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Course Code: 611 & 612 Dr. Subir Sen – Faculty Member, IBS
E-Mail: firstname.lastname@example.org, 9830697368 1) Crafting & Executing Strategy – Thompson & Strickland. 2) Strategic Management – Pearce & Robinson. 3) Strategic Management – Fred. R. David. 4) Exploring Corporate Strategy – Johnson & Scholes. 5) Competitive Advantage – Michael E. Porter. 6) HBR – Articles & Case Studies.
STRATEGY - DEFINITION
Strategy is all about making trade-offs between what to do and more importantly what not to do; consciously choosing to differentiate. It reflects a congruence between external opportunities and internal capabilities. Types of strategies – Corporate Strategies – It is all about making choices across various businesses and allocating resources among them. Business Strategies – It is all about developing leveraging and sustaining competitive advantage. Functional Strategies – It is all about finding newer ways to perform existing processes, or 3 better still adopting new processes altogether.
STRATEGIC MANAGEMENT DEFINITION
Strategic management attempts to integrate the traditional management functions and align the organization as a whole with the broader environment to make resource allocations in a way to achieve the strategic intent of the organization. This alignment is called strategic fit. It serves as a road-map for the organization in its growth trajectory. It provides the direction – extent – pace – timing. It depends on the turbulence of the environment and the aggressiveness of the organization. It distinguishes the winners from the losers.
PILLARS OF STRATEGIC MANAGEMENT
Differentiation – Differentiation of key inputs and technologies helps a firm to consciously move away from homogeneous to heterogeneous markets enabling them to earn super-normal profits from normal profits. Integration – Whenever dealing with a complex task of managing a business (i.e. involving a no. of variables with cross linkages) it is in the interest of simplicity that the task be broken up in smaller components. However, for effective control, integration is essential. Alignment – Since differentiation is prone to replication, it is in the interest of the firm to differentiate continuously by aligning the resources with environmental opportunities.
STRATEGIC MANAGEMENT FRAMEWORK
Economic al Strategic Finance Fit Political Strategic Intent Fit Political Marketin g Manageme nt Social & Cultural
It requires full commitment of the top management.STRATEGIC MANAGEMENT . It provides broad guidelines. It is long-term in nature. It is about adaptation and response to the same. It is all about creativity and innovation. It involves substantial resource outlay. 7 . It is a holistic and integrated approach. It is irreversible.FEATURES It forms the core activity of the top management.
It is fool-proof in nature. It involves only the top management. It about mere data and facts. It is rocket science. 8 . It brings instant success. It a bundle of techniques or even tricks. It is about forecasting. It involves nitty-gritty's. It is about a definite formula. It attempts to minimize risk.STRATEGIC MANAGEMENT – MYTHS It involves short-cuts.
9 To develop core–competencies. again and again ……. To be proactive. To gain expertise in technologies. To be future oriented. rather than reactive. To assimilate change faster.STRATEGIC MANAGEMENT IMPERATIVES To be continuously alert. To innovate. scale and scope. To leverage size. To be insulated against environmental threats. To generate large resource pool. To tap markets across boundaries. .
10 . In the ancient days battles were won not by virtue of size of the army or armory.ORIGIN The word strategy has its origin from the Greek word strategia meaning Military Commander.strategies.STRATEGY . but with a lot a rigour and robustness. Even in today’s markets. but by virtue of their courage. In contrast. obsession. whose origin can be traced to some of the greatest battles fought in the ancient days. It is an old wine in a new bottle. today's battles are fought over markets. battles fought on the market front are won by companies by virtue of their obsession & strategies. and more importantly . In the ancient days battles were fought over land.
Allied Forces Vs Germany (WW-II) – Strategy: Forging alliances.SOME PARALLELS Japan’s attack on Pearl Harbour – Strategy: Attack where it hurts the most. US attack of Morocco to capture Germany – Strategy: Pin-hole strategy – Wal-Mart challenging Sears by entering small towns. 11 . – Yahoo and Microsoft challenging Google. – Toyota’s entry in the US. – Reliance’s entry into telecom. Napoleon’s attack on Russia – Strategy: Waiting for the right time. challenging GM and Ford.
Industrial Revolution. The first major discontinuity in the history of global business environment was the . – Mass Production Organization Size – Complicated Processes – Complex Structures Evolving of an emerging paradigm – survival of the fittest (Fayol & Taylor. A paradigm is a dominant belief about how the business and its environment operates. 12 .EVOLUTION OF MANAGEMENT As Peter Drucker refers to it. 1910). a radical change in the business environment brings about discontinuity. The things happening around the firm when totally disconnected from the past leads to a paradigm shift.
– Changes in the technology fore-front. push to pull). Survival of the most adaptable becomes a new management paradigm (Ansoff. 1960). From uniform performance. – Homogeneous to heterogeneous products.e. – Affluence of the new customer (i. 13 .EVOLUTION OF STRATEGIC MANAGEMENT The second major discontinuity in the history of global economic environment – World War II. The question of outperforming the benchmark became the new buzzword. Efficiency and effectiveness are no longer sufficient. – Global market place. performance across firms became differentiated.
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 .
– It is primarily the top management’s prerogative. Ansoff (1960) – Strategy can be segregated into certain mutually exclusive and inter-related components aimed at managing the growth of an organization.APPROACHES TO STRATEGY Analytical Approach – Igor H. – 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. 15 . Learning always begin on a clean sheet of paper. – The choice of strategy is primarily concerned with external ones rather than internal ones.
who will be the top managers. Successful organizations align authority and responsibility of various departments in way to reach overall objectives. how it will compete. The organization initially decides which industry to enter. Once the control systems are in place. 16 . – The top managers then decide on the type of organization structure & systems to be in place. – Organization structure will precede and cause changes in strategy. everything else follows. – Management control systems has a dominating role in influencing firm performance.APPROACHES TO STRATEGY Design Approach – Alfred Chandler (1970) – Structure follows strategy.
new entrant. – The environmental forces comprises of – supplier. – A firms performance is inversely related with the bargaining power of environmental forces to which it is exposed.APPROACHES TO STRATEGY Positioning Approach – Michael E. 17 . competitors. – The organization will outperform the industry where environmental forces are weak and vice-versa. substitutes. – An organization is seldom in a position to influence the larger business environment. Porter (1980) – Choose a consumer segment and position your product accordingly. customer.
– Organizations can significantly alter the way an industry functions. 18 . locating in most attractive industries and pursuing the same strategy. Prahalad (1990) – The key to superior performance is not doing the same as other organizations. They are complex resources and undermines a firms competitive advantage. – It enables a firm to deliver unimaginable value ahead of time. – Core competencies are a set of skills that are unique and can be leveraged. K. but exploiting the resource differences among them.APPROACHES TO STRATEGY Core Competence – C.
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 .
A strategic intent is a statement of purpose of existence. It’s a philosophy that distinguishes it from its competitors. 21 . A gap that consciously manages between stagnation and atrophy. It is the cornerstone of an organizations strategic architecture reflecting its desired future state or its aspirations. A substantial gap between its resources and aspirations. It implies a significant stretch. It involves an obsession to be the best or outperform the best. It provides a sense of direction and destiny. you cannot reach there.STRATEGIC INTENT If you cannot see the future.
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 .STRATEGIC INTENT .
when radical changes in the internal and external environment (i. Dominant logic changes.DOMINANT LOGIC A dominant logic can be defined as the way in which the top management team conceptualizes its various businesses and make critical resource allocation decisions. 23 . It is core to the strategic intent of the firm. strategic variety) is apparent. To put it more simply. 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.e.
VISION It is a dream (not a forecast) about what the company wants to become in the foreseeable future. It is a combination of three basic elements – – An organizations fundamental reason for existence. – It stands for the unchanging core values of the company. but achievable aspirations. 24 . beyond just making money. It ensures that the company does not wander off into unrelated zones or fall into an activity trap. It enables the top management to remain focused. It provides an unity of purpose amidst diversity of personal goals. – It represents the company’s audacious.
clear. Brevity – It should be short.CHARACTERISTICS Reliance – Where growth is a way of life. In Reliance when a new project becomes operational top managers hand over charge to the SBU heads and move on to a new project. Reachable – It should be within a reasonable target in the known future. Sharing – The company across all hierarchies should have faith in it. Empathy – It should reflect the company’s beliefs to which it is sensitive.VISION . 25 . and memorizable. not an utopian dream. Clarity – Vividly descriptive image of what the company wants to be known for in the future.
It facilitates development of skills & capabilities. It gives a shared platform. It gives enlightment. It fosters risk taking and experimentation. It lends integrity and genuineness. 26 . It makes strategic alignment easier. It provides a holistic picture.VISION .ADVANTAGES To stay focused on the right track. It gives the impression of a forward-looking organisation. To prevent the fall in a activity trap.
27 . A broad mission statement helps in fending competitors. Although the purpose may change over time.MISSION Mission defines the space that a business wants to create for itself in a competitive terrain. its reason for existence. It is intuitive for managers to conceive their business in terms of the customer needs they are serving – What business are we in? – Which customer needs are we serving? It should be broad based and relevant to all stake-holders. It serves as a road map to reach the vision. It enables the firm to define its business landscape and identify its competitive forces.
– We do not offer insurance. We offer comfort. though some may seem unrelated in nature. Some other examples – We do not offer shoes. …………………. …………………. We offer solutions. …………………. – We do not offer software's. We offer strength. – We do not offer steel. All the businesses of the company are strongly integrated with their main business.MISSION – SOME IDEAS Reliance – We are in the business of integration. 28 . …………………. We offer security.
– It is based on Management by Objectives (MBO).100K crore company by the year 2005. – It lends direction – time frame in the medium term. – It helps identifying key success factors. 29 . – It keeps the mid management pre-occupied. – It provides a benchmark for evaluation. It is an end result (quantifiable) something a firm aims and tries to reach in a time bound frame. – It adds legitimacy and motivation. It provides a quantitative feel to an abstract proposition.GOALS & OBJECTIVES Reliance – We want to become a Rs. – It prevents deviation.
PLANS Reliance – Desire to invest 25K crore in telecom business by circa 2010. 30 . – Compress project times. It is specific to a particular business. and gaining access to desired markets to achieve the desired goals and objectives. – Use price-elasticity to break market barriers. coordinating appropriate technologies. – Acquire a market share of indomitable position. It is the process of garnering necessary inputs. – Leverage economies of size and scale. The details of the plan Reliance Telecom adopted were – Backward integrate process technologies.
In such a context. This state of affairs is known as strategic drift. past strategies tend to have a bearing on future strategies. However. strategies lose touch with the emerging realities.STRATEGIC DRIFT Due to top management commitment. Historical studies have shown that most organizations tend to continue with their existing strategies. equilibrium is maintained. radical change may lead to disequilibrium. It often leads to an organizational crisis. 31 . This tendency to restore continuity is known as inertia (resistance to change). When changes in the environment is incremental.
STRATEGIC DRIFT FRAMEWORK Environmental Change Degree of change Strategic Change Radical Change Incremental Change State of Flux Continuity Stage of Transformation Strategic Drift Stage of Atrophy Time 32 .
ORGANIZATIONAL POLITICS Strategic drift often leads to organizational politics. Some instances of organizational politics – Formation of powerful groups or coteries. 33 . – Using covert tactics to pursue self interests. – Creating a favourable image. – Creating obligations of reciprocity. – Distorting information to gain mileage. – Hiding vulnerability. – Developing a platform of support. Organizational politics involves intentional acts of influence to enhance or protect the self-interest of individuals or groups over organizational goals.
– Persons responsible for strategy conceptualization and implementation are34 divergent. – Influential stake-holders back out. .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. 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.
but as a defensible response to the complexities of a large organization that mitigate against publicizing goals. this is not to be treated as “muddling”. Learning is an integral part of logical incrementalism. but the master scheme of the rational comprehensive scheme is not apparent. They simply unfold the particulars of the sub-system in stages. Strategy formulation and implementation are linked together in a continuous improvement cycle.LOGICAL INCREMENTALISM According to the incrementalism approach (contrary to integrated approach) practitioners simply do not arrive at goals and announce them in crafted and well defined packages. 35 . However.
Leveraging Crisis – A sudden crisis or an opportunity should be used as a trigger to facilitate acceptance and implementation of change. The broader objective should serve the overall interest of the organization.IMPLEMENTING INCREMENTALISM General Concern – A vaguely felt awareness of an issue or opportunity. 36 . 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. Adaptation – As implementation progresses.
Dominant logic’s are the cornerstones of change when strategic transformation is apparent. Dominant logic’s are very rigid and sticky and prone to inertia. As it brings 37 with it a different dominant logic. . Tampering with surface level factors often leads to atrophy.STRATEGIC TRANSFORMATION Strategic transformation (a complete overhauling of the strategic architecture) becomes inevitable whenever a strategic drift takes place. It creates blinders. Strategic transformation becomes smooth through a change in top leadership.
– Informal Networks – Emerging of new ideas. Factors that fosters a learning organization – Pluralistic – An environment where different and even conflicting ideas are welcome. and skills that fosters experimentation and questioning and challenge around a shared purpose. 38 . – Organisational Slack – Enough free space. A learning organization must continuously focus on unlearning as well. experience. It helps prevent a strategic drift from occurring at the first place. – Experimentation – Fosters a culture of risk taking. – Constructive Bargaining – Agree to disagree.LEARNING ORGANIZATION A learning organization is capable of continual regeneration from knowledge.
ENVIRONMENTAL CONDITIONS Dynamic Scenario Planning Learning Organization Static Forecasting Decentralization Simple Complex 39 .
ANALYZING BUSINESS ENVIRONMENT 40 .
41 . gap analysis). Strategic planning is a function of discounting the future. It is reactive in nature. Strategic gap basically points towards a vacuum of where the organisation wants to be and where it is. It is pro-active in nature. It requires a quantum leap (i.e.PLANNING & STRATEGIC PLANNING Formal planning is a function of extrapolating the past. Competitive advantage provides the surest way to fulfill the strategic gap. It is based on the assumption of radical change. It points to a position of superiority with relation to competition. It is based on the assumption of incremental change.
Environmental scanning is very important component of strategic planning. 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. events. The world is flat. 42 . It is exploratory in nature.ENVIRONMENTAL SCANNING The environment is defined as the aggregate of conditions. and influences that affect an organizations way of doing things. Environmental factors can be external as well as internal to the organization. not guided by any boundaries. resources and ideas move unhindered.
but also to analyze the complex linkages across them. It is particularly important that PESTEL be used to look at the future impact of environmental factors. It is not intended to be used as an exhaustive list. 43 . Understanding the composite effect is critical.PESTEL PESTEL attempts to provide a broad framework on how the broader environmental forces affects an organization and influences the way it practices strategy. which may be different from the past impact. for which a holistic picture is required. It is important not only to identify the structural drivers of change.
Savings & Investment. Language Barriers. Social – Population Diversity. Social Values. Religious Sentiments. Fiscal Deficit. Government Attitude. Subsidies & Protection. Currency Stability. Monsoon & Food Grains Reserves. Economic – GDP. Economic Model. 44 .PESTEL FRAMEWORK Political – Government Stability. Inflation & Interest Rates. Literacy Levels. Infra-Structural Investments. Income & Age Distribution. Economic Cycles. Licensing & Quotas. FDI Inflows. Central – State Co-alignment. Capital Market & Forex Reserves.
Consumer Protection Laws. Technological Convergence. Research & Development. 45 . Waste Disposal & Emissions. ERP. Direct & Indirect Taxes. Obsolescence Rate. Environmental – Global Warming & CSR. Carbon Credits.PESTEL FRAMEWORK Technological – Innovation. Extended Producer Responsibility. Product Design. Legal – Monopolies Legislation. Pollution Control Laws. Patents. Employment Laws. Product Safety & Health Hazards. Non-Fossil & Alternative Fuels. Patent Laws. Environmentally Preferable Purchasing.
Structural Adjustments – Phasing out subsidies.VRS. Banking Sector Reforms. Rupee convertibility. FERA Liberalization. 46 . Abolition of import licenses. Capital Market Reforms. Encouraging exports. Dismantling price controls. Economic Reforms – Fiscal & Monetary Reforms. Curtailment of PSU’s. Exit Policy. New Trade Policy (NTP) – Lowering import tariffs. MRTP Liberalization. PSU Disinvestments.ECONOMIC LIBERALISATION New Industrial Policy (NIP) – Liberalizing industrial licensing. Encouraging FDI.
DISCONTINUITY Destabilization due to entrepreneurial freedom – Cocoon of protection disappears – Diversification spree – Existing notions of size shaken – Industry structures change radically – Economic Darwinism . Mergers & Acquisitions 47 .Survival of the fittest MNC Onslaught – Enhancing stakes – Power Equation – Joint Ventures – Technological Alliances – Take-over threat.
Consumerism Challenges on the technology front – Competencies become technology based – Investment in R&D become inescapable 48 .DISCONTINUITY Hyper Competition – MNC’s .Globalization – Cheap Imports & Dumping – Push to Pull Marketing Buyers exacting demands – Shortage to surplus – Price competition – Life-style changes – Stress on quality.
DISCONTINUITY Compulsion to find export markets – Identifying competitive advantage – Technological gap – Global presence – Depreciating currency – Exports Corporate vulnerability – It is no longer business as usual – Capital inadequacy – Lack of product clout and brand power – One product syndrome – Loss of monopoly 49 .
PORTER Threat of New Entrants Bargainin g power of Suppliers Competition from Existing Players Bargainin gBargainin power g of power of Suppliers Customer s Threat of Substitutes 50 .FIVE FORCES MODEL .
It should not only be used to understand the forces.FIVE FORCES MODEL ASSUMPTIONS The model is to be used at the SBU level and not at the industry level. incremental or otherwise. It depicts the attractiveness of an industry (i. The five forces have strong cross-linkages. but also used to understand how they can be countered and overcome.e. 51 . profit potential) per se. It is even wiser to apply the same at the product – market level. The model should not be used as a snapshot in time. the forces are subject to changes.
Threat of Customers – Buyer concentration and volumes. Unimportance of product quality. Capital requirements. Resource profile & fear of retaliation. Low relative importance of the segment. Undifferentiated product.PORTERS FIVE FORCES ANALYSIS Threat to Entry – Economies of size and scale. Access to distribution channels. Low customer switching costs. Low margins & stagnancy. 52 . Learning curve advantages. High switching costs. Presence of substitutes or unorganized sector. Scope for backward integration. Government policy. Industry stagnation. Product differentiation through proprietary technology or brand power.
Product perishability. Differentiated inputs. High customer switching costs. 53 . Threat of Substitutes – Improvement in price -performance trade-off. Jockeying for position – Fragmented market. Piracy and counterfeits. Buyer’s propensity to substitute. Lack of substitute inputs. Unorganised sector. Diversity of players. Intermittent overcapacity. Low level of differentiation. High exit barriers. Industry stagnancy. Produced by industries earning high profits. Low relative importance of the segment.PORTERS FIVE FORCES ANALYSIS Threat of Suppliers – Supplier monopoly. Scope for forward integration.
dominant or related diversified or unrelated diversified businesses (Infosys. Tata). Cohesiveness – Degree of bonding existing across affiliated firms. 54 . Inertia – Excessive commitment to past strategies prevents firms from tapping emerging opportunities. Resource Profile – It highlights the capabilities (generic) or competencies (business specific) of the firm.FIRM ENVIRONMENT Size and Scale of Operations – It is a very important component of competitiveness in today's global context (Bharti – MTN. Business Scope – The intention whether the firm wants to be in a single. Reliance).
Matured firms will always be positioned advantageously on the ECurve than new entrants. However. and with lower prices it can increase its sales volume. leverage it as a competitive advantage. which further reduces costs. an E-Curve can prove to be futile during discontinuity. experience teaches better and more effective way of doing things. The E-Curve thus enables organisations to build entry barriers. it can price its products more competitively. Experience curve has strong linkages with performance.EXPERIENCE CURVE The cost of performing an activity declines on per-unit basis as a firm becomes more efficient. With lower costs. 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 .
Case Studies – Structured Questionnaires. Websites. Suppliers. Customers. Acronym for Strengths – Weaknesses – Opportunities – Threats. Competitors. A SWOT audit involves – Company Records – Annual Reports. Observation. Interviews.VULNERABILITY ANALYSIS . It helps an organisation to capitalize on the opportunities by maximizing its strengths and neutralizing the threats minimizing the weaknesses. Press Clippings & Interviews.SWOT The framework was originally conceptualized by Kenneth Andrews in 1970. . 59 Analysts. Business Intelligence – Bankers. It is one of the earliest models in environmental scanning.
SWOT ANALYSIS .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 .
Strong R&D base – Eg. Engineering Skills – Eg. Aditya Birla. Infosys. Reddy’s. Caterpillar. Siemens. Economies of scale – Eg. Volkswagen. Motivated employees & cordial industrial relations – Eg. SBI. HUL. Large resource pool – Eg. Reliance. Tata Steel. Good credit rating – Eg. High quality products – Eg. Ranbaxy. Dr. Sony. Honda. Strong after sales & service network – Eg. Reliance. Toyota. ITC. Infosys. Biocon. Tata. Excellent penetration – Eg. 61 .SOURCES OF STRENGTH Strong brand identity – Eg.
Ballarpur Inds. J. Tatas. SAIL. Inertia – Eg. Procter & Gamble. Excess manpower – Eg. Inefficient top management – Eg. Bijoligrill. Narrow business scope – Eg. K. K. Strategic myopia – Eg.Raymond. Organizational Politics – Eg. Lack of product / brand clout – Eg. Hindustan Motors. Excessive diversification – Eg. B. Single product syndrome – Eg. CESC. Nirma. Group . Modi Group. Lacking experimentation culture – Eg.SOURCES OF WEAKNESSES Outdated technology – Eg. CMC (Tata Group) 62 .
VRS. Abolishing CCI. Life style changes – Eg. Growing population – Eg. Insurance. Telecom. Globalization – Eg. Fertilizer. Retailing. Fertilizers. Maruti. Sugar. Exit Policy – Eg.SOURCES OF OPPORTUNITIES Delicensing of Industries – Eg. Capital market reforms – Eg. Sugar. Abolishing MRTP – Eg. Middle-class buying power. GDR’s. Market driven Pricing – Eg. Free pricing – Eg. 63 . Collaborations & Joint Ventures – Bharti & WalMart. Market driven Interest rates – Eg. ECB’s.Tata Motors. Banking.
Bajoria – Bombay Dyeing. Hostile take-over – Eg. (1985–1990). Economic recession – Eg. Nationalisation – Eg. Onida. 64 .SOURCES OF THREATS Political instability – Eg. Dumping from China. 11/9. Tata Steel. Earth Quake.Social activism – Eg. Import relaxation – Eg. Tsunami. Terrorist attacks – Eg. (2008). Natural disaster – Eg. Foreign Direct Investment (FDI) – Eg. 26/11. Group disintegration – Eg. Singur SEZ. Satyam. Reliance. Land acquisition . Lack of Corporate Governance – Eg.
time series. Strategic responses (including adaptation) to opportunities and threats is critical for survival and success. Holistic view – Prepare a complete overall picture. Delphi's technique.ETOP Acronym for Environment – Threat – Opportunity – Profile. Stages in ETOP analysis – List the aspects of the environment that has a bearing on the organization. Forecasting – Predict the future (i. 65 . scenario analysis). It represents a summary picture of the external environmental factors and their likely impact on the organization.e. Assess the extent of impact of the factors.
66 Vertical integration is a powerful strategy.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. selectively. . Some key findings on major performance drivers that explains 75% deviations in performance – Product quality and relative market share. It is also a form of assessing vulnerability through longitudinal analysis. High investment intensity acts as a drag. An organization can draw upon the experience of its peers in similar situations. Relative attractiveness of the market.
.PIMS . Managers should be particularly cautious while referring to such data during times of discontinuity as it makes past patterns futile. – Contexts may vary across countries. Authenticity of data is of prime importance – Contexts drawn across one organization may not be applicable to another. – Contexts may vary over time. 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. As every organization is unique in its own way.
It enables the top management to draw focus. 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 .
IDENTIFYING ALTERNATIVE STRATEGIES 69 .
national. It indicates the quality of growth an organization is looking for. A corporate strategy identifies and fixes the strategic gap it proposes to fill. 70 .CORPORATE . dominant.GRAND STRATEGY It is concerned with the overall business scope (single. unrelated) and geographical scope (local. It reflects the customer needs it intends to satisfy. It provides broad direction to the groups vision and mission. related. global) of a firm and deals with choices of allocating resources across them. It determines the locus a firm encounters with internal and external environment.
CORPORATE STRATEGY MATRIX Corporate Strategy Stability Stability Growth Growth Combination Diversification Divestment Intensification Market Penetration Related Vertical Market Development Product Development Unrelated Horizontal 71 .
(Eg. does not relate to do-nothing (Eg. – The firm may not be willing to take additional risk associated with new projects. Hindustan Motors). The scale and scope of present operations remains almost intact.STABILITY It involves maintaining status-quo or growing in a slow and selective manner. Citibank). – To stop for a while and assess past records. – Why disturb the existing equilibrium set up? – Limited resource position. erosion of capabilities. Stability however. Even during adverse times firms need to adopt a strategy to sustain current performance levels. 72 . The reasons for stability strategy – – Lack of attractive opportunities.
ANSOFF’S MODEL New Product Existing Product Existing Market Market Penetration (+) Product Development (++) New Market Market Development (++) Diversificatio n (+++) Note: (+) indicates degree of growth and risk involved. 73 .GROWTH .
Market penetration can be achieved by – increasing sales to current customers. convert competitors customers. – Helps firms which are not comfortable with unfamiliar terrain. – Elongated product life-cycle. – Suitable for industries where scope for technological breakthrough is limited. Britannia). Ujjala. (Eg.MARKET PENETRATION It is a strategy where a firm directs its entire resources to the growth of a single product or a closely knit product set. 74 . direct non-users to users. Nirma. within a well defined market segment. – The company carries a risk of product obsolescence.
carpets. tyres. – Immense customer reach & flexible advertising.…… or Teflon: aircraft technologies to cutlery to paints or Raytheon Corp – Microwaves: radars to kitchen appliances). 75 . Du Pont – Nylon: parachutes. – Creativity and innovation – thinking out of the box. fabrics. upholstery. – Stretches product life cycles. – Moves across geographical boundaries.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. (Eg. socks & stockings. – Unconventional and flexible distribution channels.
PRODUCT DEVELOPMENT It is a strategy where a firm tries to achieve growth through a radical new product (Eg. – Areas of product improvement – performance. – Deliverable through – redesigning or reengineering. Close Up: Fluoride – Gel toothpaste or VIP . perception. Refills) 76 . features. aesthetics. durability. Microsoft: DOS to Windows) or a substantial improved version (incremental) of an existing product to repeatedly enter the same market (Eg.Strolleys). – Leveraging through – innovation. conformance. reliability. – Leverage on customer and brand loyalty. – Substitutes that serve the same needs (Eg. serviceability.
DIVERSIFICATION It marks the entry of a firm into newer markets with new products. – Conglomerate or market power (i. Why do firms diversify in the Indian context? – Shift the growth trajectory or opportunistic. – High transaction costs and institutional gaps. 77 . dominance). licenses (i. From the traditional point of view.e. thereby creating a new business. – Risk reduction. industrial embassies). the new business is distinct from the existing business in terms of – inputs – technologies – markets. – Permits: quotas.e. – Internal capital market. From the modern point of view they are strategically dissimilar.
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%. Let us assume that there are two businesses constituting the entire market – coffee and icecream. while the coffee business would register a return of 10%.HOW DIVERSIFICATION REDUCES RISK? Consider a hypothetical planet. while the coffee business would register a return of 30%. cold wave dominates the planet. If on the other hand. the ice-cream business would register a return of 30%. either of which is equally likely to prevail. What would be your ideal diversification strategy through optimization? 78 .
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.
Usually the firm concentrates on its core activities.QUASI & TAPERED INTEGRATION Full Integration . Dr.A firm produces part of its own requirements and buys the rest from outside suppliers with a variable degree of ownership and control. Quasi-integration . Maruti – Sona Steering). Reddy’s). Tapered integration . Reliance). 85 . Ranbaxy.Where one firm has full ownership and control over all the stages of a value-chain in the manufacturing of a product (Eg.A firm gets most of its requirements from one or more outside suppliers that is under its partial control through value chain partnerships (Eg. and out-sources the noncore activities (Eg.
A CASE OF TAPERED INTEGRATION Partial Ownershi p Transmission Engine Design Electricals Steering 86 Seats & Carpets Windscreen Ordinary Components Zero Ownership Very Critical Component s Full Ownership Critical Component s .
– Cost of neglect (i. lack of knowledge of competitive forces).e.e.e. myopia).e.CONGLOMERATE DIVERSIFICATION It relates to entry of firms into businesses which are distinct in terms of – inputs – technologies – markets. 87 . synergies pulling in opposite directions). core business). lack of strategic intent. – Cost of dysynergy (i. – Cost of ignorance (i. and are also strategically dissimilar. Drawbacks of unrelated diversification – – Cost of failure (i. Firms usually engage in conglomerate diversification when emerging opportunities are very attractive and offers potential growth opportunities.
CONGLOMERATE DIVERSIFICATION Paper & Packaging Edible Oils Tobacco Hotels Food & Confectionary 88 .
DIVESTMENT Divestment is a defensive strategy involving the sale of entire stake (Eg. (Eg. Glaxo’s “Glucon-D” to Heinz). L&TCement Division to Aditya Birla Group) technically known as divestiture or a product (Eg. Tata Press). Tata Pharma. It is may also be a pro-active strategy. It taken into account when performance is disappointing (i. ACC) in full to an independent entity.e. where a company simply exits because the business no longer contribute to or fit its dominant logic. Tatas sale of Goodlass Nerolac. In strategy there is no scope for sentimentality with divestment. reactive) and survival is at stake and the firm does not have resources to fend off competitive forces. 89 . It may also involve a SBU (Eg.
involving 608 pence per share). However. Hive-Off – A hive off is the creation of a new entity followed by transfer of assets. 1956 does not permit this mode. (Eg. where 100% of the assets (including intangibles) are valued and paid for. Leveraged Buy-Out (LBO) – Here the company’s shareholders are bought out through a negotiated deal using borrowed funds.3 billion.DIVESTMENT . Tatas buy-out of Corus for US $ 11. 90 . Sale of Diamond Beverages to Coca-Cola for US $ 40 million). (Eg.ROUTES Outright Sale – Popularly known as the asset route. where the equity is allotted amongst the existing shareholders on a pro-rata basis. the Companies Act.
joint ventures). A combination strategy can be implemented through green-field projects (i.e. developing facilities right from the scratch) or through brown-field projects (i.e. mergers and acquisition. It is usually pursued by a business group with diverse interests across multiple industries. There can be no ideal strategy for every business. 91 . because every business has its own unique external and internal environment. and divestment strategies applied simultaneously or sequentially for a portfolio of businesses. growth.COMBINATION STRATEGY It is a mixture of stability.
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. What then is the magical number? 93 . In most cases the trade-off is between resources and opportunities. 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. Dominant logic enables top managers to selectively scan the environment and make trade-offs.
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 . To identify the right problems. managers need to ask the right questions. if addressed. The key task before a top manager is to identify the right problems. They must choose problems which will lead to the right kind of opportunities.SELECTIVITY IS THE KEY The role of a top manager is not to solve a problem. nor is to a define a problem for others to solve. will help the firm achieve its intent.
95 Succession planning is critical to continuity. Their roots can be traced to a single family or clan and share broad similarities. formal and informal ties. Managing Agency).e. business houses in India. embassies). Proximity to the corridors of power (i. Their origins can be traced back to market imperfections existing in an economy (MRTP Laws. chaebols in Korea. High degree of centralized control (GEO. Resource sharing.BUSINESS GROUP . BRC). keiretsus in Japan. .DEFINITION A business group is known by various names in various countries – guanxique in China. Licenses & Quotas.
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 .
there are high costs associated with entry and exit. next only to choice of business. sometimes impossible. Rules of the game are different. Power and resources often goes hand in hand. 99 . Investing in emerging businesses may not actually be so simple as it appears to be.PORTFOLIO ANALYSIS Resource allocation across a portfolio of businesses is an important strategic choice. Why? Businesses are not about liquid assets. therefore. Redeployment of resources upsets the established power bases of a group. Relatedness across resources are difficult to realize.
BCG GROWTH MODEL Relative Market Share (%) Industry Growth (%) Low High High Low Stars Question Mark ? Cash Cow Dogs 100 .
market penetration. Tata Telecom. TCS. Trent. Tata-AIG). diversification). provided the company is able to build up on its market-share (i. provided the industry growth rate continues and the company is able to maintain its growth (i.e. but to larger extent than a question mark.BUSINESS ANALYSIS – TATA GROUP Question Marks – They have potentials in the long term. product development). market development. Stars – They achievers in the near term. Tata Steel).e. 101 . which remains a big? These businesses are net users of resources. These businesses are also net users of resources (Eg. and their risk profile is high (Eg.
Given that the growth potential in the business is low.e. 102 . they are generators of resources. divest) as achieving a dominant position in these businesses is a difficult task. Tata Tea. Groups prefer to dispose off such businesses (i. cash cows may also need to invest provided the industry takes an upswing (Eg. Dogs – They are a drag on the group. and the company dominates the industry ahead of competition (i. Tata Press). However.e. harvest. Tata Motors. Tata Pharma. Nelco. 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. Tata Chemicals). stability). Indian Hotels.
HUL).BCG . Cash cows may actually need substantial investments to retain their market position (Eg.e. The model does not provide specific solutions within a particular category. Cartier. factors are limited. Certain businesses in the low market share category may be the result of a conscious strategy (i. The terminologies used are somewhat prohibitive. niche – Rolex. Data may be prohibitive. Armani). 103 .LIMITATIONS It does not address the concerns of a business which is in the average category (usually the majority). neither in high or low. Mercedes Benz.
MATRIX Distinctive Capabilities Strong High Medium Weak Stability Industry Attractiveness Diversify (++) Intensify (+) Med Intensify(+) Stability Harvest (-) Low Stability Harvest (-) Divest (.GE .-) 104 .
ARTHUR’ D. LITTLE Inception Dominant Strong Favourable Tenable Weak Growth Maturity Decline Improve Selective Niche Abandon Industry Life-Cycle Divest Harvest 105 Competitive Position Invest Consolidate Hold .
SHELL – DIRECTIONAL POLICY MATRIX Business Sector Prospects Attractive Average Unattractive Generate Cash Phased Withdrawal Distinctive Capabilities Strong Market Leadership Try Harder Double Or Quit Growth Average Custodial Weak Phased Expand Withdrawal Divest 106 .
SBU – A business unit which is strategically different from another and also shares a different SIC code. BCG – Boston Consulting Group. 107 . Disinvestment involves selling in phases. Gap Analysis – It emphasizes what a firm wants to achieve. Portfolio – An organization is perceived as a portfolio of businesses.TERMINOLOGIES Harvest – It entails minimizing investments while trying to maximize short-run profits and cash flow with the intention to exit the business in the near future. Divest – Selling a part or the entire business at one go.
BUSINESS STRATEGY & COMPETITION 108 .
109 . rent).COMPETITIVE STRATEGY A competitive strategy deals with how a firm competes in a particular business or product-market segment. Competitive advantage is the back-bone of strategy. The principal focus is on meeting competition. building market-share.e. The strength of a firm in a particular business usually stems from its competitive advantage. and earning super-normal profits (i. Competitive advantage refers to a firms resources or activities in which it is way ahead of competition. Such resources or activities should be distinctive and sustainable over time.
preventing new entry and/or competition (Hax & Wilde).BUSINESS STRATEGY FRAMEWORKS How to be distinctive and yet sustainable – Differentiation – Understanding of the dynamics of competition. identifying critical success factors. Blue Ocean – Consciously moving away from overcrowded industries to uncharted territories and making competition irrelevant (Kim & Mauborgne). developing competitive advantage (Porter). leveraging (Prahalad). Resource Based View – Obsession with competence building. Delta Lock In – Two dominant players co-opt to selfreinforce and create or escalate an entry barrier. 110 . involving harmonizing and integrating multiple streams of technologies.
backward integration.PORTERS – COST LEADERSHIP Cost Leadership – It is a strategy that focuses on making a firm more competitive by producing its products more cheaply than its competitors. Ayur. Reliance) or may pass it to customers to increase market-share (Eg. preferential access to raw materials. 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. T-Series). 111 . proprietary technology. Locational or early entry advantage. Steep experience curve effects. Nirma.
Creativity.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. Means of product differentiation are peculiar to each industry. and sufficient slack. Sony. undeterred attention to quality. Successful product differentiation is often followed by premium pricing. innovation and out of the box thinking. Culture of experimentation. Feeling the pulse of the customer. Intel. Rayban). avoiding brand dilution. 112 . It selects one or more attributes that buyers perceive as important. Focus on brand loyalty. (Eg.
though it may not possess an overall competitive advantage. Rolex. A focuser seeks to achieve a competitive advantage in its target segment. They are poorly served by mainstream players. Cartier. Sub optimization alone may not be a source of superior performance. coupled with fear of structural erosion.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. The target segment must have unusual needs or the delivery system catering to this segment must be unique. Maybach. Mont-Blanc. 113 . Armani).
COMPETITIVE POSITIONS Competitive Advantage Cost Differentiation Product Differentiation Competitive Scope Broad Cost Leadership (Toyota) Product Differentiation (General Motors) Narrow Cost Focus (Hyundai) Differentiation Focus (Mercedes) 114 .
similarly differentiation may not always lead to rising costs (i. and usually outperforms a stand alone generic strategy. Tata Nano). jugaad or frugal engineering). in a hyper competitive context the two strategies need not be mutually exclusive. Firms focusing on a hybrid strategy typically aim at shifting the productivity frontier and recreating a new product-market segment altogether (Eg. 115 .e. Reducing cost does not always involve a sacrifice in differentiation. Though cost leadership and differentiation are inconsistent.HYBRID STRATEGY A hybrid strategy is the simultaneous pursuit of cost leadership and differentiation.
It will have a competitive disadvantage vis-à-vis a clearly positioned generic player. 116 . leading to what is called – straddling. It tries to compete through every means. but achieves none. Industry maturity will usually widen the gap. unless such a player is capable of discovering a profitable segment.STUCK IN THE MIDDLE A firm that engages in a hybrid strategy and fails to achieve a competitive advantage because it was ill conceived will be . It is usually the result of a firm not willing to make trade offs.stuck in the middle. The positioning therefore gets – blurred.
radical environmental changes. leading to a blurred productivity frontier and steep learning curve. Artificial intelligence). (Eg.EMERGING INDUSTRY Emerging Industry – An evolving industry characterized by . ending in a differential cost economics. technological innovations. Nano technology.) Excessive turbulence in the dynamics of the environment. 117 . First-time buyers. 3D imaging. Speech recognition software's. Eg. Consumer behaviour pattern unstable and evolving. coupled with low penetration levels. changing customer needs. It is characterized by – High level of technological uncertainty. There is a lot of scope to define the rules of competition. Market segmentation not well defined.
Consumer durables. High exit barriers because of huge investment in CAPEX.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). It is characterized by – Low entry barriers. Scope for players to change the rules of the game. Eg. Eg. because of lack of economies of size and scale. MRTP may also cause fragmentation. Paints. Eg. Diverse customer needs. IT. leading to clear fragmentation. 118 . Government regulations in the form Eg. Air Conditioning. Retail and telecom.
distribution networks. well defined consumer behavioral patterns and imperfect competition leading to near monopoly. technological maturity.technological maturity. because of economies of size and learning curve effects. established industry dynamics. Cartel among existing players through collusion. Limited scope for innovation . 119 .MATURED INDUSTRY Matured Industry – An industry characterized by saturation in growth rates. Firms are rule takers in the segment as productivity frontier is well defined. collaboration and co-option. early entry and location advantages. Strong entry barriers.
(Eg. backed by corporate espionage. Learning abilities have been stunted and firms adverse to investment in R&D and make fresh investments. Typewriters. Nature of competition extremely high.DECLINING INDUSTRY Declining Industry – An industry which has outlived its utility due to the entry of close substitutes and or radical product innovations which results in a shift of the productivity frontier. dot-matrix printers). Exit barriers are extremely high because of limited prospective buyers. scooters. and costly price wars. 120 . Firms facing a declining phase are characterized by inertia and slow to react to environmental changes. with little or no signs of recovery.
strictly product differentiation and not standardization. Fragmented Industry – Identify. aggressive building of distribution networks. Locate a defendable position. strictly cost differentiation. premium pricing. branding and promotion. assess and overcome fragmentation.COMPETITIVE STRATEGIES Emerging Industry – Set benchmarks. mergers and acquisition. reengineer. move beyond boundaries. 121 . Declining Industry – Redesign. process innovation. strike alliances. increasing scope. focus more on product differentiation or even a hybrid one. or else exit the segment. Matured Industry – Sophisticated cost analysis. recreate new markets. regenerate.
positions based on resources which are unique and inimitable are far more sustainable even in the long term. and complex learning experiences in integrating and harmonizing technologies (distinctive capabilities) that play an important role in delivering competitive advantage through “causal ambiguity”. patents. Intangible – These refer to goodwill. 122 .RESOURCE BASED VIEW Differentiation based on cost or products saturates and ceases to exist beyond the medium term. brands. They are a standard in nature. hence very rarely confer competitive advantage as can be easily acquired or replicated. However. A firms resources can be classified into – Tangible – These refer to real assets.
They play a very critical role in shaping competitive advantage. Typically. Therefore firms should concentrate on developing complex resources that forms the very basis of differentiation. they are woven around technologies.e.CAPABILITIES & COPMPETENCIES These include a complex combinations of tangible and intangible resources that organizations use to convert inputs to outputs. Hence. 123 . Capabilities can be generic (i. There is a high degree of internal and external causal ambiguity involved in it. differentiation based on capabilities can be sustained even in the long run. but not necessarily. can be leveraged across businesses) or specific to a particular business.
COMPETITIVE ADVANTAGE 124 .
COMPETITIVE ADVANTAGE A competitive advantage is a position of superiority relative (i. Strategy drives competitive advantage. A portfolio of competitive advantage comprises strategic advantage profile (SAP). competitive advantage subsequently becomes the back bone for a competitive strategy. It results in a distinct differentiation advantage or a cost advantage or hybrid as well. 125 .e. and results in well springs of new business development. Success of a strategy critically depends on SAP. It enlarges the scope of an organization. not absolute) to competition.
Identification of SAP is critical for and stretching and leveraging of resources. In today's world of discontinuity. Internal strategic fit between its strategy and dominant logics is essential for the top management to stretch and leverage SAP. SAP changes from time to time. 126 . In most cases SAP is hidden and dormant. Most successful organizations around the world have a well balanced SAP.STRATEGIC ADVANTAGE PROFILE (SAP) Organizations have to systematically and continuously conduct exercises to identify its SAP.
kaizen or internal customer). and enhanced customer tracking – higher market share. Today SCM is integrated with greening the environment as CSR practices.e.VALUE CHAIN ANALYSIS A value-chain segregates a firm into strategically relevant activities to understand its composite behaviour. A VC is often compared with a relay team. faster product launches. Inventory Mgt to Logistics Mgt to Supply Chain Mgt (SCM). 127 . Competitive advantage arises not from an individual activity but a stream of inter-related activities. Substantial cost reductions also follow. each of the players need to be efficient backed by sufficient coordination at the contact points (i. VC pay-offs: better product availability.
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 .
129 . Fit is important because discrete activities result in negative synergy and can also be easily copied by competitors. – Second order fit occurs when activities are reinforcing amongst them. A learning organization helps create strategic fit.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. – Third order fit refers to optimization of effort. A high fit involving a complex chain of activities drives both competitive advantage and its sustainability. Operational effectiveness is not strategy.
.CORE COMPETENCE A core competence represents the collective learning's of an organization around diverse streams of technologies. but not necessarily. Core competence has a high degree of external and 130 internal causal ambiguity embedded in it. These skills results in distinctive activities and processes. It should satisfy the following conditions – Contributes significantly to customer benefits. 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. – Can be leveraged across businesses. – Cannot be easily imitated or substituted.
a core competence has its roots in a set of skills. A competitive advantage is sustainable in the shortmedium term. A competitive advantage may or may not lead to superior performance. a core competence always implies a competitive advantage. only global leaders possess a core competence. a core competence is sustainable even in the long-term.CORE COMPETENCE A competitive advantage does not necessarily imply a core competence. Majority of the firms have competitive advantage. A competitive advantage manifests from a function. a core competence usually does. 131 .
A game is a contest involving two or more players. Here the magnitude of gain offsets the magnitude of loss equally. This is known as a zero-sum game. Subsequent work on game theory by John Nash led him to win the Nobel prize in 1994. In fact there are no. the stringent assumptions of game theory and difficulty in ascertaining of pay-offs makes game theory application difficult in business. illustrations depicting a win-win situation. 132 . each of whom wants to win.GAME THEORY The game theory was developed in 1944 by Oscar Morgenstern. However. In a game (similar to a business) one players win is always another's loss.
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 .
PURE STRATEGY GAME The strategy each player follows will always be the same regardless of the other players strategy. Firm Y’s Strategy Use Radio +3 +1 Use Newspaper +7 -2 134 Firm X’s Strategy Saddle Point Use Radio Use Newspaper Firm X’s Pay-Off Matrix . A saddle point is a situation where both the players are facing pure strategies.
TYPES OF GAMES Simultaneous Games – This is a situation where the players have an option to choose to cooperate or not through collusion. 135 . collaboration or cooption. Repeated Games – In this situation the players interact repeatedly with each other sub-optimizing the outcome possibilities.e. Coke Vs Pepsi). iteration) rather than through collusion (E. However. It represents the classical “prisoner’s dilemma”.g. 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. Yahoo Vs Microsoft). This is usually through learning by “experience or observation” (i.
It results in a shift in the productivity frontier.CHANGING THE RULES OF THE GAME In a situation where a player is unable to compete with the existing rules of the game may attempt to change the rules of the game altogether. but 136 players do not always behave rationally. – Building incentives for customer loyalty. – Making pricing more transparent. In a market dominated by price-based differentiation one may attempt to change the rules of the game by/when – – Bases of differentiation dependent on clear identification of what customer wants or value. Game theory relies on the principle of rationality. .
DELTA MODEL & LOCK-IN
Its a systematic approach where-in two or more industry majors, who by default has achieved a proprietary position (Microsoft – Software / IBM – Computers) which are not necessarily best-products in the industry, co-opt to create a lock-in. A lock-in implies that other players has to conform or relate to that standard in order to prosper. Becoming the industry standard requires – strong brand, causal ambiguity, and close relationship with other companies offering complimentary services. Lock-in is self reinforcing and escalating (i.e. accelerating effect).
THE THREE STRATEGIC POSITIONS
System Economics Market Dominance Complementary Share
Enabled through effective use of technology
Total Customer Solutions
Customer Economics Cooperation Customer Share
Product Economics Rivalry Product Share 138
Bill Gates is the richest man in the world not necessarily because he has developed the world’s best software's or excels at customer satisfaction; but he has got an army of people working for him who are not on his payroll – all the application software providers who are writing programs based on “Windows” compatible operating platform. Once you create the lock-in it is sustainable because of the “network effects”; which creates the proverbial “virtuous cycle” – customers want to buy the computer with largest set of applications and software developers want to write programs for the computers with the largest installed base.
The proponents (Hax & Wilde) believe that every organization has the ability to create and sustain a “lock-in” positioning (though in varying degree). This “system lock-in” is referred to as “delta” – delta being the Greek letter that stands for transformation and change amongst the players. The lock-in once created becomes very difficult for a firm to penetrate, and becomes a distinct entry barrier. The model is based on the belief that it compliments Porter’s differentiation model and RBV framework instead of contradicting them. In a lock-in strategy the performance outcomes are dependent on the success of another.
It relates to translating strategy formulations into practice. Performance realization of a strategy depends on the implementation effort. Successful implementation also depends on the appropriateness of the strategy. Since strategy implementation is a time bound process, alignment (i.e. strategic fit) is a key variable during times of radical change. Some of the other levers of successful strategy implementation are – Transformational leadership and motivating power. Resource allocation; its stretching and leveraging. Compatible organization structure & control systems. Inertia & resistance to change.
While external strategic fit (strategy – environment) is relevant for strategy formulation. 143 . – Changing the rules of the game. – Unlearning & learning of new skill sets. A high strategic fit (co alignment) is useful because it enables – – Appropriate and timely response. internal strategic fit (strategy – dominant logic) is critical to strategy implementation.IMPORTANCE OF STRATEGIC FIT Strategic fit has a central role to play in strategic management. – Development of capabilities & competencies. – Better strategic and operational control. – Resource commitment from top management.
learning levels are very high.FORMULATION Vs IMPLEMENTATION Traditionally. at the cost of sacrificing a lesser degree of control. According to Mintzberg. In fact.e. 144 . In such a situation. emergent strategy vis-à-vis intended & realized). formulation & implementation can occur simultaneously. while control is very effective. effective strategies are better crafted when there is a subtle overlapping between the two (i. Some of the key strategic learning's exists at the contact point between the organization and its customer. learning levels are very low. strategy formulation and implementation has been perceived to be distinct & independent. In such a situation.
A transactional leader is usually confined to allocating tasks & responsibilities and extracting performance. companies depend more on transformational leaders than transactional leaders. Pragmatism is the ability to make things happen. transformational leaders go one step beyond – Design a well crafted and designed strategic intent of the organization.ROLE OF TOP MANAGEMENT To bring about change and to implement strategies successfully. 145 . He should be an agent of change. Install a system of shared beliefs and values. shift from compliance to commitment. In contrast. bring about transparency.
The various methods of resource allocation includes Historical Budget – The budgets framed by HQ for a particular SBU keeping in mind past trends. labour. brands. Intangible resources (Eg. patents. skills) also includes complex resources like capabilities and competencies. machines) referred to as threshold resources (i. Performance Budget – SBU managers need to justify the distinctive resources in terms of the opportunity it is pursuing yields the highest possible pay-offs.e. minimum requirement). Zero Based Budget – In this case the budget of a SBU has to be worked out right from the scratch. land. 146 .RESOURCE ALLOCATION Resources allocation includes tangible resources (Eg.
Distinctive capabilities are complex set of skills woven around technologies.CAPABILITIES & COMPETENCIES Technology and business are slowly becoming in – separable. 147 . Mobiles). these capabilities are sustainable even in the medium to long term. though not necessarily in the case of emerging markets. Moreover. Due to causal ambiguity (complexity). convergence of multiple streams of technologies at the product – market level is becoming increasingly evident (Eg. Flat Screen Displays. Distinctive capabilities helps in stretching and leveraging resources thereby overcoming two major constraints involved in strategy implementation – times & costs.
An appropriate organization structure & adequate control systems are essential to implement strategies and achieve stated goals. A single product or a dominant business firm usually employs a functional structure.STRATEGY & STRUCTURE It is a framework within which individual efforts are coordinated to bring synergy. Once the structure is in place. processes become people independent. 148 . A firm in several related businesses usually employs a divisional structure. The level of centralization and decentralization is decisive. A firm in several unrelated businesses usually employs a SBU structure.
processes. Inputs . Project / Matrix Structure – A formal but temporary framework initiated for the completion of a particular project/crisis.Technology. Finance). 149 . based on skills and competencies. SBU Structure – Businesses segregated in terms of strategic dissimilarities (Eg. with team members having dual line of control. Divisional Structure – Units grouped together in terms of products. Team Structure – An informal group formed for a crisis. Marketing. Output). or geographical locations. Virtual Structure – A boundary less or hollow organization. disbanded subsequently.TYPES OF STRUCTURES Functional Structure – Activities grouped together by a common function (Eg.
It includes the desire for independence. facing challenges & crises. leading to a tall structure. Environment & People – Economic and political conditions have a major bearing on structure coupled with the attitude and aspirations of the people in the organization.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. as span is broader. structures are becoming flatter and more simpler. 150 . Technology – With more and more convergence of technologies in business. assuming responsibility.
INERTIA When a firm has been operating in a certain fashion for a long time. Changes in top management and unlearning helps overcome inertia. . there is a tendency to continue along the same lines. co0ntinuity). Inertia acts as an impediment in strategy implementation. Common sources of 151 inertia – complacency with past successes.e. Most firms undergo periods of strategic continuity rather than strategic discontinuity. Top managers resist change. Inertia is a characteristic of a firm that endures status quo (i. irrespective whether it is from worse to good or good to worse.
STRATEGY EVALUATION Strategy evaluation centers around assessment of strategic fit. However. Deviation of fit is detrimental to performance and may lead to strategic failure. . firms should move beyond financial performance to strategic performance as organization systems are becoming complex. certain authors propose misfit as a source of superior 152 performance. strategies need to be evaluated on an ongoing basis to prevent deviations of fit. Since the internal and external environment is in a state of continuous flux. To prevent deviation of fit.
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.
It involves assessing – strategic thrusts and milestones. However. Premise Control – Checking the validity of the assumptions on which a strategy was based. checking every premise is costly as well as difficult. Special Alert Control – It intends to uncover unanticipated information having critical impact 154 on strategies.STRATEGY CONTROL IMPLEMENTATION It involves steering the company towards its original growth trajectory & stated goals. Implementation Control – It aims at assessing whether key activities are proceeding as per schedule. It is open-ended as well as .
“If you cannot . Strategy not linked to resource allocation & capabilities – Lacking commitment of top management. low strategic fit due to consultants intervention. Performance measures are defective – What to evaluate against? How to measure the 155 construct? As a saying goes. difficult to translate into practice. Strategy intent not linked with goals and objectives – Lack of coordination at lower levels leading to negative synergy.BARRIERS TO STRATEGY EXECUTION Vision and strategy not actionable – Utopian ideas.
Managers should take into account all seven of these factors. Together these factors determine the way in which a corporation operates. On top of that. important or not they're all interdependent.7S FRAMEWORK OF Mc KINSEY The 7-S Framework of McKinsey is a management model that describes 7 factors to organize a company in an holistic and effective way. Large or small. 156 . to be sure of successful implementation of a strategy. Today it is considered one of the most powerful tools for strategy implementation determining success or failure. so if one fails to pay proper attention to one of them. the relative importance of each factor may vary over time and context. this may effect all others as well.
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. They had been investigating how Japanese industry had been so successful. At around the same time in the US Tom Peters and Robert Waterman were exploring what made a company excellent. and was taken up as a basic tool by the global management consultancy company McKinsey. 157 . Since then it is known as their 7-S model and is extensively used by corporations worldwide to implement their strategies. The 7-S model was born at a meeting of these four authors in 1982.
THE 7’S Shared Values – It represents what the organization stands for and what the top management believes in. Systems – The procedures. 158 . over time. Structure – The way in which the organization's units relate to each other in terms of their commonalities. Strategy – Trade-offs for the allocation of a firms scarce resources. Style – The way in which the top management influences the functioning of an organization. formal & informal . to reach identified & stated goals. Staff – Human inter-relationships. processes and routines that characterize how work should be done. Skills – An organizations capabilities and competencies.
STRATEGIC FIT Strategy Structure Shared Values Systems Skills Staff Style 1st Order Fit 2nd Order Fit 3rd Order Fit 159 .
structure. Ineffective in case of a virtual company.A CRITIC OF THE 7S MODEL While the hard S’s (strategy. staff. systems) are comparatively easy to identify and influence. style. 160 . the soft S’s (skill. their Japanese counterparts focus more on the soft S’s for their early success and sustainability. In contrast. A choice of an alphabet often limits the scope and skews the interpretation of a model. While the American co’s focuses on the hard S’s. because most often they are culturally embedded and often neglected. shared values) are very malleable and comparatively more difficult to identify & influence. Consider the 4P’s of marketing or 3R’s of SCM.
Low Take Overs 161 .STRATEGY IMPLEMENTATION ROUTES Strategic Fit .High Organic Growth Strategic Alliance Joint Venture Mergers & Acquisition Strategic Fit .
(Eg. subsidized power). SEZ’s. and markets.e. Long gestation leads to delayed market entry. . i. 162 Risk of cost and time overruns.e. technologies. tax holidays. Govt. (Eg.ORGANIC GROWTH Here a firm builds up its facilities right from the scratch and continues to do so without any external participation. Reliance Industries). concessions are available for green-field projects. i. The entire infra-structural facilities are set up afresh having its own gestation and break-even. It has complete control over inputs. the entire value chain. green-field projects. soft loans.
STRATEGIC ALLIANCE It involves a pro-active collaboration between two or more firms on a particular domain or function for mutual gain. It touches upon a limited aspects of a firms value chain. It has limited intervention power and usually lacks holistic commitment from the alliance partner. . Alliances are usually in the areas of technologies or markets (Eg. Tata Motors & Fiat). Alliances are usually short-lived and disbanded once the purpose is achieved. 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.
JOINT VENTURES A joint venture involves an equivalent equity participation between two firms usually of similar strategic intent and comparable size to enter a particular market through a newly formed entity. Selecting the right partner is critical for success. leaving minimum scope of overlapping. A comprehensive MOU is essential. Degree and extent of management control must be clearly 164 laid down. Tata – AIG.Honda). . (Eg. It is a win-win situation for both the companies. Hero . Dominant logic of both the companies should be complimentary.
with the individual firms ceasing to exist any more (Eg. Coca Cola – Thums Up). Economies in scale leading to lowering of costs. . Acquisition is an outright purchase of a firm assets by another independent entity (Eg. Brooke Bond & Lipton). Integration of assets and other financial resources. ITC Tribeni Tissues. Revival of a sick-unit through better management practices is a major motive behind an acquisition 165 strategy.MERGERS & ACQUISITION It refers to the fusion of two or more firms into a single entity. Integrated distribution channel leads to better market penetration and overall synergy.
Consolidation in a fragmented industry.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. Tata Steel . Most countries have stringent laws that prevents hostile take over. often the new firm is “left alone”. Instant access to capacities and markets.Corus). Make a public offer of not less than . Inform SEBI / Stock Exchange after 5% stake is 166 acquired. Integration of organization structure & cultures is difficult. Larger geo-graphical diversity.
MANAGEMENT TOOLS IN STRATEGY 167 .
TQM – Doing the right thing the first time.WHY MANAGEMENT TOOLS? Change is becoming pertinent in the business environment. The past is ceasing to be an indication of the future. 168 . Balanced Scorecard – Tracking strategy 3600. Companies therefore need to ensure competitive advantages doesn’t become competitive disadvantages. Radical change is superseding incremental change. Change provides enormous opportunities. Some tools to ensure that – Benchmarking – Adopt certain best practices. every time. or better still create next practices Reengineering – Redesigning work processes right from the scratch. it is also a source of potential threat.
A best practice is defined as an activity performed by a company in a particular domain or function which distinguishes it from others and making them world-class. These exemplary practices involves the stakeholders of the company and helps achieve its strategic intent. Best practices centers around looking at a different way to satisfy various stakeholders. Benchmarking involves the identification, understanding and adapting of certain best practices and implementing them to enhance performance. Firms are moving towards next practices as best practices make firms look more and more homogeneous.
SOME BEST PRACTICES
Dell: Customized configuration of computers. Caterpillar: 48 hours delivery anywhere in the world. Citi Bank : Priority banking services. Maruti: Certified “true value” pre-owned cars. Microsoft: ESOP to employees. Infosys: Customized work-stations. TCS: Referencing potential new recruits. ITC: Shareholders factory visit. AmEx: Outsourcing data warehousing mining. MARG: Set-top box to study viewing patterns. Honda: CEO’s visit to dealers.
TYPES OF BENCHMARKING
Functional – Used by companies to improve a particular management activity. Eg. Motorola learnt delivery scheduling from Domino’s. Process – Improving specific key processes and operations from experiences in similar businesses. Eg. Ford adopting assembly lay-out plan of Toyota. Competitive – It involves assessing the sources of competitive advantage and imitating them. Eg. Samsung leveraging miniaturization skills of Sony. Strategic – It involves assessing business models and replicating them in a different market. Eg. Reliance replicating AT&T business model.
HOW TO BENCHMARK?
Phase 1: Planning – What to benchmark? Whom to benchmark? – Identify key performance indicators & Data source. Phase 2: Analysis – Assessment of performance gaps. – Predict future performance levels. Phase 3: Integration – Communicate findings and gain acceptance. – Establish functional goals and its implementation. Phase 4: Action – Implement and monitor progress. – Measure results against stakeholder wants and needs. – Recalibrate or outperform benchmarks.
WHOM TO BENCHMARK?
Selecting the benchmarking partner is critical to solving the problem. Firms should generally avoid selecting the industry leader, because it may not always adopt the best practices for every process or activity. Benchmarking partners may also be from different industries. Types – – Internal – It involves benchmarking against its own branches, divisions, SBU’s. Proximity to data and cooperation is taken care of automatically. – External – It involves benchmarking against firms that succeeded on account of their best practices. It may also involve benchmarking against world-class firms. Friction may arise due to presence in competing industries.
BENCHMARKING - ADVANTAGES
Finding better ways of meeting stakeholder needs. Organizational learning comes from internal as well as external sources. Establishing goals based on formal assessment of external conditions. Defining effective measure of indicators, facilitate comparison, adopt from other organizations. Ensuring a continuous learning organization. Reducing competitive disadvantage. Organizational turnaround, especially effective in case of a wide strategic drift when differentiation strategies fail to work. 174
Benchmarking merely reorients profits in the hands of few to profits in the hands in the hands of many (i. clustering). While strategy is all about differentiation and not looking alike. but it cannot be used as a strategic decision making tool.e. It can at best complement it. It does not shifts the growth 175 trajectory of the industry as a whole. . Strategy is more of creating best practices rather than copying them. Benchmarking is useful for bringing about operational efficiency. the more similar they end up looking.LIMITATIONS More and more companies benchmark.BENCHMARKING .
Re-engineering attempts to radically change an organizational products or process by challenging the basic assumptions surrounding it. DOS to Windows). clean sheet). Windows 95 to 97).g. process mapping) and eliminating or improving them (E. . for achieving performance improvement (E.RE-ENGINEERING Redesigning leads to identification of superfluous activities or product features (i.g. Re-engineering involves complete reconstruction and overhauling of job descriptions from the scratch (i.e. The task demands a total change in organisational 176 culture and mindset.e.
than people driven Innovative Vs Traditional Customer centric Vs Organisational centric 177 .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.
processes. resource allocation and prepares the organization for the future through a reorientation of the entire strategic architecture. products. BPR).REENGINEERING . etc) and supports the organization for the present. .e. Strategic – It looks into the process of strategic planning. structures.e.LEVELS Reengineering can be successfully leveraged at all levels of an organization with varying degree of results. It can be of the following types – Functional – It looks into the flow of operations (i. customers and suppliers and protects the organization from the future (i. Business – It looks into markets. 178 .
– Causal Ambiguity. – High cost and time acts as a deterrent. 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. with an intention to copy it (Eg. 179 . Cheaper versions of Intel chips and mother-boards manufactured in Taiwan. However. While traditional manufacturing is a bottom-up approach. Indonesia). – Early entry advantages. reverse engineering is a top-bottom approach. It generally acts as a threat to innovation. protection can be had in the following ways – – Patenting.
Introduction – Launching the product in the market. cost and effort necessary for the purpose of reverse engineering. 180 . Actualization – Obtaining and dismantling of the product to assess how it functions. Inaccurate assessment at this stage may lead to a failure of the entire project. Implementation – Developing of a prototype. Usually in such cases segmentation and pricing is different from the original innovator. machine tools to convert ideas into a marketable product (i. nano-technology). designing facilities.e.STAGES IN REVERSE ENGINEERING Awareness – Recognizing whether the product is found to be worth the time.
Air bags. – Conformance – Emission standards . – Perception – Customer notions. – Features – Anti-lock braking systems.WHAT IS QUALITY? It involves the totality of a product or service in meeting certain stated or implied needs. – Aesthetics – Appeal in design. – Serviceability – Large no. of service stations. Car) – – Performance – Mileage of 14 kms to a litre of fuel. More and more companies are moving towards meeting implied rather than stated needs. – Reliability – Consistency in mileage. It has eight dimensions (Eg. 181 . – Durability – 1980 manufactured cars still on road.Euro IV.
Management of quality was traditionally inspect it . zero defects. It is deeply embedded as an aspect of 182 organisational life & culture. . touching upon a limited aspect of a value chain. which ensures good market standing. It had little impact on improving overall productivity.fix it in nature.TOTAL QUALITY MANAGEMENT Objective – Management of quality ensures conformance to certain pre-set standards. TQM is a way of creating an organization culture committed to the continuous improvement of work processes – Deming.
Empowerment – It takes place when employees are properly trained. Be customer centric – Generate the concept of internal customer (Ishikawa). not a final destination. 183 . Looking at quality as an endless journey. fully involved in decision-making and fairly rewarded for results. Kaizen – Make continuous improvement a way of life.TQM – KEY TENETS Do it right. provided with all relevant information and best possible tools. the first time – From reactively fixing error in products to proactively preventing errors from occurring at the first place (Juran).
saving precious top management time. 6-Sigma).STRATEGIES Outsourcing – It is the process of self-contracting services and operations which are routine and mundane.TQM . of units meet preset standards (Eg. It is based on the principles of MBO (i. 184 .e. 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. equal participation). Quality Circles – It a small group of shop-floor employees who meet periodically to take decisions regarding operational problems and crises. enabling the firm to concentrate on core activities essential to customer satisfaction.
– In the majority of failures – we estimate 70% – the real problem isn’t (bad strategy) .... Source: Fortune Magazine Why CEO’s fail? 185 . it’s bad execution... strategy implementation has never been more important.BALANCED SCORE CARD Some interesting comments .. – Less than 10% of strategies effectively formulated are effectively executed...... – Efficiency and effectiveness is passé..
Most managers tend to rely on traditional measures of performance having its origin in finance as they are well tried and tested. Organizations need to move from financial to strategic performance. 186 . rather than effects. In today’s context when organizational systems have become complex and multi-directional we need to have a holistic view of performance to cut the lag effects.CONCEPTUALISATION A company’s performance depends on how it measures performance. These measures worked well when organizational systems were simple and unidirectional and more importantly the environment was static.BSC . Focus more on causes.
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.BSC – KAPLAN & NORTON (1992) A BSC helps a manager to track and communicate the different elements of company’s strategy. because they have too many. and distinguish strategic problems from operational ones. 187 . 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.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 visits or calls made % of NPA’s 188 .
of new product launches Vs competition Product pricing Vs competition 189 . of times covered in media No.BUSINESS PERSPECTIVE GOALS Skills Excellence Exposure Introduction MEASURES New capabilities and competencies Implementation & gestation period Bank and supplier credit limits & PLR Unit Costs / Conversion Ratio / Defect Ratio No.
of product innovations 190 .LEARNING PERSPECTIVE GOALS Technology Manufacturing Focus Timing MEASURES No. of new patents registered Time to develop next generation products Average and spread in operating cycle % of products that equal 2/3 sales No.
Return on Investment Market Capitalization / PE ratio 191 .FINANCIAL PERSPECTIVE GOALS Survival Success Prosper Divestment MEASURES Cash flows Growth in Sales and Profits EPS.
STRATEGY MAPPING 192 .
BSC .IMPLEMENTATION 2 Translate strategy into operational terms 1 Mobilize change through effective leadership 5 STRATEGY Make strategy a continual process 3 Align the organization to the strategy 4 Make strategy everyone’s job 193 .
It helps translating strategy into practice (i. Focus on cause not effects. Shift from control to strategy (i.e. doing right things instead of doing things right).what they don’t know. As a result. Seek excellence. 194 performance will automatically follow.e. they don’t know . .BSC . Modern managers should be poised to ask the right questions.ADVANTAGES Most often top managers face information overload. sharing of vision). The BSC brings together the different elements of a company’s strategy at a glance.
EFFICIENCY Vs EFFECTIVENESS Ineffective Effective Inefficient Goes out of Business quickly Survives Efficient Dies Slowly Thrives 195 .
Porter 196 .Michael E. . not only thrives. but also sustains it.EFFECTIVENESS + STRATEGY A company which is effective as well as strategic.
CORPORATE RESTRUCTURING 197 .
from survival of the fittest . Strategic variety brings paradigm shift. Radical change brings about strategic variety. “every organization must be prepared to abandon everything it does.. As Peter Drucker pointed out. to survival of the most adaptable.. Restructuring involves consciously driving significant changes in the way an organizations thinks and looks (Eg.. Strategic variety may be caused by changes in the as external well as internal environment..” 198 .CORPORATE RESTRUCTURING The only thing constant in today's business environment is change. firms use restructuring strategies... Tata Group). To adapt to the changing environment.
Internal customers should also not be neglected. ATM. they should strive to provide unimaginable value ahead of its time (Eg. . Fax. Company’s should go beyond just asking what he expects.e. Instead. and dividing the core businesses into SBU’s (i. downsizing or rightsizing).RESTRUCTURING – BASIC TENETS Customer Focus – Restructuring ideally begins and ends with the customer. Core Business – Company’s should introspect – What business are we in? Business evolved out of opportunism or myopia should be divested. etc). downscoping).e. Walkman. Structural Changes – Conventional hierarchical structures should be disbanded in favour of more 199 flexible ones (i.
.... It is created and institutionalized by the top management. the Tatas were considered a benevolent and charitable organization.. Kumar Birla today is more dependent on professionals.. .) The Aditya Birla group typically relied on the “marwari” community for key management positions ... Restructuring also requires cultural reorientation. 200 . During the times of JRD. started focusing on their capabilities.RESTRUCTURING – BASIC TENETS Cultural Changes – A culture represents the values and beliefs of the people about the organization.... Ratan Tata now drives the point the group means business..) Reliance dismantled their industrial embassies .
Carry out PR campaigns. Getting feedback & addressing customer complaints. Use the reach of networking technologies. Publicizing welfare projects to demonstrate CSR. Organizing customer and supplier meets. “ … one reason our customers are satisfied is that we aren’t.MOVING CLOSER TO THE CUSTOMER As companies evolve. they tend to move away from the customer. Restructuring provides a platform to close this gap.” 201 . Honda’s ad says. Communicating to the media about organization efforts to deliver quality products.
Tata – Corus) or hostile (Eg. horizontal. Mittal – Arcelor) and can take various forms. Further. including its intangibles – Mergers – It may be vertical. or conglo-merate. It may include brands as well. it may be smooth (Eg. spin-off and equity carve. Hive Off – It involves siphoning of assets under control.ASSET RESTRUCTURING Asset Restructuring – The asset composition of a firm undergoes a major change. 202 . Further spin-off can be classified as split-off and split-up. It can have two forms. where the difference in valuation is settled off through cash or equity (Eg. Glaxo – Heinz). Asset Swaps – It entails divesting and acquisition simultaneously by two companies.
in which the equity is allotted amongst the existing shareholders on a pro-rata basis (Eg. the entire parent company loses its identity after being split into a number of subsidiaries. the existing shareholders receive equity in the subsidiary in exchange for the stocks of the parent company. Most of these practices are not in consonance with Indian laws. – Split-Up – In a split-up. Reliance Ent). Tata Industries selling 20% stake to Jardine Matheson). Equity Carve – It involves selling a minority stake to a third party while retaining control (Eg. 203 . – Split-Off – In a split-off.HIVE OFF Spin-Off – A spin off is the creation of a new entity.
Generic motives include – – Raise working capital. A complete sell-out is known as divestment (TOMCO). In 1995. but retained its engineering division. – Poor performance. repay long-term debts. 204 . Selling out in phases is called disinvestment (IPCL). In 2005. strategic misfit. Parle sold its Thums Up brand to Coke for $40 million apprehending fierce competition.DIVESTITURE It involves the sale of a brand or a division of a company to a third party. L&T sold its cements division to Aditya Birla group. for a specified market or in general with full management control.
The internal & external liability composition undergoes a major change – LBO – Acquiring control over a substantially larger company through borrowed funds (Eg. involving 608 pence per share). Share Buyback – It is a process of cancellation of shares out of free reserves to the extent of 25% of paid-up capital (Eg. Conversion – Replacing debt with equity or vice-versa or costlier with cheaper debt or cross currency debt. It provides greater leverage as well as management control.3 billion.CAPITAL RESTRUCTURING Capital Restructuring . Wipro). Tatas take-over of Corus for US $11. 205 .
1860 cr . 42 cr Voltas . 950 cr Merind . 250 cr Tata Tetley – Rs. 230 cr Diversifications Tata Motors – Rs. 1439 cr 206 Tata Timken – Rs 120 cr Tata Telecom – Rs. 99 cr Tata Power – Rs.Rs. 150 cr VSNL – Rs.BUSINESS RESTRUCTURING – TATAS Divestments Lakme – Rs. 256 cr ACC – Rs. 1170 cr Goodlass Nerolac – Rs. 1700 cr Trent – Rs. 120 cr Tata AIG – Rs.Rs. 1890 cr CMC – Rs.
of a firm’s employees and sometimes in the no. of operating units. Downscoping – It involves reducing the business and/or geographical scope of a firm (Aditya Birla group). Turnaround is the primary motive. usually as a result external turbulence. 207 .ORGANIZATIONAL RESTRUCTURING Organizational structure and systems calls for a change when strategic variety is apparent. It can be carried out in the following ways – Downsizing – It is a systematic one-time reduction in the no. Rightsizing – It is phasing of excess and redundant employees resulted out of faulty internal planning (SAIL). keeping the composition of business intact (Jet Airways). Survival is the primary motive.
Dominant logic becomes deep-rooted in organizational contexts depending on the period it is in place (tenure of the CEO).e. Strategy change is unviable without a preceding change in its dominant logics. the more difficult it becomes to uproot the paradigm (i. thumb rules) of the top management. 208 . The longer the period.STRATEGIC CHANGE One of the most difficult components of organization restructuring is the mindset of the top management represented through its dominant logic and its shared values reflected in cultural orientation. The dominant logic represents the perceptions and biases (i. as strategies are based on such beliefs and biases.e. inertia).
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.FORCES AGAINST STRATEGIC CHANGE The problem with strategic change is that the whole burden typically rests on few people (i. the factor that stifled change & performance was – culture.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. In most organizations.
Understand and deliver the quid pro quo. process ownership. never take no for an answer. Manage from the future. The best way is to alter the institutional point of view. Create relentless discomfort with the status quo. Questioning every basic action of the organization. 210 . it is not about winning but about learning.SUCCESSFUL TRANSFORMATION Build an intricate understanding of the business model at all levels of the organization. Promote inventive accountability. Harness setbacks. Encourage uncompromising straight talk.
FORCE-FIELD ANALYSIS A force-field analysis provides an initial overview of change problems that needs to tackled. Culture and style of management are two main impediments in force-field analysis. that can be both enablers and blockages to change and restructuring. It involves identifying – Aspects of current culture which needs to be reinforced. It involves diagnosing a change situation – systems & structures. also known as cultural-web. Aspects of current culture which needs to be overcome. by identifying forces for and against change. Identify and implement facilitators of cultural change. 211 .
RESTRUCTURING .OUTCOMES Alternatives Organizational Short .Term Loss of human capital Lower performance Higher performance Capital .Term Reduced labour costs Reduced debt costs Emphasis on strategic control Business High debt costs Higher risk 212 Long .
213 . the second one is a more viable strategy and sustainable option in the long run. down-scoping or asset stripping. reverse engineering and regenerating.NUMERATOR & DENOMINATOR MGT Most firms across emerging markets undergo strategic discontinuity and as a result are forced to restructure their businesses. In order to put back the company on the right track they are resort to – Denominator – It assumes that turnover cannot be increased. While the first strategy produces results instantaneously. focuses on reengineering. hence go in for downsizing. Numerator – It assumes that turnover is not a barrier or constraint.
TURNAROUND MANAGEMENT 214 .
. 215 (Govindarajan and Trimble. Source: Why do firms atrophy? (Business Today....WHY TURN AROUND MANAGEMENT? Some interesting insights .. still exist as on 2005. January 1997). – Only seven of the first fifty Indian business groups in 1947 were even in business by the turn of this century. – Less than 10% of the Fortune 500 companies as first published in 1955. and that the thirty-two of the country’s largest business groups in 1969 are no longer among the top fifty today. ..
e. While content focuses on endogenous and exogenous variables. ends the threat with a combination of strategies. Stage Theory). skills. process focuses on – A logic to explain a causal relationship between intervening variables. 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. As a sequence of events describing how things change and why they change (i. systems. Both content (what) and process (how) are equally important for a successful turnaround. 216 . and achieves sustainable performance recovery. and capabilities.
Rising input costs. Uncompetitive products or services. Low employee morale leading to high employee attrition at all levels. especially in key positions. Low stakeholder confidence. 217 .TURNAROUND INDICATORS Most firms atrophy simply because they fail to diagnose the indicators that acts as threat to organizational existence. Substantial shifts in consumer preferences. suppliers and bankers. leading to lack of acceptability from distributors and customers. unavailability or radical lowering of substitute costs or technological obsolescence. Some indicators Continuous cash flow crises as a result of dwindling market-share and profits.
Emphasis on advertising and market penetration. Product redesigning or reengineering. focus on power brands. which most top managers fail to appreciate.TURNAROUND ILLUSION The first step to a successful turnaround is the basic acceptance of the fact that …. they adopt surface level measures (disprin popping) which most often fail. prune work-force. Recalibrate prices.. Extending work hours. liquidating dead assets. consider extension. Hence. based on elasticity. be more customer centric. Common approaches adopted Change in key positions. “all is not well”. 218 . Revamp product portfolio.
TURNAROUND STAGE THEORY Stage 1 Decline Stage 2 Stage 3 Stage 4 Outcome Response Transition Performance Equilibrium Line Success Failure Indeterminate Nadir Time 219 .
primarily dwindling resources and capabilities are responsible for decline. Identification of the stimulus leads to the arrest of the downfall. 220 . R-Extinction – It suggests that organization factors.DECLINE Decline is the first stage in the turnaround process. 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. 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.
the response should be operational. 221 .RESPONSE INITIATION Turnaround responses are typically categorized as operating or strategic. If the underlying cause is internal efficiency. Strategic responses focus on changing or adjusting the business the firm is engaged in through long term moves such as – integration. new market initiatives. the response should be strategic. Operating responses typically focuses on the way the firm conducts business and involves tactics geared towards – cost cutting and process redesigning (BPR). diversification. asset reduction. If the decline stems from structural shifts. The response must match the cause of the decline.
when decline deepens shifts in strategic position becomes essential. Scope – A diversified conglomerate may acquire a distressed business to turn it around and gain valuable synergies. Untangling this question brings into focus three events – Domain – Many of the strategic cures have limited applicability for an affiliated firm. Similarly new market initiatives is feasible only for multi-product firms. which may be unavailable to a focused firm. 222 . 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.
many a times early signs of recovery fades out. lead – lag).TRANSITION Transition usually reflects the first signs of recovery. Support from all the stake holders through resource commitment. However.e. substantial amount of time usually passes before results begin to show (i. participative management (i. 223 . role model. Sustenance is the key factor in this stage.7 years with a range of (4-16) years. consensus). confidence building measures. transparency. Empirical studies show that average time is 7.e. However. Effective levers of transition. The top management has a key role to play through empowerment.
Instead of focusing on financial parameters alone.OUTCOME Outcome is said to be successful when a firm breaches the equilibrium performance level. Share price indications and media coverage. Failure is an indication that initial momentum was not sustainable characterized by irreversibility. Revival of key customers and new product launches. Regaining lost market share and distributor confidence. Commanding a premium in the market. Supplier and banker confidence. 224 . Cut off points must be unequivocal. it should adopt a holistic approach.
COOPERATIVE STRATEGIES & ALLIANCES 225 .
226 . strategic alliance. More and more companies worldwide are moving away from competition to co-option to leverage their resources and enhance bargaining power. and globalization . supply-chain partnership. or joint venture.COOPERATIVE STRATEGIES Cooperative strategies are a logical and timely response to changes in business dynamics. licensing. Any cooperative strategy maybe between firms within the same country or cross border as well. the commitment and the involvement between the firms increases manifold. It can assume any of the following forms – franchising. consortia. In the cooperative strategy continuum as firms move up the value order. technology.
227 . Branding is critical to franchising.FRANCHISING Franchising – It is a contractual agreement between two legally independent firms whereby the franchiser grants the right to the franchisee to sell the franchisor’s product or service or do business under its brand-name in a given location for a specified period of time for a consideration. owners of the brand Monginis allows its franchisees to sell its confectionary products. It is an effective strategy to penetrate markets in a shortest possible time at a minimum cost. Titan Inds. Switz Foods. owners of the brand Tanishq allows its franchisees to sell its jewellery products.
228 .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. Become a systems integrator (CKD). as in Tata Indica. Develop a product through its crude stage. HM manufacturing GM range of cars in India with a buy-back arrangement is a perfect example of CBU. refine processes and adopt necessary technologies (SKD). Different levels of licensing Manufacturing without embracing any technology (CBU).
229 . Cross Holdings – A maze of equity holdings through centralised control to ensure earnings stability & threshold resources for critical mass (Eg. Coke – Pepsi). Airbus – Boeing). Collusion – Few firms in a matured industry collude to reduce industry output below the equilibrium level. Tata. It can be of the following types – Multipartner – Intends to share an underlying technology or asset. Hyundai). leverage upon size to preempt competition by escalating entry barriers (Eg.CONSORTIA Consortia – They are defined as large inter-locking relationships & cross holdings between businesses in a similar industry. enabling them to increase prices (Eg.
Companies in different industries with different but complimentary skills. Continuous sharing of knowledge is critical to the success of a supply chain partnership.SUPPLY CHAIN PARTNERSHIP It is a pro-active & collaborative arrangement between supplier and customer aimed at achieving better control over the value chain (Eg. Tata Motors – IDEA). link their capabilities to create value for end users. It usually provides a platform to sort out differences between conceptualization and implementation to suit local market needs. otherwise it 230 becomes routine outsourcing. .
Generic motives involved are .learning organization. preempt competition. Tata Motors – Fiat. instead of hurrying into a relationship. to gain knowledge and to obtain access to new markets (Eg. 231 . Partner selection is one of the critical success factors. enter newer markets.STRATEGIC ALLIANCE It is an short to medium term understanding between two or more firms to share knowledge and risk. enhance credibility. design next generation products. effective R&D management. Despite their popularity (50-60)% of the alliances fail to accomplish their stated objectives. Firm’s should undertake a long courtship with potential partners. Reliance – Du Pont).
STRATEGIC ALLIANCE . Backward – An alliance (quasi or tapered) with a supplier of critical components seeking commitment (Eg. Coke – Pepsi). Complementary Equals – Two firms mutually promoting each others complimentary products (Eg. Alliances of the Weak – An alliance is entered into to preempt competition (Eg. Airbus – Boeing). Bootstrap – An alliance between a weak and a strong company with an intention to acquire it. Maruti). 232 . Bajaj – Castrol). Whirlpool – Tide.TYPES Collusion – Tacit top management understanding to neutralize price wars (Eg.
Cultural orientation has been found to have a profound effect on top management’s strategic orientation (Eg. Differences in level of economic development can produce differences in alliances motives. 233 .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. – Japan Vs US). Too much stress on financials & structure be avoided. Firms from developed markets seek access to markets and firms from emerging markets seeking access to technology.
Partner’s ability to acquire fresh skills. Managerial capabilities. Intangible Assets – Move beyond the financials of the firm. Experience related to previous alliances. 234 . including ability to provide quality products and services. Dominant Logic’s – Similarity in beliefs & biases. Unique Resources – Abilities or skills which cannot be easily duplicated.PARTNER CHARACTERISTICS Complimentarity of Capabilities – The degree to which partners resources can be used in conjunction. Willingness to share knowledge and skills.
MANAGING ALLIANCES Alliances are more than just a deal. vows to include commitment to expand the relationship. incorporating clear signs of continuing independence for all partners. Getting Engaged – It should incorporate a specific joint activity. instead of focusing controlling the relationship. the value chain. operational & cultural integration. Setting up the housekeeping. understanding the chemistry. Changing within. 235 . partners should nurture it. degree of compatibility. differences not anticipated earlier. Selection & Courtship – It involves self analyzing. Learning to collaborate – strategic.
e. combining parts). There are substantial linkages in the value-chain. . synergy) rather than mere exchange (i. It aims at creating new value (i.JOINT VENTURE A joint venture is a long term association between two equal partners to create an independent firm (SPV) by complementing their resources and capabilities to explore newer businesses or markets for achieving a shared vision. It lasts till the vision is reached. a joint venture is a selection among modes by which two or more firms can transact. whilst the partners continue to operate independently. Conceptually.e. separation is very 236 bitter.
237 . The market fails as sellers are unwilling to reveal their technology and buyers are unwilling to purchase in the absence of inspection. It may also be linked to deterring entry or eroding competitors position. Strategic Behaviour – Firms may override transaction costs. in addition to a high degree of asset specificity. Organizational Learning – It is a means through which a firm learns or seeks to retain their capabilities. though more profitable alternative to other choices.JOINT VENTURE – GENERIC MOTIVES Transaction Cost – The situational characteristics best suited for a JV are high performance uncertainty.
– Eg. Daimler – Chrysler (Premium Cars) 238 . – Eg. Eli Lily – Ranbaxy. Renault – Nissan (Minivans – Cars). – Eg. Sharing of resources. Essar – Hutch (Vodafone). Endorsement from government authorities. TVS – Suzuki (4-Stroke Engines) Fill gaps in existing product lines. – Eg. Maruti – Suzuki. Learning new technologies. Yamaha – Escorts.OTHER MOTIVES Entry into newer markets. – Eg. – Eg. Define future industry standards.
technology) drain. LML – Piaggio Differences in size and resource base. – Eg. PAL – Fiat If the cost of continuing exceeds the exit costs? – Eg. Risk of brain (i. – Maruti – Suzuki. – Eg.e.Enka. Risk of over dependence. Century .RISKS INVOLVED Incompatibility – Differences in cultural background. Tata – Aditya Birla in Idea Cellular 239 . Modi – Telstra What after exit (parenting disadvantage)? – Eg. – Godrej – Procter & Gamble.
240 . Objectives – Shared vision. time sharing. Focus – Avoid strategic myopia. Costs – Other modes of transaction becomes cheaper. respect. Agreement – Clarity on operational control. Partner – Avoid duplication of skills and capabilities. Equality – Lack of dominance. Flexibility – Sufficient space to breathe and adjust.PRE-REQUISITES FOR SUCCESS Commitment – Mutual trust. Inertia – Differences in age and evolution patterns. Incompatibility – Performance expectations. Culture – Reconcile gaps.
MERGERS & ACQUISITION 241 .
however. Ranbaxy . reverses are also taking place through LBO) with a view to acquire conglomerate power and induce synergy (Eg. HLL – Tomco). Mittal Arcelor). Brooke Bond – Lipton). Most countries have stringent laws that prevents hostile takeovers (Eg.MERGERS & ACQUISITION A merger is a mutually beneficial consent between two or more firms (usually of similar size) to form a newly evolved entity by absolving their individual entities to preempt competition (Eg. An acquisition is the purchase of a firm by a firm (of larger size. 242 . The larger objective is to leverage on size.Daichi) and hostile if it is without the consent of the management (Eg. SEBI Takeover Code. An acquisition is said be smooth if it is with the consent of the management (Eg. 2002).
Acquirer – Someone (individual or firm) who picks up an atleast 5% stake without mandatory disclosure having an intention to wrest management control (i. 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. creeping acquisition). . Hike – An acquirer who has already picked up a 5% has to make a mandatory disclosure for every additional 1% stake that it acquires.SEBI TAKEOVER CODE. Control – A special resolution of 75% of the share 243 holders approving the change of guard. Preferential – A preferential allottee ending up acquiring 5% stake also comes under its purview.e.
Grasim – L&T Cement. Disclosure – All acquirers have to inform the respective stock exchanges where it is listed and SEBI upon acquiring the basic limit and upon every incremental limit thereon. 244 . asset stripping). credentials or track record is at stake. 2002 Pricing – Acquirers will have to offer minority shareholders (at least 20%) the past 26 weeks or past 2 weeks average price. and/or does not enjoy the confidence of the different stake holders. SEBI – In case of a hostile take over.SEBI TAKEOVER CODE. Gujarat Ambuja – ACC). the SEBI can intervene and block share transfers if: the acquirer has ulterior motives (i. whichever is higher as an exit route (Eg.e.
Kelvinator). The type of merger is depends on the degree of relatedness (strategic) between the two businesses. Reliance). Vertical – It involves complimentarily (partially related) in terms of supply of inputs or marketing activities (Eg. ITC). Horizontal – It involves integration of two highly related businesses (Eg. Godrej. usually opportunistic (Eg. Electrolux .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. 245 . Conglomerate – It involves integration of two distinctly unrelated businesses.
MERGERS & ACQUISITION . Coinsurance effect – Higher debt raising capability. ITC Bhadrachalam). Overcoming entry barriers (Eg. quick access).e. Acquiring assets or capabilities (Eg. Tax benefits (Eg.MOTIVES Increased market / conglomerate power. Avoiding risk of new product development. 246 . Mittal – Arcelor). Economies of size. Access to newer segments (Eg. ICICI –ITC Classic). scale and scope. Ulterior motives – (Eg. Tata Steel – Corus). Reduced gestation (i. Ranbaxy – Crosslands). Reduction in risk. Global image (Eg. Asset Stripping – Shaw Wallace).
Top management overtly focused on due diligence exercise and negotiations. Managing size. Merging of organisational structures.MERGERS & ACQUISITIONS PITFALLS Cultural differences (Eg. Overvaluation of buying firms (Eg. their initial offer was around 420 pence/share. Inability to achieve synergy. while the ultimate acquisition was made at 607 pence/share). When Tata Steel started negotiations with Corus. Managing over-diversification. 247 . Tata – Corus). Overvaluation is often as a result of an ego drive and substantially affects future returns. neglecting core business.
with an objective to reinforce its growth trajectory or to take on the might of a comparatively larger player (Eg. 248 .MERGER TYPE & PLC Introduction – A larger firm may acquire a newly formed entity with an objective to preempt new competition or acquire its license (Eg. Decline – Horizontal mergers are undertaken to ensure survival. Tata Steel – Corus). Growth – This stage may witness parallel merger of two firms of similar size. Brooke Bond – Lipton). Maturity – A larger firm acquires a smaller firm with an objective to achieve economies of scale and experience curve effects (Eg. Kingfisher – Air Deccan). vertical to save transactions costs.
Strong differences may stifle plans and its execution. An acquisition just for the sake of it or reputation yields very little value in the long term. Blanket promotions across entities and confidence building exercises needs to be practiced. 249 . Immediate attempts to super impose structure and culture may cause bottle necks. active top management intervention in phases.INTERNATIONAL M&A .FRAMEWORK Positive contribution to the acquired company. A common shared vision. Left alone syndrome. A concern of respect and trust for the business of the acquired company.
INTEGRATION . Redefine responsibilities and authority. 250 Do not ignore the “people factor”. Determine business strategy. . Decide upon management control systems. Shift attention from business portfolio to people and processes. Integrating work processes. promptly. They can carry the message to the various stake holders. Decide on the new hierarchy. It will enable focus on customers and key people.BLUEPRINT Take the media into confidence.
operational & financial). Financial motives – Undervaluation relative to true value. – Synergy – Potential value gain from combining operations (i.VALUATION The process of valuation is central to M&A. Valuation decisions are arrived through a due diligence process when the prospective acquirer gets access to the books of accounts of acquiring company. – Market for corporate control.e. 251 . over valuation can become a curse. – Unstated reasons – Personal self interest and hubris. While under valuation may be a significant opportunity.M&A . The process takes (6-12) months.
– Conglomerate Synergy – Gains come when one firm complements the resources or capabilities of another (Eg. Synergy can be negative as well.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. Innovative product – Good distribution network). – Vertical Synergy – Gains come from controlling the supplychain and savings in transaction costs. 252 . Sources of operational synergy – Horizontal Synergy – Gains come from economies of scale which reduces costs. or from increased market power which increases sales and margins.
Tax Benefits – Tax benefits may accrue from tax entitlements and depreciation benefits unutilized by a loss making firm. Cash Slack – It reduces asymmetry between cash starved firms with deserving projects and cash cows with no investment opportunities. shareholders can accomplish the same at a much lesser cost. Hotmail). and without paying take-over premiums. Synergy comes from projects which would not have been undertaken if the two firms stayed apart (Eg. However. ITC – Bhadrachalam Paper). but availed after being merged with a profitable firm (Eg. 253 .VALUING FINANCIAL SYNERGY Diversification – Reduce variability in earnings by diversifying into unrelated industries.
VALUING FINANCIAL SYNERGY Co-Insurance Effect – If the cash flows of the two firms are less than perfectly correlated. – Coupon rates may also be negotiated at lower rates. 254 . It relates to the concept of diversification. 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. as risky debt is spread across the new firm's operations. hence better performance. higher leverage. This will induce higher debt capacity. – Default risk comes down and credit rating improves. the cash flow the merged firm will be less variable than the individual firms.
The value of wrestling control is inversely proportional to the perceived quality of that management. Assessment of perceived quality is critical. since a restructuring can lead to significant increase in value. – – Value of Control = Value of firm after restructuring Value of firm before restructuring.VALUING CORPORATE CONTROL Premium of M&A are often justified to control the management of the firm. The value of control can be substantial for firms that are operating well below optimal value. 255 . While value of corporate control is negligible for firms that are operating close to their optimal value.
LBO facilitates a relatively smaller firm to bid for a comparatively larger firm in the bid for management control. Confidence of investment bankers and the international financial community is essential.e. It is a very costly and risky proposition. 256 . debt component) at the time of buyout and rapid changes in capital structure over time. sometimes in combination with the assets of the acquiring company.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.
– Increased information needs. 257 . However. – Separation of ownership from management. liquidity.TO GO PUBLIC OR NOT? However. A research study showed that 30% of the publicly listed firms reported above average returns after going private. off-late many publicly traded firms have gone private keeping in mind the following – – The fear of LBO.access to financial markets. The increased benefit showed in the following way – reduced costs and increased revenue. the advantages of going public includes . – The need to satisfy analysts and shareholders. on-going valuation.
– It is a temporary phenomenon.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).e. which disappears once assets are liquidated and significant portion of debt is paid off. 258 . – Cash trapped company unable to utilize opportunities. – Managers cannot be trusted to invest free cash flows wisely. – Cost of debt coming down (i. co-insurance effect). – 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. initial rise in leverage is anticipated. As the firm liquidates / pledges assets and pays off debt. leverage is expected to decrease over time. Lack of sufficient cash flows to repay costly debts resulting in a possible debt trap. – Increase equity valuation. A LBO has to pass two tests to be viable – – Restructuring to pay-off increased debt. Any discounting has to reflect these changing cost of capital. Therefore. 259 .
e. 260 .REVERSE MERGER Reverse Merger – The acquisition of a public company. or costly. – Automatic listing in major exchanges. shell company) by a private company. – Prevents dilution of equity. allowing the private company to bypass the usually lengthy and complex process of going public. time-barred. Objectives – – Traditional route of filing prospectus and undergoing an IPO is costly. – Tax shelter. which has discontinued its operations (i. small in size but having a promising business. – Facilitates better valuation and forthcoming offerings.
Excess returns also vary across time periods. takeover failures have only initial negative effects on stock prices. and 35% during bullish periods. Initial anomaly in stock prices usually normalizes over a period of time (6-12) months.EFFECT OF TAKE-OVER ANNOUNCEMENT The shareholders of target firms are the clear winners. – Takeover announcements reported 30% excess returns. Most target firms are taken over within (6090) days. However. – Merger announcements reported 20% excess returns. During bearish periods excess returns were 19%. 261 .
1988 . Bradley.EFFECT OF TAKE-OVER ANNOUNCEMENT The effect of take-over announcement on bidder firm’s stock prices are not clear cut. – However. – Most studies reported insignificant excess returns around take-over offers or merger announcements. – However. and Kim. as stock markets become more and more perfect such anomalies would reduce Source: Jensen and Ruback. 1983. in the event of take-over failure negative returns to the extent of 5% on bidder firm stock prices is reflected. Desai. over time. 262 Jarrel. and Netter. Brickley. 1983.
so that nothing is left for the raider to strip off. 263 . Asset Stripping – The targeted company hives off its key assets to another subsidiary. Poison Put – Premature retirement of bonds at attractive rates to pour surplus cash and make target investment unattractive. Rights). Poison Pill – An offer to existing shareholders to buy shares at a substantial discount to increase their voting rights (Eg.DEFENSIVE STRATEGIES Golden Parachute – An employment contract that compensates top managers for loss of jobs as a result of change in management control.
DEFENSIVE STRATEGIES White Knight – It is the placing of stocks to a cash rich investor and bargaining for protection in return. thus thwarting the raider company’s attention. Shapoorji Pallonji). But often the White Knight turns a betrayer himself (Eg. 264 . Gray Knight – The target company takes the help of friendly company to buy the shares of the raiding company. Pac Man – The target company makes a counter bid to take over the raider company. Green Mail – The targeted company buys large blocks from holders either through premium or through pressure tactics (Eg. East India Hotels – Reliance Industries – ITC).
COMPETING FOR THE FUTURE 265 .
Honda overpowering Volkswagen. Compaq overpowering IBM. Honda overpowering GM. Nokia overpowering Motorola. Wal-Mart overpowering Sears. The reverse was true for the companies overpowering. Hitachi overpowering Westinghouse. British Air overpowering Pan Am. What went wrong???? What were they doing with the present? What were they pre-occupied with? 266 . were spending 99% of their precious time dealing with present.GETTING OFF THE TREADMILL Canon overpowering Xerox. Most companies were too preoccupied with the present than the future? 99% of the companies overpowered.
downsizing). Thus efficiency was grievously hurt. CEO’s brutally pick up the knife and ruthlessly carve away layers of corporate flab (delayering. These denominator based managers stuck to their restructuring strategies (like building pyramids) and didn't know what to do next? Thus they became history? (like the pharaohs) 267 . falling market share). most often they ended up cutting corporate muscle as well and became anorexic.THE PAST OF COMPETITION Beyond Restructuring – When a competitiveness become inescapable problem (stagnant growth. decluttering. declining margins. Not knowing when to stop.
The future is not about catching up with competition.THE PRESENT OF COMPETITION Beyond Reengineering – Numerator based managers (innovation) at least offers some hope. incrementalism or nominal innovation has almost reached a plateau. 268 . but forging ahead in competition. However. top managers believed that quality will be a source of competitive advantage of the future. but not of the future. A poll in circa 2000 revealed that 80% of the U. ensuring only survival of the present. On the contrary only 20% of Japanese managers believed that quality will be a source of competitive advantage of the future.S.
Empower from bottom to top. 269 . and regenerate its strategies (breaking its – managerial frames). they are not enough to get a company to the future. demographics and lifestyles. better. Companies need to fundamentally reconcieve itself. It involves Dream about the company’s future. as important as these may be. reinvent its industry. Transform the industry. Creating the future requires industry foresight. don’t predict. aspirations and resources. Create a potential gap. It is based on deep insights into trends in technology. faster. not just the organization.THE FUTURE OF COMPETITION Regenerating – Leaner. not the other way.
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. Therefore. blue oceans). It is about deliberately creating a strategic misfit. It drives a hunger and a passion to transform. Change in at least one fundamental way the rules of engagement in an industry.e. Successful companies have a complete grip over the industry. they do not need to restructure. Redraw the boundaries between industries. 271 . by converging technologies complex. Create entirely new industries (i. hence do not fall sick in the first place.
Such a process is called institutionalization (from people centric to organisational centric). 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.ABOUT THE EMPOWERMENT Bring about a revolution (a paradigm shift) in the organization. Transformational leaders merely lead the way. A revolution that is thrust upon from the top seldom sustains. 272 . More importantly. The middle management plays a strong moderating role.
Get to the future first. Apply the 40 – 30 – 20 principle. Apple – iphone). It requires a lot of common sense and a little bit of out of the box thinking. South West Airlines – LCC. Companies need to strategize (think ahead of times). 273 . Toshiba – LCD. What does it take to get to the future first? Understanding how competition for the future is different. A process for finding and gaining insight into tomorrows opportunities (Eg. without taking undue risk.THE FUTURE OF STRATEGY A company must get to the future not only first but also for less. An ability to energize the company.
As there is no one future. Companies of the future will be not based so much on the strength of their resources. greatness from mediocrity. as on their aspirations. is the ability to imagine in a different way what the future could be.HOW DOES THE FUTURE LOOK LIKE? There is no rule which says that for every leader there will be a follower. We are in the midst of a 3600 vacuum. but hundreds. 274 . The farther one can see in this endless space. What distinguishes a leader from a laggard. each point in space represents a unique business opportunity. the farther it will be away from competition.
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 Curve t1 t2 t3 Time t4 t5 277 . Degree of Learning Unlearning Curve P2: Unlearning in previous period does not necessarily ensure learning in the current period.LEARNING TO FORGET P1: The degree of learning in current period is directly proportional to the degree of unlearning in the previous period.
Leverage – They are the gateways to future markets. It represents the collective learning's of an organization centering around diverse streams of technologies. Inimitable & Insubstitutable – A high degree causal ambiguity between these skills yield sustainable competitive advantage. It is characterized by the following – Unique – It provides unimaginable customer value ahead of its times. 278 . It cannot be matched even by its closest competitors.CORE COMPETENCE A core competence relates to a bundle of skills (not an asset or a business) that revolves around activities or processes and critically underpins a firm’s competitive advantage.
Although a core competence may lose value over time. Wal-Mart – logistics. Honda – engines. Toyota – lean manufacturing. Intel – nano-electronics. it gets more refined and valuable through use. Toshiba – flat screen displays. it is deeply embedded in the heart of the organization. at the most three to four. Most companies around the world do not possess one. leaders have one. Coca Cola – brand. SKF – antifriction and precision. Canon – imaging.MORE ABOUT CORE COMPETENCE Sony – miniaturization. 279 . Core competencies are the roots of the organization. A core competency cannot be outsourced. Nike – designing.
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 .
1997). strategies suited for the developed markets may not be appropriate for emerging markets. Diversified groups in operating in emerging markets therefore benefit from unrelated diversification. Therefore focused strategies based on core competence may not be suitable for emerging markets (Khanna & Palepu.EMERGING MARKETS Emerging markets (India. high levels of market imperfection). 288 . and high transaction costs. China.e. Emerging markets are characterised by infrastructural bottlenecks. Therefore. Korea. institutional gaps. Chile) provide a different context (i.
Entropy). Synergy. Concentric. subsequently negatively related across developed markets. et al. (2000) 289 . Experience Strategic Fit Diversity Palich. Optimum level of diversification Performance Diversity is initially positively related with performance. Size & Scale.DIVERSITY .PERFORMANCE (I) Diversity attempts to measure the degree and extent of diversification (Herfindahl.
DIVERSITY . subsequently positively related across emerging markets. Huge initial investment.PERFORMANCE (II) Diversity is initially negatively related with performance. conglomerate power Threshold level of diversification Performance Diversity (Khanna & Palepu. 2001) 290 . brand building Risk diversification.
It should have a spread of interest groups / stake holders. Characteristics – It should have a spread of affiliates or subsidiaries.INTERNATIONAL IDENTITY MNC’s consciously engage in FDI in different parts of the globe to forge resource diversity as a distinct competitive advantage. act locally (Eg. It should think globally. 291 . revenues and profits. It should have a spread of assets. HSBC). It should have a spread of manufacturing facilities.
292 . Feminity Index .It reflects the disparities in women in workforce (Eg. high feminity index in developed markets and vice versa for emerging markets).GLOBAL BUSINESS ENVIRONMENT Power Distance – It reflects the disparities in income and intellectual development (Eg. low risk profile in developed markets and vice versa for emerging markets). low group scale in developed markets and vice versa for emerging markets). Group Scale . Risk Profile – It reflects the risk attitude of the top management (Eg.It reflects the relative role of team building (Eg. low power distance in developed markets and vice versa for emerging markets).
judiciary) of doing business in a particular country (Eg. currency.culture. credit rating. 293 . inflation. flexibility (Eg. code of conduct. way of life. attitude. terrorism (9/11). customs. dress sense.GLOBAL BUSINESS ENVIRONMENT Cultural Adaptability – It reflects the adaptive ability to a changing environment . interest rates. corruption. FOREX reserves. high cultural adaptability in developed markets and vice versa for emerging markets). Country Risk – It reflects the political and economic risk (Eg. political stability. time value. low country risk in developed markets and vice versa for emerging markets).
in most emerging markets use of an interpreter may be a standard protocol. High levels of ethnocentrism usually has a negative effect on business. time-zones. Language Barriers – Developed country managers expect foreign partners to communicate in their languages. Ethnocentrism – Developed country managers tend to regard their own culture as superior. in most emerging markets meetings are delayed and lasts unusually long. and vice-versa. 294 . Other factors – local celebrations.GLOBAL BUSINESS ENVIRONMENT Time Sensitiveness – Developed country managers regard time as precious. however.
GATT GATT was a bi-lateral treaty initiated between US and some member countries in 1947 to promote free trade. It also highlighted the nexus between US & WTO. It also initiated provisions on anti-dumping. copyrights. The 2001 (Doha Round) focused on power blocks (NAFTA. It focused largely on TRIPS (patents. BRIC). ASEAN. 295 . The 1999 (Seattle Round) saw a lot of protest amidst bringing agriculture under the purview of TRIPS. It a multi-lateral treaty with 143 (as on 2002) member countries to reduce tariff and non-tariff (quota) barriers. trademarks). In 1995 (Uruguay Round) GATT was renamed to WTO.
the Euro slowly started outperforming the Dollar.EURO – SINGLE CURRENCY In 1999 twelve member countries in Europe joined hands to move over to a single currency (i. However. Euro).e. primarily the OPEC countries. The notable exception was Great Britain which still continues with its local currency (i. However with current recession in the US 2002 onwards. Sterling . The Euro was significantly devalued against the Dollar till 2002. 296 . the Dollar still remains the most preferred currency globally. three countries joined in 2002 increasing it to fifteen members as of 2008.Pound).e.
Transparency – A single currency is transparent and competitive.SINGLE Vs MULTIPLE CURRENCY Transaction Costs – Though the initial cost of introduction of a single currency is very complicated and costly. a multiple currency is preferable where the business cycles of member nations are different. Trade Block – It will strengthen the EU identity which would not have been possible otherwise. but it may have spill-over effects. it helps avoiding transaction costs associated with a multiple currency. However. Rate Uncertainty – A single currency eliminates the risk of competitive devaluations. 297 .
– FDI (transfer of tangible resources) is slow but steady for the purpose of economic growth.e. It is short-medium term with comparatively low levels of commitment.FII Vs FDI INVESTMENT Classical economists believed that foreign investment (in any form) is basically a zero sum game (i.e. hot money). Neo classical economists believe that foreign investment may in fact be a win-win game. – FII (transfer of intangible resources) is fast but may have strong repercussions (i. the gain of one country is loss of another). It is long term with high levels of commitment. 298 .
Pricing – It depends on the competitive structure (PLC – Kellogg's). lifestyle (petroleum 299 outlets – departmental stores). promotion (surrogate advertising). technology (microchip). buying patterns (spread).INTERNATION MARKETING Product – The various attributes of a product may receive different degrees of emphasis depending on differences in . economic (middle class buying power). customer awareness (microwaves). usage (talk time).culture (food habits). . Distribution – It depends on the market characteristics (fragmented – concentrated).
Cost Structure – Companies in India need to investment in fixed costs due to poor infra-structure 300 compared to developed markets. equity is cheap in India). Leverage – The leverage may vary across countries depending upon money and capital market conditions (Eg.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. Accounting Norms – The accounting norms of one country (AS . .India) may be different from that another trading country (US – GAAP or IRS). debt is cheap in US.
double taxation. Compensation – Differential pay packages exists because of differences in purchasing power. technology (convergence.INTERNATIONAL HR An uniform HR policy is idealistic to enable parity in performance appraisal. and cultural barriers (language) vis-à-vis emerging markets. in most cases it is not desirable nor practiced. Recruitment – In local recruitment. skills are more important that cultural fit and vice-versa. shortened life cycles). Training – It is a pre-requisite for international business to reduce language. social security. 301 . however. labour laws.
Bosch spark plugs are used by car manufacturers worldwide).INTERNATIONAL OPERATIONS Location Incentives – FDI in emerging markets should explore options for SEZ’s to explore benefits (tax holidays. reduce power costs) vis-à-vis infrastructural bottlenecks. Outsourcing – A company having a core competence may be the source of global outsourcing (Eg. SCM – Use of ERP to network the extended enterprise 302 across the globe. . Technology – The cost to be evaluated in terms of latest technology (Euro VI) vis-à-vis effective cost of appropriate technology (Euro II).
CONTEMPORARY TOPICS 303 .
While innovation typically adds value for organizations. innovation is the first attempt to carry it out in practice. it has destructive effects as well. Innovation is all about staying ahead of competition. but has inherent risks involved as well. 304 . Innovation is the most preferred strategy today to maintain competitive advantage in the present turbulent business environment.INNOVATION An invention is the first occurrence of an idea for a new product or process. Innovations typically paves the way for more secured and improved lifestyle for consumers in general.
While product innovations are typically customer driven. Process innovation usually follows product innovation. Strategic innovation has the potential to change the rules of the game.TYPES OF INNOVATION A key challenge is maintaining a balance between process and product innovations. process innovations are organizational driven. process innovation is necessary to sustain the competitive advantage of product innovation. However. Tangible impact of product innovation on performance is significantly higher than process innovation. 305 .
Disruptive business models brings in a new frame of reference (i. Data Storage (Pen Drives). Innovations are the back-bone of successful business models .e.BUSINESS MODEL It is a simplified description and representation of a complex real world. putting an idea into practice). Medical Surgery (Lasik). Processors (Pentium). Drug Development (Bio Chemicals). It leads to a shift in the price – performance envelope. Telecom (CDMA Technology). 306 . about how an organization makes money (i.e. a paradigm shift).
The segment(s) of clients to be addressed. The channels to reach out to the clients. The key partners involved in the activities. The cost structure resulting from the business model. The key activities / processes necessary for execution. The key resources and capabilities required.NINE BUILDING BLOCKS Value proposition offered to the market. 307 . The revenue streams generated by the activities. The proposed relationships established with clients.
BUSINESS MODEL FRAMEWORK 308 .
It involves – Product Visualization – Product Prototype – Product Test – Capacity – Pricing – Distribution. The revenue model described here are the means to generate revenues. With the rapid erosion of certain industries (IT. innovative companies to carve out unique business models to fend off competition. It is just one piece of the puzzle. Real Estate) companies need to untangle and understand the intricacies of their business model. Investment Banking. 309 .REVENUE MODEL Positioning is just not sufficient.
Provide reasonable incentives (not necessarily monetary). A favourable intellectual property (IP) climate. Allow the management sufficient slack to be future oriented. 310 . Promote the grape-vine. Allow the workforce idiosyncrasies for their errors. Have a lean and a flat organization structure.HOW TO MAKE INNOVATIVE CO’S Innovative company’s are a matter of culture and aspirations rather than tangible resources. Promote the culture of experimentation.
companies are increasingly relying on internal protection to sustain innovation effects.HOW TO PROTECT INNOVATION? Without adequate protection (external or otherwise) the effects of innovation does not translate to performance. Collusion with the judiciary is also another distinct possibility in emerging markets. however that possibility is slowly atrophying. The most preferred strategy of internal protection includes imbibing “causal ambiguity” in the production process to make reverse engineering difficult. In most emerging markets where the IP climate is not so favorable. 311 311 .
Corporate governance aims to reduce the principal-agent problem present in most professional managed organizations through appropriate forms of accountability and control mechanisms. 312 312 . In fact the principles of corporate governance implies that managers go beyond in satisfying the stated and unstated needs of the multiple stakeholders.CORPORATE GOVERNANCE The basic theme of corporate governance is to ensure that professional managers are identified and made accountable in terms of clear business processes or activities and held responsible through adequate mechanisms & control systems for channelizing their decisions for the benefit of stakeholders at large.
shareholders can diversify their portfolio at a much lesser risk and cost. From the strategic point of view managers tend to diversify into unrelated businesses as it provides higher returns hence a more favourable appraisal. 313 .AGENCY THEORY The root of Corporate Governance goes back to the Agency Theory. However. According to the agency theory top managers and shareholders interests are usually conflicting in nature and tend to pull in opposite directions. not present in portfolio diversifications. also known as the principal-agent problem or agency dilemma. This exposes the shareholders to additional risks and higher costs.
SEBI Report – 2005. various laws were enacted to ensure proper usage of these funds. . the US government passed the Sarbanes – Oxley Act. After the Enron downfall. defines corporate governance (headed by Kumar Mangalam Birla) as the acceptance by management of the inalienable rights of shareholders as the true owners of the corporation and of their own role as trustees on behalf of the 314 shareholders.ORIGIN & CONTEXT Since the early 20th century since a large part of public funds were held by publicly traded firms in the US. 2002 to restore public confidence in corporate governance.
including the society at large. Role and responsibilities of the board: It deals with issues about an appropriate mix of executive and nonexecutive directors. 315 . Interests of other stakeholders: Recognize the legal and other obligations of all legitimate stakeholders.GOVERNANCE PRINCIPLES Rights and equitable treatment of shareholders: Help shareholders exercise their rights by effectively communicating information in transparent ways that is understandable and accessible and encouraging shareholders to participate in general meetings. The key roles of chairperson and CEO should not be held by the same person and their offices be clearly separated.
. assessment and mitigation of risks and retirement by rotation over a fixed period of time. They should also implement systems to independently verify and safeguard the integrity of the company's financial reporting.GOVERNANCE PRINCIPLES Integrity and ethical behaviour: Organizations should develop a code of conduct for their top management that promotes ethical and responsible decision making. Disclosure and transparency: Disclosure of information should be timely and balanced to ensure that investors have clear access to data and facts. Independence of the entity's auditors: Identification. 316 316 .
Remuneration: Performance-based remuneration is designed to relate some proportion of salary to individual performance. they should provide no mechanism or scope for opportunistic behaviour. fire and compensate top management. discussed and resolved.GOVERNANCE STRATEGIES Monitoring by the board of directors: The board of directors. with its legal authority to hire. a person benefitting from a decision should abstain from it. However. safeguards invested capital. Regular board meetings allow potential problems to be identified. 317 . Balance of power: The simplest balance of power is very common.
The size of the premium varied by market. from 10% for companies where the regulatory backdrop was least certain (those in Morocco. who had no management ties. They defined a well-governed company as one that had mostly out-side directors. 318 . Egypt and Russia) to around 40% for Canadian & European companies.GOVERNANCE & PERFORMANCE In its “Global Investor Opinion Survey” of over 200 institutional investors in 2002. McKinsey found that 80% of the respondents would pay a premium for wellgoverned companies. and was responsive to investors' requests for information on governance issues. undertook formal evaluation of its directors.
Therefore. today economic institutions are considered as a major drivers of improvement in quality of life in general and therefore needs to include multiple stakeholders. The basic premise is that firms cannot exist in vacuum. However. the short-term view of profit maximisation gave way to a more broader and mediumterm view wealth maximisation of the shareholders. 319 . corporate philanthropy should be a part of every corporate mission.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. Over a period of time.
“a healthy business cannot exist in a sick and impoverished society”. giving a very important message that one cannot exist without the other. Therefore. economic and social responsibilities cannot be mutually exclusive. However.CORPORATE SOCIAL RESPONSIBILITY As Peter Drucker rightly pointed out that. “an enterprises decisions and actions being taken for reasons at least partially beyond its immediate economic interests”. CSR can be defined as. Therefore. in fact a large part of it is significantly overlapping. the debate on CRS still continues whether firms should detract its focus from its business? 320 .
The role of media: The media and various consumer organizations have come up in protecting consumer rights and exposing mal-practices. Public image: Entrepreneurs are increasingly relying on public image as a source of competitive advantage and a higher financial discounting. MRTP). 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.GROWING CONCERN FOR CSR Awareness due to education: With growing literacy. 321 .
and extended producer responsibility (Eg. Cement . Exide – Product take back). Tata Steel – Life Line Express). 322 . Refrigerators – CFC. Aditya Birla Research Centre – LBS). designing eco-friendly products. Education. Literacy & Training Programs – (Eg.Paper packaging. eco efficiency.CSR STRATEGIES Green Supply Chain Management: It includes environmentally preferable purchasing. Health & Hygiene – Attending the health hazards due to wastes and by-products to employees and society in proximity (Eg.
323 . In turn companies by serving these markets. C. Strategic innovations leading to disruptive business models can show the way out. they're helping millions of the world's poorest people to escape poverty.BOTTOM OF THE PYRAMID With the market across most developed markets including the US getting saturated. They represent an enormous opportunity for companies who learn how to serve them. K. Prahalad notes that future markets exist collectively. across the world's billions of poor people having immense untapped buying power.
BLUE OCEAN STRATEGY 324 .
MARKETSPACE .TWO WORLDS 325 .
competing head on results in nothing but a bloody red ocean of rivals fighting over a shrinking profit pool. .WHAT IS RED OCEAN? Companies have long engaged in head-to-head competition in search of sustained. battled over market-share. profitable growth. They have fought for profits. one companies gain is always at the 326 cost of another companies loss. Yet in today’s overcrowded industries. In today’s red oceans. where most industries are saturated. and struggled for differentiation (cost or product).
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 is only the frames of the . Such strategic moves are possible through the pursuit of product differentiation and low cost simultaneously. it will exist 327 in the future as well. rendering rivals obsolete and unleashing new demand.WHAT IS BLUE OCEAN? Tomorrow’s leading companies will succeed not by battling in red oceans. Blue Ocean’s have existed in the past.
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 .
information imperfections atrophy instantly. Population shrinkage across a no.BLUE OCEAN STRATEGY IMPERATIVES Prospects in most established market spaces – red oceans – are shrinking steadily. As trade barriers between nations & regions fall. Niche markets & monopoly havens are continuing to disappear. . Demand across developed markets reaching a plateau. of European nations. Technological advances have substantially 329 improved industrial productivity.
Company & industry are the wrong units of 330 strategic analysis. the underlying technology was often already in existence. . Incumbents often create blue oceans within the ambit of their core business.CONCEPTUAL UNDERPINNINGS Blue oceans have existed in the past and will exist in the future as well. managerial moves are. They are not necessarily about technology. History indicates that blue oceans exist in three basic industries – automobiles (how people get to work) – computers (what people use at work) – entertainment (what people do after work).
IMPLEMENTATION Reduce Which factors to be reduced below the industry standard Eliminate Which of the industry factors that the industry takes for granted should be eliminated Create VI Which factors should be created that the industry has not offered Raise Which of the factors should be raised above the industry’s standard 331 .BLUE OCEAN .
IMPLEMENTATION SEQUENCE Buyer Utility (1) Is there exceptional buyer utility in your business idea? Price (2) Is your price easily accessible to the mass of buyers? Blue Ocean Strategy Adoption (4) What are the adoption hurdles in actualizing your business idea? Are you addressing them up front? Cost (3) Can you attain your cost target to profit at your strategic price? 332 .
Sony Play Station: Redefining machine-human interface in entertainment and targeting an altogether new user base.SOME GLARING EXAMPLES In the last century authors Kim and Mauborgne have documented the creation of more than 150 blue ocean creations across 30 industries – Virgin Atlantic: Fractional jet ownership or travel to space. Citibank – Automated teller machines & credit 333 cards. . Southwest Airlines: Pioneering the concept of LCC.
greater than themselves.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. According to this view. companies & managers are largely at the mercy of economic forces. 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. Off late emerging views in strategy having its origin in (Organization Theory) led to a paradigm shift to what is called the – reconstructionist view.
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