 vacuum. each point in space represents a unique business opportunity. Companies of the future will be not based so much on the strength of their resources. is the ability to imagine in a different way what the future could be. but hundreds. greatness from mediocrity.
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 .
It represents the collective learning's of an organization centering around diverse streams of technologies. 278 . Leverage – They are the gateways to future markets. It is characterized by the following – Unique – It provides unimaginable customer value ahead of its times.CORE COMPETENCE A core competence relates to a bundle of skills (not an asset or a business) that revolves around activities or processes and critically underpins a firm’s competitive advantage. Inimitable & Insubstitutable – A high degree causal ambiguity between these skills yield sustainable competitive advantage. It cannot be matched even by its closest competitors.
A core competency cannot be outsourced. Honda – engines. SKF – antifriction and precision. Core competencies are the roots of the organization. Wal-Mart – logistics.MORE ABOUT CORE COMPETENCE Sony – miniaturization. it is deeply embedded in the heart of the organization. Intel – nano-electronics. it gets more refined and valuable through use. Toshiba – flat screen displays. Nike – designing. Coca Cola – brand. at the most three to four. Canon – imaging. 279 . leaders have one. Although a core competence may lose value over time. Toyota – lean manufacturing. Most companies around the world do not possess one.
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 .
Therefore. Chile) provide a different context (i. 288 . China. high levels of market imperfection). Emerging markets are characterised by infrastructural bottlenecks. institutional gaps. 1997). Diversified groups in operating in emerging markets therefore benefit from unrelated diversification. Korea.EMERGING MARKETS Emerging markets (India. strategies suited for the developed markets may not be appropriate for emerging markets. Therefore focused strategies based on core competence may not be suitable for emerging markets (Khanna & Palepu. and high transaction costs.e.
et al. (2000) 289 . Synergy. Experience Strategic Fit Diversity Palich.DIVERSITY . subsequently negatively related across developed markets. Entropy).PERFORMANCE (I) Diversity attempts to measure the degree and extent of diversification (Herfindahl. Size & Scale. Concentric. Optimum level of diversification Performance Diversity is initially positively related with performance.
Huge initial investment.PERFORMANCE (II) Diversity is initially negatively related with performance. 2001) 290 .DIVERSITY . subsequently positively related across emerging markets. conglomerate power Threshold level of diversification Performance Diversity (Khanna & Palepu. brand building Risk diversification.
It should have a spread of manufacturing facilities. It should think globally. HSBC). 291 . revenues and profits.INTERNATIONAL IDENTITY MNC’s consciously engage in FDI in different parts of the globe to forge resource diversity as a distinct competitive advantage. It should have a spread of interest groups / stake holders. It should have a spread of assets. Characteristics – It should have a spread of affiliates or subsidiaries. act locally (Eg.
Feminity Index .GLOBAL BUSINESS ENVIRONMENT Power Distance – It reflects the disparities in income and intellectual development (Eg. low power distance in developed markets and vice versa for emerging markets). 292 . low group scale in developed markets and vice versa for emerging markets). Risk Profile – It reflects the risk attitude of the top management (Eg.It reflects the relative role of team building (Eg.It reflects the disparities in women in workforce (Eg. high feminity index in developed markets and vice versa for emerging markets). low risk profile in developed markets and vice versa for emerging markets). Group Scale .
customs. high cultural adaptability in developed markets and vice versa for emerging markets). FOREX reserves.culture. inflation. flexibility (Eg. attitude. interest rates. currency. 293 . corruption. time value. dress sense. code of conduct.GLOBAL BUSINESS ENVIRONMENT Cultural Adaptability – It reflects the adaptive ability to a changing environment . low country risk in developed markets and vice versa for emerging markets). way of life. terrorism (9/11). credit rating. judiciary) of doing business in a particular country (Eg. political stability. Country Risk – It reflects the political and economic risk (Eg.
time-zones. Other factors – local celebrations. however.GLOBAL BUSINESS ENVIRONMENT Time Sensitiveness – Developed country managers regard time as precious. High levels of ethnocentrism usually has a negative effect on business. Language Barriers – Developed country managers expect foreign partners to communicate in their languages. and vice-versa. in most emerging markets use of an interpreter may be a standard protocol. in most emerging markets meetings are delayed and lasts unusually long. 294 . Ethnocentrism – Developed country managers tend to regard their own culture as superior.
295 . In 1995 (Uruguay Round) GATT was renamed to WTO. It a multi-lateral treaty with 143 (as on 2002) member countries to reduce tariff and non-tariff (quota) barriers. It also highlighted the nexus between US & WTO. It also initiated provisions on anti-dumping. It focused largely on TRIPS (patents. ASEAN. 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. The 1999 (Seattle Round) saw a lot of protest amidst bringing agriculture under the purview of TRIPS. trademarks). copyrights.
The Euro was significantly devalued against the Dollar till 2002.e. three countries joined in 2002 increasing it to fifteen members as of 2008.e. However with current recession in the US 2002 onwards.Pound). the Dollar still remains the most preferred currency globally. Sterling . primarily the OPEC countries. However.EURO – SINGLE CURRENCY In 1999 twelve member countries in Europe joined hands to move over to a single currency (i. The notable exception was Great Britain which still continues with its local currency (i. the Euro slowly started outperforming the Dollar. 296 . Euro).
it helps avoiding transaction costs associated with a multiple currency. However. but it may have spill-over effects. Trade Block – It will strengthen the EU identity which would not have been possible otherwise.SINGLE Vs MULTIPLE CURRENCY Transaction Costs – Though the initial cost of introduction of a single currency is very complicated and costly. Rate Uncertainty – A single currency eliminates the risk of competitive devaluations. 297 . Transparency – A single currency is transparent and competitive. a multiple currency is preferable where the business cycles of member nations are different.
– FDI (transfer of tangible resources) is slow but steady for the purpose of economic growth.FII Vs FDI INVESTMENT Classical economists believed that foreign investment (in any form) is basically a zero sum game (i. – FII (transfer of intangible resources) is fast but may have strong repercussions (i. Neo classical economists believe that foreign investment may in fact be a win-win game.e. It is short-medium term with comparatively low levels of commitment. It is long term with high levels of commitment. the gain of one country is loss of another).e. 298 . hot money).
buying patterns (spread). economic (middle class buying power). customer awareness (microwaves). Distribution – It depends on the market characteristics (fragmented – concentrated). . lifestyle (petroleum 299 outlets – departmental stores). promotion (surrogate advertising).INTERNATION MARKETING Product – The various attributes of a product may receive different degrees of emphasis depending on differences in . technology (microchip).culture (food habits). usage (talk time). Pricing – It depends on the competitive structure (PLC – Kellogg's).
India) may be different from that another trading country (US – GAAP or IRS). Cost Structure – Companies in India need to investment in fixed costs due to poor infra-structure 300 compared to developed markets.INTERNATION FINANCE Currency Risk – Many Indian IT companies (Rs) having business in US (Dollar) are asking for quotes in (Euro) or are shifting bases out of US to avoid risk of devaluation of Dollar. equity is cheap in India). Leverage – The leverage may vary across countries depending upon money and capital market conditions (Eg. . Accounting Norms – The accounting norms of one country (AS . debt is cheap in US.
and cultural barriers (language) vis-à-vis emerging markets. 301 . Training – It is a pre-requisite for international business to reduce language.INTERNATIONAL HR An uniform HR policy is idealistic to enable parity in performance appraisal. double taxation. shortened life cycles). social security. skills are more important that cultural fit and vice-versa. however. Recruitment – In local recruitment. Compensation – Differential pay packages exists because of differences in purchasing power. technology (convergence. labour laws. in most cases it is not desirable nor practiced.
Bosch spark plugs are used by car manufacturers worldwide). reduce power costs) vis-à-vis infrastructural bottlenecks. Technology – The cost to be evaluated in terms of latest technology (Euro VI) vis-à-vis effective cost of appropriate technology (Euro II). . SCM – Use of ERP to network the extended enterprise 302 across the globe. Outsourcing – A company having a core competence may be the source of global outsourcing (Eg.INTERNATIONAL OPERATIONS Location Incentives – FDI in emerging markets should explore options for SEZ’s to explore benefits (tax holidays.
CONTEMPORARY TOPICS 303 .
304 .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. Innovations typically paves the way for more secured and improved lifestyle for consumers in general. Innovation is all about staying ahead of competition. but has inherent risks involved as well. While innovation typically adds value for organizations. Innovation is the most preferred strategy today to maintain competitive advantage in the present turbulent business environment. it has destructive effects as well.
305 . Tangible impact of product innovation on performance is significantly higher than process innovation. However. While product innovations are typically customer driven. process innovation is necessary to sustain the competitive advantage of product innovation. Strategic innovation has the potential to change the rules of the game. Process innovation usually follows product innovation.TYPES OF INNOVATION A key challenge is maintaining a balance between process and product innovations. process innovations are organizational driven.
e. a paradigm shift). It leads to a shift in the price – performance envelope. putting an idea into practice). Medical Surgery (Lasik).BUSINESS MODEL It is a simplified description and representation of a complex real world. Innovations are the back-bone of successful business models . 306 . Data Storage (Pen Drives). about how an organization makes money (i. Telecom (CDMA Technology). Disruptive business models brings in a new frame of reference (i.e. Drug Development (Bio Chemicals). Processors (Pentium).
The segment(s) of clients to be addressed. The key activities / processes necessary for execution. The key partners involved in the activities. 307 .NINE BUILDING BLOCKS Value proposition offered to the market. The revenue streams generated by the activities. The cost structure resulting from the business model. The channels to reach out to the clients. The proposed relationships established with clients. The key resources and capabilities required.
BUSINESS MODEL FRAMEWORK 308 .
innovative companies to carve out unique business models to fend off competition. With the rapid erosion of certain industries (IT. It involves – Product Visualization – Product Prototype – Product Test – Capacity – Pricing – Distribution. 309 . It is just one piece of the puzzle. The revenue model described here are the means to generate revenues. Real Estate) companies need to untangle and understand the intricacies of their business model.REVENUE MODEL Positioning is just not sufficient. Investment Banking.
Have a lean and a flat organization structure. Promote the grape-vine. Provide reasonable incentives (not necessarily monetary). 310 . Allow the management sufficient slack to be future oriented. Promote the culture of experimentation. A favourable intellectual property (IP) climate. 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.
companies are increasingly relying on internal protection to sustain innovation effects. The most preferred strategy of internal protection includes imbibing “causal ambiguity” in the production process to make reverse engineering difficult.HOW TO PROTECT INNOVATION? Without adequate protection (external or otherwise) the effects of innovation does not translate to performance. Collusion with the judiciary is also another distinct possibility in emerging markets. In most emerging markets where the IP climate is not so favorable. 311 311 . however that possibility is slowly atrophying.
In fact the principles of corporate governance implies that managers go beyond in satisfying the stated and unstated needs of the multiple stakeholders. 312 312 . Corporate governance aims to reduce the principal-agent problem present in most professional managed organizations through appropriate forms of accountability and control mechanisms.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.
From the strategic point of view managers tend to diversify into unrelated businesses as it provides higher returns hence a more favourable appraisal. also known as the principal-agent problem or agency dilemma. not present in portfolio diversifications. shareholders can diversify their portfolio at a much lesser risk and cost. However. 313 . According to the agency theory top managers and shareholders interests are usually conflicting in nature and tend to pull in opposite directions.AGENCY THEORY The root of Corporate Governance goes back to the Agency Theory. This exposes the shareholders to additional risks and higher costs.
SEBI Report – 2005. 2002 to restore public confidence in corporate governance. various laws were enacted to ensure proper usage of these funds. . the US government passed the Sarbanes – Oxley Act.ORIGIN & CONTEXT Since the early 20th century since a large part of public funds were held by publicly traded firms in the US. defines corporate governance (headed by Kumar Mangalam Birla) as the acceptance by management of the inalienable rights of shareholders as the true owners of the corporation and of their own role as trustees on behalf of the 314 shareholders. After the Enron downfall.
Interests of other stakeholders: Recognize the legal and other obligations of all legitimate stakeholders. The key roles of chairperson and CEO should not be held by the same person and their offices be clearly separated.GOVERNANCE PRINCIPLES Rights and equitable treatment of shareholders: Help shareholders exercise their rights by effectively communicating information in transparent ways that is understandable and accessible and encouraging shareholders to participate in general meetings. Role and responsibilities of the board: It deals with issues about an appropriate mix of executive and nonexecutive directors. including the society at large. 315 .
GOVERNANCE PRINCIPLES Integrity and ethical behaviour: Organizations should develop a code of conduct for their top management that promotes ethical and responsible decision making. assessment and mitigation of risks and retirement by rotation over a fixed period of time. Independence of the entity's auditors: Identification. Disclosure and transparency: Disclosure of information should be timely and balanced to ensure that investors have clear access to data and facts.. They should also implement systems to independently verify and safeguard the integrity of the company's financial reporting. 316 316 .
with its legal authority to hire. they should provide no mechanism or scope for opportunistic behaviour. a person benefitting from a decision should abstain from it. discussed and resolved. 317 . Regular board meetings allow potential problems to be identified. However. safeguards invested capital.GOVERNANCE STRATEGIES Monitoring by the board of directors: The board of directors. fire and compensate top management. Remuneration: Performance-based remuneration is designed to relate some proportion of salary to individual performance. Balance of power: The simplest balance of power is very common.
and was responsive to investors' requests for information on governance issues. undertook formal evaluation of its directors. who had no management ties. They defined a well-governed company as one that had mostly out-side directors. McKinsey found that 80% of the respondents would pay a premium for wellgoverned companies. 318 . The size of the premium varied by market. Egypt and Russia) to around 40% for Canadian & European companies. from 10% for companies where the regulatory backdrop was least certain (those in Morocco.GOVERNANCE & PERFORMANCE In its “Global Investor Opinion Survey” of over 200 institutional investors in 2002.
today economic institutions are considered as a major drivers of improvement in quality of life in general and therefore needs to include multiple stakeholders. Therefore. Over a period of time.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. The basic premise is that firms cannot exist in vacuum. 319 . However. corporate philanthropy should be a part of every corporate mission.
giving a very important message that one cannot exist without the other. “a healthy business cannot exist in a sick and impoverished society”. Therefore.CORPORATE SOCIAL RESPONSIBILITY As Peter Drucker rightly pointed out that. However. economic and social responsibilities cannot be mutually exclusive. the debate on CRS still continues whether firms should detract its focus from its business? 320 . in fact a large part of it is significantly overlapping. CSR can be defined as. “an enterprises decisions and actions being taken for reasons at least partially beyond its immediate economic interests”. Therefore.
MRTP). 321 . Fear of government interference: Excessive quench for profits may lead to build up of adverse public opinion compelling the government to intervene (Eg. people are becoming increasingly aware of their right to a decent and healthy life. The role of media: The media and various consumer organizations have come up in protecting consumer rights and exposing mal-practices.GROWING CONCERN FOR CSR Awareness due to education: With growing literacy. Public image: Entrepreneurs are increasingly relying on public image as a source of competitive advantage and a higher financial discounting.
Paper packaging. Aditya Birla Research Centre – LBS).CSR STRATEGIES Green Supply Chain Management: It includes environmentally preferable purchasing. Exide – Product take back). Education. Refrigerators – CFC. Literacy & Training Programs – (Eg. Health & Hygiene – Attending the health hazards due to wastes and by-products to employees and society in proximity (Eg. designing eco-friendly products. 322 . Tata Steel – Life Line Express). and extended producer responsibility (Eg. Cement . eco efficiency.
Strategic innovations leading to disruptive business models can show the way out.BOTTOM OF THE PYRAMID With the market across most developed markets including the US getting saturated. In turn companies by serving these markets. 323 . They represent an enormous opportunity for companies who learn how to serve them. Prahalad notes that future markets exist collectively. K. across the world's billions of poor people having immense untapped buying power. C. they're helping millions of the world's poorest people to escape poverty.
BLUE OCEAN STRATEGY 324 .
MARKETSPACE .TWO WORLDS 325 .
In today’s red oceans. where most industries are saturated. one companies gain is always at the 326 cost of another companies loss. They have fought for profits. . profitable growth.WHAT IS RED OCEAN? Companies have long engaged in head-to-head competition in search of sustained. and struggled for differentiation (cost or product). battled over market-share. Yet in today’s overcrowded industries. competing head on results in nothing but a bloody red ocean of rivals fighting over a shrinking profit pool.
Such strategic moves are possible through the pursuit of product differentiation and low cost simultaneously. but by creating blue oceans of uncontested market space ripe for growth . It helps in creating powerful leaps in value for both the firm and its buyers. it will exist 327 in the future as well. rendering rivals obsolete and unleashing new demand. It is only the frames of the . Blue Ocean’s have existed in the past.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 .
As trade barriers between nations & regions fall. of European nations. Population shrinkage across a no.BLUE OCEAN STRATEGY IMPERATIVES Prospects in most established market spaces – red oceans – are shrinking steadily. Demand across developed markets reaching a plateau. information imperfections atrophy instantly. Technological advances have substantially 329 improved industrial productivity. . Niche markets & monopoly havens are continuing to disappear.
History indicates that blue oceans exist in three basic industries – automobiles (how people get to work) – computers (what people use at work) – entertainment (what people do after work). Company & industry are the wrong units of 330 strategic analysis. managerial moves are.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. They are not necessarily about technology. Incumbents often create blue oceans within the ambit of their core business.
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 .
Sony Play Station: Redefining machine-human interface in entertainment and targeting an altogether new user base. Citibank – Automated teller machines & credit 333 cards. . Southwest Airlines: Pioneering the concept of LCC.SOME GLARING EXAMPLES In the last century authors Kim and Mauborgne have documented the creation of more than 150 blue ocean creations across 30 industries – Virgin Atlantic: Fractional jet ownership or travel to space.
According to this view managers need not be constrained to act within the confines of their industry. 334 . 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. Off late emerging views in strategy having its origin in (Organization Theory) led to a paradigm shift to what is called the – reconstructionist view. companies & managers are largely at the mercy of economic forces. According to this view.
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