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Course Code: 611 & 612 Dr. Subir Sen – Faculty Member, IBS
E-Mail: email@example.com, 9830697368 1) Crafting & Executing Strategy – Thompson & Strickland. 2) Strategic Management – Pearce & Robinson. 3) Strategic Management – Fred. R. David. 4) Exploring Corporate Strategy – Johnson & Scholes. 5) Competitive Advantage – Michael E. Porter. 6) HBR – Articles & Case Studies.
STRATEGY - DEFINITION
Strategy is all about making trade-offs between what to do and more importantly what not to do; consciously choosing to differentiate. It reflects a congruence between external opportunities and internal capabilities. Types of strategies – Corporate Strategies – It is all about making choices across various businesses and allocating resources among them. Business Strategies – It is all about developing leveraging and sustaining competitive advantage. Functional Strategies – It is all about finding newer ways to perform existing processes, or 3 better still adopting new processes altogether.
STRATEGIC MANAGEMENT DEFINITION
Strategic management attempts to integrate the traditional management functions and align the organization as a whole with the broader environment to make resource allocations in a way to achieve the strategic intent of the organization. This alignment is called strategic fit. It serves as a road-map for the organization in its growth trajectory. It provides the direction – extent – pace – timing. It depends on the turbulence of the environment and the aggressiveness of the organization. It distinguishes the winners from the losers.
PILLARS OF STRATEGIC MANAGEMENT
Differentiation – Differentiation of key inputs and technologies helps a firm to consciously move away from homogeneous to heterogeneous markets enabling them to earn super-normal profits from normal profits. Integration – Whenever dealing with a complex task of managing a business (i.e. involving a no. of variables with cross linkages) it is in the interest of simplicity that the task be broken up in smaller components. However, for effective control, integration is essential. Alignment – Since differentiation is prone to replication, it is in the interest of the firm to differentiate continuously by aligning the resources with environmental opportunities.
STRATEGIC MANAGEMENT FRAMEWORK
Economic al Strategic Finance Fit Political Strategic Intent Fit Political Marketin g Manageme nt Social & Cultural
It is long-term in nature. It involves substantial resource outlay. It is all about creativity and innovation. It provides broad guidelines.STRATEGIC MANAGEMENT . It is a holistic and integrated approach.FEATURES It forms the core activity of the top management. It is irreversible. 7 . It is about adaptation and response to the same. It requires full commitment of the top management.
It involves only the top management. It brings instant success. It attempts to minimize risk. It is about forecasting. It involves nitty-gritty's. It a bundle of techniques or even tricks.STRATEGIC MANAGEMENT – MYTHS It involves short-cuts. 8 . It is about a definite formula. It about mere data and facts. It is fool-proof in nature. It is rocket science.
To assimilate change faster. To tap markets across boundaries. To be proactive. scale and scope. To be future oriented.STRATEGIC MANAGEMENT IMPERATIVES To be continuously alert. To innovate. 9 To develop core–competencies. rather than reactive. again and again ……. . To gain expertise in technologies. To generate large resource pool. To be insulated against environmental threats. To leverage size.
Even in today’s markets. but by virtue of their courage. today's battles are fought over markets.ORIGIN The word strategy has its origin from the Greek word strategia meaning Military Commander. It is an old wine in a new bottle. battles fought on the market front are won by companies by virtue of their obsession & strategies. whose origin can be traced to some of the greatest battles fought in the ancient days. but with a lot a rigour and robustness.strategies. In contrast. In the ancient days battles were won not by virtue of size of the army or armory. obsession. and more importantly . In the ancient days battles were fought over land.STRATEGY . 10 .
SOME PARALLELS Japan’s attack on Pearl Harbour – Strategy: Attack where it hurts the most. – Reliance’s entry into telecom. Napoleon’s attack on Russia – Strategy: Waiting for the right time. US attack of Morocco to capture Germany – Strategy: Pin-hole strategy – Wal-Mart challenging Sears by entering small towns. – Yahoo and Microsoft challenging Google. – Toyota’s entry in the US. 11 . Allied Forces Vs Germany (WW-II) – Strategy: Forging alliances. challenging GM and Ford.
– Mass Production Organization Size – Complicated Processes – Complex Structures Evolving of an emerging paradigm – survival of the fittest (Fayol & Taylor. The first major discontinuity in the history of global business environment was the . The things happening around the firm when totally disconnected from the past leads to a paradigm shift.EVOLUTION OF MANAGEMENT As Peter Drucker refers to it. 12 . a radical change in the business environment brings about discontinuity. A paradigm is a dominant belief about how the business and its environment operates. 1910).Industrial Revolution.
13 .EVOLUTION OF STRATEGIC MANAGEMENT The second major discontinuity in the history of global economic environment – World War II. Survival of the most adaptable becomes a new management paradigm (Ansoff. Efficiency and effectiveness are no longer sufficient. push to pull). – Affluence of the new customer (i.e. 1960). performance across firms became differentiated. – Changes in the technology fore-front. – Homogeneous to heterogeneous products. The question of outperforming the benchmark became the new buzzword. – Global market place. From uniform performance.
ENVIRONMENTAL CHANGE Phase IV: Horizon of Scenarios 2 1 Phase I: Extrapolation of the past 1 3 1990 onwards 1 2 1 3 1A 1B 2A Prior to 1950 Phase II: Discrete Scenarios Phase III: Range of Scenarios 1970 to 1990 2 2B 1950 to 1970 14 .
– Biases and prejudices has a very little role to play in strategic choices pursued by managers. 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. – It is primarily the top management’s prerogative. – The choice of product-market mix is based on conscious evaluation of risk – return factors. – The choice of strategy is primarily concerned with external ones rather than internal ones. 15 . Learning always begin on a clean sheet of paper.
everything else follows. how it will compete. The organization initially decides which industry to enter. 16 .APPROACHES TO STRATEGY Design Approach – Alfred Chandler (1970) – Structure follows strategy. – Management control systems has a dominating role in influencing firm performance. Successful organizations align authority and responsibility of various departments in way to reach overall objectives. – Organization structure will precede and cause changes in strategy. – The top managers then decide on the type of organization structure & systems to be in place. Once the control systems are in place. who will be the top managers.
– The organization will outperform the industry where environmental forces are weak and vice-versa. – The environmental forces comprises of – supplier. customer. 17 . new entrant. – An organization is seldom in a position to influence the larger business environment. – A firms performance is inversely related with the bargaining power of environmental forces to which it is exposed.APPROACHES TO STRATEGY Positioning Approach – Michael E. competitors. substitutes. Porter (1980) – Choose a consumer segment and position your product accordingly.
They are complex resources and undermines a firms competitive advantage. 18 . – Core competencies are a set of skills that are unique and can be leveraged. but exploiting the resource differences among them. locating in most attractive industries and pursuing the same strategy.APPROACHES TO STRATEGY Core Competence – C. K. – Organizations can significantly alter the way an industry functions. Prahalad (1990) – The key to superior performance is not doing the same as other organizations. – It enables a firm to deliver unimaginable value ahead of time.
STRATEGIC MANAGEMENT PROCESS Strategic Intent Strategic Planning Strategic Gap – Environmental Scanning – Internal Appraisal of the Firm Strategy Formulation – Corporate Strategy – Business Strategy Strategic Choices – Functional Strategy Strategy Implementation Strategy Performance Strategy Evaluation & Control 19 .
TOP MANAGEMENT PERSPECTIVE 20 .
you cannot reach there. A substantial gap between its resources and aspirations. It provides a sense of direction and destiny. A strategic intent is a statement of purpose of existence. It implies a significant stretch. It’s a philosophy that distinguishes it from its competitors. 21 .STRATEGIC INTENT If you cannot see the future. It is the cornerstone of an organizations strategic architecture reflecting its desired future state or its aspirations. A gap that consciously manages between stagnation and atrophy. It involves an obsession to be the best or outperform the best.
STRATEGIC INTENT .HIERARCHY Integrativ e m Do an in Visio n Mission Dominant Objective s Goal s Plans Lo g ic Single Specifi c Man y 22 t .
DOMINANT LOGIC A dominant logic can be defined as the way in which the top management team conceptualizes its various businesses and make critical resource allocation decisions. when radical changes in the internal and external environment (i. 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. Dominant logic changes. strategic variety) is apparent. To put it more simply. It is core to the strategic intent of the firm. 23 .
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. but achievable aspirations. It provides an unity of purpose amidst diversity of personal goals.VISION It is a dream (not a forecast) about what the company wants to become in the foreseeable future. It is a combination of three basic elements – – An organizations fundamental reason for existence. beyond just making money. – It stands for the unchanging core values of the company. 24 . – It represents the company’s audacious.
In Reliance when a new project becomes operational top managers hand over charge to the SBU heads and move on to a new project. Reachable – It should be within a reasonable target in the known future. Empathy – It should reflect the company’s beliefs to which it is sensitive. and memorizable. Sharing – The company across all hierarchies should have faith in it.CHARACTERISTICS Reliance – Where growth is a way of life.VISION . 25 . clear. not an utopian dream. Brevity – It should be short. Clarity – Vividly descriptive image of what the company wants to be known for in the future.
26 . It provides a holistic picture.VISION . To prevent the fall in a activity trap. It makes strategic alignment easier. It fosters risk taking and experimentation. It lends integrity and genuineness. It facilitates development of skills & capabilities. It gives enlightment. It gives a shared platform. It gives the impression of a forward-looking organisation.ADVANTAGES To stay focused on the right track.
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. 27 . Although the purpose may change over time.MISSION Mission defines the space that a business wants to create for itself in a competitive terrain. It serves as a road map to reach the vision. its reason for existence. It enables the firm to define its business landscape and identify its competitive forces. A broad mission statement helps in fending competitors.
We offer solutions. Some other examples – We do not offer shoes. …………………. – We do not offer insurance.MISSION – SOME IDEAS Reliance – We are in the business of integration. 28 . – We do not offer software's. though some may seem unrelated in nature. …………………. We offer strength. …………………. All the businesses of the company are strongly integrated with their main business. We offer security. – We do not offer steel. We offer comfort. ………………….
– It adds legitimacy and motivation.100K crore company by the year 2005. – It provides a benchmark for evaluation. It provides a quantitative feel to an abstract proposition. – It keeps the mid management pre-occupied.GOALS & OBJECTIVES Reliance – We want to become a Rs. It is an end result (quantifiable) something a firm aims and tries to reach in a time bound frame. – It is based on Management by Objectives (MBO). – It lends direction – time frame in the medium term. – It prevents deviation. – It helps identifying key success factors. 29 .
The details of the plan Reliance Telecom adopted were – Backward integrate process technologies. – Acquire a market share of indomitable position. It is specific to a particular business. coordinating appropriate technologies. 30 . It is the process of garnering necessary inputs.PLANS Reliance – Desire to invest 25K crore in telecom business by circa 2010. – Use price-elasticity to break market barriers. – Compress project times. and gaining access to desired markets to achieve the desired goals and objectives. – Leverage economies of size and scale.
past strategies tend to have a bearing on future strategies. This tendency to restore continuity is known as inertia (resistance to change). This state of affairs is known as strategic drift. When changes in the environment is incremental. equilibrium is maintained. However. It often leads to an organizational crisis. Historical studies have shown that most organizations tend to continue with their existing strategies. 31 . radical change may lead to disequilibrium. In such a context.STRATEGIC DRIFT Due to top management commitment. strategies lose touch with the emerging realities.
STRATEGIC DRIFT FRAMEWORK Environmental Change Degree of change Strategic Change Radical Change Incremental Change State of Flux Continuity Stage of Transformation Strategic Drift Stage of Atrophy Time 32 .
– Hiding vulnerability. – Creating obligations of reciprocity. 33 .ORGANIZATIONAL POLITICS Strategic drift often leads to organizational politics. Some instances of organizational politics – Formation of powerful groups or coteries. – Creating a favourable image. – Developing a platform of support. Organizational politics involves intentional acts of influence to enhance or protect the self-interest of individuals or groups over organizational goals. – Distorting information to gain mileage. – Using covert tactics to pursue self interests.
Other causes – – The plans are unworkable and utopian. – Influential stake-holders back out.INTENDED & REALISED STRATEGIES An intended strategy is an expression of interest of a desired strategic direction. . – Persons responsible for strategy conceptualization and implementation are34 divergent. 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. – The environment context has changed.
Strategy formulation and implementation are linked together in a continuous improvement cycle. but as a defensible response to the complexities of a large organization that mitigate against publicizing goals. However. but the master scheme of the rational comprehensive scheme is not apparent. this is not to be treated as “muddling”. 35 .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. They simply unfold the particulars of the sub-system in stages. Learning is an integral part of logical incrementalism.
Adaptation – As implementation progresses.IMPLEMENTING INCREMENTALISM General Concern – A vaguely felt awareness of an issue or opportunity. Leveraging Crisis – A sudden crisis or an opportunity should be used as a trigger to facilitate acceptance and implementation of change. Agent of Change – Formal ratification of a change plan through MBO. 36 . The broader objective should serve the overall interest of the organization. Macro Broadcasting – The broad idea is floated without details to invite pros and cons leading to finer refinements.
It creates blinders. Tampering with surface level factors often leads to atrophy. Dominant logic’s are very rigid and sticky and prone to inertia. As it brings 37 with it a different dominant logic.STRATEGIC TRANSFORMATION Strategic transformation (a complete overhauling of the strategic architecture) becomes inevitable whenever a strategic drift takes place. . Strategic transformation becomes smooth through a change in top leadership. Dominant logic’s are the cornerstones of change when strategic transformation is apparent.
experience. A learning organization must continuously focus on unlearning as well. and skills that fosters experimentation and questioning and challenge around a shared purpose. – Experimentation – Fosters a culture of risk taking. – Informal Networks – Emerging of new ideas. – Organisational Slack – Enough free space. 38 . It helps prevent a strategic drift from occurring at the first place.LEARNING ORGANIZATION A learning organization is capable of continual regeneration from knowledge. Factors that fosters a learning organization – Pluralistic – An environment where different and even conflicting ideas are welcome. – Constructive Bargaining – Agree to disagree.
ENVIRONMENTAL CONDITIONS Dynamic Scenario Planning Learning Organization Static Forecasting Decentralization Simple Complex 39 .
ANALYZING BUSINESS ENVIRONMENT 40 .
It is pro-active in nature. It points to a position of superiority with relation to competition. Strategic gap basically points towards a vacuum of where the organisation wants to be and where it is. gap analysis). It requires a quantum leap (i. Strategic planning is a function of discounting the future.e. It is based on the assumption of incremental change.PLANNING & STRATEGIC PLANNING Formal planning is a function of extrapolating the past. 41 . It is based on the assumption of radical change. Competitive advantage provides the surest way to fulfill the strategic gap. It is reactive in nature.
A manager has to continuously scan the environment to ensure alignment of the strategies with the radically changing environment. The segments of the environment a top manager scans selectively depends upon his dominant logics. The world is flat. not guided by any boundaries. Environmental scanning is very important component of strategic planning. It is exploratory in nature. 42 . events. resources and ideas move unhindered. Environmental factors can be external as well as internal to the organization.ENVIRONMENTAL SCANNING The environment is defined as the aggregate of conditions. and influences that affect an organizations way of doing things.
but also to analyze the complex linkages across them. It is important not only to identify the structural drivers of change. for which a holistic picture is required. 43 . 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. which may be different from the past impact.PESTEL PESTEL attempts to provide a broad framework on how the broader environmental forces affects an organization and influences the way it practices strategy. Understanding the composite effect is critical.
Savings & Investment.PESTEL FRAMEWORK Political – Government Stability. 44 . Central – State Co-alignment. Economic Model. Income & Age Distribution. Literacy Levels. Monsoon & Food Grains Reserves. Fiscal Deficit. Licensing & Quotas. Social Values. Economic Cycles. Subsidies & Protection. Government Attitude. Religious Sentiments. Language Barriers. Inflation & Interest Rates. Economic – GDP. Currency Stability. FDI Inflows. Infra-Structural Investments. Capital Market & Forex Reserves. Social – Population Diversity.
Environmentally Preferable Purchasing. Non-Fossil & Alternative Fuels.PESTEL FRAMEWORK Technological – Innovation. Carbon Credits. Legal – Monopolies Legislation. Research & Development. Consumer Protection Laws. Patent Laws. Employment Laws. Obsolescence Rate. Pollution Control Laws. Product Design. Technological Convergence. Extended Producer Responsibility. Direct & Indirect Taxes. 45 . Product Safety & Health Hazards. Environmental – Global Warming & CSR. Waste Disposal & Emissions. ERP. Patents.
FERA Liberalization. Curtailment of PSU’s. Encouraging FDI. MRTP Liberalization. New Trade Policy (NTP) – Lowering import tariffs. Capital Market Reforms. Dismantling price controls. Encouraging exports. Economic Reforms – Fiscal & Monetary Reforms.ECONOMIC LIBERALISATION New Industrial Policy (NIP) – Liberalizing industrial licensing. Banking Sector Reforms. Structural Adjustments – Phasing out subsidies. PSU Disinvestments. Exit Policy. 46 .VRS. Abolition of import licenses. Rupee convertibility.
Survival of the fittest MNC Onslaught – Enhancing stakes – Power Equation – Joint Ventures – Technological Alliances – Take-over threat. Mergers & Acquisitions 47 .DISCONTINUITY Destabilization due to entrepreneurial freedom – Cocoon of protection disappears – Diversification spree – Existing notions of size shaken – Industry structures change radically – Economic Darwinism .
Consumerism Challenges on the technology front – Competencies become technology based – Investment in R&D become inescapable 48 .Globalization – Cheap Imports & Dumping – Push to Pull Marketing Buyers exacting demands – Shortage to surplus – Price competition – Life-style changes – Stress on quality.DISCONTINUITY Hyper Competition – MNC’s .
DISCONTINUITY Compulsion to find export markets – Identifying competitive advantage – Technological gap – Global presence – Depreciating currency – Exports Corporate vulnerability – It is no longer business as usual – Capital inadequacy – Lack of product clout and brand power – One product syndrome – Loss of monopoly 49 .
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 .
FIVE FORCES MODEL ASSUMPTIONS The model is to be used at the SBU level and not at the industry level. but also used to understand how they can be countered and overcome. profit potential) per se. The model should not be used as a snapshot in time. the forces are subject to changes. The five forces have strong cross-linkages.e. It is even wiser to apply the same at the product – market level. It should not only be used to understand the forces. incremental or otherwise. It depicts the attractiveness of an industry (i. 51 .
Threat of Customers – Buyer concentration and volumes. Resource profile & fear of retaliation. Low customer switching costs. Government policy.PORTERS FIVE FORCES ANALYSIS Threat to Entry – Economies of size and scale. Industry stagnation. Access to distribution channels. Undifferentiated product. Unimportance of product quality. Low margins & stagnancy. Capital requirements. Learning curve advantages. Product differentiation through proprietary technology or brand power. Low relative importance of the segment. 52 . High switching costs. Scope for backward integration. Presence of substitutes or unorganized sector.
Differentiated inputs. High exit barriers.PORTERS FIVE FORCES ANALYSIS Threat of Suppliers – Supplier monopoly. Jockeying for position – Fragmented market. Produced by industries earning high profits. Threat of Substitutes – Improvement in price -performance trade-off. 53 . Low level of differentiation. Low relative importance of the segment. Diversity of players. Industry stagnancy. Unorganised sector. Lack of substitute inputs. Buyer’s propensity to substitute. Intermittent overcapacity. Product perishability. High customer switching costs. Piracy and counterfeits. Scope for forward integration.
Cohesiveness – Degree of bonding existing across affiliated firms. dominant or related diversified or unrelated diversified businesses (Infosys. 54 . Resource Profile – It highlights the capabilities (generic) or competencies (business specific) of the firm. Business Scope – The intention whether the firm wants to be in a single. Inertia – Excessive commitment to past strategies prevents firms from tapping emerging opportunities. Tata). Reliance).FIRM ENVIRONMENT Size and Scale of Operations – It is a very important component of competitiveness in today's global context (Bharti – MTN.
55 . and with lower prices it can increase its sales volume. The E-Curve thus enables organisations to build entry barriers. it can price its products more competitively. However.EXPERIENCE CURVE The cost of performing an activity declines on per-unit basis as a firm becomes more efficient. Experience curve has strong linkages with performance. With lower costs. an E-Curve can prove to be futile during discontinuity. which further reduces costs. Matured firms will always be positioned advantageously on the ECurve than new entrants. experience teaches better and more effective way of doing things. leverage it as a competitive advantage.
EXPERIENCE CURVE Cost per unit of output Decreases at an increasing rate Point of inflexion Decreases at a constant rate Decreases at a decreasing rate Production / Volume 56 .
EXPERIENCE CURVE .TRADITIONAL VIEW Efficiency = Lower Costs 2 3 1 Experience = Efficiency Lower Costs = Higher Sales Entry Barrier = Better Performance 4 6 5 Higher Sales = Lower Costs Lower Costs = Entry Barrier 57 .
EXPERIENCE CURVE .STRATEGIC VIEW Inertia = Limited Growth Experience = Inertia 2 3 1 Limited Growth = Diversification Strategic Failure = Poor Performance 6 5 4 Diversification = New Experience New Experience ≠ Old Experience 58 .
Case Studies – Structured Questionnaires. Business Intelligence – Bankers. Interviews. Acronym for Strengths – Weaknesses – Opportunities – Threats. Press Clippings & Interviews.SWOT The framework was originally conceptualized by Kenneth Andrews in 1970. Observation. Websites. 59 Analysts. Suppliers. . Competitors. Customers. A SWOT audit involves – Company Records – Annual Reports. It helps an organisation to capitalize on the opportunities by maximizing its strengths and neutralizing the threats minimizing the weaknesses. It is one of the earliest models in environmental scanning.VULNERABILITY ANALYSIS .
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 .
Reddy’s. Infosys. Excellent penetration – Eg.SOURCES OF STRENGTH Strong brand identity – Eg. Caterpillar. Economies of scale – Eg. 61 . Aditya Birla. ITC. Ranbaxy. Reliance. Reliance. Siemens. Engineering Skills – Eg. HUL. Biocon. SBI. Tata. Toyota. High quality products – Eg. Sony. Large resource pool – Eg. Strong R&D base – Eg. Motivated employees & cordial industrial relations – Eg. Infosys. Strong after sales & service network – Eg. Good credit rating – Eg. Volkswagen. Dr. Tata Steel. Honda.
K. Modi Group.Raymond. Inertia – Eg. Inefficient top management – Eg. B. Tatas. CESC. Procter & Gamble. Ballarpur Inds.SOURCES OF WEAKNESSES Outdated technology – Eg. Excessive diversification – Eg. Lack of product / brand clout – Eg. Group . K. Organizational Politics – Eg. Single product syndrome – Eg. Narrow business scope – Eg. Excess manpower – Eg. J. Lacking experimentation culture – Eg. Nirma. SAIL. Bijoligrill. CMC (Tata Group) 62 . Strategic myopia – Eg. Hindustan Motors.
Free pricing – Eg. Retailing. VRS. Growing population – Eg. Sugar. Telecom. Fertilizers. Exit Policy – Eg. 63 . Capital market reforms – Eg. Sugar.Tata Motors. Banking. Market driven Interest rates – Eg. Fertilizer. Abolishing CCI.SOURCES OF OPPORTUNITIES Delicensing of Industries – Eg. Globalization – Eg. Life style changes – Eg. Maruti. Middle-class buying power. Collaborations & Joint Ventures – Bharti & WalMart. Abolishing MRTP – Eg. Market driven Pricing – Eg. Insurance. ECB’s. GDR’s.
Dumping from China. Earth Quake. 26/11. Hostile take-over – Eg. Lack of Corporate Governance – Eg. Terrorist attacks – Eg. Tsunami. 64 . Natural disaster – Eg. Reliance.Social activism – Eg. Import relaxation – Eg. Satyam. Onida. Nationalisation – Eg. Economic recession – Eg. (2008). Tata Steel. (1985–1990). Land acquisition .SOURCES OF THREATS Political instability – Eg. Group disintegration – Eg. Bajoria – Bombay Dyeing. Singur SEZ. Foreign Direct Investment (FDI) – Eg. 11/9.
e. time series. It represents a summary picture of the external environmental factors and their likely impact on the organization. Delphi's technique.ETOP Acronym for Environment – Threat – Opportunity – Profile. scenario analysis). Strategic responses (including adaptation) to opportunities and threats is critical for survival and success. Holistic view – Prepare a complete overall picture. Stages in ETOP analysis – List the aspects of the environment that has a bearing on the organization. Forecasting – Predict the future (i. 65 . Assess the extent of impact of the factors.
It is also a form of assessing vulnerability through longitudinal analysis.PROFIT IMPACT OF MARKET STRATEGY PIMS is a database model developed by GE and later extended by HBS to examine the impact of a wide range of strategy variables on business performance. Some key findings on major performance drivers that explains 75% deviations in performance – Product quality and relative market share. An organization can draw upon the experience of its peers in similar situations. selectively. High investment intensity acts as a drag. . 66 Vertical integration is a powerful strategy. Relative attractiveness of the market.
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.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. Authenticity of data is of prime importance – Contexts drawn across one organization may not be applicable to another. – Contexts may vary over time. . therefore 67 validity may be a question. when radical changes in the economy takes place.PIMS .
KSF helps organizations spot early opportunities and convert them into value adding business propositions. It involves a three-stage process – Identify KSF – What does it take to be successful in a business? Drawing KSF – What should be the organizations response to the same? Benchmarking KSF – How do we evaluate organization success on this factor? 68 . It enables the top management to draw focus.KEY SUCCESS FACTORS (KSF) KSF relates to identification and putting concentrated effort on a particular activity or process which forms the very basis of competitive advantage.
IDENTIFYING ALTERNATIVE STRATEGIES 69 .
unrelated) and geographical scope (local.CORPORATE . It determines the locus a firm encounters with internal and external environment. It provides broad direction to the groups vision and mission. dominant. 70 .GRAND STRATEGY It is concerned with the overall business scope (single. related. It reflects the customer needs it intends to satisfy. A corporate strategy identifies and fixes the strategic gap it proposes to fill. It indicates the quality of growth an organization is looking for. national. global) of a firm and deals with choices of allocating resources across them.
CORPORATE STRATEGY MATRIX Corporate Strategy Stability Stability Growth Growth Combination Diversification Divestment Intensification Market Penetration Related Vertical Market Development Product Development Unrelated Horizontal 71 .
Stability however. does not relate to do-nothing (Eg.STABILITY It involves maintaining status-quo or growing in a slow and selective manner. 72 . The reasons for stability strategy – – Lack of attractive opportunities. (Eg. – The firm may not be willing to take additional risk associated with new projects. Citibank). erosion of capabilities. – To stop for a while and assess past records. The scale and scope of present operations remains almost intact. – Why disturb the existing equilibrium set up? – Limited resource position. Hindustan Motors). Even during adverse times firms need to adopt a strategy to sustain current performance levels.
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.GROWTH . 73 .
– Suitable for industries where scope for technological breakthrough is limited. – Elongated product life-cycle. Nirma. 74 . direct non-users to users. – Helps firms which are not comfortable with unfamiliar terrain. Britannia).MARKET PENETRATION It is a strategy where a firm directs its entire resources to the growth of a single product or a closely knit product set. within a well defined market segment. – The company carries a risk of product obsolescence. Market penetration can be achieved by – increasing sales to current customers. convert competitors customers. (Eg. Ujjala.
– Unconventional and flexible distribution channels. tyres.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. Du Pont – Nylon: parachutes. 75 . (Eg. carpets. – Moves across geographical boundaries. – Immense customer reach & flexible advertising. – Stretches product life cycles. socks & stockings. upholstery. fabrics.…… or Teflon: aircraft technologies to cutlery to paints or Raytheon Corp – Microwaves: radars to kitchen appliances). – Creativity and innovation – thinking out of the box.
Strolleys). perception. reliability. Microsoft: DOS to Windows) or a substantial improved version (incremental) of an existing product to repeatedly enter the same market (Eg. – Areas of product improvement – performance. Close Up: Fluoride – Gel toothpaste or VIP . serviceability.PRODUCT DEVELOPMENT It is a strategy where a firm tries to achieve growth through a radical new product (Eg. features. – Leveraging through – innovation. conformance. – Leverage on customer and brand loyalty. – Substitutes that serve the same needs (Eg. durability. Refills) 76 . – Deliverable through – redesigning or reengineering. aesthetics.
77 . – Conglomerate or market power (i. thereby creating a new business. industrial embassies). licenses (i. – High transaction costs and institutional gaps. From the modern point of view they are strategically dissimilar. From the traditional point of view.DIVERSIFICATION It marks the entry of a firm into newer markets with new products.e. dominance). – Internal capital market. – Permits: quotas. – Risk reduction.e. Why do firms diversify in the Indian context? – Shift the growth trajectory or opportunistic. the new business is distinct from the existing business in terms of – inputs – technologies – markets.
the ice-cream business would register a return of 30%. Let us assume that there are two businesses constituting the entire market – coffee and icecream. If the hot wave dominates the planet. cold wave dominates the planet. while the coffee business would register a return of 30%. either of which is equally likely to prevail.HOW DIVERSIFICATION REDUCES RISK? Consider a hypothetical planet. ice-cream business would register a return of 10%. in which a given year is either under hot or cold wave. while the coffee business would register a return of 10%. If on the other hand. 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.
Ranbaxy.QUASI & TAPERED INTEGRATION Full Integration . Tapered integration . 85 . Reddy’s).Where one firm has full ownership and control over all the stages of a value-chain in the manufacturing of a product (Eg. Quasi-integration . and out-sources the noncore activities (Eg. Dr. Reliance). Usually the firm concentrates on its core activities.A firm produces part of its own requirements and buys the rest from outside suppliers with a variable degree of ownership and control. Maruti – Sona Steering).A firm gets most of its requirements from one or more outside suppliers that is under its partial control through value chain partnerships (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 ignorance (i. myopia). lack of strategic intent. – Cost of dysynergy (i. and are also strategically dissimilar. synergies pulling in opposite directions). – Cost of neglect (i. lack of knowledge of competitive forces).e. Firms usually engage in conglomerate diversification when emerging opportunities are very attractive and offers potential growth opportunities. core business).e. 87 . Drawbacks of unrelated diversification – – Cost of failure (i.CONGLOMERATE DIVERSIFICATION It relates to entry of firms into businesses which are distinct in terms of – inputs – technologies – markets.e.e.
CONGLOMERATE DIVERSIFICATION Paper & Packaging Edible Oils Tobacco Hotels Food & Confectionary 88 .
where a company simply exits because the business no longer contribute to or fit its dominant logic. reactive) and survival is at stake and the firm does not have resources to fend off competitive forces. L&TCement Division to Aditya Birla Group) technically known as divestiture or a product (Eg. ACC) in full to an independent entity. Tatas sale of Goodlass Nerolac. Tata Press). It is may also be a pro-active strategy. It may also involve a SBU (Eg. It taken into account when performance is disappointing (i. (Eg.DIVESTMENT Divestment is a defensive strategy involving the sale of entire stake (Eg. In strategy there is no scope for sentimentality with divestment. Tata Pharma. Glaxo’s “Glucon-D” to Heinz).e. 89 .
Sale of Diamond Beverages to Coca-Cola for US $ 40 million).3 billion.DIVESTMENT . the Companies Act. (Eg. 1956 does not permit this mode. Tatas buy-out of Corus for US $ 11. However.ROUTES Outright Sale – Popularly known as the asset route. Hive-Off – A hive off is the creation of a new entity followed by transfer of assets. where the equity is allotted amongst the existing shareholders on a pro-rata basis. 90 . involving 608 pence per share). 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. (Eg.
e. mergers and acquisition. growth. developing facilities right from the scratch) or through brown-field projects (i.COMBINATION STRATEGY It is a mixture of stability. A combination strategy can be implemented through green-field projects (i. and divestment strategies applied simultaneously or sequentially for a portfolio of businesses. joint ventures). It is usually pursued by a business group with diverse interests across multiple industries. because every business has its own unique external and internal environment. 91 .e. There can be no ideal strategy for every business.
STRATEGY CHOICE & PORTFOLIO ANALYSIS 92 .
What then is the magical number? 93 . Dominant logic enables top managers to selectively scan the environment and make trade-offs.STRATEGIC CHOICE A strategic choice seeks to determine the alternative courses of action available before top managers to achieve its strategic intent. In most cases the trade-off is between resources and opportunities. 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.
The key task before a top manager is to identify the right problems. managers need to ask the right questions. They must choose problems which will lead to the right kind of opportunities.SELECTIVITY IS THE KEY The role of a top manager is not to solve a problem. if addressed. To identify the right problems. will help the firm achieve its intent. nor is to a define a problem for others to solve. For an optimal choice the following four issues need to be resolved – Is the strategy clearly identifiable? Is it consistent with the resources of the firm? Will it be able to exploit the opportunities in full? Is it in tune with the values and beliefs of the firm? 94 .
keiretsus in Japan. embassies). formal and informal ties. Their roots can be traced to a single family or clan and share broad similarities. BRC).BUSINESS GROUP . High degree of centralized control (GEO. 95 Succession planning is critical to continuity. chaebols in Korea.DEFINITION A business group is known by various names in various countries – guanxique in China. . Their origins can be traced back to market imperfections existing in an economy (MRTP Laws. business houses in India.e. Licenses & Quotas. Proximity to the corridors of power (i. Managing Agency). Resource sharing.
RESOURCE SHARING ACROSS FIRMS Parent Company Firm 1 Firm 5 Firm 3 Firm 2 Firm 4 96 .
STRATEGIC CHOICE – MACRO TIMING Recession (Stability) Prosperity (Diversificatio n) Depression (Divestmen t) Recovery (Intensification ) 97 .
STRATEGIC CHOICE – MICRO TIMING ReEngineering Growth (%) Maturity Stability Growth Diversification Decline .Divestment Duration (Yrs) Inception Intensification 98 .
Redeployment of resources upsets the established power bases of a group. Investing in emerging businesses may not actually be so simple as it appears to be. Why? Businesses are not about liquid assets.PORTFOLIO ANALYSIS Resource allocation across a portfolio of businesses is an important strategic choice. next only to choice of business. Power and resources often goes hand in hand. there are high costs associated with entry and exit. 99 . Rules of the game are different. Relatedness across resources are difficult to realize. sometimes impossible. therefore.
BCG GROWTH MODEL Relative Market Share (%) Industry Growth (%) Low High High Low Stars Question Mark ? Cash Cow Dogs 100 .
but to larger extent than a question mark. provided the industry growth rate continues and the company is able to maintain its growth (i. Tata Steel). These businesses are also net users of resources (Eg. market development. product development).e. Tata Telecom.BUSINESS ANALYSIS – TATA GROUP Question Marks – They have potentials in the long term. diversification). market penetration. 101 . which remains a big? These businesses are net users of resources. Trent. provided the company is able to build up on its market-share (i. Stars – They achievers in the near term. Tata-AIG).e. and their risk profile is high (Eg. TCS.
Tata Motors. Tata Press).e. harvest.e. they are generators of resources. However. Tata Tea. Dogs – They are a drag on the group. Indian Hotels. stability). Groups prefer to dispose off such businesses (i. Tata Chemicals). Tata Pharma. cash cows may also need to invest provided the industry takes an upswing (Eg. Given that the growth potential in the business is low. Nelco. 102 . divest) as achieving a dominant position in these businesses is a difficult task. and the company dominates the industry ahead of competition (i.BUSINESS ANALYSIS – TATA GROUP Cash Cow – These are matured businesses. and they lack on competencies to take on competition and are basically cash traps (Eg.
Certain businesses in the low market share category may be the result of a conscious strategy (i. factors are limited. niche – Rolex. Data may be prohibitive. The model does not provide specific solutions within a particular category. neither in high or low. HUL).BCG . Armani). Cartier. Cash cows may actually need substantial investments to retain their market position (Eg. The terminologies used are somewhat prohibitive. 103 .LIMITATIONS It does not address the concerns of a business which is in the average category (usually the majority).e. Mercedes Benz.
GE .-) 104 .MATRIX Distinctive Capabilities Strong High Medium Weak Stability Industry Attractiveness Diversify (++) Intensify (+) Med Intensify(+) Stability Harvest (-) Low Stability Harvest (-) Divest (.
ARTHUR’ D. LITTLE Inception Dominant Strong Favourable Tenable Weak Growth Maturity Decline Improve Selective Niche Abandon Industry Life-Cycle Divest Harvest 105 Competitive Position Invest Consolidate Hold .
SHELL – DIRECTIONAL POLICY MATRIX Business Sector Prospects Attractive Average Unattractive Generate Cash Phased Withdrawal Distinctive Capabilities Strong Market Leadership Try Harder Double Or Quit Growth Average Custodial Weak Phased Expand Withdrawal Divest 106 .
Divest – Selling a part or the entire business at one go. BCG – Boston Consulting Group.TERMINOLOGIES Harvest – It entails minimizing investments while trying to maximize short-run profits and cash flow with the intention to exit the business in the near future. Gap Analysis – It emphasizes what a firm wants to achieve. SBU – A business unit which is strategically different from another and also shares a different SIC code. Portfolio – An organization is perceived as a portfolio of businesses. Disinvestment involves selling in phases. 107 .
BUSINESS STRATEGY & COMPETITION 108 .
Competitive advantage refers to a firms resources or activities in which it is way ahead of competition. rent). Competitive advantage is the back-bone of strategy. and earning super-normal profits (i. The strength of a firm in a particular business usually stems from its competitive advantage. 109 .e. building market-share. Such resources or activities should be distinctive and sustainable over time.COMPETITIVE STRATEGY A competitive strategy deals with how a firm competes in a particular business or product-market segment. The principal focus is on meeting competition.
involving harmonizing and integrating multiple streams of technologies. Delta Lock In – Two dominant players co-opt to selfreinforce and create or escalate an entry barrier. Blue Ocean – Consciously moving away from overcrowded industries to uncharted territories and making competition irrelevant (Kim & Mauborgne). Resource Based View – Obsession with competence building. developing competitive advantage (Porter). identifying critical success factors.BUSINESS STRATEGY FRAMEWORKS How to be distinctive and yet sustainable – Differentiation – Understanding of the dynamics of competition. 110 . leveraging (Prahalad). preventing new entry and/or competition (Hax & Wilde).
Steep experience curve effects. Reliance) or may pass it to customers to increase market-share (Eg. 111 . Nirma. Ayur. Locational or early entry advantage.PORTERS – COST LEADERSHIP Cost Leadership – It is a strategy that focuses on making a firm more competitive by producing its products more cheaply than its competitors. The firm may retain the benefits of cost advantage by enjoying higher margins (Eg. Sources of cost advantage are varied and depends on the structure of the industry – Economies of size. proprietary technology. preferential access to raw materials. Compress project duration through crashing. T-Series). backward integration.
Sony. innovation and out of the box thinking. 112 . Intel. Focus on brand loyalty. It selects one or more attributes that buyers perceive as important. avoiding brand dilution. Rayban). undeterred attention to quality. (Eg.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. Creativity. Culture of experimentation. and sufficient slack. Feeling the pulse of the customer. Successful product differentiation is often followed by premium pricing. Means of product differentiation are peculiar to each industry.
113 . The target segment must have unusual needs or the delivery system catering to this segment must be unique. though it may not possess an overall competitive advantage. They are poorly served by mainstream players.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. Cartier. Mont-Blanc. Sub optimization alone may not be a source of superior performance. Rolex. Maybach. coupled with fear of structural erosion. Armani). A focuser seeks to achieve a competitive advantage in its target segment.
COMPETITIVE POSITIONS Competitive Advantage Cost Differentiation Product Differentiation Competitive Scope Broad Cost Leadership (Toyota) Product Differentiation (General Motors) Narrow Cost Focus (Hyundai) Differentiation Focus (Mercedes) 114 .
Reducing cost does not always involve a sacrifice in differentiation. 115 . Tata Nano). Firms focusing on a hybrid strategy typically aim at shifting the productivity frontier and recreating a new product-market segment altogether (Eg. in a hyper competitive context the two strategies need not be mutually exclusive. similarly differentiation may not always lead to rising costs (i.HYBRID STRATEGY A hybrid strategy is the simultaneous pursuit of cost leadership and differentiation. Though cost leadership and differentiation are inconsistent. jugaad or frugal engineering). and usually outperforms a stand alone generic strategy.e.
It will have a competitive disadvantage vis-à-vis a clearly positioned generic player. It tries to compete through every means. Industry maturity will usually widen the gap.STUCK IN THE MIDDLE A firm that engages in a hybrid strategy and fails to achieve a competitive advantage because it was ill conceived will be .stuck in the middle. leading to what is called – straddling. It is usually the result of a firm not willing to make trade offs. unless such a player is capable of discovering a profitable segment. but achieves none. 116 . The positioning therefore gets – blurred.
leading to a blurred productivity frontier and steep learning curve. 3D imaging. changing customer needs. Eg.) Excessive turbulence in the dynamics of the environment. 117 . (Eg. There is a lot of scope to define the rules of competition.radical environmental changes. Artificial intelligence). Nano technology. coupled with low penetration levels. Speech recognition software's. technological innovations. ending in a differential cost economics. It is characterized by – High level of technological uncertainty. Market segmentation not well defined. First-time buyers. Consumer behaviour pattern unstable and evolving.EMERGING INDUSTRY Emerging Industry – An evolving industry characterized by .
It is characterized by – Low entry barriers. Government regulations in the form Eg. High exit barriers because of huge investment in CAPEX. because of lack of economies of size and scale. 118 . Diverse customer needs.GROWTH / FRAGMENTED INDUSTRY Growth Industry – An industry characterized by high growth potential in the long run and where no firm has a significant market share (an edge over another). Scope for players to change the rules of the game. Air Conditioning. MRTP may also cause fragmentation. leading to clear fragmentation. Paints. Consumer durables. Retail and telecom. Eg. IT. Eg. Eg.
119 . technological maturity.MATURED INDUSTRY Matured Industry – An industry characterized by saturation in growth rates.technological maturity. Limited scope for innovation . Firms are rule takers in the segment as productivity frontier is well defined. distribution networks. established industry dynamics. because of economies of size and learning curve effects. early entry and location advantages. Strong entry barriers. Cartel among existing players through collusion. collaboration and co-option. well defined consumer behavioral patterns and imperfect competition leading to near monopoly.
Learning abilities have been stunted and firms adverse to investment in R&D and make fresh investments. with little or no signs of recovery.DECLINING INDUSTRY Declining Industry – An industry which has outlived its utility due to the entry of close substitutes and or radical product innovations which results in a shift of the productivity frontier. Exit barriers are extremely high because of limited prospective buyers. (Eg. Firms facing a declining phase are characterized by inertia and slow to react to environmental changes. scooters. dot-matrix printers). Nature of competition extremely high. and costly price wars. 120 . backed by corporate espionage. Typewriters.
aggressive building of distribution networks. Matured Industry – Sophisticated cost analysis. strictly cost differentiation. strictly product differentiation and not standardization. move beyond boundaries. assess and overcome fragmentation. increasing scope. process innovation. regenerate. 121 . premium pricing. Fragmented Industry – Identify.COMPETITIVE STRATEGIES Emerging Industry – Set benchmarks. reengineer. or else exit the segment. Locate a defendable position. mergers and acquisition. recreate new markets. focus more on product differentiation or even a hybrid one. Declining Industry – Redesign. branding and promotion. strike alliances.
A firms resources can be classified into – Tangible – These refer to real assets. and complex learning experiences in integrating and harmonizing technologies (distinctive capabilities) that play an important role in delivering competitive advantage through “causal ambiguity”. They are a standard in nature. 122 . However. Intangible – These refer to goodwill. hence very rarely confer competitive advantage as can be easily acquired or replicated. patents. brands.RESOURCE BASED VIEW Differentiation based on cost or products saturates and ceases to exist beyond the medium term. positions based on resources which are unique and inimitable are far more sustainable even in the long term.
There is a high degree of internal and external causal ambiguity involved in it. 123 . they are woven around technologies.e. Hence. differentiation based on capabilities can be sustained even in the long run. but not necessarily. Therefore firms should concentrate on developing complex resources that forms the very basis of differentiation.CAPABILITIES & COPMPETENCIES These include a complex combinations of tangible and intangible resources that organizations use to convert inputs to outputs. They play a very critical role in shaping competitive advantage. can be leveraged across businesses) or specific to a particular business. Typically. Capabilities can be generic (i.
COMPETITIVE ADVANTAGE 124 .
Strategy drives competitive advantage. Success of a strategy critically depends on SAP. A portfolio of competitive advantage comprises strategic advantage profile (SAP).COMPETITIVE ADVANTAGE A competitive advantage is a position of superiority relative (i. It results in a distinct differentiation advantage or a cost advantage or hybrid as well. and results in well springs of new business development.e. 125 . It enlarges the scope of an organization. competitive advantage subsequently becomes the back bone for a competitive strategy. not absolute) to competition.
In most cases SAP is hidden and dormant. SAP changes from time to time. In today's world of discontinuity. Most successful organizations around the world have a well balanced SAP. Internal strategic fit between its strategy and dominant logics is essential for the top management to stretch and leverage SAP. 126 .STRATEGIC ADVANTAGE PROFILE (SAP) Organizations have to systematically and continuously conduct exercises to identify its SAP. Identification of SAP is critical for and stretching and leveraging of resources.
VALUE CHAIN ANALYSIS A value-chain segregates a firm into strategically relevant activities to understand its composite behaviour. VC pay-offs: better product availability. 127 . Inventory Mgt to Logistics Mgt to Supply Chain Mgt (SCM). Substantial cost reductions also follow. each of the players need to be efficient backed by sufficient coordination at the contact points (i. Competitive advantage arises not from an individual activity but a stream of inter-related activities. faster product launches. kaizen or internal customer). and enhanced customer tracking – higher market share. Today SCM is integrated with greening the environment as CSR practices. A VC is often compared with a relay team.e.
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 .
– Second order fit occurs when activities are reinforcing amongst them. – Third order fit refers to optimization of effort. – First order fit refers to simple consistency between each activity and the overall strategy. Operational effectiveness is not strategy.STRATEGIC FIT – THE PORTER WAY The sustainability of the value chain depends on the degree of fit between the activities. A learning organization helps create strategic fit. 129 . Fit is important because discrete activities result in negative synergy and can also be easily copied by competitors. A high fit involving a complex chain of activities drives both competitive advantage and its sustainability.
It forms the very basis of competitive advantage. Core competence has a high degree of external and 130 internal causal ambiguity embedded in it. A core competence usually has its roots in technology. .CORE COMPETENCE A core competence represents the collective learning's of an organization around diverse streams of technologies. but not necessarily. – Can be leveraged across businesses. – Cannot be easily imitated or substituted. – Can be sustained even in the long run. It should satisfy the following conditions – Contributes significantly to customer benefits. These skills results in distinctive activities and processes.
A competitive advantage manifests from a function. a core competence has its roots in a set of skills. a core competence usually does. A competitive advantage is sustainable in the shortmedium term. Majority of the firms have competitive advantage. a core competence always implies a competitive advantage. A competitive advantage may or may not lead to superior performance.CORE COMPETENCE A competitive advantage does not necessarily imply a core competence. only global leaders possess a core competence. a core competence is sustainable even in the long-term. 131 .
This is known as a zero-sum game. In a game (similar to a business) one players win is always another's loss. 132 . illustrations depicting a win-win situation. However. the stringent assumptions of game theory and difficulty in ascertaining of pay-offs makes game theory application difficult in business. Subsequent work on game theory by John Nash led him to win the Nobel prize in 1994. In fact there are no. each of whom wants to win. A game is a contest involving two or more players. Here the magnitude of gain offsets the magnitude of loss equally.GAME THEORY The game theory was developed in 1944 by Oscar Morgenstern.
BIASED AND UNBIASED GAME A game is said to be biased when one of the players have a disproportionate chance of winning. An unbiased game is one where both the players have equal chances of winning. Firm Y’s Strategy Use Radio Use Radio +2 +6 Use Newspaper +7 -4 133 Firm X’s Strategy Use Newspaper Firm X’s Pay-Off Matrix .
A saddle point is a situation where both the players are facing pure strategies.PURE STRATEGY GAME The strategy each player follows will always be the same regardless of the other players strategy. Firm Y’s Strategy Use Radio +3 +1 Use Newspaper +7 -2 134 Firm X’s Strategy Saddle Point Use Radio Use Newspaper Firm X’s Pay-Off Matrix .
TYPES OF GAMES Simultaneous Games – This is a situation where the players have an option to choose to cooperate or not through collusion. Yahoo Vs Microsoft). 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. Coke Vs Pepsi). Repeated Games – In this situation the players interact repeatedly with each other sub-optimizing the outcome possibilities. However. 135 .g. iteration) rather than through collusion (E.e. This is usually through learning by “experience or observation” (i. collaboration or cooption. It represents the classical “prisoner’s dilemma”.
Game theory relies on the principle of rationality. but 136 players do not always behave rationally. – Making pricing more transparent. It results in a shift in the productivity frontier. 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.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. – Building incentives for customer loyalty. .
DELTA MODEL & LOCK-IN
Its a systematic approach where-in two or more industry majors, who by default has achieved a proprietary position (Microsoft – Software / IBM – Computers) which are not necessarily best-products in the industry, co-opt to create a lock-in. A lock-in implies that other players has to conform or relate to that standard in order to prosper. Becoming the industry standard requires – strong brand, causal ambiguity, and close relationship with other companies offering complimentary services. Lock-in is self reinforcing and escalating (i.e. accelerating effect).
THE THREE STRATEGIC POSITIONS
System Economics Market Dominance Complementary Share
Enabled through effective use of technology
Total Customer Solutions
Customer Economics Cooperation Customer Share
Product Economics Rivalry Product Share 138
Bill Gates is the richest man in the world not necessarily because he has developed the world’s best software's or excels at customer satisfaction; but he has got an army of people working for him who are not on his payroll – all the application software providers who are writing programs based on “Windows” compatible operating platform. Once you create the lock-in it is sustainable because of the “network effects”; which creates the proverbial “virtuous cycle” – customers want to buy the computer with largest set of applications and software developers want to write programs for the computers with the largest installed base.
The proponents (Hax & Wilde) believe that every organization has the ability to create and sustain a “lock-in” positioning (though in varying degree). This “system lock-in” is referred to as “delta” – delta being the Greek letter that stands for transformation and change amongst the players. The lock-in once created becomes very difficult for a firm to penetrate, and becomes a distinct entry barrier. The model is based on the belief that it compliments Porter’s differentiation model and RBV framework instead of contradicting them. In a lock-in strategy the performance outcomes are dependent on the success of another.
It relates to translating strategy formulations into practice. Performance realization of a strategy depends on the implementation effort. Successful implementation also depends on the appropriateness of the strategy. Since strategy implementation is a time bound process, alignment (i.e. strategic fit) is a key variable during times of radical change. Some of the other levers of successful strategy implementation are – Transformational leadership and motivating power. Resource allocation; its stretching and leveraging. Compatible organization structure & control systems. Inertia & resistance to change.
– Unlearning & learning of new skill sets. While external strategic fit (strategy – environment) is relevant for strategy formulation. 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. – Resource commitment from top management.IMPORTANCE OF STRATEGIC FIT Strategic fit has a central role to play in strategic management. – Changing the rules of the game. – Development of capabilities & competencies. 143 . – Better strategic and operational control.
In fact. formulation & implementation can occur simultaneously.FORMULATION Vs IMPLEMENTATION Traditionally. emergent strategy vis-à-vis intended & realized). learning levels are very low. According to Mintzberg. learning levels are very high. at the cost of sacrificing a lesser degree of control. Some of the key strategic learning's exists at the contact point between the organization and its customer. 144 . while control is very effective. effective strategies are better crafted when there is a subtle overlapping between the two (i. strategy formulation and implementation has been perceived to be distinct & independent. In such a situation.e. In such a situation.
145 . bring about transparency. transformational leaders go one step beyond – Design a well crafted and designed strategic intent of the organization. He should be an agent of change.ROLE OF TOP MANAGEMENT To bring about change and to implement strategies successfully. A transactional leader is usually confined to allocating tasks & responsibilities and extracting performance. Pragmatism is the ability to make things happen. In contrast. companies depend more on transformational leaders than transactional leaders. Install a system of shared beliefs and values. shift from compliance to commitment.
land. Intangible resources (Eg. patents. The various methods of resource allocation includes Historical Budget – The budgets framed by HQ for a particular SBU keeping in mind past trends.e. Performance Budget – SBU managers need to justify the distinctive resources in terms of the opportunity it is pursuing yields the highest possible pay-offs.RESOURCE ALLOCATION Resources allocation includes tangible resources (Eg. 146 . labour. Zero Based Budget – In this case the budget of a SBU has to be worked out right from the scratch. skills) also includes complex resources like capabilities and competencies. minimum requirement). brands. machines) referred to as threshold resources (i.
Due to causal ambiguity (complexity). Distinctive capabilities helps in stretching and leveraging resources thereby overcoming two major constraints involved in strategy implementation – times & costs. Distinctive capabilities are complex set of skills woven around technologies. 147 . Moreover.CAPABILITIES & COMPETENCIES Technology and business are slowly becoming in – separable. convergence of multiple streams of technologies at the product – market level is becoming increasingly evident (Eg. Mobiles). Flat Screen Displays. these capabilities are sustainable even in the medium to long term. though not necessarily in the case of emerging markets.
processes become people independent. Once the structure is in place. A firm in several unrelated businesses usually employs a SBU structure. An appropriate organization structure & adequate control systems are essential to implement strategies and achieve stated goals. A firm in several related businesses usually employs a divisional structure. 148 . The level of centralization and decentralization is decisive. 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.
Technology. with team members having dual line of control. Output). processes. SBU Structure – Businesses segregated in terms of strategic dissimilarities (Eg. Divisional Structure – Units grouped together in terms of products. Marketing. disbanded subsequently. Virtual Structure – A boundary less or hollow organization. based on skills and competencies. Team Structure – An informal group formed for a crisis. Finance). Project / Matrix Structure – A formal but temporary framework initiated for the completion of a particular project/crisis. or geographical locations.TYPES OF STRUCTURES Functional Structure – Activities grouped together by a common function (Eg. 149 . Inputs .
as span is broader. structures are becoming flatter and more simpler. Technology – With more and more convergence of technologies in business. leading to a tall structure.FACTORS INFLUENCING STRUCTURE Size – As an organizations size increases there is more specialization and differentiation leading to the top management moving away from operational issues and control. Environment & People – Economic and political conditions have a major bearing on structure coupled with the attitude and aspirations of the people in the organization. It includes the desire for independence. assuming responsibility. 150 . facing challenges & crises.
Most firms undergo periods of strategic continuity rather than strategic discontinuity.INERTIA When a firm has been operating in a certain fashion for a long time. Inertia acts as an impediment in strategy implementation. there is a tendency to continue along the same lines. co0ntinuity).e. Top managers resist change. Changes in top management and unlearning helps overcome inertia. Common sources of 151 inertia – complacency with past successes. . irrespective whether it is from worse to good or good to worse. Inertia is a characteristic of a firm that endures status quo (i.
Since the internal and external environment is in a state of continuous flux. To prevent deviation of fit. Deviation of fit is detrimental to performance and may lead to strategic failure. certain authors propose misfit as a source of superior 152 performance. firms should move beyond financial performance to strategic performance as organization systems are becoming complex. However. strategies need to be evaluated on an ongoing basis to prevent deviations of fit.STRATEGY EVALUATION Strategy evaluation centers around assessment of strategic fit. .
. competitive advantages becoming disadvantages? Has the company acquired any new competency? Has the company been able to overcome the 153 environmental threats.STRATEGY CONTROL It is concerned with trafficking a strategy as it is being implemented. detecting changes in the external and internal environment and taking corrective action wherever necessary. It attempts to answer the following questions – Is the strategic intent appropriate to the changing context? Are the organizations capabilities still holding good.
It is open-ended as well as . Special Alert Control – It intends to uncover unanticipated information having critical impact 154 on strategies. Implementation Control – It aims at assessing whether key activities are proceeding as per schedule. checking every premise is costly as well as difficult. It involves assessing – strategic thrusts and milestones.STRATEGY CONTROL IMPLEMENTATION It involves steering the company towards its original growth trajectory & stated goals. Premise Control – Checking the validity of the assumptions on which a strategy was based. However.
Strategy not linked to resource allocation & capabilities – Lacking commitment of top management. Performance measures are defective – What to evaluate against? How to measure the 155 construct? As a saying goes. Strategy intent not linked with goals and objectives – Lack of coordination at lower levels leading to negative synergy.BARRIERS TO STRATEGY EXECUTION Vision and strategy not actionable – Utopian ideas. difficult to translate into practice. “If you cannot . low strategic fit due to consultants intervention.
Together these factors determine the way in which a corporation operates. this may effect all others as well. Managers should take into account all seven of these factors. so if one fails to pay proper attention to one of them. Large or small. Today it is considered one of the most powerful tools for strategy implementation determining success or failure. important or not they're all interdependent. On top of that. to be sure of successful implementation of a strategy. the relative importance of each factor may vary over time and context. 156 .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.
They had been investigating how Japanese industry had been so successful. The 7-S model was born at a meeting of these four authors in 1982. 157 . 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. 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. Since then it is known as their 7-S model and is extensively used by corporations worldwide to implement their strategies.
THE 7’S Shared Values – It represents what the organization stands for and what the top management believes in. Systems – The procedures. Staff – Human inter-relationships. 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. 158 . formal & informal . Style – The way in which the top management influences the functioning of an organization. Skills – An organizations capabilities and competencies. processes and routines that characterize how work should be done. to reach identified & stated goals. over time.
STRATEGIC FIT Strategy Structure Shared Values Systems Skills Staff Style 1st Order Fit 2nd Order Fit 3rd Order Fit 159 .
shared values) are very malleable and comparatively more difficult to identify & influence. Ineffective in case of a virtual company. systems) are comparatively easy to identify and influence. Consider the 4P’s of marketing or 3R’s of SCM. the soft S’s (skill. structure.A CRITIC OF THE 7S MODEL While the hard S’s (strategy. 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. style. staff. because most often they are culturally embedded and often neglected. 160 .
High Organic Growth Strategic Alliance Joint Venture Mergers & Acquisition Strategic Fit .STRATEGY IMPLEMENTATION ROUTES Strategic Fit .Low Take Overs 161 .
soft loans. and markets.ORGANIC GROWTH Here a firm builds up its facilities right from the scratch and continues to do so without any external participation. The entire infra-structural facilities are set up afresh having its own gestation and break-even. It has complete control over inputs.e. (Eg. (Eg. . Long gestation leads to delayed market entry. Reliance Industries). tax holidays. i. concessions are available for green-field projects.e. technologies. green-field projects. SEZ’s. Govt. the entire value chain. 162 Risk of cost and time overruns. subsidized power). i.
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. Tata Motors & Fiat). Alliances are usually short-lived and disbanded once the purpose is achieved. It has limited intervention power and usually lacks holistic commitment from the alliance partner. There is no funding or equity participation from the alliance partner & both the firms continue to operate independently. Alliances are usually in the areas of technologies or markets (Eg. 163 It is a form of competitive collaboration.
leaving minimum scope of overlapping.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. It is a win-win situation for both the companies. (Eg. A comprehensive MOU is essential. Dominant logic of both the companies should be complimentary. Degree and extent of management control must be clearly 164 laid down.Honda). Tata – AIG. Selecting the right partner is critical for success. Hero . .
. Brooke Bond & Lipton). Acquisition is an outright purchase of a firm assets by another independent entity (Eg.MERGERS & ACQUISITION It refers to the fusion of two or more firms into a single entity. with the individual firms ceasing to exist any more (Eg. Economies in scale leading to lowering of costs. Integration of assets and other financial resources. Revival of a sick-unit through better management practices is a major motive behind an acquisition 165 strategy. Coca Cola – Thums Up). Integrated distribution channel leads to better market penetration and overall synergy. ITC Tribeni Tissues.
Integration of organization structure & cultures is difficult. Larger geo-graphical diversity. Consolidation in a fragmented industry. Inform SEBI / Stock Exchange after 5% stake is 166 acquired. often the new firm is “left alone”.Corus).TAKE OVERS It refers to the acquisition of significant management control by buying out majority stake in a firm through due diligence or hostility (Eg. Make a public offer of not less than . Instant access to capacities and markets. Most countries have stringent laws that prevents hostile take over. Tata Steel .
MANAGEMENT TOOLS IN STRATEGY 167 .
WHY MANAGEMENT TOOLS? Change is becoming pertinent in the business environment. Balanced Scorecard – Tracking strategy 3600. Radical change is superseding incremental change. it is also a source of potential threat. Change provides enormous opportunities. or better still create next practices Reengineering – Redesigning work processes right from the scratch. 168 . TQM – Doing the right thing the first time. every time. Some tools to ensure that – Benchmarking – Adopt certain best practices. Companies therefore need to ensure competitive advantages doesn’t become competitive disadvantages. The past is ceasing to be an indication of the future.
A best practice is defined as an activity performed by a company in a particular domain or function which distinguishes it from others and making them world-class. These exemplary practices involves the stakeholders of the company and helps achieve its strategic intent. Best practices centers around looking at a different way to satisfy various stakeholders. Benchmarking involves the identification, understanding and adapting of certain best practices and implementing them to enhance performance. Firms are moving towards next practices as best practices make firms look more and more homogeneous.
SOME BEST PRACTICES
Dell: Customized configuration of computers. Caterpillar: 48 hours delivery anywhere in the world. Citi Bank : Priority banking services. Maruti: Certified “true value” pre-owned cars. Microsoft: ESOP to employees. Infosys: Customized work-stations. TCS: Referencing potential new recruits. ITC: Shareholders factory visit. AmEx: Outsourcing data warehousing mining. MARG: Set-top box to study viewing patterns. Honda: CEO’s visit to dealers.
TYPES OF BENCHMARKING
Functional – Used by companies to improve a particular management activity. Eg. Motorola learnt delivery scheduling from Domino’s. Process – Improving specific key processes and operations from experiences in similar businesses. Eg. Ford adopting assembly lay-out plan of Toyota. Competitive – It involves assessing the sources of competitive advantage and imitating them. Eg. Samsung leveraging miniaturization skills of Sony. Strategic – It involves assessing business models and replicating them in a different market. Eg. Reliance replicating AT&T business model.
HOW TO BENCHMARK?
Phase 1: Planning – What to benchmark? Whom to benchmark? – Identify key performance indicators & Data source. Phase 2: Analysis – Assessment of performance gaps. – Predict future performance levels. Phase 3: Integration – Communicate findings and gain acceptance. – Establish functional goals and its implementation. Phase 4: Action – Implement and monitor progress. – Measure results against stakeholder wants and needs. – Recalibrate or outperform benchmarks.
WHOM TO BENCHMARK?
Selecting the benchmarking partner is critical to solving the problem. Firms should generally avoid selecting the industry leader, because it may not always adopt the best practices for every process or activity. Benchmarking partners may also be from different industries. Types – – Internal – It involves benchmarking against its own branches, divisions, SBU’s. Proximity to data and cooperation is taken care of automatically. – External – It involves benchmarking against firms that succeeded on account of their best practices. It may also involve benchmarking against world-class firms. Friction may arise due to presence in competing industries.
BENCHMARKING - ADVANTAGES
Finding better ways of meeting stakeholder needs. Organizational learning comes from internal as well as external sources. Establishing goals based on formal assessment of external conditions. Defining effective measure of indicators, facilitate comparison, adopt from other organizations. Ensuring a continuous learning organization. Reducing competitive disadvantage. Organizational turnaround, especially effective in case of a wide strategic drift when differentiation strategies fail to work. 174
the more similar they end up looking. Benchmarking merely reorients profits in the hands of few to profits in the hands in the hands of many (i. Strategy is more of creating best practices rather than copying them. While strategy is all about differentiation and not looking alike. . but it cannot be used as a strategic decision making tool. Benchmarking is useful for bringing about operational efficiency. It can at best complement it.BENCHMARKING . It does not shifts the growth 175 trajectory of the industry as a whole. clustering).LIMITATIONS More and more companies benchmark.e.
RE-ENGINEERING Redesigning leads to identification of superfluous activities or product features (i.e. Re-engineering involves complete reconstruction and overhauling of job descriptions from the scratch (i.g. Re-engineering attempts to radically change an organizational products or process by challenging the basic assumptions surrounding it.g. Windows 95 to 97). The task demands a total change in organisational 176 culture and mindset. for achieving performance improvement (E. clean sheet).e. DOS to Windows). process mapping) and eliminating or improving them (E. .
REENGINEERING – KEY TENETS Ambition Focus Attitude Enabler Performance Large scale improvement by questioning basic assumptions about how work is done Micro Vs Macro Business Processes Vs Organisational Processes Starting right from the scratch Not historical More IT driven. than people driven Innovative Vs Traditional Customer centric Vs Organisational centric 177 .
Strategic – It looks into the process of strategic planning. Business – It looks into markets.LEVELS Reengineering can be successfully leveraged at all levels of an organization with varying degree of results.e. .REENGINEERING . BPR). products. structures. customers and suppliers and protects the organization from the future (i. processes. 178 . resource allocation and prepares the organization for the future through a reorientation of the entire strategic architecture.e. It can be of the following types – Functional – It looks into the flow of operations (i. etc) and supports the organization for the present.
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. – Causal Ambiguity. 179 . – Early entry advantages. Indonesia). However. – High cost and time acts as a deterrent. protection can be had in the following ways – – Patenting. reverse engineering is a top-bottom approach. with an intention to copy it (Eg. Cheaper versions of Intel chips and mother-boards manufactured in Taiwan. It generally acts as a threat to innovation. While traditional manufacturing is a bottom-up approach. learning curve advantage.
designing facilities.e. 180 . Implementation – Developing of a prototype. nano-technology). machine tools to convert ideas into a marketable product (i. cost and effort necessary for the purpose of reverse engineering. Introduction – Launching the product in the market. Inaccurate assessment at this stage may lead to a failure of the entire project. Actualization – Obtaining and dismantling of the product to assess how it functions.STAGES IN REVERSE ENGINEERING Awareness – Recognizing whether the product is found to be worth the time. Usually in such cases segmentation and pricing is different from the original innovator.
181 .Euro IV. It has eight dimensions (Eg. – Serviceability – Large no. of service stations. – Aesthetics – Appeal in design. Car) – – Performance – Mileage of 14 kms to a litre of fuel.WHAT IS QUALITY? It involves the totality of a product or service in meeting certain stated or implied needs. – Perception – Customer notions. – Conformance – Emission standards . – Durability – 1980 manufactured cars still on road. – Reliability – Consistency in mileage. Air bags. More and more companies are moving towards meeting implied rather than stated needs. – Features – Anti-lock braking systems.
touching upon a limited aspect of a value chain. zero defects. TQM is a way of creating an organization culture committed to the continuous improvement of work processes – Deming.TOTAL QUALITY MANAGEMENT Objective – Management of quality ensures conformance to certain pre-set standards. Management of quality was traditionally inspect it . . It is deeply embedded as an aspect of 182 organisational life & culture. which ensures good market standing.fix it in nature. It had little impact on improving overall productivity.
Looking at quality as an endless journey. fully involved in decision-making and fairly rewarded for results. Be customer centric – Generate the concept of internal customer (Ishikawa). provided with all relevant information and best possible tools. Kaizen – Make continuous improvement a way of life. Empowerment – It takes place when employees are properly trained.TQM – KEY TENETS Do it right. not a final destination. the first time – From reactively fixing error in products to proactively preventing errors from occurring at the first place (Juran). 183 .
It is based on the principles of MBO (i. of units meet preset standards (Eg. SQC – It is a process used to determine how many units of a product should be inspected to calculate a probability that the total no.TQM . saving precious top management time.e. 6-Sigma). enabling the firm to concentrate on core activities essential to customer satisfaction. equal participation). Quality Circles – It a small group of shop-floor employees who meet periodically to take decisions regarding operational problems and crises. 184 .STRATEGIES Outsourcing – It is the process of self-contracting services and operations which are routine and mundane.
. Source: Fortune Magazine Why CEO’s fail? 185 ... strategy implementation has never been more important.. – Less than 10% of strategies effectively formulated are effectively executed. – Efficiency and effectiveness is passé.. – In the majority of failures – we estimate 70% – the real problem isn’t (bad strategy) .... it’s bad execution...BALANCED SCORE CARD Some interesting comments ...
rather than effects. Focus more on causes.BSC . 186 .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. 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. 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.
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. 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. The most critical element of a BSC is to measure these four dimensions. and distinguish strategic problems from operational ones. 187 .
ageing schedule) % of key customer transactions Ranking of key customer accounts No. of visits or calls made % of NPA’s 188 .CUSTOMER PERSPECTIVE GOALS Products Supply Preference Relationship MEASURES Relative market share (%) % of sales from new Vs proprietary products Timely deliveries and service Customer credit analysis (i.e.
of times covered in media No. of new product launches Vs competition Product pricing Vs competition 189 .BUSINESS PERSPECTIVE GOALS Skills Excellence Exposure Introduction MEASURES New capabilities and competencies Implementation & gestation period Bank and supplier credit limits & PLR Unit Costs / Conversion Ratio / Defect Ratio No.
of new patents registered Time to develop next generation products Average and spread in operating cycle % of products that equal 2/3 sales No.LEARNING PERSPECTIVE GOALS Technology Manufacturing Focus Timing MEASURES No. of product innovations 190 .
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 .
what they don’t know. It helps translating strategy into practice (i.e. 194 performance will automatically follow. Seek excellence.BSC . Shift from control to strategy (i.ADVANTAGES Most often top managers face information overload. sharing of vision). As a result. doing right things instead of doing things right). Modern managers should be poised to ask the right questions. Focus on cause not effects. they don’t know . The BSC brings together the different elements of a company’s strategy at a glance.e. .
EFFICIENCY Vs EFFECTIVENESS Ineffective Effective Inefficient Goes out of Business quickly Survives Efficient Dies Slowly Thrives 195 .
Porter 196 . . but also sustains it.EFFECTIVENESS + STRATEGY A company which is effective as well as strategic. not only thrives.Michael E.
CORPORATE RESTRUCTURING 197 .
Tata Group).. Strategic variety may be caused by changes in the as external well as internal environment. “every organization must be prepared to abandon everything it does. As Peter Drucker pointed out. to survival of the most adaptable.... Radical change brings about strategic variety.. Strategic variety brings paradigm shift.” 198 . Restructuring involves consciously driving significant changes in the way an organizations thinks and looks (Eg. from survival of the fittest .CORPORATE RESTRUCTURING The only thing constant in today's business environment is change.. firms use restructuring strategies. To adapt to the changing environment.
Walkman. Fax.RESTRUCTURING – BASIC TENETS Customer Focus – Restructuring ideally begins and ends with the customer. Structural Changes – Conventional hierarchical structures should be disbanded in favour of more 199 flexible ones (i. ATM. downsizing or rightsizing).e. and dividing the core businesses into SBU’s (i. Instead. Internal customers should also not be neglected.e. they should strive to provide unimaginable value ahead of its time (Eg. etc). Company’s should go beyond just asking what he expects. downscoping). . Core Business – Company’s should introspect – What business are we in? Business evolved out of opportunism or myopia should be divested.
.. It is created and institutionalized by the top management..) The Aditya Birla group typically relied on the “marwari” community for key management positions .. started focusing on their capabilities. 200 .RESTRUCTURING – BASIC TENETS Cultural Changes – A culture represents the values and beliefs of the people about the organization.... Kumar Birla today is more dependent on professionals... Ratan Tata now drives the point the group means business.) Reliance dismantled their industrial embassies . During the times of JRD... the Tatas were considered a benevolent and charitable organization.. Restructuring also requires cultural reorientation..
“ … one reason our customers are satisfied is that we aren’t. Use the reach of networking technologies. Honda’s ad says. Publicizing welfare projects to demonstrate CSR. Restructuring provides a platform to close this gap. Carry out PR campaigns.MOVING CLOSER TO THE CUSTOMER As companies evolve. they tend to move away from the customer. Communicating to the media about organization efforts to deliver quality products.” 201 . Organizing customer and supplier meets. Getting feedback & addressing customer complaints.
it may be smooth (Eg. Glaxo – Heinz). It may include brands as well. where the difference in valuation is settled off through cash or equity (Eg. Mittal – Arcelor) and can take various forms. Further spin-off can be classified as split-off and split-up. or conglo-merate. 202 . including its intangibles – Mergers – It may be vertical. Tata – Corus) or hostile (Eg. It can have two forms. Further. horizontal. 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. Asset Swaps – It entails divesting and acquisition simultaneously by two companies.
– Split-Up – In a split-up.HIVE OFF Spin-Off – A spin off is the creation of a new entity. Most of these practices are not in consonance with Indian laws. – Split-Off – In a split-off. the existing shareholders receive equity in the subsidiary in exchange for the stocks of the parent company. 203 . Equity Carve – It involves selling a minority stake to a third party while retaining control (Eg. 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. Tata Industries selling 20% stake to Jardine Matheson). Reliance Ent).
– Poor performance. L&T sold its cements division to Aditya Birla group. In 2005. for a specified market or in general with full management control. 204 . strategic misfit. In 1995.DIVESTITURE It involves the sale of a brand or a division of a company to a third party. A complete sell-out is known as divestment (TOMCO). Selling out in phases is called disinvestment (IPCL). Parle sold its Thums Up brand to Coke for $40 million apprehending fierce competition. repay long-term debts. but retained its engineering division. Generic motives include – – Raise working capital.
205 .The internal & external liability composition undergoes a major change – LBO – Acquiring control over a substantially larger company through borrowed funds (Eg. Wipro). involving 608 pence per share). Tatas take-over of Corus for US $11. It provides greater leverage as well as management control.3 billion.CAPITAL RESTRUCTURING Capital Restructuring . Conversion – Replacing debt with equity or vice-versa or costlier with cheaper debt or cross currency debt. Share Buyback – It is a process of cancellation of shares out of free reserves to the extent of 25% of paid-up capital (Eg.
150 cr VSNL – Rs. 1439 cr 206 Tata Timken – Rs 120 cr Tata Telecom – Rs. 256 cr ACC – Rs. 42 cr Voltas .Rs. 950 cr Merind . 250 cr Tata Tetley – Rs. 1890 cr CMC – Rs. 1700 cr Trent – Rs. 99 cr Tata Power – Rs. 230 cr Diversifications Tata Motors – Rs. 1170 cr Goodlass Nerolac – Rs. 1860 cr .BUSINESS RESTRUCTURING – TATAS Divestments Lakme – Rs.Rs. 120 cr Tata AIG – Rs.
of operating units. Downscoping – It involves reducing the business and/or geographical scope of a firm (Aditya Birla group). keeping the composition of business intact (Jet Airways). It can be carried out in the following ways – Downsizing – It is a systematic one-time reduction in the no. Turnaround is the primary motive. Rightsizing – It is phasing of excess and redundant employees resulted out of faulty internal planning (SAIL). 207 . Survival is the primary motive. usually as a result external turbulence.ORGANIZATIONAL RESTRUCTURING Organizational structure and systems calls for a change when strategic variety is apparent. of a firm’s employees and sometimes in the no.
Strategy change is unviable without a preceding change in its dominant logics. Dominant logic becomes deep-rooted in organizational contexts depending on the period it is in place (tenure of the CEO).STRATEGIC CHANGE One of the most difficult components of organization restructuring is the mindset of the top management represented through its dominant logic and its shared values reflected in cultural orientation. the more difficult it becomes to uproot the paradigm (i. thumb rules) of the top management. 208 .e. The dominant logic represents the perceptions and biases (i. as strategies are based on such beliefs and biases.e. inertia). The longer the period.
e. Companies achieve real agility only when people at every level rise above the ordinary to face the challenges – revitalization or transformation. Successful transformation requires – incorporating employees fully into the process – leading from a different place so as to maintain employee involvement – instill mental disciplines that will enable employees to behave differently.FORCES AGAINST STRATEGIC CHANGE The problem with strategic change is that the whole burden typically rests on few people (i. In most organizations. 20% of the people carry out 80% of the changes). the factor that stifled change & performance was – culture. 209 .
The best way is to alter the institutional point of view. never take no for an answer.SUCCESSFUL TRANSFORMATION Build an intricate understanding of the business model at all levels of the organization. Manage from the future. process ownership. Questioning every basic action of the organization. Harness setbacks. Encourage uncompromising straight talk. Promote inventive accountability. 210 . Create relentless discomfort with the status quo. Understand and deliver the quid pro quo. it is not about winning but about learning.
It involves diagnosing a change situation – systems & structures. It involves identifying – Aspects of current culture which needs to be reinforced. that can be both enablers and blockages to change and restructuring. Aspects of current culture which needs to be overcome. also known as cultural-web. Identify and implement facilitators of cultural change. 211 . by identifying forces for and against change.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.
Term Loss of human capital Lower performance Higher performance Capital .RESTRUCTURING .OUTCOMES Alternatives Organizational Short .Term Reduced labour costs Reduced debt costs Emphasis on strategic control Business High debt costs Higher risk 212 Long .
down-scoping or asset stripping. 213 . reverse engineering and regenerating. hence go in for downsizing.NUMERATOR & DENOMINATOR MGT Most firms across emerging markets undergo strategic discontinuity and as a result are forced to restructure their businesses. In order to put back the company on the right track they are resort to – Denominator – It assumes that turnover cannot be increased. focuses on reengineering. the second one is a more viable strategy and sustainable option in the long run. While the first strategy produces results instantaneously. Numerator – It assumes that turnover is not a barrier or constraint.
TURNAROUND MANAGEMENT 214 .
. – Only seven of the first fifty Indian business groups in 1947 were even in business by the turn of this century. January 1997).... and that the thirty-two of the country’s largest business groups in 1969 are no longer among the top fifty today. 215 (Govindarajan and Trimble.. still exist as on 2005..WHY TURN AROUND MANAGEMENT? Some interesting insights . – Less than 10% of the Fortune 500 companies as first published in 1955.. Source: Why do firms atrophy? (Business Today.
process focuses on – A logic to explain a causal relationship between intervening variables.TURN AROUND MANAGEMENT A turnaround is said to occur when a firm perseveres through an existence threatening performance decline. skills. ends the threat with a combination of strategies. systems. Stage Theory). 216 . and achieves sustainable performance recovery. and capabilities. As a sequence of events describing how things change and why they change (i.e. While content focuses on endogenous and exogenous variables. A category of underlying principles and concepts. Both content (what) and process (how) are equally important for a successful turnaround.
Substantial shifts in consumer preferences. Low stakeholder confidence. Some indicators Continuous cash flow crises as a result of dwindling market-share and profits.TURNAROUND INDICATORS Most firms atrophy simply because they fail to diagnose the indicators that acts as threat to organizational existence. Uncompetitive products or services. suppliers and bankers. especially in key positions. 217 . unavailability or radical lowering of substitute costs or technological obsolescence. leading to lack of acceptability from distributors and customers. Low employee morale leading to high employee attrition at all levels. Rising input costs.
Hence. liquidating dead assets. they adopt surface level measures (disprin popping) which most often fail. which most top managers fail to appreciate. 218 . Extending work hours. Product redesigning or reengineering. prune work-force.. based on elasticity. be more customer centric. Revamp product portfolio.TURNAROUND ILLUSION The first step to a successful turnaround is the basic acceptance of the fact that …. Recalibrate prices. consider extension. Common approaches adopted Change in key positions. “all is not well”. focus on power brands. Emphasis on advertising and market penetration.
TURNAROUND STAGE THEORY Stage 1 Decline Stage 2 Stage 3 Stage 4 Outcome Response Transition Performance Equilibrium Line Success Failure Indeterminate Nadir Time 219 .
It has its origin in “environment led fit” that subscribes to the view that a firm has little control over external factors. It involves the identification of the theoretical perspectives that explains performance decline – K-Extinction – It suggests that macro economic and industry wide factors are responsible for decline. Identification of the stimulus leads to the arrest of the downfall. It has its origin in “resource led stretch” and subscribes to the view that a firm has substantial power to override the context. 220 . R-Extinction – It suggests that organization factors.DECLINE Decline is the first stage in the turnaround process. primarily dwindling resources and capabilities are responsible for decline.
diversification.RESPONSE INITIATION Turnaround responses are typically categorized as operating or strategic. asset reduction. the response should be strategic. the response should be operational. 221 . If the decline stems from structural shifts. The response must match the cause of the decline. new market initiatives. Operating responses typically focuses on the way the firm conducts business and involves tactics geared towards – cost cutting and process redesigning (BPR). Strategic responses focus on changing or adjusting the business the firm is engaged in through long term moves such as – integration. If the underlying cause is internal efficiency.
222 .RESPONSE DICHOTOMY The response initiation is somewhat dichotomous and cannot be universally applicable. Contour – It is easier to reverse decline in the earlier stages through operational measures. 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. when decline deepens shifts in strategic position becomes essential.
However. Support from all the stake holders through resource commitment. lead – lag). The top management has a key role to play through empowerment. Sustenance is the key factor in this stage. However. Effective levers of transition. many a times early signs of recovery fades out. participative management (i. consensus). transparency.7 years with a range of (4-16) years.TRANSITION Transition usually reflects the first signs of recovery.e.e. Empirical studies show that average time is 7. role model. 223 . substantial amount of time usually passes before results begin to show (i. confidence building measures.
224 . Share price indications and media coverage. Commanding a premium in the market. Revival of key customers and new product launches. Supplier and banker confidence. Regaining lost market share and distributor confidence. Instead of focusing on financial parameters alone.OUTCOME Outcome is said to be successful when a firm breaches the equilibrium performance level. it should adopt a holistic approach. Cut off points must be unequivocal. Failure is an indication that initial momentum was not sustainable characterized by irreversibility.
COOPERATIVE STRATEGIES & ALLIANCES 225 .
consortia. Any cooperative strategy maybe between firms within the same country or cross border as well. It can assume any of the following forms – franchising. strategic alliance. the commitment and the involvement between the firms increases manifold. 226 . supply-chain partnership. In the cooperative strategy continuum as firms move up the value order. and globalization . More and more companies worldwide are moving away from competition to co-option to leverage their resources and enhance bargaining power. licensing. or joint venture.COOPERATIVE STRATEGIES Cooperative strategies are a logical and timely response to changes in business dynamics. technology.
owners of the brand Monginis allows its franchisees to sell its confectionary products. owners of the brand Tanishq allows its franchisees to sell its jewellery products. 227 . Titan Inds. It is an effective strategy to penetrate markets in a shortest possible time at a minimum cost. Branding is critical to franchising. Switz Foods.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.
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). Develop a product through its crude stage. as in Tata Indica. Different levels of licensing Manufacturing without embracing any technology (CBU). 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).
Collusion – Few firms in a matured industry collude to reduce industry output below the equilibrium level. leverage upon size to preempt competition by escalating entry barriers (Eg. 229 . enabling them to increase prices (Eg.CONSORTIA Consortia – They are defined as large inter-locking relationships & cross holdings between businesses in a similar industry. Cross Holdings – A maze of equity holdings through centralised control to ensure earnings stability & threshold resources for critical mass (Eg. Coke – Pepsi). Hyundai). It can be of the following types – Multipartner – Intends to share an underlying technology or asset. Tata. Airbus – Boeing).
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. Continuous sharing of knowledge is critical to the success of a supply chain partnership. Companies in different industries with different but complimentary skills. otherwise it 230 becomes routine outsourcing. It usually provides a platform to sort out differences between conceptualization and implementation to suit local market needs.
Reliance – Du Pont). Firm’s should undertake a long courtship with potential partners. Despite their popularity (50-60)% of the alliances fail to accomplish their stated objectives.learning organization. instead of hurrying into a relationship. enter newer markets. Tata Motors – Fiat. 231 . Generic motives involved are . design next generation products. enhance credibility. effective R&D management. to gain knowledge and to obtain access to new markets (Eg.STRATEGIC ALLIANCE It is an short to medium term understanding between two or more firms to share knowledge and risk. Partner selection is one of the critical success factors. preempt competition.
Airbus – Boeing). 232 .STRATEGIC ALLIANCE . Complementary Equals – Two firms mutually promoting each others complimentary products (Eg. Bootstrap – An alliance between a weak and a strong company with an intention to acquire it. Whirlpool – Tide. Maruti).TYPES Collusion – Tacit top management understanding to neutralize price wars (Eg. Backward – An alliance (quasi or tapered) with a supplier of critical components seeking commitment (Eg. Alliances of the Weak – An alliance is entered into to preempt competition (Eg. Bajaj – Castrol). Coke – Pepsi).
Firms from developed markets seek access to markets and firms from emerging markets seeking access to technology. 233 . – Japan Vs US). Cultural orientation has been found to have a profound effect on top management’s strategic orientation (Eg.PARTNER SELECTION CRITERIA It is likely that partners will not have complete consent on alliance objectives because the institutional context in which the alliance embedded varies from country to country. Too much stress on financials & structure be avoided. Differences in level of economic development can produce differences in alliances motives.
Partner’s ability to acquire fresh skills.PARTNER CHARACTERISTICS Complimentarity of Capabilities – The degree to which partners resources can be used in conjunction. Managerial capabilities. Dominant Logic’s – Similarity in beliefs & biases. 234 . including ability to provide quality products and services. Experience related to previous alliances. Intangible Assets – Move beyond the financials of the firm. Willingness to share knowledge and skills. Unique Resources – Abilities or skills which cannot be easily duplicated.
degree of compatibility. Getting Engaged – It should incorporate a specific joint activity. Changing within. operational & cultural integration. incorporating clear signs of continuing independence for all partners.MANAGING ALLIANCES Alliances are more than just a deal. Selection & Courtship – It involves self analyzing. partners should nurture it. instead of focusing controlling the relationship. the value chain. Setting up the housekeeping. vows to include commitment to expand the relationship. 235 . understanding the chemistry. differences not anticipated earlier. Learning to collaborate – strategic.
synergy) rather than mere exchange (i. Conceptually. It lasts till the vision is reached.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. separation is very 236 bitter. It aims at creating new value (i. combining parts). whilst the partners continue to operate independently.e. . a joint venture is a selection among modes by which two or more firms can transact. There are substantial linkages in the value-chain.e.
Organizational Learning – It is a means through which a firm learns or seeks to retain their capabilities. 237 . though more profitable alternative to other choices. It may also be linked to deterring entry or eroding competitors position. in addition to a high degree of asset specificity. The market fails as sellers are unwilling to reveal their technology and buyers are unwilling to purchase in the absence of inspection. Strategic Behaviour – Firms may override transaction costs.JOINT VENTURE – GENERIC MOTIVES Transaction Cost – The situational characteristics best suited for a JV are high performance uncertainty.
– Eg. – Eg. Maruti – Suzuki. – Eg. Sharing of resources.OTHER MOTIVES Entry into newer markets. Eli Lily – Ranbaxy. – Eg. Yamaha – Escorts. Endorsement from government authorities. – Eg. Essar – Hutch (Vodafone). TVS – Suzuki (4-Stroke Engines) Fill gaps in existing product lines. Define future industry standards. Renault – Nissan (Minivans – Cars). Daimler – Chrysler (Premium Cars) 238 . Learning new technologies. – Eg.
– Maruti – Suzuki. Century . technology) drain. – Eg. LML – Piaggio Differences in size and resource base. Risk of over dependence. Modi – Telstra What after exit (parenting disadvantage)? – Eg. Tata – Aditya Birla in Idea Cellular 239 . PAL – Fiat If the cost of continuing exceeds the exit costs? – Eg. – Godrej – Procter & Gamble. Risk of brain (i.Enka.e.RISKS INVOLVED Incompatibility – Differences in cultural background. – Eg.
Inertia – Differences in age and evolution patterns.PRE-REQUISITES FOR SUCCESS Commitment – Mutual trust. respect. Flexibility – Sufficient space to breathe and adjust. Objectives – Shared vision. Culture – Reconcile gaps. Partner – Avoid duplication of skills and capabilities. Agreement – Clarity on operational control. Equality – Lack of dominance. Focus – Avoid strategic myopia. time sharing. Incompatibility – Performance expectations. 240 . Costs – Other modes of transaction becomes cheaper.
MERGERS & ACQUISITION 241 .
Daichi) and hostile if it is without the consent of the management (Eg. Mittal Arcelor). reverses are also taking place through LBO) with a view to acquire conglomerate power and induce synergy (Eg. 242 . An acquisition is said be smooth if it is with the consent of the management (Eg. The larger objective is to leverage on size. Most countries have stringent laws that prevents hostile takeovers (Eg. An acquisition is the purchase of a firm by a firm (of larger size. 2002). Brooke Bond – Lipton). Ranbaxy .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. however. HLL – Tomco). SEBI Takeover Code.
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. Preferential – A preferential allottee ending up acquiring 5% stake also comes under its purview. Hike – An acquirer who has already picked up a 5% has to make a mandatory disclosure for every additional 1% stake that it acquires.SEBI TAKEOVER CODE. . Acquirer – Someone (individual or firm) who picks up an atleast 5% stake without mandatory disclosure having an intention to wrest management control (i. Control – A special resolution of 75% of the share 243 holders approving the change of guard.e. creeping acquisition).
credentials or track record is at stake. whichever is higher as an exit route (Eg.SEBI TAKEOVER CODE. the SEBI can intervene and block share transfers if: the acquirer has ulterior motives (i. Gujarat Ambuja – ACC). SEBI – In case of a hostile take over. Disclosure – All acquirers have to inform the respective stock exchanges where it is listed and SEBI upon acquiring the basic limit and upon every incremental limit thereon.e. Grasim – L&T Cement. 2002 Pricing – Acquirers will have to offer minority shareholders (at least 20%) the past 26 weeks or past 2 weeks average price. 244 . and/or does not enjoy the confidence of the different stake holders. asset stripping).
Electrolux . ITC). Conglomerate – It involves integration of two distinctly unrelated businesses.Kelvinator). Vertical – It involves complimentarily (partially related) in terms of supply of inputs or marketing activities (Eg. Horizontal – It involves integration of two highly related businesses (Eg. Reliance). The type of merger is depends on the degree of relatedness (strategic) between the two businesses. 245 .TYPES OF MERGERS A business is an activity that involves procuring of desired inputs to transform it to an output by using appropriate technologies and thereby creating value for its stake holders in the process. usually opportunistic (Eg. Godrej.
Mittal – Arcelor). 246 .MOTIVES Increased market / conglomerate power.e. Overcoming entry barriers (Eg. Reduced gestation (i. quick access). Tax benefits (Eg. Reduction in risk. ITC Bhadrachalam). ICICI –ITC Classic). Asset Stripping – Shaw Wallace). Avoiding risk of new product development.MERGERS & ACQUISITION . Access to newer segments (Eg. Ranbaxy – Crosslands). Global image (Eg. Ulterior motives – (Eg. Economies of size. Tata Steel – Corus). scale and scope. Coinsurance effect – Higher debt raising capability. Acquiring assets or capabilities (Eg.
Overvaluation of buying firms (Eg. Top management overtly focused on due diligence exercise and negotiations. Inability to achieve synergy. Overvaluation is often as a result of an ego drive and substantially affects future returns. Managing over-diversification. their initial offer was around 420 pence/share. Merging of organisational structures. 247 . while the ultimate acquisition was made at 607 pence/share). neglecting core business. Tata – Corus). Managing size. When Tata Steel started negotiations with Corus.MERGERS & ACQUISITIONS PITFALLS Cultural differences (Eg.
Kingfisher – Air Deccan). vertical to save transactions costs. with an objective to reinforce its growth trajectory or to take on the might of a comparatively larger player (Eg. 248 . Tata Steel – Corus).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. Maturity – A larger firm acquires a smaller firm with an objective to achieve economies of scale and experience curve effects (Eg. Brooke Bond – Lipton). Growth – This stage may witness parallel merger of two firms of similar size.
active top management intervention in phases. Blanket promotions across entities and confidence building exercises needs to be practiced.INTERNATIONAL M&A . An acquisition just for the sake of it or reputation yields very little value in the long term. 249 . Left alone syndrome. A concern of respect and trust for the business of the acquired company.FRAMEWORK Positive contribution to the acquired company. A common shared vision. Strong differences may stifle plans and its execution. Immediate attempts to super impose structure and culture may cause bottle necks.
BLUEPRINT Take the media into confidence. Shift attention from business portfolio to people and processes. Integrating work processes. Redefine responsibilities and authority. They can carry the message to the various stake holders. It will enable focus on customers and key people. 250 Do not ignore the “people factor”. Decide upon management control systems. promptly. Decide on the new hierarchy. .INTEGRATION . Determine business strategy.
– Synergy – Potential value gain from combining operations (i. Valuation decisions are arrived through a due diligence process when the prospective acquirer gets access to the books of accounts of acquiring company.VALUATION The process of valuation is central to M&A. The process takes (6-12) months. – Market for corporate control.e. over valuation can become a curse. operational & financial).M&A . While under valuation may be a significant opportunity. 251 . – Unstated reasons – Personal self interest and hubris. Financial motives – Undervaluation relative to true value.
– Vertical Synergy – Gains come from controlling the supplychain and savings in transaction costs. Sources of operational synergy – Horizontal Synergy – Gains come from economies of scale which reduces costs. when the “fit” between the two entities is very poor. or from increased market power which increases sales and margins.VALUING OPERATIONAL SYNERGY Synergy – It refers to the potential value gain where the whole is greater than the sum of the parts. – Conglomerate Synergy – Gains come when one firm complements the resources or capabilities of another (Eg. Innovative product – Good distribution network). Synergy can be negative as well. 252 .
Hotmail). but availed after being merged with a profitable firm (Eg. Cash Slack – It reduces asymmetry between cash starved firms with deserving projects and cash cows with no investment opportunities. Synergy comes from projects which would not have been undertaken if the two firms stayed apart (Eg. shareholders can accomplish the same at a much lesser cost. 253 . ITC – Bhadrachalam Paper). However. and without paying take-over premiums.VALUING FINANCIAL SYNERGY Diversification – Reduce variability in earnings by diversifying into unrelated industries. Tax Benefits – Tax benefits may accrue from tax entitlements and depreciation benefits unutilized by a loss making firm.
It relates to the concept of diversification.VALUING FINANCIAL SYNERGY Co-Insurance Effect – If the cash flows of the two firms are less than perfectly correlated. higher leverage. the cash flow the merged firm will be less variable than the individual firms. – Default risk comes down and credit rating improves. hence better performance. 254 . – Coupon rates may also be negotiated at lower rates. 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. This will induce higher debt capacity.
The value of control can be substantial for firms that are operating well below optimal value. While value of corporate control is negligible for firms that are operating close to their optimal value. The value of wrestling control is inversely proportional to the perceived quality of that management.VALUING CORPORATE CONTROL Premium of M&A are often justified to control the management of the firm. 255 . – – Value of Control = Value of firm after restructuring Value of firm before restructuring. since a restructuring can lead to significant increase in value. Assessment of perceived quality is critical.
sometimes in combination with the assets of the acquiring company. LBO facilitates a relatively smaller firm to bid for a comparatively larger firm in the bid for management control. It is a very costly and risky proposition. The assets of the acquired company are used as collateral for the borrowed capital. Confidence of investment bankers and the international financial community is essential. 256 .e.LEVERAGE BUYOUT (LBO) The basic difference between a take-over and a LBO is the high inherent leverage (i. debt component) at the time of buyout and rapid changes in capital structure over time.
liquidity. The increased benefit showed in the following way – reduced costs and increased revenue. A research study showed that 30% of the publicly listed firms reported above average returns after going private. However. – Separation of ownership from management. on-going valuation.access to financial markets. the advantages of going public includes . off-late many publicly traded firms have gone private keeping in mind the following – – The fear of LBO. 257 . – Increased information needs. – The need to satisfy analysts and shareholders.TO GO PUBLIC OR NOT? However.
258 .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). – Cost of debt coming down (i. which disappears once assets are liquidated and significant portion of debt is paid off. – It is a temporary phenomenon. – Debts repaid off from increased value after successful restructuring and wresting management control. – Managers cannot be trusted to invest free cash flows wisely. – Cash trapped company unable to utilize opportunities.e. co-insurance effect).
EFFECT OF HIGH LEVERAGE Increases the riskiness of dividend flows to shareholders by increasing the interest cost to debt holders. A LBO has to pass two tests to be viable – – Restructuring to pay-off increased debt. Lack of sufficient cash flows to repay costly debts resulting in a possible debt trap. Therefore. initial rise in leverage is anticipated. As the firm liquidates / pledges assets and pays off debt. Any discounting has to reflect these changing cost of capital. leverage is expected to decrease over time. – Increase equity valuation. 259 .
Objectives – – Traditional route of filing prospectus and undergoing an IPO is costly. – Prevents dilution of equity. time-barred. – Facilitates better valuation and forthcoming offerings. – Automatic listing in major exchanges. allowing the private company to bypass the usually lengthy and complex process of going public. small in size but having a promising business.e. which has discontinued its operations (i. shell company) by a private company. – Tax shelter. 260 .REVERSE MERGER Reverse Merger – The acquisition of a public company. or costly.
Excess returns also vary across time periods.EFFECT OF TAKE-OVER ANNOUNCEMENT The shareholders of target firms are the clear winners. – Takeover announcements reported 30% excess returns. – Merger announcements reported 20% excess returns. During bearish periods excess returns were 19%. and 35% during bullish periods. However. 261 . Initial anomaly in stock prices usually normalizes over a period of time (6-12) months. takeover failures have only initial negative effects on stock prices. Most target firms are taken over within (6090) days.
EFFECT OF TAKE-OVER ANNOUNCEMENT The effect of take-over announcement on bidder firm’s stock prices are not clear cut. 1988 . Bradley. – Most studies reported insignificant excess returns around take-over offers or merger announcements. 1983. – However. as stock markets become more and more perfect such anomalies would reduce Source: Jensen and Ruback. in the event of take-over failure negative returns to the extent of 5% on bidder firm stock prices is reflected. 262 Jarrel. and Kim. Desai. and Netter. – However. over time. Brickley. 1983.
DEFENSIVE STRATEGIES Golden Parachute – An employment contract that compensates top managers for loss of jobs as a result of change in management control. Poison Put – Premature retirement of bonds at attractive rates to pour surplus cash and make target investment unattractive. Rights). so that nothing is left for the raider to strip off. Asset Stripping – The targeted company hives off its key assets to another subsidiary. 263 . Poison Pill – An offer to existing shareholders to buy shares at a substantial discount to increase their voting rights (Eg.
But often the White Knight turns a betrayer himself (Eg. Shapoorji Pallonji). 264 . thus thwarting the raider company’s attention.DEFENSIVE STRATEGIES White Knight – It is the placing of stocks to a cash rich investor and bargaining for protection in return. Green Mail – The targeted company buys large blocks from holders either through premium or through pressure tactics (Eg. Pac Man – The target company makes a counter bid to take over the raider company. East India Hotels – Reliance Industries – ITC). Gray Knight – The target company takes the help of friendly company to buy the shares of the raiding company.
COMPETING FOR THE FUTURE 265 .
What went wrong???? What were they doing with the present? What were they pre-occupied with? 266 . Honda overpowering Volkswagen. were spending 99% of their precious time dealing with present. Honda overpowering GM. Most companies were too preoccupied with the present than the future? 99% of the companies overpowered. Compaq overpowering IBM. Wal-Mart overpowering Sears.GETTING OFF THE TREADMILL Canon overpowering Xerox. The reverse was true for the companies overpowering. British Air overpowering Pan Am. Hitachi overpowering Westinghouse. Nokia overpowering Motorola.
Not knowing when to stop. 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 . CEO’s brutally pick up the knife and ruthlessly carve away layers of corporate flab (delayering. most often they ended up cutting corporate muscle as well and became anorexic. downsizing).THE PAST OF COMPETITION Beyond Restructuring – When a competitiveness become inescapable problem (stagnant growth. decluttering. declining margins. falling market share). Thus efficiency was grievously hurt.
A poll in circa 2000 revealed that 80% of the U. The future is not about catching up with competition. 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. However.S. but forging ahead in competition. top managers believed that quality will be a source of competitive advantage of the future. 268 . but not of the future. incrementalism or nominal innovation has almost reached a plateau.THE PRESENT OF COMPETITION Beyond Reengineering – Numerator based managers (innovation) at least offers some hope.
Creating the future requires industry foresight. not the other way. Transform the industry. Companies need to fundamentally reconcieve itself. they are not enough to get a company to the future. and regenerate its strategies (breaking its – managerial frames). reinvent its industry. It involves Dream about the company’s future. demographics and lifestyles. as important as these may be. better. Create a potential gap. don’t predict. Empower from bottom to top. It is based on deep insights into trends in technology. aspirations and resources.THE FUTURE OF COMPETITION Regenerating – Leaner. not just the organization. 269 . faster.
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. Create entirely new industries (i. Therefore. hence do not fall sick in the first place. Successful companies have a complete grip over the industry. blue oceans). Change in at least one fundamental way the rules of engagement in an industry. 271 . they do not need to restructure. Redraw the boundaries between industries. It is about deliberately creating a strategic misfit.e. by converging technologies complex. It drives a hunger and a passion to transform.
The middle management plays a strong moderating role. More importantly.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. 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. 272 . Such a process is called institutionalization (from people centric to organisational centric).
Companies need to strategize (think ahead of times). Apply the 40 – 30 – 20 principle. 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. Toshiba – LCD. It requires a lot of common sense and a little bit of out of the box thinking. Apple – iphone). South West Airlines – LCC. without taking undue risk. An ability to energize the company. 273 . Get to the future first.THE FUTURE OF STRATEGY A company must get to the future not only first but also for less.
The farther one can see in this endless space. is the ability to imagine in a different way what the future could be. as on their aspirations. We are in the midst of a 3600 vacuum. As there is no one future. each point in space represents a unique business opportunity. the farther it will be away from competition.HOW DOES THE FUTURE LOOK LIKE? There is no rule which says that for every leader there will be a follower. but hundreds. What distinguishes a leader from a laggard. 274 . greatness from mediocrity. Companies of the future will be not based so much on the strength of their resources.
THE EMERGING STRATEGY PARADIGM Not Only Reengineering Processes But Also Regenerating Strategy The Competitive Challenge Organizational Transformation Industry Transformation Competing for Market Share Competing for Opportunity Share Finding the Future Strategy as Learning Strategy as Positioning Strategy as Engineering Strategy as Unlearning Strategy as Dream Strategy as Architecture 275 .
THE EMERGING STRATEGY PARADIGM Not Only But Also Mobilising for the Future Strategic Fit Resource Allocation Strategic Misfit Resource Stretch & Leverage Getting to the Future First Existing Industry Structure Product Leadership Single Entity Product Hits & Timing Future Industry Structure Competency Leadership Dominant Coalitions / Co-option Market Learning & Preemption 276 .
LEARNING TO FORGET P1: The degree of learning in current period is directly proportional to the degree of unlearning in the previous period. Degree of Learning Unlearning Curve P2: Unlearning in previous period does not necessarily ensure learning in the current period. Learning Curve t1 t2 t3 Time t4 t5 277 .
It is characterized by the following – Unique – It provides unimaginable customer value ahead of its times. Inimitable & Insubstitutable – A high degree causal ambiguity between these skills yield sustainable competitive advantage. 278 .CORE COMPETENCE A core competence relates to a bundle of skills (not an asset or a business) that revolves around activities or processes and critically underpins a firm’s competitive advantage. It cannot be matched even by its closest competitors. Leverage – They are the gateways to future markets. It represents the collective learning's of an organization centering around diverse streams of technologies.
it is deeply embedded in the heart of the organization. Wal-Mart – logistics. Although a core competence may lose value over time. Most companies around the world do not possess one. Toshiba – flat screen displays. Coca Cola – brand. Honda – engines. Canon – imaging. it gets more refined and valuable through use.MORE ABOUT CORE COMPETENCE Sony – miniaturization. Nike – designing. leaders have one. 279 . Intel – nano-electronics. A core competency cannot be outsourced. Toyota – lean manufacturing. Core competencies are the roots of the organization. at the most three to four. SKF – antifriction and precision.
ROOTS OF COMPETITIVENESS End Products 1 2 3 4 5 6 7 8 9 10 Core Businesses Core Business 1 Core Business 2 Core Business 3 Core Business 4 Core Product 2 Core Products Core Competencies Core Product 1 Competence 1 Competence 2 Competence 3 Competence 4 280 .
RESOURCE STRETCH & LEVERAGE
Initial resource position is a very poor indicator of future performance. It leads to atrophy and stagnation. Successful companies consciously create a potential gap between aspirations and resources. Resource crunch is a common factor among firms that faces a wealthy rival, and outperforms them. Leveraging what a company already has, rather than allocating it is a more creative response to scarcity. – By concentrating existing resources. – By accumulating existing resources. – By complementing existing resources. – By conserving existing resources. – By recovering existing resources.
Concentrating – It involves effectively directing portfolio of resources on key strategic goals in which individual efforts converge over time. It is a balance between individual mediocrity and collective brilliance. It is achieved through – Converging – Redirecting multiple diverging (i.e. fragmented) short term goals into one long term goal. It is then resources can be stretched over time. Focusing – Making trade-offs and preventing dilution of resources at a particular point of time. Targeting – Focusing on the right innovations that are likely to have the biggest impact on customer value.
Accumulating – Using existing reservoir of resources to build new resources. Each and every individual is a rich & potential source of learning, discover better ways of doing things. It is achieved through Mining – Extracting learning experiences from existing body of each additional experience (i.e. success or failure). It is an attitude that can be acquired, but never learnt. It leads to a substantial jump in the experience curve. Borrowing – Utilizing resources outside the firm through licensing, alliances, joint ventures. A firms absorptive capacity is as important as its inventive capacity.
Complementing – Using resources of one type with another that aligns smoothly to create higher order value. In a way it produces an accelerating effect on each individual resource. It is achieved through – Blending – Interweaving discrete capabilities to create world class technologies (GM – Honda) through integration and imagination. Different functional skills can also be blended to create a world class end products (Yamaha – Keyboard). Balancing – An ability to exploit excellence in one area is never imperiled by mediocrity in another (GE acquiring the CT scanning rights from EMI because of its inadequate market reach).
Conserving – Sustaining competencies over time through frequent usage. Resources are never abandoned; they are always preserved for future use. Recycling – Increasing the velocity of use of a competencies over time. As a result core competencies can be leveraged across an array of products (Sony - Betamax). It includes brand extensions as well. Co-Opting – Enticing resources of potential competitors to exercise influence in an industry (Fujitsu – IBM). Shielding – It involves identifying competitors blind spots and then attacking without having the fear of retaliation.
Recovering - It is the process of reducing the elapsed time between investing in resources and the recovery of those resources in the form of revenues via the market. Speeding – Prior to the 1980’s Detroit’s majors took an average of 8 years to develop an entirely new model; the Japanese reduced it to less than 4.5 years, with major new variants in 2 years. This envisaged Japanese players in giving customers more opportunities to switch allegiance and loyalty (Toyota). Protecting – It uses competitors strength to one’s own advantage, by deflecting it, rather than absorbing it as practiced in Judo.
INTERNATIONAL BUSINESS ENVIRONMENT 287 .
288 . Therefore focused strategies based on core competence may not be suitable for emerging markets (Khanna & Palepu. 1997). Emerging markets are characterised by infrastructural bottlenecks. high levels of market imperfection). strategies suited for the developed markets may not be appropriate for emerging markets. institutional gaps. China. Therefore.EMERGING MARKETS Emerging markets (India. Diversified groups in operating in emerging markets therefore benefit from unrelated diversification. and high transaction costs.e. Chile) provide a different context (i. Korea.
Size & Scale.DIVERSITY . et al. Concentric. subsequently negatively related across developed markets. (2000) 289 .PERFORMANCE (I) Diversity attempts to measure the degree and extent of diversification (Herfindahl. Synergy. Experience Strategic Fit Diversity Palich. Entropy). Optimum level of diversification Performance Diversity is initially positively related with performance.
brand building Risk diversification. Huge initial investment.PERFORMANCE (II) Diversity is initially negatively related with performance.DIVERSITY . 2001) 290 . conglomerate power Threshold level of diversification Performance Diversity (Khanna & Palepu. subsequently positively related across emerging markets.
291 . revenues and profits. It should think globally. It should have a spread of interest groups / stake holders. HSBC). Characteristics – It should have a spread of affiliates or subsidiaries. It should have a spread of assets. It should have a spread of manufacturing facilities. act locally (Eg.INTERNATIONAL IDENTITY MNC’s consciously engage in FDI in different parts of the globe to forge resource diversity as a distinct competitive advantage.
It reflects the relative role of team building (Eg.GLOBAL BUSINESS ENVIRONMENT Power Distance – It reflects the disparities in income and intellectual development (Eg. low power distance in developed markets and vice versa for emerging markets). high feminity index in developed markets and vice versa for emerging markets).It reflects the disparities in women in workforce (Eg. Risk Profile – It reflects the risk attitude of the top management (Eg. Feminity Index . low risk profile in developed markets and vice versa for emerging markets). 292 . Group Scale . low group scale in developed markets and vice versa for emerging markets).
low country risk in developed markets and vice versa for emerging markets). flexibility (Eg. Country Risk – It reflects the political and economic risk (Eg. high cultural adaptability in developed markets and vice versa for emerging markets).culture. corruption. interest rates. 293 . code of conduct. judiciary) of doing business in a particular country (Eg. way of life. political stability.GLOBAL BUSINESS ENVIRONMENT Cultural Adaptability – It reflects the adaptive ability to a changing environment . time value. attitude. dress sense. currency. credit rating. terrorism (9/11). FOREX reserves. customs. inflation.
Ethnocentrism – Developed country managers tend to regard their own culture as superior. however. High levels of ethnocentrism usually has a negative effect on business. in most emerging markets use of an interpreter may be a standard protocol. 294 . in most emerging markets meetings are delayed and lasts unusually long. Other factors – local celebrations. Language Barriers – Developed country managers expect foreign partners to communicate in their languages.GLOBAL BUSINESS ENVIRONMENT Time Sensitiveness – Developed country managers regard time as precious. and vice-versa. time-zones.
It a multi-lateral treaty with 143 (as on 2002) member countries to reduce tariff and non-tariff (quota) barriers. It also initiated provisions on anti-dumping. The 1999 (Seattle Round) saw a lot of protest amidst bringing agriculture under the purview of TRIPS. It also highlighted the nexus between US & WTO. The 2001 (Doha Round) focused on power blocks (NAFTA. 295 . In 1995 (Uruguay Round) GATT was renamed to WTO. It focused largely on TRIPS (patents.GATT GATT was a bi-lateral treaty initiated between US and some member countries in 1947 to promote free trade. trademarks). copyrights. BRIC). ASEAN.
Sterling . Euro). three countries joined in 2002 increasing it to fifteen members as of 2008. primarily the OPEC countries.Pound).e. the Euro slowly started outperforming the Dollar. However with current recession in the US 2002 onwards.e. 296 . The Euro was significantly devalued against the Dollar till 2002. the Dollar still remains the most preferred currency globally. However. The notable exception was Great Britain which still continues with its local currency (i.EURO – SINGLE CURRENCY In 1999 twelve member countries in Europe joined hands to move over to a single currency (i.
it helps avoiding transaction costs associated with a multiple currency. but it may have spill-over effects. 297 . 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. However. Trade Block – It will strengthen the EU identity which would not have been possible otherwise. Rate Uncertainty – A single currency eliminates the risk of competitive devaluations.
298 . – FDI (transfer of tangible resources) is slow but steady for the purpose of economic growth. 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.e. hot money). It is long term with high levels of commitment.FII Vs FDI INVESTMENT Classical economists believed that foreign investment (in any form) is basically a zero sum game (i. It is short-medium term with comparatively low levels of commitment.e. the gain of one country is loss of another).
lifestyle (petroleum 299 outlets – departmental stores).INTERNATION MARKETING Product – The various attributes of a product may receive different degrees of emphasis depending on differences in . customer awareness (microwaves). usage (talk time).culture (food habits). Distribution – It depends on the market characteristics (fragmented – concentrated). Pricing – It depends on the competitive structure (PLC – Kellogg's). technology (microchip). economic (middle class buying power). promotion (surrogate advertising). buying patterns (spread). .
India) may be different from that another trading country (US – GAAP or IRS).INTERNATION FINANCE Currency Risk – Many Indian IT companies (Rs) having business in US (Dollar) are asking for quotes in (Euro) or are shifting bases out of US to avoid risk of devaluation of Dollar. debt is cheap in US. Leverage – The leverage may vary across countries depending upon money and capital market conditions (Eg. Accounting Norms – The accounting norms of one country (AS . 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). .
technology (convergence.INTERNATIONAL HR An uniform HR policy is idealistic to enable parity in performance appraisal. Training – It is a pre-requisite for international business to reduce language. Recruitment – In local recruitment. 301 . in most cases it is not desirable nor practiced. shortened life cycles). labour laws. Compensation – Differential pay packages exists because of differences in purchasing power. and cultural barriers (language) vis-à-vis emerging markets. double taxation. however. social security. skills are more important that cultural fit and vice-versa.
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).INTERNATIONAL OPERATIONS Location Incentives – FDI in emerging markets should explore options for SEZ’s to explore benefits (tax holidays. Bosch spark plugs are used by car manufacturers worldwide). reduce power costs) vis-à-vis infrastructural bottlenecks.
CONTEMPORARY TOPICS 303 .
Innovation is the most preferred strategy today to maintain competitive advantage in the present turbulent business environment. 304 . Innovation is all about staying ahead of competition. but has inherent risks involved as well. Innovations typically paves the way for more secured and improved lifestyle for consumers in general. innovation is the first attempt to carry it out in practice. it has destructive effects as well. While innovation typically adds value for organizations.INNOVATION An invention is the first occurrence of an idea for a new product or process.
TYPES OF INNOVATION A key challenge is maintaining a balance between process and product innovations. While product innovations are typically customer driven. process innovation is necessary to sustain the competitive advantage of product innovation. Strategic innovation has the potential to change the rules of the game. Tangible impact of product innovation on performance is significantly higher than process innovation. 305 . Process innovation usually follows product innovation. However. process innovations are organizational driven.
putting an idea into practice). 306 . Drug Development (Bio Chemicals). about how an organization makes money (i. It leads to a shift in the price – performance envelope.e.BUSINESS MODEL It is a simplified description and representation of a complex real world. Innovations are the back-bone of successful business models . Telecom (CDMA Technology).e. Disruptive business models brings in a new frame of reference (i. Data Storage (Pen Drives). a paradigm shift). Processors (Pentium). Medical Surgery (Lasik).
The segment(s) of clients to be addressed. The key partners involved in the activities. The revenue streams generated by the activities. The key activities / processes necessary for execution. 307 . The channels to reach out to the clients.NINE BUILDING BLOCKS Value proposition offered to the market. The cost structure resulting from the business model. The proposed relationships established with clients. The key resources and capabilities required.
BUSINESS MODEL FRAMEWORK 308 .
It is just one piece of the puzzle.REVENUE MODEL Positioning is just not sufficient. Real Estate) companies need to untangle and understand the intricacies of their business model. Investment Banking. innovative companies to carve out unique business models to fend off competition. The revenue model described here are the means to generate revenues. 309 . It involves – Product Visualization – Product Prototype – Product Test – Capacity – Pricing – Distribution. With the rapid erosion of certain industries (IT.
Have a lean and a flat organization structure. Provide reasonable incentives (not necessarily monetary). Promote the grape-vine. Allow the management sufficient slack to be future oriented. 310 . A favourable intellectual property (IP) climate. Promote the culture of experimentation. Allow the workforce idiosyncrasies for their errors.HOW TO MAKE INNOVATIVE CO’S Innovative company’s are a matter of culture and aspirations rather than tangible resources.
In most emerging markets where the IP climate is not so favorable. companies are increasingly relying on internal protection to sustain innovation effects. The most preferred strategy of internal protection includes imbibing “causal ambiguity” in the production process to make reverse engineering difficult. however that possibility is slowly atrophying. 311 311 .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.
312 312 .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. Corporate governance aims to reduce the principal-agent problem present in most professional managed organizations through appropriate forms of accountability and control mechanisms. In fact the principles of corporate governance implies that managers go beyond in satisfying the stated and unstated needs of the multiple stakeholders.
also known as the principal-agent problem or agency dilemma. However. According to the agency theory top managers and shareholders interests are usually conflicting in nature and tend to pull in opposite directions.AGENCY THEORY The root of Corporate Governance goes back to the Agency Theory. 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 . This exposes the shareholders to additional risks and higher costs. not present in portfolio diversifications.
SEBI Report – 2005. After the Enron downfall. the US government passed the Sarbanes – Oxley Act. 2002 to restore public confidence in corporate governance. various laws were enacted to ensure proper usage of these funds. 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.
Interests of other stakeholders: Recognize the legal and other obligations of all legitimate stakeholders. including the society at large. Role and responsibilities of the board: It deals with issues about an appropriate mix of executive and nonexecutive directors. The key roles of chairperson and CEO should not be held by the same person and their offices be clearly separated. 315 .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.
assessment and mitigation of risks and retirement by rotation over a fixed period of time. Independence of the entity's auditors: Identification.. Disclosure and transparency: Disclosure of information should be timely and balanced to ensure that investors have clear access to data and facts. 316 316 .GOVERNANCE PRINCIPLES Integrity and ethical behaviour: Organizations should develop a code of conduct for their top management that promotes ethical and responsible decision making. They should also implement systems to independently verify and safeguard the integrity of the company's financial reporting.
GOVERNANCE STRATEGIES Monitoring by the board of directors: The board of directors. 317 . a person benefitting from a decision should abstain from it. Regular board meetings allow potential problems to be identified. However. they should provide no mechanism or scope for opportunistic behaviour. discussed and resolved. safeguards invested capital. Balance of power: The simplest balance of power is very common. with its legal authority to hire. Remuneration: Performance-based remuneration is designed to relate some proportion of salary to individual performance. fire and compensate top management.
undertook formal evaluation of its directors. who had no management ties. 318 . McKinsey found that 80% of the respondents would pay a premium for wellgoverned companies. The size of the premium varied by market. They defined a well-governed company as one that had mostly out-side directors. Egypt and Russia) to around 40% for Canadian & European companies. from 10% for companies where the regulatory backdrop was least certain (those in Morocco.GOVERNANCE & PERFORMANCE In its “Global Investor Opinion Survey” of over 200 institutional investors in 2002. and was responsive to investors' requests for information on governance issues.
corporate philanthropy should be a part of every corporate mission. 319 . The basic premise is that firms cannot exist in vacuum.SHAREHODER – STAKE HOLDER THEORY Till the early part of the 20th the basic objective of modern organizations was to provide goods and services for public consumption for profit maximisation. However. the short-term view of profit maximisation gave way to a more broader and mediumterm view wealth maximisation of the shareholders. Therefore. Over a period of time. today economic institutions are considered as a major drivers of improvement in quality of life in general and therefore needs to include multiple stakeholders.
the debate on CRS still continues whether firms should detract its focus from its business? 320 . CSR can be defined as. Therefore. “an enterprises decisions and actions being taken for reasons at least partially beyond its immediate economic interests”. giving a very important message that one cannot exist without the other. in fact a large part of it is significantly overlapping. However. Therefore.CORPORATE SOCIAL RESPONSIBILITY As Peter Drucker rightly pointed out that. “a healthy business cannot exist in a sick and impoverished society”. economic and social responsibilities cannot be mutually exclusive.
Fear of government interference: Excessive quench for profits may lead to build up of adverse public opinion compelling the government to intervene (Eg. people are becoming increasingly aware of their right to a decent and healthy life. The role of media: The media and various consumer organizations have come up in protecting consumer rights and exposing mal-practices.GROWING CONCERN FOR CSR Awareness due to education: With growing literacy. MRTP). Public image: Entrepreneurs are increasingly relying on public image as a source of competitive advantage and a higher financial discounting. 321 .
and extended producer responsibility (Eg. Tata Steel – Life Line Express). Literacy & Training Programs – (Eg.CSR STRATEGIES Green Supply Chain Management: It includes environmentally preferable purchasing. Exide – Product take back). 322 . designing eco-friendly products. Health & Hygiene – Attending the health hazards due to wastes and by-products to employees and society in proximity (Eg. Refrigerators – CFC. Education. Cement . eco efficiency.Paper packaging. Aditya Birla Research Centre – LBS).
In turn companies by serving these markets. Strategic innovations leading to disruptive business models can show the way out. C. Prahalad notes that future markets exist collectively. across the world's billions of poor people having immense untapped buying power. 323 . K. They represent an enormous opportunity for companies who learn how to serve them.BOTTOM OF THE PYRAMID With the market across most developed markets including the US getting saturated. they're helping millions of the world's poorest people to escape poverty.
BLUE OCEAN STRATEGY 324 .
MARKETSPACE .TWO WORLDS 325 .
where most industries are saturated. battled over market-share. profitable growth. . In today’s red oceans.WHAT IS RED OCEAN? Companies have long engaged in head-to-head competition in search of sustained. They have fought for profits. Yet in today’s overcrowded industries. one companies gain is always at the 326 cost of another companies loss. and struggled for differentiation (cost or product). competing head on results in nothing but a bloody red ocean of rivals fighting over a shrinking profit pool.
but by creating blue oceans of uncontested market space ripe for growth . it will exist 327 in the future as well. Blue Ocean’s have existed in the past.WHAT IS BLUE OCEAN? Tomorrow’s leading companies will succeed not by battling in red oceans. Such strategic moves are possible through the pursuit of product differentiation and low cost simultaneously. It helps in creating powerful leaps in value for both the firm and its buyers. It is only the frames of the . rendering rivals obsolete and unleashing new demand.
RED OCEAN Vs BLUE OCEAN Compete in existing markets Compete in uncontested markets Beat the competition Exploit existing demand Make the competition irrelevant Create and capture demand Make the value-cost trade off Break the value-cost trade off Demand is the limiting factor Supply is the limiting factor 328 .
Demand across developed markets reaching a plateau. Technological advances have substantially 329 improved industrial productivity.BLUE OCEAN STRATEGY IMPERATIVES Prospects in most established market spaces – red oceans – are shrinking steadily. of European nations. As trade barriers between nations & regions fall. . Niche markets & monopoly havens are continuing to disappear. information imperfections atrophy instantly. Population shrinkage across a no.
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). Incumbents often create blue oceans within the ambit of their core business. . Company & industry are the wrong units of 330 strategic analysis. the underlying technology was often already in existence. managerial moves are.CONCEPTUAL UNDERPINNINGS Blue oceans have existed in the past and will exist in the future as well.
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 .
SOME GLARING EXAMPLES In the last century authors Kim and Mauborgne have documented the creation of more than 150 blue ocean creations across 30 industries – Virgin Atlantic: Fractional jet ownership or travel to space. . Southwest Airlines: Pioneering the concept of LCC. Citibank – Automated teller machines & credit 333 cards. Sony Play Station: Redefining machine-human interface in entertainment and targeting an altogether new user base.
Off late emerging views in strategy having its origin in (Organization Theory) led to a paradigm shift to what is called the – reconstructionist view. According to this view managers need not be constrained to act within the confines of their industry. 334 . greater than themselves. According to this view. companies & managers are largely at the mercy of economic forces. All they need to do is change their managerial frames.WHAT THEN IS THE HANDICAP? Most of the traditional views in strategy having its origin in (Economic Theory) led to what is called the – structuralist paradigm.
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