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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 all about creativity and innovation. 7 . It requires full commitment of the top management. It is long-term in nature. It is about adaptation and response to the same. It provides broad guidelines. It is irreversible.FEATURES It forms the core activity of the top management. It involves substantial resource outlay. It is a holistic and integrated approach.STRATEGIC MANAGEMENT .
8 . It is fool-proof in nature. It involves only the top management.STRATEGIC MANAGEMENT – MYTHS It involves short-cuts. It is about a definite formula. It involves nitty-gritty's. It about mere data and facts. It brings instant success. It a bundle of techniques or even tricks. It attempts to minimize risk. It is about forecasting. It is rocket science.
STRATEGIC MANAGEMENT IMPERATIVES To be continuously alert. To be future oriented. To be insulated against environmental threats. 9 To develop core–competencies. To be proactive. To innovate. To leverage size. rather than reactive. scale and scope. To assimilate change faster. To generate large resource pool. again and again ……. . To tap markets across boundaries. To gain expertise in technologies.
It is an old wine in a new bottle. In the ancient days battles were won not by virtue of size of the army or armory. and more importantly . In the ancient days battles were fought over land. but with a lot a rigour and robustness. today's battles are fought over markets. Even in today’s markets. battles fought on the market front are won by companies by virtue of their obsession & strategies. obsession. In contrast.strategies. but by virtue of their courage.STRATEGY . whose origin can be traced to some of the greatest battles fought in the ancient days.ORIGIN The word strategy has its origin from the Greek word strategia meaning Military Commander. 10 .
US attack of Morocco to capture Germany – Strategy: Pin-hole strategy – Wal-Mart challenging Sears by entering small towns. – Reliance’s entry into telecom. challenging GM and Ford.SOME PARALLELS Japan’s attack on Pearl Harbour – Strategy: Attack where it hurts the most. Allied Forces Vs Germany (WW-II) – Strategy: Forging alliances. 11 . Napoleon’s attack on Russia – Strategy: Waiting for the right time. – Yahoo and Microsoft challenging Google. – Toyota’s entry in the US.
A paradigm is a dominant belief about how the business and its environment operates. The things happening around the firm when totally disconnected from the past leads to a paradigm shift. 12 . 1910).EVOLUTION OF MANAGEMENT As Peter Drucker refers to it. a radical change in the business environment brings about discontinuity. The first major discontinuity in the history of global business environment was the . – Mass Production Organization Size – Complicated Processes – Complex Structures Evolving of an emerging paradigm – survival of the fittest (Fayol & Taylor.Industrial Revolution.
push to pull). – Homogeneous to heterogeneous products.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. – Changes in the technology fore-front. 1960). performance across firms became differentiated. 13 .e. – Global market place. From uniform performance. The question of outperforming the benchmark became the new buzzword. – Affluence of the new customer (i. Efficiency and effectiveness are no longer sufficient.
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 .
Ansoff (1960) – Strategy can be segregated into certain mutually exclusive and inter-related components aimed at managing the growth of an organization. – Biases and prejudices has a very little role to play in strategic choices pursued by managers.APPROACHES TO STRATEGY Analytical Approach – Igor H. – 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. – It is primarily the top management’s prerogative. Learning always begin on a clean sheet of paper. 15 .
– Organization structure will precede and cause changes in strategy. how it will compete. Successful organizations align authority and responsibility of various departments in way to reach overall objectives. – Management control systems has a dominating role in influencing firm performance. 16 . – The top managers then decide on the type of organization structure & systems to be in place. everything else follows. Once the control systems are in place. The organization initially decides which industry to enter. who will be the top managers.APPROACHES TO STRATEGY Design Approach – Alfred Chandler (1970) – Structure follows strategy.
substitutes. – An organization is seldom in a position to influence the larger business environment. 17 . – A firms performance is inversely related with the bargaining power of environmental forces to which it is exposed. new entrant. customer. – The environmental forces comprises of – supplier. Porter (1980) – Choose a consumer segment and position your product accordingly.APPROACHES TO STRATEGY Positioning Approach – Michael E. competitors. – The organization will outperform the industry where environmental forces are weak and vice-versa.
They are complex resources and undermines a firms competitive advantage. but exploiting the resource differences among them. K. Prahalad (1990) – The key to superior performance is not doing the same as other organizations. – Core competencies are a set of skills that are unique and can be leveraged. 18 . – Organizations can significantly alter the way an industry functions.APPROACHES TO STRATEGY Core Competence – C. – It enables a firm to deliver unimaginable value ahead of time. locating in most attractive industries and pursuing the same strategy.
STRATEGIC MANAGEMENT PROCESS Strategic Intent Strategic Planning Strategic Gap – Environmental Scanning – Internal Appraisal of the Firm Strategy Formulation – Corporate Strategy – Business Strategy Strategic Choices – Functional Strategy Strategy Implementation Strategy Performance Strategy Evaluation & Control 19 .
TOP MANAGEMENT PERSPECTIVE 20 .
STRATEGIC INTENT If you cannot see the future. It implies a significant stretch. A substantial gap between its resources and aspirations. A strategic intent is a statement of purpose of existence. It is the cornerstone of an organizations strategic architecture reflecting its desired future state or its aspirations. 21 . A gap that consciously manages between stagnation and atrophy. It provides a sense of direction and destiny. you cannot reach there. It involves an obsession to be the best or outperform the best. It’s a philosophy that distinguishes it from its competitors.
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 .
when radical changes in the internal and external environment (i. Dominant logic changes. It is core to the strategic intent of the firm. 23 . To put it more simply. strategic variety) is apparent. it can be perceived as a set of working rules (similar to thumb rules) that enables the top management to decide what can be done and more importantly what cannot be done.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.e.
– It represents the company’s audacious. 24 . It is a combination of three basic elements – – An organizations fundamental reason for existence. It enables the top management to remain focused. beyond just making money. – It stands for the unchanging core values of the company. It ensures that the company does not wander off into unrelated zones or fall into an activity trap. but achievable aspirations.VISION It is a dream (not a forecast) about what the company wants to become in the foreseeable future. It provides an unity of purpose amidst diversity of personal goals.
and memorizable. Reachable – It should be within a reasonable target in the known future.CHARACTERISTICS Reliance – Where growth is a way of life. Brevity – It should be short. not an utopian dream. In Reliance when a new project becomes operational top managers hand over charge to the SBU heads and move on to a new project. Clarity – Vividly descriptive image of what the company wants to be known for in the future. clear. 25 . Sharing – The company across all hierarchies should have faith in it.VISION . Empathy – It should reflect the company’s beliefs to which it is sensitive.
It lends integrity and genuineness. It makes strategic alignment easier. It gives enlightment.ADVANTAGES To stay focused on the right track. It gives the impression of a forward-looking organisation. To prevent the fall in a activity trap. It gives a shared platform. It fosters risk taking and experimentation. 26 . It facilitates development of skills & capabilities.VISION . It provides a holistic picture.
A broad mission statement helps in fending competitors. Although the purpose may change over time. It enables the firm to define its business landscape and identify its competitive forces. It is intuitive for managers to conceive their business in terms of the customer needs they are serving – What business are we in? – Which customer needs are we serving? It should be broad based and relevant to all stake-holders. It serves as a road map to reach the vision. 27 . its reason for existence.MISSION Mission defines the space that a business wants to create for itself in a competitive terrain.
…………………. though some may seem unrelated in nature. …………………. 28 . All the businesses of the company are strongly integrated with their main business. – We do not offer steel. We offer security. We offer solutions. ………………….MISSION – SOME IDEAS Reliance – We are in the business of integration. We offer strength. – We do not offer software's. Some other examples – We do not offer shoes. – We do not offer insurance. …………………. We offer comfort.
– It is based on Management by Objectives (MBO). – It prevents deviation.100K crore company by the year 2005. – It keeps the mid management pre-occupied. 29 . – It lends direction – time frame in the medium term. – It provides a benchmark for evaluation. It is an end result (quantifiable) something a firm aims and tries to reach in a time bound frame.GOALS & OBJECTIVES Reliance – We want to become a Rs. – It helps identifying key success factors. It provides a quantitative feel to an abstract proposition. – It adds legitimacy and motivation.
It is specific to a particular business. – Compress project times. – Acquire a market share of indomitable position. It is the process of garnering necessary inputs. 30 . coordinating appropriate technologies. The details of the plan Reliance Telecom adopted were – Backward integrate process technologies.PLANS Reliance – Desire to invest 25K crore in telecom business by circa 2010. and gaining access to desired markets to achieve the desired goals and objectives. – Use price-elasticity to break market barriers. – Leverage economies of size and scale.
It often leads to an organizational crisis. 31 . Historical studies have shown that most organizations tend to continue with their existing strategies.STRATEGIC DRIFT Due to top management commitment. In such a context. radical change may lead to disequilibrium. This tendency to restore continuity is known as inertia (resistance to change). However. equilibrium is maintained. This state of affairs is known as strategic drift. When changes in the environment is incremental. past strategies tend to have a bearing on future strategies. strategies lose touch with the emerging realities.
STRATEGIC DRIFT FRAMEWORK Environmental Change Degree of change Strategic Change Radical Change Incremental Change State of Flux Continuity Stage of Transformation Strategic Drift Stage of Atrophy Time 32 .
– Distorting information to gain mileage. – Developing a platform of support. – Using covert tactics to pursue self interests.ORGANIZATIONAL POLITICS Strategic drift often leads to organizational politics. – Creating obligations of reciprocity. Some instances of organizational politics – Formation of powerful groups or coteries. – Creating a favourable image. – Hiding vulnerability. 33 . Organizational politics involves intentional acts of influence to enhance or protect the self-interest of individuals or groups over organizational goals.
– The environment context has changed. Usually there is wide gap between the two when organizational politics is evident. – Influential stake-holders back out.INTENDED & REALISED STRATEGIES An intended strategy is an expression of interest of a desired strategic direction. Other causes – – The plans are unworkable and utopian. A realized strategy is what the top management actually translates into practice. – Persons responsible for strategy conceptualization and implementation are34 divergent. .
this is not to be treated as “muddling”. Strategy formulation and implementation are linked together in a continuous improvement cycle. 35 . but as a defensible response to the complexities of a large organization that mitigate against publicizing goals. Learning is an integral part of logical incrementalism. but the master scheme of the rational comprehensive scheme is not apparent. However. They simply unfold the particulars of the sub-system in stages.LOGICAL INCREMENTALISM According to the incrementalism approach (contrary to integrated approach) practitioners simply do not arrive at goals and announce them in crafted and well defined packages.
Leveraging Crisis – A sudden crisis or an opportunity should be used as a trigger to facilitate acceptance and implementation of change. The broader objective should serve the overall interest of the organization. Agent of Change – Formal ratification of a change plan through MBO. 36 .IMPLEMENTING INCREMENTALISM General Concern – A vaguely felt awareness of an issue or opportunity. Macro Broadcasting – The broad idea is floated without details to invite pros and cons leading to finer refinements. Adaptation – As implementation progresses.
Tampering with surface level factors often leads to atrophy. 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. Dominant logic’s are very rigid and sticky and prone to inertia. Strategic transformation becomes smooth through a change in top leadership. . Dominant logic’s are the cornerstones of change when strategic transformation is apparent. It creates blinders.
– Organisational Slack – Enough free space. – Constructive Bargaining – Agree to disagree. – Experimentation – Fosters a culture of risk taking. Factors that fosters a learning organization – Pluralistic – An environment where different and even conflicting ideas are welcome. A learning organization must continuously focus on unlearning as well. 38 . It helps prevent a strategic drift from occurring at the first place. experience.LEARNING ORGANIZATION A learning organization is capable of continual regeneration from knowledge. – Informal Networks – Emerging of new ideas. and skills that fosters experimentation and questioning and challenge around a shared purpose.
ENVIRONMENTAL CONDITIONS Dynamic Scenario Planning Learning Organization Static Forecasting Decentralization Simple Complex 39 .
ANALYZING BUSINESS ENVIRONMENT 40 .
It is pro-active in nature. Competitive advantage provides the surest way to fulfill the strategic gap. gap analysis). It is based on the assumption of radical change. 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. It is reactive in nature. Strategic planning is a function of discounting the future. It is based on the assumption of incremental change. It requires a quantum leap (i.e. 41 .PLANNING & STRATEGIC PLANNING Formal planning is a function of extrapolating the past.
Environmental scanning is very important component of strategic planning. It is exploratory in nature. Environmental factors can be external as well as internal to the organization. events. and influences that affect an organizations way of doing things. The world is flat. The segments of the environment a top manager scans selectively depends upon his dominant logics. A manager has to continuously scan the environment to ensure alignment of the strategies with the radically changing environment. resources and ideas move unhindered.ENVIRONMENTAL SCANNING The environment is defined as the aggregate of conditions. not guided by any boundaries. 42 .
43 . It is not intended to be used as an exhaustive list. Understanding the composite effect is critical. It is particularly important that PESTEL be used to look at the future impact of environmental factors. which may be different from the past impact. It is important not only to identify the structural drivers of change. but also to analyze the complex linkages across them. for which a holistic picture is required.PESTEL PESTEL attempts to provide a broad framework on how the broader environmental forces affects an organization and influences the way it practices strategy.
Inflation & Interest Rates. Capital Market & Forex Reserves. Literacy Levels. Social – Population Diversity. Government Attitude. Social Values. Economic – GDP. Language Barriers.PESTEL FRAMEWORK Political – Government Stability. FDI Inflows. Income & Age Distribution. Religious Sentiments. 44 . Fiscal Deficit. Central – State Co-alignment. Subsidies & Protection. Monsoon & Food Grains Reserves. Infra-Structural Investments. Savings & Investment. Economic Cycles. Currency Stability. Economic Model. Licensing & Quotas.
Waste Disposal & Emissions. Research & Development. Non-Fossil & Alternative Fuels. Patent Laws. Pollution Control Laws. Environmental – Global Warming & CSR. Technological Convergence. Carbon Credits. 45 . Consumer Protection Laws. ERP. Legal – Monopolies Legislation. Product Safety & Health Hazards. Employment Laws. Extended Producer Responsibility. Direct & Indirect Taxes. Obsolescence Rate. Environmentally Preferable Purchasing. Product Design. Patents.PESTEL FRAMEWORK Technological – Innovation.
Curtailment of PSU’s.VRS. Rupee convertibility. MRTP Liberalization. 46 . Dismantling price controls.ECONOMIC LIBERALISATION New Industrial Policy (NIP) – Liberalizing industrial licensing. Abolition of import licenses. Capital Market Reforms. Encouraging exports. Economic Reforms – Fiscal & Monetary Reforms. Exit Policy. Banking Sector Reforms. PSU Disinvestments. FERA Liberalization. New Trade Policy (NTP) – Lowering import tariffs. Encouraging FDI. Structural Adjustments – Phasing out subsidies.
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 .
Globalization – Cheap Imports & Dumping – Push to Pull Marketing Buyers exacting demands – Shortage to surplus – Price competition – Life-style changes – Stress on quality. Consumerism Challenges on the technology front – Competencies become technology based – Investment in R&D become inescapable 48 .DISCONTINUITY Hyper Competition – MNC’s .
DISCONTINUITY Compulsion to find export markets – Identifying competitive advantage – Technological gap – Global presence – Depreciating currency – Exports Corporate vulnerability – It is no longer business as usual – Capital inadequacy – Lack of product clout and brand power – One product syndrome – Loss of monopoly 49 .
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 .
profit potential) per se. incremental or otherwise. It is even wiser to apply the same at the product – market level. It should not only be used to understand the forces.e. but also used to understand how they can be countered and overcome. 51 . the forces are subject to changes. The model should not be used as a snapshot in time.FIVE FORCES MODEL ASSUMPTIONS The model is to be used at the SBU level and not at the industry level. The five forces have strong cross-linkages. It depicts the attractiveness of an industry (i.
Product differentiation through proprietary technology or brand power. Scope for backward integration. Unimportance of product quality. Government policy. Undifferentiated product. Low margins & stagnancy. High switching costs. Industry stagnation.PORTERS FIVE FORCES ANALYSIS Threat to Entry – Economies of size and scale. Learning curve advantages. Low relative importance of the segment. Resource profile & fear of retaliation. Presence of substitutes or unorganized sector. Access to distribution channels. 52 . Capital requirements. Low customer switching costs. Threat of Customers – Buyer concentration and volumes.
Scope for forward integration. Piracy and counterfeits. Unorganised sector. Differentiated inputs. Product perishability. Diversity of players. 53 .PORTERS FIVE FORCES ANALYSIS Threat of Suppliers – Supplier monopoly. Intermittent overcapacity. Low relative importance of the segment. Lack of substitute inputs. Produced by industries earning high profits. Industry stagnancy. Jockeying for position – Fragmented market. Buyer’s propensity to substitute. High customer switching costs. Low level of differentiation. Threat of Substitutes – Improvement in price -performance trade-off. High exit barriers.
Reliance). Tata). Inertia – Excessive commitment to past strategies prevents firms from tapping emerging opportunities. Business Scope – The intention whether the firm wants to be in a single.FIRM ENVIRONMENT Size and Scale of Operations – It is a very important component of competitiveness in today's global context (Bharti – MTN. Resource Profile – It highlights the capabilities (generic) or competencies (business specific) of the firm. dominant or related diversified or unrelated diversified businesses (Infosys. Cohesiveness – Degree of bonding existing across affiliated firms. 54 .
With lower costs. it can price its products more competitively. However. which further reduces costs. and with lower prices it can increase its sales volume. Experience curve has strong linkages with performance. Matured firms will always be positioned advantageously on the ECurve than new entrants. 55 . an E-Curve can prove to be futile during discontinuity.EXPERIENCE CURVE The cost of performing an activity declines on per-unit basis as a firm becomes more efficient. The E-Curve thus enables organisations to build entry barriers. 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 .
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 .EXPERIENCE CURVE .
It is one of the earliest models in environmental scanning. Business Intelligence – Bankers. It helps an organisation to capitalize on the opportunities by maximizing its strengths and neutralizing the threats minimizing the weaknesses. Customers. Competitors. Case Studies – Structured Questionnaires. Observation. Interviews.SWOT The framework was originally conceptualized by Kenneth Andrews in 1970. Acronym for Strengths – Weaknesses – Opportunities – Threats. . Websites. Suppliers. Press Clippings & Interviews.VULNERABILITY ANALYSIS . A SWOT audit involves – Company Records – Annual Reports. 59 Analysts.
FRAMEWORK Opportunities Nullify weaknesses which prevents you from exploiting opportunities Leverage strengths to make use of opportunities Weaknesses Minimize weaknesses which prevents you from countering threats Strengths Threats Utilise strengths to counter threats (?) 60 .SWOT ANALYSIS .
Aditya Birla. Ranbaxy. Large resource pool – Eg. Biocon. Economies of scale – Eg. Engineering Skills – Eg. ITC. SBI. Toyota. High quality products – Eg. Reddy’s. Strong R&D base – Eg. Tata. Excellent penetration – Eg. Reliance. Siemens. Honda. Motivated employees & cordial industrial relations – Eg. Sony. Infosys. Reliance. Tata Steel. 61 . HUL. Strong after sales & service network – Eg. Caterpillar.SOURCES OF STRENGTH Strong brand identity – Eg. Good credit rating – Eg. Infosys. Volkswagen. Dr.
Bijoligrill. Strategic myopia – Eg. Organizational Politics – Eg. Nirma. CMC (Tata Group) 62 . Group . Modi Group. Tatas. Ballarpur Inds. Lack of product / brand clout – Eg. Hindustan Motors. Narrow business scope – Eg. K. Inertia – Eg. Lacking experimentation culture – Eg. Excess manpower – Eg.Raymond. K. B.SOURCES OF WEAKNESSES Outdated technology – Eg. Single product syndrome – Eg. Excessive diversification – Eg. SAIL. CESC. J. Inefficient top management – Eg. Procter & Gamble.
Insurance. Abolishing MRTP – Eg. 63 . Market driven Interest rates – Eg. Globalization – Eg. VRS. GDR’s. ECB’s. Collaborations & Joint Ventures – Bharti & WalMart. Market driven Pricing – Eg. Capital market reforms – Eg.Tata Motors.SOURCES OF OPPORTUNITIES Delicensing of Industries – Eg. Fertilizers. Fertilizer. Maruti. Retailing. Free pricing – Eg. Middle-class buying power. Sugar. Abolishing CCI. Exit Policy – Eg. Banking. Life style changes – Eg. Sugar. Growing population – Eg. Telecom.
(2008). Onida. Natural disaster – Eg. Bajoria – Bombay Dyeing. Terrorist attacks – Eg.Social activism – Eg. Land acquisition . 11/9. Tata Steel. Economic recession – Eg. Tsunami. 26/11. Hostile take-over – Eg. 64 . Foreign Direct Investment (FDI) – Eg.SOURCES OF THREATS Political instability – Eg. Lack of Corporate Governance – Eg. Nationalisation – Eg. Earth Quake. Dumping from China. Import relaxation – Eg. Reliance. Group disintegration – Eg. Singur SEZ. (1985–1990). Satyam.
Assess the extent of impact of the factors. Forecasting – Predict the future (i. scenario analysis).ETOP Acronym for Environment – Threat – Opportunity – Profile. Strategic responses (including adaptation) to opportunities and threats is critical for survival and success.e. It represents a summary picture of the external environmental factors and their likely impact on the organization. Stages in ETOP analysis – List the aspects of the environment that has a bearing on the organization. Holistic view – Prepare a complete overall picture. Delphi's technique. 65 . time series.
66 Vertical integration is a powerful strategy. An organization can draw upon the experience of its peers in similar situations. 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. selectively. High investment intensity acts as a drag. Relative attractiveness of the market. Some key findings on major performance drivers that explains 75% deviations in performance – Product quality and relative market share. .
PIMS . As every organization is unique in its own way. when radical changes in the economy takes place.LIMITATIONS The analysis is based on historical data and it does not take care of future challenges. Managers should be particularly cautious while referring to such data during times of discontinuity as it makes past patterns futile. Authenticity of data is of prime importance – Contexts drawn across one organization may not be applicable to another. therefore 67 validity may be a question. – Contexts may vary over time. – Contexts may vary across countries. .
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. KSF helps organizations spot early opportunities and convert them into value adding business propositions. It enables the top management to draw focus. It involves a three-stage process – Identify KSF – What does it take to be successful in a business? Drawing KSF – What should be the organizations response to the same? Benchmarking KSF – How do we evaluate organization success on this factor? 68 .
IDENTIFYING ALTERNATIVE STRATEGIES 69 .
related. It provides broad direction to the groups vision and mission. dominant. global) of a firm and deals with choices of allocating resources across them. It determines the locus a firm encounters with internal and external environment. A corporate strategy identifies and fixes the strategic gap it proposes to fill. national.CORPORATE . unrelated) and geographical scope (local. It indicates the quality of growth an organization is looking for. It reflects the customer needs it intends to satisfy.GRAND STRATEGY It is concerned with the overall business scope (single. 70 .
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. – The firm may not be willing to take additional risk associated with new projects. does not relate to do-nothing (Eg. (Eg. The reasons for stability strategy – – Lack of attractive opportunities. Hindustan Motors). erosion of capabilities. 72 . Citibank). – To stop for a while and assess past records. The scale and scope of present operations remains almost intact.STABILITY It involves maintaining status-quo or growing in a slow and selective manner. – Why disturb the existing equilibrium set up? – Limited resource position. Even during adverse times firms need to adopt a strategy to sustain current performance levels.
GROWTH .ANSOFF’S MODEL New Product Existing Product Existing Market Market Penetration (+) Product Development (++) New Market Market Development (++) Diversificatio n (+++) Note: (+) indicates degree of growth and risk involved. 73 .
(Eg. Ujjala. Market penetration can be achieved by – increasing sales to current customers. – The company carries a risk of product obsolescence. – Suitable for industries where scope for technological breakthrough is limited. – Helps firms which are not comfortable with unfamiliar terrain. within a well defined market segment. convert competitors customers. direct non-users to users.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. Britannia). 74 . – Elongated product life-cycle. Nirma.
– Moves across geographical boundaries.…… or Teflon: aircraft technologies to cutlery to paints or Raytheon Corp – Microwaves: radars to kitchen appliances).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. – Stretches product life cycles. socks & stockings. Du Pont – Nylon: parachutes. – Creativity and innovation – thinking out of the box. (Eg. 75 . fabrics. upholstery. tyres. – Immense customer reach & flexible advertising. carpets. – Unconventional and flexible distribution channels.
Close Up: Fluoride – Gel toothpaste or VIP . serviceability. – Substitutes that serve the same needs (Eg.PRODUCT DEVELOPMENT It is a strategy where a firm tries to achieve growth through a radical new product (Eg. perception. durability. – Leverage on customer and brand loyalty. features. reliability. aesthetics.Strolleys). – Leveraging through – innovation. conformance. Microsoft: DOS to Windows) or a substantial improved version (incremental) of an existing product to repeatedly enter the same market (Eg. – Deliverable through – redesigning or reengineering. Refills) 76 . – Areas of product improvement – performance.
– Permits: quotas. – Conglomerate or market power (i. thereby creating a new business. the new business is distinct from the existing business in terms of – inputs – technologies – markets. Why do firms diversify in the Indian context? – Shift the growth trajectory or opportunistic. From the modern point of view they are strategically dissimilar.DIVERSIFICATION It marks the entry of a firm into newer markets with new products. – Risk reduction. From the traditional point of view. industrial embassies).e.e. licenses (i. dominance). – Internal capital market. – High transaction costs and institutional gaps. 77 .
Let us assume that there are two businesses constituting the entire market – coffee and icecream. If the hot wave dominates the planet. while the coffee business would register a return of 30%. the ice-cream business would register a return of 30%. ice-cream business would register a return of 10%.HOW DIVERSIFICATION REDUCES RISK? Consider a hypothetical planet. What would be your ideal diversification strategy through optimization? 78 . cold wave dominates the planet. in which a given year is either under hot or cold wave. If on the other hand. either of which is equally likely to prevail. while the coffee business would register a return of 10%.
If we diversified in either of the two businesses, our expected return will be 20%, with a possible risk of 10%. If, we split our investment between the two businesses in equal proportion, half of our investment will earn a return of 30%, while the other half would earn 10%, so our expected return would still be 20%. But in the second instance there is no possibility of deviation of returns (i.e. risk). Diversification results in 20% expected return with zero risk, whereas investing in individual businesses was yielding an expected return of 20% with a risk factor of 10%. The pivotal point is that the two businesses are negatively correlated. 79
It takes place when a company increases the breadth of a firms business or geographical scope by getting into product – market segments which compliments its existing businesses (Eg. Reliance). Alternatively, existing business may recreate new businesses, which are distinct, but supplements its existing business (Eg. Bajaj – scooters to motorcycles, Dove – soaps to shampoo). – It results in increased market power. – Leveraging existing capabilities. – Resources can be shared for mutual benefit. – Reduces economic risk (i.e. business cycles). – Enables brand or product line extension.
It increases the depth of its business scope either in a backward business process or in a forward one. Backward integration occurs when the company starts manufacturing its inputs or catalysts. In forward integration a firm moves into marketing of its products and services. Advantages of backward integration – – Cost competitiveness – entry barrier. – Better operational control – timely supplies, quality control, coordination – JIT, savings in indirect taxes. Disadvantages of backward integration – – It may spark of a chain reaction - contagion effect. – Long gestation & break even - investment in CAPEX.
Oil & Gas exploration Naptha-cracking Acetic Acid Paraxylene (PX)
Purified tetra-pthalic acid
Polyester Filament Polyester Staple Fibre (PSF) Yarn (PFY) Textiles 83
DIVERSIFICATION SUCCESS ?
While diversifying into new businesses, the scope of relatedness or unrelatedness should not be judged from the traditional static view, but from the modern dynamic view which incorporates strategic factors like capabilities and dominant logic. Countermanding reasons – Potential to reap economies of scope across SBU’s that can share the same strategic asset. Potential to use an existing capability to help improve the quality of a strategic asset in another business. Potential to use an existing capability to create a new strategic asset in another business. Potential to expand the existing pool of capabilities. Dominant logic ensures timely & appropriate response.
QUASI & TAPERED INTEGRATION Full Integration . Reddy’s). Quasi-integration .Where one firm has full ownership and control over all the stages of a value-chain in the manufacturing of a product (Eg. Reliance). and out-sources the noncore activities (Eg. Maruti – Sona Steering). Tapered integration . Dr.A firm produces part of its own requirements and buys the rest from outside suppliers with a variable degree of ownership and control. Ranbaxy. Usually the firm concentrates on its core activities. 85 .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 .
and are also strategically dissimilar. lack of knowledge of competitive forces). Firms usually engage in conglomerate diversification when emerging opportunities are very attractive and offers potential growth opportunities.e.e.CONGLOMERATE DIVERSIFICATION It relates to entry of firms into businesses which are distinct in terms of – inputs – technologies – markets.e. Drawbacks of unrelated diversification – – Cost of failure (i. – Cost of neglect (i. myopia).e. 87 . – Cost of ignorance (i. synergies pulling in opposite directions). core business). lack of strategic intent. – Cost of dysynergy (i.
CONGLOMERATE DIVERSIFICATION Paper & Packaging Edible Oils Tobacco Hotels Food & Confectionary 88 .
Glaxo’s “Glucon-D” to Heinz). reactive) and survival is at stake and the firm does not have resources to fend off competitive forces. where a company simply exits because the business no longer contribute to or fit its dominant logic.e. Tatas sale of Goodlass Nerolac. ACC) in full to an independent entity. It taken into account when performance is disappointing (i. It may also involve a SBU (Eg. In strategy there is no scope for sentimentality with divestment. Tata Pharma. Tata Press). L&TCement Division to Aditya Birla Group) technically known as divestiture or a product (Eg. (Eg. 89 .DIVESTMENT Divestment is a defensive strategy involving the sale of entire stake (Eg. It is may also be a pro-active strategy.
(Eg. where 100% of the assets (including intangibles) are valued and paid for. Sale of Diamond Beverages to Coca-Cola for US $ 40 million). (Eg. Leveraged Buy-Out (LBO) – Here the company’s shareholders are bought out through a negotiated deal using borrowed funds. involving 608 pence per share). 1956 does not permit this mode.3 billion. Tatas buy-out of Corus for US $ 11.ROUTES Outright Sale – Popularly known as the asset route. 90 . Hive-Off – A hive off is the creation of a new entity followed by transfer of assets.DIVESTMENT . the Companies Act. where the equity is allotted amongst the existing shareholders on a pro-rata basis. However.
mergers and acquisition. There can be no ideal strategy for every business.e. developing facilities right from the scratch) or through brown-field projects (i. growth. 91 . A combination strategy can be implemented through green-field projects (i.COMBINATION STRATEGY It is a mixture of stability.e. because every business has its own unique external and internal environment. It is usually pursued by a business group with diverse interests across multiple industries. and divestment strategies applied simultaneously or sequentially for a portfolio of businesses. joint ventures).
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. In most cases the trade-off is between resources and opportunities.STRATEGIC CHOICE A strategic choice seeks to determine the alternative courses of action available before top managers to achieve its strategic intent. It attempts to answer the following questions – How effective has the existing strategy been? How effective will that strategy be in the future? What will be the effectiveness of alternative strategies? It is impossible for a manager to assess all the alternatives.
nor is to a define a problem for others to solve. They must choose problems which will lead to the right kind of opportunities. For an optimal choice the following four issues need to be resolved – Is the strategy clearly identifiable? Is it consistent with the resources of the firm? Will it be able to exploit the opportunities in full? Is it in tune with the values and beliefs of the firm? 94 . To identify the right problems. managers need to ask the right questions. will help the firm achieve its intent. The key task before a top manager is to identify the right problems. if addressed.SELECTIVITY IS THE KEY The role of a top manager is not to solve a problem.
Proximity to the corridors of power (i. Licenses & Quotas. Their origins can be traced back to market imperfections existing in an economy (MRTP Laws. High degree of centralized control (GEO.e.DEFINITION A business group is known by various names in various countries – guanxique in China. embassies).BUSINESS GROUP . Resource sharing. BRC). Managing Agency). formal and informal ties. . 95 Succession planning is critical to continuity. business houses in India. keiretsus in Japan. chaebols in Korea. Their roots can be traced to a single family or clan and share broad similarities.
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 .
Divestment Duration (Yrs) Inception Intensification 98 .STRATEGIC CHOICE – MICRO TIMING ReEngineering Growth (%) Maturity Stability Growth Diversification Decline .
there are high costs associated with entry and exit. Investing in emerging businesses may not actually be so simple as it appears to be.PORTFOLIO ANALYSIS Resource allocation across a portfolio of businesses is an important strategic choice. next only to choice of business. sometimes impossible. Power and resources often goes hand in hand. Relatedness across resources are difficult to realize. 99 . Rules of the game are different. Redeployment of resources upsets the established power bases of a group. therefore. Why? Businesses are not about liquid assets.
BCG GROWTH MODEL Relative Market Share (%) Industry Growth (%) Low High High Low Stars Question Mark ? Cash Cow Dogs 100 .
e. market development. Tata Telecom. TCS. provided the company is able to build up on its market-share (i.BUSINESS ANALYSIS – TATA GROUP Question Marks – They have potentials in the long term. Tata Steel).e. product development). Stars – They achievers in the near term. provided the industry growth rate continues and the company is able to maintain its growth (i. diversification). which remains a big? These businesses are net users of resources. Tata-AIG). but to larger extent than a question mark. These businesses are also net users of resources (Eg. market penetration. Trent. and their risk profile is high (Eg. 101 .
However. and they lack on competencies to take on competition and are basically cash traps (Eg. Given that the growth potential in the business is low. Tata Chemicals). cash cows may also need to invest provided the industry takes an upswing (Eg. Tata Motors. 102 . Dogs – They are a drag on the group. Tata Tea. Groups prefer to dispose off such businesses (i. Tata Press). Nelco. harvest. stability).BUSINESS ANALYSIS – TATA GROUP Cash Cow – These are matured businesses. and the company dominates the industry ahead of competition (i.e. Indian Hotels.e. they are generators of resources. Tata Pharma. divest) as achieving a dominant position in these businesses is a difficult task.
Mercedes Benz. The model does not provide specific solutions within a particular category. Armani). The terminologies used are somewhat prohibitive. Data may be prohibitive. HUL). Cartier.LIMITATIONS It does not address the concerns of a business which is in the average category (usually the majority).BCG . factors are limited. niche – Rolex. 103 . neither in high or low.e. Cash cows may actually need substantial investments to retain their market position (Eg. Certain businesses in the low market share category may be the result of a conscious strategy (i.
GE .MATRIX Distinctive Capabilities Strong High Medium Weak Stability Industry Attractiveness Diversify (++) Intensify (+) Med Intensify(+) Stability Harvest (-) Low Stability Harvest (-) Divest (.-) 104 .
LITTLE Inception Dominant Strong Favourable Tenable Weak Growth Maturity Decline Improve Selective Niche Abandon Industry Life-Cycle Divest Harvest 105 Competitive Position Invest Consolidate Hold .ARTHUR’ D.
SHELL – DIRECTIONAL POLICY MATRIX Business Sector Prospects Attractive Average Unattractive Generate Cash Phased Withdrawal Distinctive Capabilities Strong Market Leadership Try Harder Double Or Quit Growth Average Custodial Weak Phased Expand Withdrawal Divest 106 .
Gap Analysis – It emphasizes what a firm wants to achieve. 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. 107 . Divest – Selling a part or the entire business at one go. SBU – A business unit which is strategically different from another and also shares a different SIC code. Disinvestment involves selling in phases. Portfolio – An organization is perceived as a portfolio of businesses.
BUSINESS STRATEGY & COMPETITION 108 .
The principal focus is on meeting competition.COMPETITIVE STRATEGY A competitive strategy deals with how a firm competes in a particular business or product-market segment.e. Such resources or activities should be distinctive and sustainable over time. building market-share. Competitive advantage refers to a firms resources or activities in which it is way ahead of competition. The strength of a firm in a particular business usually stems from its competitive advantage. 109 . rent). and earning super-normal profits (i. Competitive advantage is the back-bone of strategy.
BUSINESS STRATEGY FRAMEWORKS How to be distinctive and yet sustainable – Differentiation – Understanding of the dynamics of competition. Delta Lock In – Two dominant players co-opt to selfreinforce and create or escalate an entry barrier. 110 . preventing new entry and/or competition (Hax & Wilde). developing competitive advantage (Porter). identifying critical success factors. Resource Based View – Obsession with competence building. leveraging (Prahalad). involving harmonizing and integrating multiple streams of technologies. Blue Ocean – Consciously moving away from overcrowded industries to uncharted territories and making competition irrelevant (Kim & Mauborgne).
Nirma. Sources of cost advantage are varied and depends on the structure of the industry – Economies of size. 111 . Ayur. proprietary technology. T-Series). Locational or early entry advantage. preferential access to raw materials. Steep experience curve effects.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. Reliance) or may pass it to customers to increase market-share (Eg. backward integration. Compress project duration through crashing.
Sony. and sufficient slack. Intel. avoiding brand dilution.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. innovation and out of the box thinking. undeterred attention to quality. Rayban). 112 . Means of product differentiation are peculiar to each industry. Feeling the pulse of the customer. (Eg. Culture of experimentation. It selects one or more attributes that buyers perceive as important. Successful product differentiation is often followed by premium pricing. Creativity. Focus on brand loyalty.
113 . Armani). Rolex. They are poorly served by mainstream players. Sub optimization alone may not be a source of superior performance.PORTERS NICHE OR FOCUS Focus / Niche – It is a variant strategy of cost leadership or product differentiation targeting a specific market or buyer sub-segment with the exclusion of others (Eg. coupled with fear of structural erosion. Mont-Blanc. Cartier. Maybach. though it may not possess an overall competitive advantage. The target segment must have unusual needs or the delivery system catering to this segment must be unique. A focuser seeks to achieve a competitive advantage in its target segment.
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 .
Tata Nano). Reducing cost does not always involve a sacrifice in differentiation.e. jugaad or frugal engineering). Though cost leadership and differentiation are inconsistent. Firms focusing on a hybrid strategy typically aim at shifting the productivity frontier and recreating a new product-market segment altogether (Eg. and usually outperforms a stand alone generic strategy. 115 .HYBRID STRATEGY A hybrid strategy is the simultaneous pursuit of cost leadership and differentiation. in a hyper competitive context the two strategies need not be mutually exclusive. similarly differentiation may not always lead to rising costs (i.
The positioning therefore gets – blurred. Industry maturity will usually widen the gap. It tries to compete through every means. unless such a player is capable of discovering a profitable segment.STUCK IN THE MIDDLE A firm that engages in a hybrid strategy and fails to achieve a competitive advantage because it was ill conceived will be .stuck in the middle. It is usually the result of a firm not willing to make trade offs. leading to what is called – straddling. but achieves none. It will have a competitive disadvantage vis-à-vis a clearly positioned generic player. 116 .
3D imaging. It is characterized by – High level of technological uncertainty. Consumer behaviour pattern unstable and evolving. technological innovations. changing customer needs. Artificial intelligence). Eg. 117 . coupled with low penetration levels.radical environmental changes. leading to a blurred productivity frontier and steep learning curve. Market segmentation not well defined. There is a lot of scope to define the rules of competition. ending in a differential cost economics.EMERGING INDUSTRY Emerging Industry – An evolving industry characterized by . Speech recognition software's. First-time buyers. Nano technology. (Eg.) Excessive turbulence in the dynamics of the environment.
Eg. Government regulations in the form Eg. Scope for players to change the rules of the game. MRTP may also cause fragmentation.GROWTH / FRAGMENTED INDUSTRY Growth Industry – An industry characterized by high growth potential in the long run and where no firm has a significant market share (an edge over another). Eg. because of lack of economies of size and scale. 118 . It is characterized by – Low entry barriers. leading to clear fragmentation. Consumer durables. High exit barriers because of huge investment in CAPEX. Diverse customer needs. IT. Eg. Retail and telecom. Air Conditioning. Paints.
distribution networks. because of economies of size and learning curve effects.technological maturity. well defined consumer behavioral patterns and imperfect competition leading to near monopoly. technological maturity. 119 . Limited scope for innovation . Strong entry barriers. early entry and location advantages. Firms are rule takers in the segment as productivity frontier is well defined. Cartel among existing players through collusion.MATURED INDUSTRY Matured Industry – An industry characterized by saturation in growth rates. established industry dynamics. collaboration and co-option.
Learning abilities have been stunted and firms adverse to investment in R&D and make fresh investments. Nature of competition extremely high. dot-matrix printers). Firms facing a declining phase are characterized by inertia and slow to react to environmental changes. (Eg.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. backed by corporate espionage. Exit barriers are extremely high because of limited prospective buyers. Typewriters. scooters. 120 . with little or no signs of recovery. and costly price wars.
mergers and acquisition. reengineer. 121 . strictly product differentiation and not standardization. strictly cost differentiation. focus more on product differentiation or even a hybrid one.COMPETITIVE STRATEGIES Emerging Industry – Set benchmarks. strike alliances. regenerate. Declining Industry – Redesign. recreate new markets. move beyond boundaries. process innovation. increasing scope. Locate a defendable position. branding and promotion. or else exit the segment. assess and overcome fragmentation. premium pricing. Fragmented Industry – Identify. aggressive building of distribution networks. Matured Industry – Sophisticated cost analysis.
They are a standard in nature. positions based on resources which are unique and inimitable are far more sustainable even in the long term. brands.RESOURCE BASED VIEW Differentiation based on cost or products saturates and ceases to exist beyond the medium term. hence very rarely confer competitive advantage as can be easily acquired or replicated. 122 . However. patents. and complex learning experiences in integrating and harmonizing technologies (distinctive capabilities) that play an important role in delivering competitive advantage through “causal ambiguity”. Intangible – These refer to goodwill. A firms resources can be classified into – Tangible – These refer to real assets.
differentiation based on capabilities can be sustained even in the long run. they are woven around technologies. There is a high degree of internal and external causal ambiguity involved in it. Capabilities can be generic (i.e. but not necessarily. can be leveraged across businesses) or specific to a particular business. Therefore firms should concentrate on developing complex resources that forms the very basis of differentiation. They play a very critical role in shaping competitive advantage.CAPABILITIES & COPMPETENCIES These include a complex combinations of tangible and intangible resources that organizations use to convert inputs to outputs. Typically. Hence. 123 .
COMPETITIVE ADVANTAGE 124 .
competitive advantage subsequently becomes the back bone for a competitive strategy. not absolute) to competition. A portfolio of competitive advantage comprises strategic advantage profile (SAP).COMPETITIVE ADVANTAGE A competitive advantage is a position of superiority relative (i. 125 . It results in a distinct differentiation advantage or a cost advantage or hybrid as well. Success of a strategy critically depends on SAP. Strategy drives competitive advantage.e. It enlarges the scope of an organization. and results in well springs of new business development.
Internal strategic fit between its strategy and dominant logics is essential for the top management to stretch and leverage SAP. Identification of SAP is critical for and stretching and leveraging of resources. Most successful organizations around the world have a well balanced SAP. In today's world of discontinuity. SAP changes from time to time. In most cases SAP is hidden and dormant.STRATEGIC ADVANTAGE PROFILE (SAP) Organizations have to systematically and continuously conduct exercises to identify its SAP. 126 .
Inventory Mgt to Logistics Mgt to Supply Chain Mgt (SCM). 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. and enhanced customer tracking – higher market share. faster product launches. A VC is often compared with a relay team.e.VALUE CHAIN ANALYSIS A value-chain segregates a firm into strategically relevant activities to understand its composite behaviour. Today SCM is integrated with greening the environment as CSR practices. Substantial cost reductions also follow. VC pay-offs: better product availability. 127 . kaizen or internal customer).
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 .
– Third order fit refers to optimization of effort. Operational effectiveness is not strategy. A learning organization helps create strategic fit. Fit is important because discrete activities result in negative synergy and can also be easily copied by competitors.STRATEGIC FIT – THE PORTER WAY The sustainability of the value chain depends on the degree of fit between the activities. A high fit involving a complex chain of activities drives both competitive advantage and its sustainability. – Second order fit occurs when activities are reinforcing amongst them. 129 . – First order fit refers to simple consistency between each activity and the overall strategy.
Core competence has a high degree of external and 130 internal causal ambiguity embedded in it. It should satisfy the following conditions – Contributes significantly to customer benefits. It forms the very basis of competitive advantage. but not necessarily. – Cannot be easily imitated or substituted. . A core competence usually has its roots in technology. These skills results in distinctive activities and processes. – Can be leveraged across businesses. – Can be sustained even in the long run.CORE COMPETENCE A core competence represents the collective learning's of an organization around diverse streams of technologies.
a core competence usually does.CORE COMPETENCE A competitive advantage does not necessarily imply a core competence. a core competence is sustainable even in the long-term. only global leaders possess a core competence. A competitive advantage may or may not lead to superior performance. A competitive advantage manifests from a function. 131 . a core competence has its roots in a set of skills. Majority of the firms have competitive advantage. A competitive advantage is sustainable in the shortmedium term. a core competence always implies a competitive advantage.
In a game (similar to a business) one players win is always another's loss. However.GAME THEORY The game theory was developed in 1944 by Oscar Morgenstern. illustrations depicting a win-win situation. 132 . each of whom wants to win. 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. A game is a contest involving two or more players. In fact there are no. Here the magnitude of gain offsets the magnitude of loss equally. This is known as a zero-sum game.
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 .
PURE STRATEGY GAME The strategy each player follows will always be the same regardless of the other players strategy. Firm Y’s Strategy Use Radio +3 +1 Use Newspaper +7 -2 134 Firm X’s Strategy Saddle Point Use Radio Use Newspaper Firm X’s Pay-Off Matrix . A saddle point is a situation where both the players are facing pure strategies.
there is likely to be temptation by any of the players to try to steal the advantage over the other by breaking the rules of the game (Eg.e. Coke Vs Pepsi).TYPES OF GAMES Simultaneous Games – This is a situation where the players have an option to choose to cooperate or not through collusion. However. collaboration or cooption.g. It represents the classical “prisoner’s dilemma”. Yahoo Vs Microsoft). iteration) rather than through collusion (E. This is usually through learning by “experience or observation” (i. 135 . Repeated Games – In this situation the players interact repeatedly with each other sub-optimizing the outcome possibilities.
Game theory relies on the principle of rationality. It results in a shift in the productivity frontier. – Making pricing more transparent. .CHANGING THE RULES OF THE GAME In a situation where a player is unable to compete with the existing rules of the game may attempt to change the rules of the game altogether. – Building incentives for customer loyalty. In a market dominated by price-based differentiation one may attempt to change the rules of the game by/when – – Bases of differentiation dependent on clear identification of what customer wants or value. but 136 players do not always behave rationally.
DELTA MODEL & LOCK-IN
Its a systematic approach where-in two or more industry majors, who by default has achieved a proprietary position (Microsoft – Software / IBM – Computers) which are not necessarily best-products in the industry, co-opt to create a lock-in. A lock-in implies that other players has to conform or relate to that standard in order to prosper. Becoming the industry standard requires – strong brand, causal ambiguity, and close relationship with other companies offering complimentary services. Lock-in is self reinforcing and escalating (i.e. accelerating effect).
THE THREE STRATEGIC POSITIONS
System Economics Market Dominance Complementary Share
Enabled through effective use of technology
Total Customer Solutions
Customer Economics Cooperation Customer Share
Product Economics Rivalry Product Share 138
Bill Gates is the richest man in the world not necessarily because he has developed the world’s best software's or excels at customer satisfaction; but he has got an army of people working for him who are not on his payroll – all the application software providers who are writing programs based on “Windows” compatible operating platform. Once you create the lock-in it is sustainable because of the “network effects”; which creates the proverbial “virtuous cycle” – customers want to buy the computer with largest set of applications and software developers want to write programs for the computers with the largest installed base.
The proponents (Hax & Wilde) believe that every organization has the ability to create and sustain a “lock-in” positioning (though in varying degree). This “system lock-in” is referred to as “delta” – delta being the Greek letter that stands for transformation and change amongst the players. The lock-in once created becomes very difficult for a firm to penetrate, and becomes a distinct entry barrier. The model is based on the belief that it compliments Porter’s differentiation model and RBV framework instead of contradicting them. In a lock-in strategy the performance outcomes are dependent on the success of another.
It relates to translating strategy formulations into practice. Performance realization of a strategy depends on the implementation effort. Successful implementation also depends on the appropriateness of the strategy. Since strategy implementation is a time bound process, alignment (i.e. strategic fit) is a key variable during times of radical change. Some of the other levers of successful strategy implementation are – Transformational leadership and motivating power. Resource allocation; its stretching and leveraging. Compatible organization structure & control systems. Inertia & resistance to change.
While external strategic fit (strategy – environment) is relevant for strategy formulation. internal strategic fit (strategy – dominant logic) is critical to strategy implementation. – Development of capabilities & competencies. – Changing the rules of the game. 143 . – Resource commitment from top management. A high strategic fit (co alignment) is useful because it enables – – Appropriate and timely response.IMPORTANCE OF STRATEGIC FIT Strategic fit has a central role to play in strategic management. – Unlearning & learning of new skill sets. – Better strategic and operational control.
learning levels are very low. at the cost of sacrificing a lesser degree of control. while control is very effective. formulation & implementation can occur simultaneously. learning levels are very high.FORMULATION Vs IMPLEMENTATION Traditionally. effective strategies are better crafted when there is a subtle overlapping between the two (i. 144 . Some of the key strategic learning's exists at the contact point between the organization and its customer. In such a situation. In such a situation. emergent strategy vis-à-vis intended & realized). strategy formulation and implementation has been perceived to be distinct & independent. In fact. According to Mintzberg.e.
Pragmatism is the ability to make things happen.ROLE OF TOP MANAGEMENT To bring about change and to implement strategies successfully. companies depend more on transformational leaders than transactional leaders. shift from compliance to commitment. In contrast. He should be an agent of change. bring about transparency. A transactional leader is usually confined to allocating tasks & responsibilities and extracting performance. 145 . transformational leaders go one step beyond – Design a well crafted and designed strategic intent of the organization. Install a system of shared beliefs and values.
patents. brands. labour. Performance Budget – SBU managers need to justify the distinctive resources in terms of the opportunity it is pursuing yields the highest possible pay-offs. minimum requirement). Zero Based Budget – In this case the budget of a SBU has to be worked out right from the scratch. land. skills) also includes complex resources like capabilities and competencies. Intangible resources (Eg. The various methods of resource allocation includes Historical Budget – The budgets framed by HQ for a particular SBU keeping in mind past trends. machines) referred to as threshold resources (i. 146 .RESOURCE ALLOCATION Resources allocation includes tangible resources (Eg.e.
Mobiles). these capabilities are sustainable even in the medium to long term. Flat Screen Displays. Distinctive capabilities helps in stretching and leveraging resources thereby overcoming two major constraints involved in strategy implementation – times & costs.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. 147 . though not necessarily in the case of emerging markets. Distinctive capabilities are complex set of skills woven around technologies. Moreover. Due to causal ambiguity (complexity).
148 . processes become people independent. A firm in several related businesses usually employs a divisional structure. The level of centralization and decentralization is decisive. An appropriate organization structure & adequate control systems are essential to implement strategies and achieve stated goals.STRATEGY & STRUCTURE It is a framework within which individual efforts are coordinated to bring synergy. A firm in several unrelated businesses usually employs a SBU structure. A single product or a dominant business firm usually employs a functional structure. Once the structure is in place.
Output).Technology.TYPES OF STRUCTURES Functional Structure – Activities grouped together by a common function (Eg. Finance). Divisional Structure – Units grouped together in terms of products. Team Structure – An informal group formed for a crisis. Project / Matrix Structure – A formal but temporary framework initiated for the completion of a particular project/crisis. based on skills and competencies. processes. Virtual Structure – A boundary less or hollow organization. Inputs . 149 . with team members having dual line of control. disbanded subsequently. Marketing. SBU Structure – Businesses segregated in terms of strategic dissimilarities (Eg. or geographical locations.
assuming responsibility. Environment & People – Economic and political conditions have a major bearing on structure coupled with the attitude and aspirations of the people in the organization. It includes the desire for independence. Technology – With more and more convergence of technologies in business.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. 150 . structures are becoming flatter and more simpler. facing challenges & crises. as span is broader. leading to a tall structure.
Inertia acts as an impediment in strategy implementation. irrespective whether it is from worse to good or good to worse. there is a tendency to continue along the same lines.e. Common sources of 151 inertia – complacency with past successes. Inertia is a characteristic of a firm that endures status quo (i. Top managers resist change. co0ntinuity). .INERTIA When a firm has been operating in a certain fashion for a long time. Most firms undergo periods of strategic continuity rather than strategic discontinuity. Changes in top management and unlearning helps overcome inertia.
Since the internal and external environment is in a state of continuous flux. strategies need to be evaluated on an ongoing basis to prevent deviations of fit. However. To prevent deviation of fit. . certain authors propose misfit as a source of superior 152 performance. Deviation of fit is detrimental to performance and may lead to strategic failure. firms should move beyond financial performance to strategic performance as organization systems are becoming complex.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. It attempts to answer the following questions – Is the strategic intent appropriate to the changing context? Are the organizations capabilities still holding good. detecting changes in the external and internal environment and taking corrective action wherever necessary. .
checking every premise is costly as well as difficult. It is open-ended as well as . However.STRATEGY CONTROL IMPLEMENTATION It involves steering the company towards its original growth trajectory & stated goals. Implementation Control – It aims at assessing whether key activities are proceeding as per schedule. Premise Control – Checking the validity of the assumptions on which a strategy was based. Special Alert Control – It intends to uncover unanticipated information having critical impact 154 on strategies. It involves assessing – strategic thrusts and milestones.
Performance measures are defective – What to evaluate against? How to measure the 155 construct? As a saying goes. low strategic fit due to consultants intervention. Strategy not linked to resource allocation & capabilities – Lacking commitment of top management.BARRIERS TO STRATEGY EXECUTION Vision and strategy not actionable – Utopian ideas. difficult to translate into practice. Strategy intent not linked with goals and objectives – Lack of coordination at lower levels leading to negative synergy. “If you cannot .
7S FRAMEWORK OF Mc KINSEY The 7-S Framework of McKinsey is a management model that describes 7 factors to organize a company in an holistic and effective way. Large or small. important or not they're all interdependent. this may effect all others as well. Today it is considered one of the most powerful tools for strategy implementation determining success or failure. On top of that. to be sure of successful implementation of a strategy. 156 . the relative importance of each factor may vary over time and context. so if one fails to pay proper attention to one of them. Managers should take into account all seven of these factors. Together these factors determine the way in which a corporation operates.
and was taken up as a basic tool by the global management consultancy company McKinsey.BACKGROUND & ORIGIN The 7-S Framework was first mentioned in "The Art Of Japanese Management" by Richard Pascale and Anthony Athos in 1981. At around the same time in the US Tom Peters and Robert Waterman were exploring what made a company excellent. It appeared also in "In Search of Excellence" by Peters and Waterman. 157 . The 7-S model was born at a meeting of these four authors in 1982. Since then it is known as their 7-S model and is extensively used by corporations worldwide to implement their strategies. They had been investigating how Japanese industry had been so successful.
over time. Structure – The way in which the organization's units relate to each other in terms of their commonalities. Systems – The procedures. processes and routines that characterize how work should be done. Style – The way in which the top management influences the functioning of an organization. formal & informal .THE 7’S Shared Values – It represents what the organization stands for and what the top management believes in. Skills – An organizations capabilities and competencies. to reach identified & stated goals. Strategy – Trade-offs for the allocation of a firms scarce resources. Staff – Human inter-relationships. 158 .
STRATEGIC FIT Strategy Structure Shared Values Systems Skills Staff Style 1st Order Fit 2nd Order Fit 3rd Order Fit 159 .
the soft S’s (skill.A CRITIC OF THE 7S MODEL While the hard S’s (strategy. Ineffective in case of a virtual company. Consider the 4P’s of marketing or 3R’s of SCM. systems) are comparatively easy to identify and influence. style. While the American co’s focuses on the hard S’s. their Japanese counterparts focus more on the soft S’s for their early success and sustainability. 160 . shared values) are very malleable and comparatively more difficult to identify & influence. staff. In contrast. A choice of an alphabet often limits the scope and skews the interpretation of a model. because most often they are culturally embedded and often neglected. structure.
STRATEGY IMPLEMENTATION ROUTES Strategic Fit .High Organic Growth Strategic Alliance Joint Venture Mergers & Acquisition Strategic Fit .Low Take Overs 161 .
e. (Eg. (Eg. technologies. 162 Risk of cost and time overruns. the entire value chain. It has complete control over inputs. tax holidays. soft loans.e. green-field projects. i. and markets. The entire infra-structural facilities are set up afresh having its own gestation and break-even. Govt. SEZ’s.ORGANIC GROWTH Here a firm builds up its facilities right from the scratch and continues to do so without any external participation. . Long gestation leads to delayed market entry. Reliance Industries). concessions are available for green-field projects. subsidized power). i.
It touches upon a limited aspects of a firms value chain. . Tata Motors & Fiat).STRATEGIC ALLIANCE It involves a pro-active collaboration between two or more firms on a particular domain or function for mutual gain. It has limited intervention power and usually lacks holistic commitment from the alliance partner. Alliances are usually in the areas of technologies or markets (Eg. There is no funding or equity participation from the alliance partner & both the firms continue to operate independently. 163 It is a form of competitive collaboration. Alliances are usually short-lived and disbanded once the purpose is achieved.
Selecting the right partner is critical for success.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. Hero . It is a win-win situation for both the companies. A comprehensive MOU is essential. . leaving minimum scope of overlapping. (Eg. Tata – AIG. Dominant logic of both the companies should be complimentary.Honda). Degree and extent of management control must be clearly 164 laid down.
Integrated distribution channel leads to better market penetration and overall synergy. Revival of a sick-unit through better management practices is a major motive behind an acquisition 165 strategy. ITC Tribeni Tissues. with the individual firms ceasing to exist any more (Eg. Economies in scale leading to lowering of costs. Brooke Bond & Lipton).MERGERS & ACQUISITION It refers to the fusion of two or more firms into a single entity. . Acquisition is an outright purchase of a firm assets by another independent entity (Eg. Integration of assets and other financial resources. Coca Cola – Thums Up).
often the new firm is “left alone”.Corus). Instant access to capacities and markets. Consolidation in a fragmented industry. Inform SEBI / Stock Exchange after 5% stake is 166 acquired. Make a public offer of not less than . Most countries have stringent laws that prevents hostile take over. Tata Steel . Integration of organization structure & cultures is difficult.TAKE OVERS It refers to the acquisition of significant management control by buying out majority stake in a firm through due diligence or hostility (Eg. Larger geo-graphical diversity.
MANAGEMENT TOOLS IN STRATEGY 167 .
TQM – Doing the right thing the first time. Radical change is superseding incremental change. it is also a source of potential threat. Some tools to ensure that – Benchmarking – Adopt certain best practices. Balanced Scorecard – Tracking strategy 3600.WHY MANAGEMENT TOOLS? Change is becoming pertinent in the business environment. Change provides enormous opportunities. The past is ceasing to be an indication of the future. Companies therefore need to ensure competitive advantages doesn’t become competitive disadvantages. or better still create next practices Reengineering – Redesigning work processes right from the scratch. 168 . every time.
A best practice is defined as an activity performed by a company in a particular domain or function which distinguishes it from others and making them world-class. These exemplary practices involves the stakeholders of the company and helps achieve its strategic intent. Best practices centers around looking at a different way to satisfy various stakeholders. Benchmarking involves the identification, understanding and adapting of certain best practices and implementing them to enhance performance. Firms are moving towards next practices as best practices make firms look more and more homogeneous.
SOME BEST PRACTICES
Dell: Customized configuration of computers. Caterpillar: 48 hours delivery anywhere in the world. Citi Bank : Priority banking services. Maruti: Certified “true value” pre-owned cars. Microsoft: ESOP to employees. Infosys: Customized work-stations. TCS: Referencing potential new recruits. ITC: Shareholders factory visit. AmEx: Outsourcing data warehousing mining. MARG: Set-top box to study viewing patterns. Honda: CEO’s visit to dealers.
TYPES OF BENCHMARKING
Functional – Used by companies to improve a particular management activity. Eg. Motorola learnt delivery scheduling from Domino’s. Process – Improving specific key processes and operations from experiences in similar businesses. Eg. Ford adopting assembly lay-out plan of Toyota. Competitive – It involves assessing the sources of competitive advantage and imitating them. Eg. Samsung leveraging miniaturization skills of Sony. Strategic – It involves assessing business models and replicating them in a different market. Eg. Reliance replicating AT&T business model.
HOW TO BENCHMARK?
Phase 1: Planning – What to benchmark? Whom to benchmark? – Identify key performance indicators & Data source. Phase 2: Analysis – Assessment of performance gaps. – Predict future performance levels. Phase 3: Integration – Communicate findings and gain acceptance. – Establish functional goals and its implementation. Phase 4: Action – Implement and monitor progress. – Measure results against stakeholder wants and needs. – Recalibrate or outperform benchmarks.
WHOM TO BENCHMARK?
Selecting the benchmarking partner is critical to solving the problem. Firms should generally avoid selecting the industry leader, because it may not always adopt the best practices for every process or activity. Benchmarking partners may also be from different industries. Types – – Internal – It involves benchmarking against its own branches, divisions, SBU’s. Proximity to data and cooperation is taken care of automatically. – External – It involves benchmarking against firms that succeeded on account of their best practices. It may also involve benchmarking against world-class firms. Friction may arise due to presence in competing industries.
BENCHMARKING - ADVANTAGES
Finding better ways of meeting stakeholder needs. Organizational learning comes from internal as well as external sources. Establishing goals based on formal assessment of external conditions. Defining effective measure of indicators, facilitate comparison, adopt from other organizations. Ensuring a continuous learning organization. Reducing competitive disadvantage. Organizational turnaround, especially effective in case of a wide strategic drift when differentiation strategies fail to work. 174
Strategy is more of creating best practices rather than copying them. It does not shifts the growth 175 trajectory of the industry as a whole.e. but it cannot be used as a strategic decision making tool. Benchmarking merely reorients profits in the hands of few to profits in the hands in the hands of many (i. the more similar they end up looking.BENCHMARKING . It can at best complement it. clustering). . While strategy is all about differentiation and not looking alike.LIMITATIONS More and more companies benchmark. Benchmarking is useful for bringing about operational efficiency.
.e. DOS to Windows). Windows 95 to 97).g. clean sheet).e. process mapping) and eliminating or improving them (E.g.RE-ENGINEERING Redesigning leads to identification of superfluous activities or product features (i. Re-engineering involves complete reconstruction and overhauling of job descriptions from the scratch (i. for achieving performance improvement (E. The task demands a total change in organisational 176 culture and mindset. Re-engineering attempts to radically change an organizational products or process by challenging the basic assumptions surrounding it.
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 .
Business – It looks into markets.e. etc) and supports the organization for the present. structures. customers and suppliers and protects the organization from the future (i. Strategic – It looks into the process of strategic planning. processes.e. It can be of the following types – Functional – It looks into the flow of operations (i. BPR).LEVELS Reengineering can be successfully leveraged at all levels of an organization with varying degree of results. resource allocation and prepares the organization for the future through a reorientation of the entire strategic architecture. 178 . products. .REENGINEERING .
– Causal Ambiguity. reverse engineering is a top-bottom approach. It generally acts as a threat to innovation. 179 . However.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. learning curve advantage. – High cost and time acts as a deterrent. Cheaper versions of Intel chips and mother-boards manufactured in Taiwan. Indonesia). with an intention to copy it (Eg. – Early entry advantages. While traditional manufacturing is a bottom-up approach. protection can be had in the following ways – – Patenting.
nano-technology). Introduction – Launching the product in the market. Implementation – Developing of a prototype. designing facilities. machine tools to convert ideas into a marketable product (i. Usually in such cases segmentation and pricing is different from the original innovator.STAGES IN REVERSE ENGINEERING Awareness – Recognizing whether the product is found to be worth the time. cost and effort necessary for the purpose of reverse engineering.e. 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. 180 .
– Perception – Customer notions. 181 . It has eight dimensions (Eg. Car) – – Performance – Mileage of 14 kms to a litre of fuel. – Durability – 1980 manufactured cars still on road. – Aesthetics – Appeal in design. – Conformance – Emission standards . Air bags. More and more companies are moving towards meeting implied rather than stated needs. – Reliability – Consistency in mileage. – Features – Anti-lock braking systems. – Serviceability – Large no. of service stations.Euro IV.WHAT IS QUALITY? It involves the totality of a product or service in meeting certain stated or implied needs.
which ensures good market standing. Management of quality was traditionally inspect it .fix it in nature. zero defects.TOTAL QUALITY MANAGEMENT Objective – Management of quality ensures conformance to certain pre-set standards. . It had little impact on improving overall productivity. touching upon a limited aspect of a value chain. TQM is a way of creating an organization culture committed to the continuous improvement of work processes – Deming. It is deeply embedded as an aspect of 182 organisational life & culture.
Kaizen – Make continuous improvement a way of life. Be customer centric – Generate the concept of internal customer (Ishikawa). provided with all relevant information and best possible tools. not a final destination. the first time – From reactively fixing error in products to proactively preventing errors from occurring at the first place (Juran). Empowerment – It takes place when employees are properly trained.TQM – KEY TENETS Do it right. fully involved in decision-making and fairly rewarded for results. Looking at quality as an endless journey. 183 .
184 . Quality Circles – It a small group of shop-floor employees who meet periodically to take decisions regarding operational problems and crises. enabling the firm to concentrate on core activities essential to customer satisfaction. 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.STRATEGIES Outsourcing – It is the process of self-contracting services and operations which are routine and mundane.TQM . 6-Sigma). of units meet preset standards (Eg. equal participation). It is based on the principles of MBO (i. saving precious top management time.e.
... strategy implementation has never been more important. it’s bad execution.. – Efficiency and effectiveness is passé. Source: Fortune Magazine Why CEO’s fail? 185 ...... – Less than 10% of strategies effectively formulated are effectively executed... – In the majority of failures – we estimate 70% – the real problem isn’t (bad strategy) .BALANCED SCORE CARD Some interesting comments ..
Focus more on causes. These measures worked well when organizational systems were simple and unidirectional and more importantly the environment was static. 186 . 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.BSC .CONCEPTUALISATION A company’s performance depends on how it measures 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. rather than effects.
The most critical element of a BSC is to measure these four dimensions. 187 . because they have too many. and distinguish strategic problems from operational ones.BSC – KAPLAN & NORTON (1992) A BSC helps a manager to track and communicate the different elements of company’s strategy. It has four dimensions – – How do customers see us? – What must we excel at? – Can we continue to improve and create value? – How do we look to shareholders? Firms more often have problems.
ageing schedule) % of key customer transactions Ranking of key customer accounts No.e.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. of visits or calls made % of NPA’s 188 .
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 product launches Vs competition Product pricing Vs competition 189 . of times covered in media No.
of product innovations 190 . of new patents registered Time to develop next generation products Average and spread in operating cycle % of products that equal 2/3 sales No.LEARNING PERSPECTIVE GOALS Technology Manufacturing Focus Timing MEASURES No.
Return on Investment Market Capitalization / PE ratio 191 .FINANCIAL PERSPECTIVE GOALS Survival Success Prosper Divestment MEASURES Cash flows Growth in Sales and Profits EPS.
STRATEGY MAPPING 192 .
IMPLEMENTATION 2 Translate strategy into operational terms 1 Mobilize change through effective leadership 5 STRATEGY Make strategy a continual process 3 Align the organization to the strategy 4 Make strategy everyone’s job 193 .BSC .
sharing of vision).ADVANTAGES Most often top managers face information overload. As a result. 194 performance will automatically follow. Focus on cause not effects. The BSC brings together the different elements of a company’s strategy at a glance.e.what they don’t know. Modern managers should be poised to ask the right questions.BSC . . Seek excellence. It helps translating strategy into practice (i.e. Shift from control to strategy (i. doing right things instead of doing things right). they don’t know .
EFFICIENCY Vs EFFECTIVENESS Ineffective Effective Inefficient Goes out of Business quickly Survives Efficient Dies Slowly Thrives 195 .
Michael E. but also sustains it.EFFECTIVENESS + STRATEGY A company which is effective as well as strategic. Porter 196 . . not only thrives.
CORPORATE RESTRUCTURING 197 .
firms use restructuring strategies...” 198 . to survival of the most adaptable. from survival of the fittest . “every organization must be prepared to abandon everything it does. Restructuring involves consciously driving significant changes in the way an organizations thinks and looks (Eg. As Peter Drucker pointed out..CORPORATE RESTRUCTURING The only thing constant in today's business environment is change... To adapt to the changing environment. Tata Group). Strategic variety brings paradigm shift. Strategic variety may be caused by changes in the as external well as internal environment. Radical change brings about strategic variety..
e. etc). Internal customers should also not be neglected. Fax. downscoping). Structural Changes – Conventional hierarchical structures should be disbanded in favour of more 199 flexible ones (i. Instead.RESTRUCTURING – BASIC TENETS Customer Focus – Restructuring ideally begins and ends with the customer. downsizing or rightsizing). Core Business – Company’s should introspect – What business are we in? Business evolved out of opportunism or myopia should be divested. Walkman. they should strive to provide unimaginable value ahead of its time (Eg. ATM. Company’s should go beyond just asking what he expects. and dividing the core businesses into SBU’s (i. .e.
It is created and institutionalized by the top management.) Reliance dismantled their industrial embassies . Kumar Birla today is more dependent on professionals. During the times of JRD.... ... 200 ... Ratan Tata now drives the point the group means business.. Restructuring also requires cultural reorientation.RESTRUCTURING – BASIC TENETS Cultural Changes – A culture represents the values and beliefs of the people about the organization...) The Aditya Birla group typically relied on the “marwari” community for key management positions .. the Tatas were considered a benevolent and charitable organization. started focusing on their capabilities..
Honda’s ad says. Restructuring provides a platform to close this gap.MOVING CLOSER TO THE CUSTOMER As companies evolve. Publicizing welfare projects to demonstrate CSR. Use the reach of networking technologies. they tend to move away from the customer. Organizing customer and supplier meets. Communicating to the media about organization efforts to deliver quality products. Carry out PR campaigns. Getting feedback & addressing customer complaints.” 201 . “ … one reason our customers are satisfied is that we aren’t.
spin-off and equity carve. Further. Tata – Corus) or hostile (Eg. Mittal – Arcelor) and can take various forms. Glaxo – Heinz). it may be smooth (Eg. It can have two forms. where the difference in valuation is settled off through cash or equity (Eg.ASSET RESTRUCTURING Asset Restructuring – The asset composition of a firm undergoes a major change. or conglo-merate. Asset Swaps – It entails divesting and acquisition simultaneously by two companies. It may include brands as well. horizontal. Further spin-off can be classified as split-off and split-up. including its intangibles – Mergers – It may be vertical. 202 . Hive Off – It involves siphoning of assets under control.
203 . – Split-Up – In a split-up. Most of these practices are not in consonance with Indian laws. Reliance Ent). the entire parent company loses its identity after being split into a number of subsidiaries.HIVE OFF Spin-Off – A spin off is the creation of a new entity. in which the equity is allotted amongst the existing shareholders on a pro-rata basis (Eg. Tata Industries selling 20% stake to Jardine Matheson). the existing shareholders receive equity in the subsidiary in exchange for the stocks of the parent company. – Split-Off – In a split-off. Equity Carve – It involves selling a minority stake to a third party while retaining control (Eg.
Selling out in phases is called disinvestment (IPCL). – Poor performance. for a specified market or in general with full management control. In 2005. repay long-term debts. Parle sold its Thums Up brand to Coke for $40 million apprehending fierce competition. but retained its engineering division. In 1995. Generic motives include – – Raise working capital.DIVESTITURE It involves the sale of a brand or a division of a company to a third party. 204 . strategic misfit. L&T sold its cements division to Aditya Birla group. A complete sell-out is known as divestment (TOMCO).
involving 608 pence per share). Tatas take-over of Corus for US $11. Wipro). Conversion – Replacing debt with equity or vice-versa or costlier with cheaper debt or cross currency debt.3 billion. 205 . Share Buyback – It is a process of cancellation of shares out of free reserves to the extent of 25% of paid-up capital (Eg.The internal & external liability composition undergoes a major change – LBO – Acquiring control over a substantially larger company through borrowed funds (Eg.CAPITAL RESTRUCTURING Capital Restructuring . It provides greater leverage as well as management control.
99 cr Tata Power – Rs.Rs. 1860 cr . 256 cr ACC – Rs. 1890 cr CMC – Rs. 1700 cr Trent – Rs. 950 cr Merind . 250 cr Tata Tetley – Rs. 1170 cr Goodlass Nerolac – Rs. 230 cr Diversifications Tata Motors – Rs. 42 cr Voltas . 120 cr Tata AIG – Rs. 1439 cr 206 Tata Timken – Rs 120 cr Tata Telecom – Rs.BUSINESS RESTRUCTURING – TATAS Divestments Lakme – Rs.Rs. 150 cr VSNL – Rs.
keeping the composition of business intact (Jet Airways). Rightsizing – It is phasing of excess and redundant employees resulted out of faulty internal planning (SAIL). It can be carried out in the following ways – Downsizing – It is a systematic one-time reduction in the no. Survival is the primary motive.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. 207 . of operating units. usually as a result external turbulence. Turnaround is the primary motive. Downscoping – It involves reducing the business and/or geographical scope of a firm (Aditya Birla group).
inertia). The longer the period. 208 . as strategies are based on such beliefs and biases. the more difficult it becomes to uproot the paradigm (i.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. Dominant logic becomes deep-rooted in organizational contexts depending on the period it is in place (tenure of the CEO).e. Strategy change is unviable without a preceding change in its dominant logics. The dominant logic represents the perceptions and biases (i.e. thumb rules) of the top management.
In most organizations. 20% of the people carry out 80% of the changes).e. Successful transformation requires – incorporating employees fully into the process – leading from a different place so as to maintain employee involvement – instill mental disciplines that will enable employees to behave differently. the factor that stifled change & performance was – culture.FORCES AGAINST STRATEGIC CHANGE The problem with strategic change is that the whole burden typically rests on few people (i. 209 . Companies achieve real agility only when people at every level rise above the ordinary to face the challenges – revitalization or transformation.
Manage from the future. it is not about winning but about learning. 210 .SUCCESSFUL TRANSFORMATION Build an intricate understanding of the business model at all levels of the organization. Understand and deliver the quid pro quo. The best way is to alter the institutional point of view. process ownership. Promote inventive accountability. Questioning every basic action of the organization. never take no for an answer. Create relentless discomfort with the status quo. Encourage uncompromising straight talk. Harness setbacks.
also known as cultural-web. It involves diagnosing a change situation – systems & structures. Aspects of current culture which needs to be overcome. Culture and style of management are two main impediments in force-field analysis. 211 . Identify and implement facilitators of cultural change. that can be both enablers and blockages to change and restructuring. It involves identifying – Aspects of current culture which needs to be reinforced. 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.
RESTRUCTURING .Term Loss of human capital Lower performance Higher performance Capital .Term Reduced labour costs Reduced debt costs Emphasis on strategic control Business High debt costs Higher risk 212 Long .OUTCOMES Alternatives Organizational Short .
the second one is a more viable strategy and sustainable option in the long run.NUMERATOR & DENOMINATOR MGT Most firms across emerging markets undergo strategic discontinuity and as a result are forced to restructure their businesses. reverse engineering and regenerating. focuses on reengineering. 213 . down-scoping or asset stripping. hence go in for downsizing. In order to put back the company on the right track they are resort to – Denominator – It assumes that turnover cannot be increased. Numerator – It assumes that turnover is not a barrier or constraint. While the first strategy produces results instantaneously.
TURNAROUND MANAGEMENT 214 .
. January 1997). Source: Why do firms atrophy? (Business Today. . – Less than 10% of the Fortune 500 companies as first published in 1955.. still exist as on 2005. 215 (Govindarajan and Trimble..WHY TURN AROUND MANAGEMENT? Some interesting insights ... – Only seven of the first fifty Indian business groups in 1947 were even in business by the turn of this century. and that the thirty-two of the country’s largest business groups in 1969 are no longer among the top fifty today..
Stage Theory). skills. ends the threat with a combination of strategies.e. As a sequence of events describing how things change and why they change (i. systems. Both content (what) and process (how) are equally important for a successful turnaround. process focuses on – A logic to explain a causal relationship between intervening variables. A category of underlying principles and concepts. and achieves sustainable performance recovery. 216 .TURN AROUND MANAGEMENT A turnaround is said to occur when a firm perseveres through an existence threatening performance decline. and capabilities. While content focuses on endogenous and exogenous variables.
Low stakeholder confidence. Some indicators Continuous cash flow crises as a result of dwindling market-share and profits. 217 . suppliers and bankers.TURNAROUND INDICATORS Most firms atrophy simply because they fail to diagnose the indicators that acts as threat to organizational existence. especially in key positions. Substantial shifts in consumer preferences. unavailability or radical lowering of substitute costs or technological obsolescence. Rising input costs. leading to lack of acceptability from distributors and customers. Uncompetitive products or services. Low employee morale leading to high employee attrition at all levels.
Hence. consider extension. 218 . be more customer centric. Common approaches adopted Change in key positions. Emphasis on advertising and market penetration.. Product redesigning or reengineering. they adopt surface level measures (disprin popping) which most often fail. based on elasticity. Recalibrate prices. prune work-force.TURNAROUND ILLUSION The first step to a successful turnaround is the basic acceptance of the fact that …. focus on power brands. Revamp product portfolio. “all is not well”. Extending work hours. which most top managers fail to appreciate. liquidating dead assets.
TURNAROUND STAGE THEORY Stage 1 Decline Stage 2 Stage 3 Stage 4 Outcome Response Transition Performance Equilibrium Line Success Failure Indeterminate Nadir Time 219 .
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.DECLINE Decline is the first stage in the turnaround process. It has its origin in “resource led stretch” and subscribes to the view that a firm has substantial power to override the context. primarily dwindling resources and capabilities are responsible for decline. Identification of the stimulus leads to the arrest of the downfall. R-Extinction – It suggests that organization factors. It has its origin in “environment led fit” that subscribes to the view that a firm has little control over external factors. 220 .
If the underlying cause is internal efficiency. the response should be strategic. new market initiatives. Strategic responses focus on changing or adjusting the business the firm is engaged in through long term moves such as – integration. If the decline stems from structural shifts. asset reduction. diversification. Operating responses typically focuses on the way the firm conducts business and involves tactics geared towards – cost cutting and process redesigning (BPR).RESPONSE INITIATION Turnaround responses are typically categorized as operating or strategic. the response should be operational. 221 . The response must match the cause of the decline.
RESPONSE DICHOTOMY The response initiation is somewhat dichotomous and cannot be universally applicable. 222 . Scope – A diversified conglomerate may acquire a distressed business to turn it around and gain valuable synergies. which may be unavailable to a focused firm. Similarly new market initiatives is feasible only for multi-product firms. Untangling this question brings into focus three events – Domain – Many of the strategic cures have limited applicability for an affiliated firm. Contour – It is easier to reverse decline in the earlier stages through operational measures. when decline deepens shifts in strategic position becomes essential.
223 . role model.e. participative management (i. Sustenance is the key factor in this stage. However. The top management has a key role to play through empowerment. Empirical studies show that average time is 7. many a times early signs of recovery fades out. Support from all the stake holders through resource commitment. substantial amount of time usually passes before results begin to show (i. However. confidence building measures. Effective levers of transition.TRANSITION Transition usually reflects the first signs of recovery. lead – lag). transparency.7 years with a range of (4-16) years.e. consensus).
Share price indications and media coverage. Cut off points must be unequivocal. Commanding a premium in the market. Regaining lost market share and distributor confidence. 224 .OUTCOME Outcome is said to be successful when a firm breaches the equilibrium performance level. Revival of key customers and new product launches. Failure is an indication that initial momentum was not sustainable characterized by irreversibility. it should adopt a holistic approach. Supplier and banker confidence. Instead of focusing on financial parameters alone.
COOPERATIVE STRATEGIES & ALLIANCES 225 .
It can assume any of the following forms – franchising. strategic alliance. More and more companies worldwide are moving away from competition to co-option to leverage their resources and enhance bargaining power. Any cooperative strategy maybe between firms within the same country or cross border as well. technology.COOPERATIVE STRATEGIES Cooperative strategies are a logical and timely response to changes in business dynamics. or joint venture. licensing. and globalization . consortia. the commitment and the involvement between the firms increases manifold. 226 . In the cooperative strategy continuum as firms move up the value order. supply-chain partnership.
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. Titan Inds. owners of the brand Tanishq allows its franchisees to sell its jewellery products. It is an effective strategy to penetrate markets in a shortest possible time at a minimum cost. owners of the brand Monginis allows its franchisees to sell its confectionary products. Branding is critical to franchising. 227 . Switz Foods.
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. HM manufacturing GM range of cars in India with a buy-back arrangement is a perfect example of CBU. Different levels of licensing Manufacturing without embracing any technology (CBU). Become a systems integrator (CKD). Develop a product through its crude stage. 228 . refine processes and adopt necessary technologies (SKD). as in Tata Indica.
It can be of the following types – Multipartner – Intends to share an underlying technology or asset. Hyundai). Cross Holdings – A maze of equity holdings through centralised control to ensure earnings stability & threshold resources for critical mass (Eg. Coke – Pepsi). leverage upon size to preempt competition by escalating entry barriers (Eg. Airbus – Boeing). 229 . Collusion – Few firms in a matured industry collude to reduce industry output below the equilibrium level.CONSORTIA Consortia – They are defined as large inter-locking relationships & cross holdings between businesses in a similar industry. Tata. enabling them to increase prices (Eg.
otherwise it 230 becomes routine outsourcing. Continuous sharing of knowledge is critical to the success of a supply chain partnership. Companies in different industries with different but complimentary skills. link their capabilities to create value for end users.SUPPLY CHAIN PARTNERSHIP It is a pro-active & collaborative arrangement between supplier and customer aimed at achieving better control over the value chain (Eg. . It usually provides a platform to sort out differences between conceptualization and implementation to suit local market needs. Tata Motors – IDEA).
instead of hurrying into a relationship. 231 . effective R&D management. Generic motives involved are .learning organization. Despite their popularity (50-60)% of the alliances fail to accomplish their stated objectives. enter newer markets. design next generation products. Reliance – Du Pont).STRATEGIC ALLIANCE It is an short to medium term understanding between two or more firms to share knowledge and risk. preempt competition. Partner selection is one of the critical success factors. Firm’s should undertake a long courtship with potential partners. Tata Motors – Fiat. enhance credibility. to gain knowledge and to obtain access to new markets (Eg.
Maruti). Whirlpool – Tide. Backward – An alliance (quasi or tapered) with a supplier of critical components seeking commitment (Eg. Complementary Equals – Two firms mutually promoting each others complimentary products (Eg. Airbus – Boeing). Bootstrap – An alliance between a weak and a strong company with an intention to acquire it.STRATEGIC ALLIANCE . Coke – Pepsi). 232 .TYPES Collusion – Tacit top management understanding to neutralize price wars (Eg. Alliances of the Weak – An alliance is entered into to preempt competition (Eg. Bajaj – Castrol).
Firms from developed markets seek access to markets and firms from emerging markets seeking access to technology.PARTNER SELECTION CRITERIA It is likely that partners will not have complete consent on alliance objectives because the institutional context in which the alliance embedded varies from country to country. 233 . Cultural orientation has been found to have a profound effect on top management’s strategic orientation (Eg. – Japan Vs US). Too much stress on financials & structure be avoided. Differences in level of economic development can produce differences in alliances motives.
Dominant Logic’s – Similarity in beliefs & biases. Partner’s ability to acquire fresh skills.PARTNER CHARACTERISTICS Complimentarity of Capabilities – The degree to which partners resources can be used in conjunction. including ability to provide quality products and services. Intangible Assets – Move beyond the financials of the firm. Managerial capabilities. Unique Resources – Abilities or skills which cannot be easily duplicated. Willingness to share knowledge and skills. Experience related to previous alliances. 234 .
operational & cultural integration. degree of compatibility. the value chain. Learning to collaborate – strategic. partners should nurture it. Selection & Courtship – It involves self analyzing. 235 . differences not anticipated earlier.MANAGING ALLIANCES Alliances are more than just a deal. instead of focusing controlling the relationship. understanding the chemistry. Setting up the housekeeping. Getting Engaged – It should incorporate a specific joint activity. incorporating clear signs of continuing independence for all partners. Changing within. vows to include commitment to expand the relationship.
e. whilst the partners continue to operate independently. . There are substantial linkages in the value-chain. It aims at creating new value (i. separation is very 236 bitter. synergy) rather than mere exchange (i.e.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. a joint venture is a selection among modes by which two or more firms can transact. combining parts). It lasts till the vision is reached. Conceptually.
The market fails as sellers are unwilling to reveal their technology and buyers are unwilling to purchase in the absence of inspection. It may also be linked to deterring entry or eroding competitors position.JOINT VENTURE – GENERIC MOTIVES Transaction Cost – The situational characteristics best suited for a JV are high performance uncertainty. Organizational Learning – It is a means through which a firm learns or seeks to retain their capabilities. in addition to a high degree of asset specificity. 237 . Strategic Behaviour – Firms may override transaction costs. though more profitable alternative to other choices.
– Eg. Define future industry standards. Sharing of resources. Yamaha – Escorts.OTHER MOTIVES Entry into newer markets. Learning new technologies. Maruti – Suzuki. Eli Lily – Ranbaxy. Renault – Nissan (Minivans – Cars). – Eg. Endorsement from government authorities. Daimler – Chrysler (Premium Cars) 238 . Essar – Hutch (Vodafone). – Eg. – Eg. – Eg. – Eg. TVS – Suzuki (4-Stroke Engines) Fill gaps in existing product lines.
Risk of brain (i. – Eg. – Maruti – Suzuki. PAL – Fiat If the cost of continuing exceeds the exit costs? – Eg. LML – Piaggio Differences in size and resource base. – Godrej – Procter & Gamble.e. Century . Modi – Telstra What after exit (parenting disadvantage)? – Eg. Tata – Aditya Birla in Idea Cellular 239 .RISKS INVOLVED Incompatibility – Differences in cultural background. – Eg.Enka. Risk of over dependence. technology) drain.
Culture – Reconcile gaps. time sharing. 240 . Focus – Avoid strategic myopia. Partner – Avoid duplication of skills and capabilities. Incompatibility – Performance expectations. Objectives – Shared vision. respect. Flexibility – Sufficient space to breathe and adjust. Costs – Other modes of transaction becomes cheaper. Equality – Lack of dominance. Agreement – Clarity on operational control.PRE-REQUISITES FOR SUCCESS Commitment – Mutual trust. Inertia – Differences in age and evolution patterns.
MERGERS & ACQUISITION 241 .
however.Daichi) and hostile if it is without the consent of the management (Eg. HLL – Tomco). Brooke Bond – Lipton). Mittal Arcelor). An acquisition is said be smooth if it is with the consent of the management (Eg. An acquisition is the purchase of a firm by a firm (of larger size. SEBI Takeover Code. 242 . The larger objective is to leverage on size. Most countries have stringent laws that prevents hostile takeovers (Eg.MERGERS & ACQUISITION A merger is a mutually beneficial consent between two or more firms (usually of similar size) to form a newly evolved entity by absolving their individual entities to preempt competition (Eg. Ranbaxy . 2002). reverses are also taking place through LBO) with a view to acquire conglomerate power and induce synergy (Eg.
. creeping acquisition).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. 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.
SEBI TAKEOVER CODE.e. Grasim – L&T Cement. and/or does not enjoy the confidence of the different stake holders. SEBI – In case of a hostile take over. asset stripping). 244 . Gujarat Ambuja – ACC). Disclosure – All acquirers have to inform the respective stock exchanges where it is listed and SEBI upon acquiring the basic limit and upon every incremental limit thereon. the SEBI can intervene and block share transfers if: the acquirer has ulterior motives (i. credentials or track record is at stake. 2002 Pricing – Acquirers will have to offer minority shareholders (at least 20%) the past 26 weeks or past 2 weeks average price. whichever is higher as an exit route (Eg.
Horizontal – It involves integration of two highly related businesses (Eg. Reliance). Vertical – It involves complimentarily (partially related) in terms of supply of inputs or marketing activities (Eg. 245 . The type of merger is depends on the degree of relatedness (strategic) between the two businesses. ITC). Conglomerate – It involves integration of two distinctly unrelated businesses.TYPES OF MERGERS A business is an activity that involves procuring of desired inputs to transform it to an output by using appropriate technologies and thereby creating value for its stake holders in the process. Electrolux . Godrej. usually opportunistic (Eg.Kelvinator).
Economies of size. Global image (Eg.e. Reduced gestation (i. ICICI –ITC Classic). Mittal – Arcelor). Ranbaxy – Crosslands). Overcoming entry barriers (Eg. Coinsurance effect – Higher debt raising capability. Access to newer segments (Eg. quick access). 246 . Ulterior motives – (Eg. ITC Bhadrachalam). Tax benefits (Eg. scale and scope. Reduction in risk. Avoiding risk of new product development.MOTIVES Increased market / conglomerate power. Tata Steel – Corus). Asset Stripping – Shaw Wallace).MERGERS & ACQUISITION . Acquiring assets or capabilities (Eg.
Overvaluation of buying firms (Eg. Inability to achieve synergy. Tata – Corus).MERGERS & ACQUISITIONS PITFALLS Cultural differences (Eg. Top management overtly focused on due diligence exercise and negotiations. while the ultimate acquisition was made at 607 pence/share). When Tata Steel started negotiations with Corus. 247 . Managing over-diversification. Managing size. neglecting core business. Overvaluation is often as a result of an ego drive and substantially affects future returns. their initial offer was around 420 pence/share. Merging of organisational structures.
Brooke Bond – Lipton). Maturity – A larger firm acquires a smaller firm with an objective to achieve economies of scale and experience curve effects (Eg. Tata Steel – Corus). 248 . Growth – This stage may witness parallel merger of two firms of similar size. vertical to save transactions costs.MERGER TYPE & PLC Introduction – A larger firm may acquire a newly formed entity with an objective to preempt new competition or acquire its license (Eg. Kingfisher – Air Deccan). with an objective to reinforce its growth trajectory or to take on the might of a comparatively larger player (Eg. Decline – Horizontal mergers are undertaken to ensure survival.
Strong differences may stifle plans and its execution. Immediate attempts to super impose structure and culture may cause bottle necks. Blanket promotions across entities and confidence building exercises needs to be practiced. active top management intervention in phases. Left alone syndrome.INTERNATIONAL M&A . 249 . An acquisition just for the sake of it or reputation yields very little value in the long term.FRAMEWORK Positive contribution to the acquired company. A common shared vision. A concern of respect and trust for the business of the acquired company.
Integrating work processes.INTEGRATION . Shift attention from business portfolio to people and processes. . Decide upon management control systems. Determine business strategy. Redefine responsibilities and authority. promptly. They can carry the message to the various stake holders.BLUEPRINT Take the media into confidence. Decide on the new hierarchy. 250 Do not ignore the “people factor”. It will enable focus on customers and key people.
– Market for corporate control.M&A . – Synergy – Potential value gain from combining operations (i.VALUATION The process of valuation is central to M&A. The process takes (6-12) months.e. operational & financial). While under valuation may be a significant opportunity. 251 . – Unstated reasons – Personal self interest and hubris. Financial motives – Undervaluation relative to true value. Valuation decisions are arrived through a due diligence process when the prospective acquirer gets access to the books of accounts of acquiring company. over valuation can become a curse.
252 .VALUING OPERATIONAL SYNERGY Synergy – It refers to the potential value gain where the whole is greater than the sum of the parts. Sources of operational synergy – Horizontal Synergy – Gains come from economies of scale which reduces costs. when the “fit” between the two entities is very poor. or from increased market power which increases sales and margins. Synergy can be negative as well. – Conglomerate Synergy – Gains come when one firm complements the resources or capabilities of another (Eg. Innovative product – Good distribution network). – Vertical Synergy – Gains come from controlling the supplychain and savings in transaction costs.
ITC – Bhadrachalam Paper). Synergy comes from projects which would not have been undertaken if the two firms stayed apart (Eg. Tax Benefits – Tax benefits may accrue from tax entitlements and depreciation benefits unutilized by a loss making firm. shareholders can accomplish the same at a much lesser cost. Cash Slack – It reduces asymmetry between cash starved firms with deserving projects and cash cows with no investment opportunities. However. Hotmail). 253 . and without paying take-over premiums.VALUING FINANCIAL SYNERGY Diversification – Reduce variability in earnings by diversifying into unrelated industries. but availed after being merged with a profitable firm (Eg.
hence better performance. – Default risk comes down and credit rating improves. – Coupon rates may also be negotiated at lower rates. higher leverage. It relates to the concept of diversification. This will induce higher debt capacity. 254 . the cash flow the merged firm will be less variable than the individual firms. as risky debt is spread across the new firm's operations.VALUING FINANCIAL SYNERGY Co-Insurance Effect – If the cash flows of the two firms are less than perfectly correlated. 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.
While value of corporate control is negligible for firms that are operating close to their optimal value. 255 . 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. Assessment of perceived quality is critical. – – Value of Control = Value of firm after restructuring Value of firm before restructuring. since a restructuring can lead to significant increase in value. The value of control can be substantial for firms that are operating well below optimal value.
debt component) at the time of buyout and rapid changes in capital structure over time. LBO facilitates a relatively smaller firm to bid for a comparatively larger firm in the bid for management control.e.LEVERAGE BUYOUT (LBO) The basic difference between a take-over and a LBO is the high inherent leverage (i. The assets of the acquired company are used as collateral for the borrowed capital. Confidence of investment bankers and the international financial community is essential. sometimes in combination with the assets of the acquiring company. 256 . It is a very costly and risky proposition.
liquidity. The increased benefit showed in the following way – reduced costs and increased revenue.TO GO PUBLIC OR NOT? However.access to financial markets. – The need to satisfy analysts and shareholders. However. off-late many publicly traded firms have gone private keeping in mind the following – – The fear of LBO. on-going valuation. the advantages of going public includes . – Increased information needs. – Separation of ownership from management. A research study showed that 30% of the publicly listed firms reported above average returns after going private. 257 .
e. which disappears once assets are liquidated and significant portion of debt is paid off. co-insurance effect). – It is a temporary phenomenon.RATIONALE FOR HIGH LEVERAGE The high leverage in a LBO can be justified by – – If the target firm has too little debt (relative to its optimal capital structure). – Cash trapped company unable to utilize opportunities. – Debts repaid off from increased value after successful restructuring and wresting management control. 258 . – Cost of debt coming down (i. – Managers cannot be trusted to invest free cash flows wisely.
leverage is expected to decrease over time. 259 . Therefore. initial rise in leverage is anticipated. Any discounting has to reflect these changing cost of capital.EFFECT OF HIGH LEVERAGE Increases the riskiness of dividend flows to shareholders by increasing the interest cost to debt holders. As the firm liquidates / pledges assets and pays off debt. Lack of sufficient cash flows to repay costly debts resulting in a possible debt trap. A LBO has to pass two tests to be viable – – Restructuring to pay-off increased debt. – Increase equity valuation.
REVERSE MERGER Reverse Merger – The acquisition of a public company. allowing the private company to bypass the usually lengthy and complex process of going public. time-barred. or costly. Objectives – – Traditional route of filing prospectus and undergoing an IPO is costly.e. – Prevents dilution of equity. small in size but having a promising business. – Facilitates better valuation and forthcoming offerings. – Tax shelter. shell company) by a private company. 260 . – Automatic listing in major exchanges. which has discontinued its operations (i.
– Takeover announcements reported 30% excess returns.EFFECT OF TAKE-OVER ANNOUNCEMENT The shareholders of target firms are the clear winners. takeover failures have only initial negative effects on stock prices. – Merger announcements reported 20% excess returns. During bearish periods excess returns were 19%. and 35% during bullish periods. Most target firms are taken over within (6090) days. However. Excess returns also vary across time periods. Initial anomaly in stock prices usually normalizes over a period of time (6-12) months. 261 .
1988 . 1983.EFFECT OF TAKE-OVER ANNOUNCEMENT The effect of take-over announcement on bidder firm’s stock prices are not clear cut. Bradley. – However. 262 Jarrel. – However. in the event of take-over failure negative returns to the extent of 5% on bidder firm stock prices is reflected. and Kim. Brickley. – Most studies reported insignificant excess returns around take-over offers or merger announcements. as stock markets become more and more perfect such anomalies would reduce Source: Jensen and Ruback. 1983. Desai. and Netter. over time.
so that nothing is left for the raider to strip off. Rights).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. Poison Pill – An offer to existing shareholders to buy shares at a substantial discount to increase their voting rights (Eg. 263 . Asset Stripping – The targeted company hives off its key assets to another subsidiary.
Shapoorji Pallonji). East India Hotels – Reliance Industries – ITC). But often the White Knight turns a betrayer himself (Eg. thus thwarting the raider company’s attention. Pac Man – The target company makes a counter bid to take over the raider company. Gray Knight – The target company takes the help of friendly company to buy the shares of the raiding company.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. 264 .
COMPETING FOR THE FUTURE 265 .
British Air overpowering Pan Am. Honda overpowering Volkswagen. Nokia overpowering Motorola. What went wrong???? What were they doing with the present? What were they pre-occupied with? 266 . Honda overpowering GM. Wal-Mart overpowering Sears. Compaq overpowering IBM. Hitachi overpowering Westinghouse. were spending 99% of their precious time dealing with present.GETTING OFF THE TREADMILL Canon overpowering Xerox. The reverse was true for the companies overpowering. Most companies were too preoccupied with the present than the future? 99% of the companies overpowered.
downsizing). decluttering. 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 . Not knowing when to stop. most often they ended up cutting corporate muscle as well and became anorexic. falling market share). declining margins. CEO’s brutally pick up the knife and ruthlessly carve away layers of corporate flab (delayering. Thus efficiency was grievously hurt.THE PAST OF COMPETITION Beyond Restructuring – When a competitiveness become inescapable problem (stagnant growth.
but not of the future. 268 . However. incrementalism or nominal innovation has almost reached a plateau. A poll in circa 2000 revealed that 80% of the U. top managers believed that quality will be a source of competitive advantage of the future. ensuring only survival of the present.THE PRESENT OF COMPETITION Beyond Reengineering – Numerator based managers (innovation) at least offers some hope. The future is not about catching up with competition. but forging ahead in competition. On the contrary only 20% of Japanese managers believed that quality will be a source of competitive advantage of the future.S.
It is based on deep insights into trends in technology. Companies need to fundamentally reconcieve itself. they are not enough to get a company to the future. aspirations and resources. better. Creating the future requires industry foresight. Empower from bottom to top.THE FUTURE OF COMPETITION Regenerating – Leaner. It involves Dream about the company’s future. as important as these may be. don’t predict. not the other way. Create a potential gap. not just the organization. demographics and lifestyles. reinvent its industry. 269 . faster. Transform the industry. and regenerate its strategies (breaking its – managerial frames).
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 .
It drives a hunger and a passion to transform. Redraw the boundaries between industries. hence do not fall sick in the first place. Therefore.ABOUT THE TRANSFORMATION The future does not belong to those who take the industry for granted. Successful companies have a complete grip over the industry. It is about deliberately creating a strategic misfit. Change in at least one fundamental way the rules of engagement in an industry. Create entirely new industries (i. they do not need to restructure.e. 271 . by converging technologies complex. blue oceans).
A revolution that is thrust upon from the top seldom sustains. 272 . The middle management plays a strong moderating role. the revolution must start at the bottom and spread in all directions of the organization. More importantly. Such a process is called institutionalization (from people centric to organisational centric). Most successful revolutions (Gandhi to Mandela) rose from the dispossessed. Transformational leaders merely lead the way.ABOUT THE EMPOWERMENT Bring about a revolution (a paradigm shift) in the organization.
What does it take to get to the future first? Understanding how competition for the future is different.THE FUTURE OF STRATEGY A company must get to the future not only first but also for less. An ability to energize the company. It requires a lot of common sense and a little bit of out of the box thinking. Apple – iphone). 273 . without taking undue risk. A process for finding and gaining insight into tomorrows opportunities (Eg. South West Airlines – LCC. Get to the future first. Toshiba – LCD. Apply the 40 – 30 – 20 principle. Companies need to strategize (think ahead of times).
The farther one can see in this endless space. but hundreds. As there is no one future. each point in space represents a unique business opportunity. What distinguishes a leader from a laggard. as on their aspirations. 274 . greatness from mediocrity. Companies of the future will be not based so much on the strength of their resources. We are in the midst of a 3600 vacuum. 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. is the ability to imagine in a different way what the future could be.
THE EMERGING STRATEGY PARADIGM Not Only Reengineering Processes But Also Regenerating Strategy The Competitive Challenge Organizational Transformation Industry Transformation Competing for Market Share Competing for Opportunity Share Finding the Future Strategy as Learning Strategy as Positioning Strategy as Engineering Strategy as Unlearning Strategy as Dream Strategy as Architecture 275 .
THE EMERGING STRATEGY PARADIGM Not Only But Also Mobilising for the Future Strategic Fit Resource Allocation Strategic Misfit Resource Stretch & Leverage Getting to the Future First Existing Industry Structure Product Leadership Single Entity Product Hits & Timing Future Industry Structure Competency Leadership Dominant Coalitions / Co-option Market Learning & Preemption 276 .
Degree of Learning Unlearning Curve P2: Unlearning in previous period does not necessarily ensure learning in the current period. Learning Curve t1 t2 t3 Time t4 t5 277 .LEARNING TO FORGET P1: The degree of learning in current period is directly proportional to the degree of unlearning in the previous period.
Inimitable & Insubstitutable – A high degree causal ambiguity between these skills yield sustainable competitive advantage. Leverage – They are the gateways to future markets. 278 . It represents the collective learning's of an organization centering around diverse streams of technologies. It is characterized by the following – Unique – It provides unimaginable customer value ahead of its times. It cannot be matched even by its closest competitors.CORE COMPETENCE A core competence relates to a bundle of skills (not an asset or a business) that revolves around activities or processes and critically underpins a firm’s competitive advantage.
Although a core competence may lose value over time.MORE ABOUT CORE COMPETENCE Sony – miniaturization. Canon – imaging. Most companies around the world do not possess one. Honda – engines. Core competencies are the roots of the organization. Wal-Mart – logistics. 279 . A core competency cannot be outsourced. at the most three to four. Coca Cola – brand. Toshiba – flat screen displays. Toyota – lean manufacturing. it gets more refined and valuable through use. Intel – nano-electronics. SKF – antifriction and precision. Nike – designing. it is deeply embedded in the heart of the organization. leaders have one.
ROOTS OF COMPETITIVENESS End Products 1 2 3 4 5 6 7 8 9 10 Core Businesses Core Business 1 Core Business 2 Core Business 3 Core Business 4 Core Product 2 Core Products Core Competencies Core Product 1 Competence 1 Competence 2 Competence 3 Competence 4 280 .
RESOURCE STRETCH & LEVERAGE
Initial resource position is a very poor indicator of future performance. It leads to atrophy and stagnation. Successful companies consciously create a potential gap between aspirations and resources. Resource crunch is a common factor among firms that faces a wealthy rival, and outperforms them. Leveraging what a company already has, rather than allocating it is a more creative response to scarcity. – By concentrating existing resources. – By accumulating existing resources. – By complementing existing resources. – By conserving existing resources. – By recovering existing resources.
Concentrating – It involves effectively directing portfolio of resources on key strategic goals in which individual efforts converge over time. It is a balance between individual mediocrity and collective brilliance. It is achieved through – Converging – Redirecting multiple diverging (i.e. fragmented) short term goals into one long term goal. It is then resources can be stretched over time. Focusing – Making trade-offs and preventing dilution of resources at a particular point of time. Targeting – Focusing on the right innovations that are likely to have the biggest impact on customer value.
Accumulating – Using existing reservoir of resources to build new resources. Each and every individual is a rich & potential source of learning, discover better ways of doing things. It is achieved through Mining – Extracting learning experiences from existing body of each additional experience (i.e. success or failure). It is an attitude that can be acquired, but never learnt. It leads to a substantial jump in the experience curve. Borrowing – Utilizing resources outside the firm through licensing, alliances, joint ventures. A firms absorptive capacity is as important as its inventive capacity.
Complementing – Using resources of one type with another that aligns smoothly to create higher order value. In a way it produces an accelerating effect on each individual resource. It is achieved through – Blending – Interweaving discrete capabilities to create world class technologies (GM – Honda) through integration and imagination. Different functional skills can also be blended to create a world class end products (Yamaha – Keyboard). Balancing – An ability to exploit excellence in one area is never imperiled by mediocrity in another (GE acquiring the CT scanning rights from EMI because of its inadequate market reach).
Conserving – Sustaining competencies over time through frequent usage. Resources are never abandoned; they are always preserved for future use. Recycling – Increasing the velocity of use of a competencies over time. As a result core competencies can be leveraged across an array of products (Sony - Betamax). It includes brand extensions as well. Co-Opting – Enticing resources of potential competitors to exercise influence in an industry (Fujitsu – IBM). Shielding – It involves identifying competitors blind spots and then attacking without having the fear of retaliation.
Recovering - It is the process of reducing the elapsed time between investing in resources and the recovery of those resources in the form of revenues via the market. Speeding – Prior to the 1980’s Detroit’s majors took an average of 8 years to develop an entirely new model; the Japanese reduced it to less than 4.5 years, with major new variants in 2 years. This envisaged Japanese players in giving customers more opportunities to switch allegiance and loyalty (Toyota). Protecting – It uses competitors strength to one’s own advantage, by deflecting it, rather than absorbing it as practiced in Judo.
INTERNATIONAL BUSINESS ENVIRONMENT 287 .
and high transaction costs. strategies suited for the developed markets may not be appropriate for emerging markets. 288 . Emerging markets are characterised by infrastructural bottlenecks. high levels of market imperfection). Chile) provide a different context (i.e. China. Therefore focused strategies based on core competence may not be suitable for emerging markets (Khanna & Palepu. Diversified groups in operating in emerging markets therefore benefit from unrelated diversification. Korea. 1997).EMERGING MARKETS Emerging markets (India. Therefore. institutional gaps.
(2000) 289 . Concentric. subsequently negatively related across developed markets. Entropy). et al. Synergy.PERFORMANCE (I) Diversity attempts to measure the degree and extent of diversification (Herfindahl.DIVERSITY . Optimum level of diversification Performance Diversity is initially positively related with performance. Size & Scale. Experience Strategic Fit Diversity Palich.
Huge initial investment.PERFORMANCE (II) Diversity is initially negatively related with performance. conglomerate power Threshold level of diversification Performance Diversity (Khanna & Palepu. 2001) 290 . brand building Risk diversification. subsequently positively related across emerging markets.DIVERSITY .
It should think globally. 291 . It should have a spread of assets.INTERNATIONAL IDENTITY MNC’s consciously engage in FDI in different parts of the globe to forge resource diversity as a distinct competitive advantage. act locally (Eg. It should have a spread of interest groups / stake holders. It should have a spread of manufacturing facilities. Characteristics – It should have a spread of affiliates or subsidiaries. HSBC). revenues and profits.
292 . high feminity index in developed markets and vice versa for emerging markets). low power distance in developed markets and vice versa for emerging markets).It reflects the relative role of team building (Eg. Risk Profile – It reflects the risk attitude of the top management (Eg. low risk profile in developed markets and vice versa for emerging markets). low group scale in developed markets and vice versa for emerging markets). Feminity Index . Group Scale .GLOBAL BUSINESS ENVIRONMENT Power Distance – It reflects the disparities in income and intellectual development (Eg.It reflects the disparities in women in workforce (Eg.
currency. code of conduct. political stability.GLOBAL BUSINESS ENVIRONMENT Cultural Adaptability – It reflects the adaptive ability to a changing environment . corruption. time value.culture. low country risk in developed markets and vice versa for emerging markets). way of life. inflation. flexibility (Eg. interest rates. high cultural adaptability in developed markets and vice versa for emerging markets). terrorism (9/11). judiciary) of doing business in a particular country (Eg. attitude. FOREX reserves. customs. credit rating. dress sense. Country Risk – It reflects the political and economic risk (Eg. 293 .
time-zones. in most emerging markets use of an interpreter may be a standard protocol. however. High levels of ethnocentrism usually has a negative effect on business. Other factors – local celebrations. in most emerging markets meetings are delayed and lasts unusually long. Ethnocentrism – Developed country managers tend to regard their own culture as superior. 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. 294 .
It focused largely on TRIPS (patents. It also initiated provisions on anti-dumping.GATT GATT was a bi-lateral treaty initiated between US and some member countries in 1947 to promote free trade. The 1999 (Seattle Round) saw a lot of protest amidst bringing agriculture under the purview of TRIPS. trademarks). It also highlighted the nexus between US & WTO. ASEAN. copyrights. It a multi-lateral treaty with 143 (as on 2002) member countries to reduce tariff and non-tariff (quota) barriers. BRIC). 295 . In 1995 (Uruguay Round) GATT was renamed to WTO. The 2001 (Doha Round) focused on power blocks (NAFTA.
However with current recession in the US 2002 onwards.Pound). the Dollar still remains the most preferred currency globally. The Euro was significantly devalued against the Dollar till 2002. Sterling . three countries joined in 2002 increasing it to fifteen members as of 2008.EURO – SINGLE CURRENCY In 1999 twelve member countries in Europe joined hands to move over to a single currency (i. primarily the OPEC countries. the Euro slowly started outperforming the Dollar. However. Euro).e.e. The notable exception was Great Britain which still continues with its local currency (i. 296 .
However. Transparency – A single currency is transparent and competitive. it helps avoiding transaction costs associated with a multiple currency. but it may have spill-over effects. Rate Uncertainty – A single currency eliminates the risk of competitive devaluations. 297 .SINGLE Vs MULTIPLE CURRENCY Transaction Costs – Though the initial cost of introduction of a single currency is very complicated and costly. Trade Block – It will strengthen the EU identity which would not have been possible otherwise. a multiple currency is preferable where the business cycles of member nations are different.
298 . – FII (transfer of intangible resources) is fast but may have strong repercussions (i. It is long term with high levels of commitment. It is short-medium term with comparatively low levels of commitment. Neo classical economists believe that foreign investment may in fact be a win-win game.e.e. – FDI (transfer of tangible resources) is slow but steady for the purpose of economic growth.FII Vs FDI INVESTMENT Classical economists believed that foreign investment (in any form) is basically a zero sum game (i. the gain of one country is loss of another). hot money).
technology (microchip). economic (middle class buying power). Pricing – It depends on the competitive structure (PLC – Kellogg's). usage (talk time). buying patterns (spread). Distribution – It depends on the market characteristics (fragmented – concentrated).culture (food habits). customer awareness (microwaves). lifestyle (petroleum 299 outlets – departmental stores). promotion (surrogate advertising). .INTERNATION MARKETING Product – The various attributes of a product may receive different degrees of emphasis depending on differences in .
India) may be different from that another trading country (US – GAAP or IRS). 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. debt is cheap in US. equity is cheap in India).INTERNATION FINANCE Currency Risk – Many Indian IT companies (Rs) having business in US (Dollar) are asking for quotes in (Euro) or are shifting bases out of US to avoid risk of devaluation of Dollar. Leverage – The leverage may vary across countries depending upon money and capital market conditions (Eg. .
social security. technology (convergence. and cultural barriers (language) vis-à-vis emerging markets. Training – It is a pre-requisite for international business to reduce language. Compensation – Differential pay packages exists because of differences in purchasing power. skills are more important that cultural fit and vice-versa. shortened life cycles). labour laws.INTERNATIONAL HR An uniform HR policy is idealistic to enable parity in performance appraisal. 301 . double taxation. in most cases it is not desirable nor practiced. Recruitment – In local recruitment. however.
INTERNATIONAL OPERATIONS Location Incentives – FDI in emerging markets should explore options for SEZ’s to explore benefits (tax holidays. SCM – Use of ERP to network the extended enterprise 302 across the globe. Outsourcing – A company having a core competence may be the source of global outsourcing (Eg. . Technology – The cost to be evaluated in terms of latest technology (Euro VI) vis-à-vis effective cost of appropriate technology (Euro II). reduce power costs) vis-à-vis infrastructural bottlenecks. Bosch spark plugs are used by car manufacturers worldwide).
CONTEMPORARY TOPICS 303 .
Innovations typically paves the way for more secured and improved lifestyle for consumers in general.INNOVATION An invention is the first occurrence of an idea for a new product or process. innovation is the first attempt to carry it out in practice. Innovation is the most preferred strategy today to maintain competitive advantage in the present turbulent business environment. Innovation is all about staying ahead of competition. it has destructive effects as well. but has inherent risks involved as well. 304 . While innovation typically adds value for organizations.
process innovation is necessary to sustain the competitive advantage of product innovation. However. Process innovation usually follows product innovation. While product innovations are typically customer driven. Strategic innovation has the potential to change the rules of the game. process innovations are organizational driven.TYPES OF INNOVATION A key challenge is maintaining a balance between process and product innovations. Tangible impact of product innovation on performance is significantly higher than process innovation. 305 .
a paradigm shift).BUSINESS MODEL It is a simplified description and representation of a complex real world. Innovations are the back-bone of successful business models . about how an organization makes money (i. Disruptive business models brings in a new frame of reference (i. Processors (Pentium). Medical Surgery (Lasik). It leads to a shift in the price – performance envelope. 306 . putting an idea into practice). Drug Development (Bio Chemicals).e. Telecom (CDMA Technology).e. Data Storage (Pen Drives).
The revenue streams generated by the activities. The segment(s) of clients to be addressed. 307 . The key resources and capabilities required. The cost structure resulting from the business model. The proposed relationships established with clients.NINE BUILDING BLOCKS Value proposition offered to the market. The key activities / processes necessary for execution. The channels to reach out to the clients. The key partners involved in the activities.
BUSINESS MODEL FRAMEWORK 308 .
The revenue model described here are the means to generate revenues. It is just one piece of the puzzle. 309 .REVENUE MODEL Positioning is just not sufficient. It involves – Product Visualization – Product Prototype – Product Test – Capacity – Pricing – Distribution. innovative companies to carve out unique business models to fend off competition. Investment Banking. Real Estate) companies need to untangle and understand the intricacies of their business model. With the rapid erosion of certain industries (IT.
A favourable intellectual property (IP) climate.HOW TO MAKE INNOVATIVE CO’S Innovative company’s are a matter of culture and aspirations rather than tangible resources. Have a lean and a flat organization structure. Provide reasonable incentives (not necessarily monetary). Allow the management sufficient slack to be future oriented. 310 . Allow the workforce idiosyncrasies for their errors. Promote the culture of experimentation. Promote the grape-vine.
Collusion with the judiciary is also another distinct possibility in emerging markets. however that possibility is slowly atrophying. The most preferred strategy of internal protection includes imbibing “causal ambiguity” in the production process to make reverse engineering difficult. In most emerging markets where the IP climate is not so favorable. companies are increasingly relying on internal protection to sustain innovation effects. 311 311 .HOW TO PROTECT INNOVATION? Without adequate protection (external or otherwise) the effects of innovation does not translate to performance.
CORPORATE GOVERNANCE The basic theme of corporate governance is to ensure that professional managers are identified and made accountable in terms of clear business processes or activities and held responsible through adequate mechanisms & control systems for channelizing their decisions for the benefit of stakeholders at large. 312 312 . In fact the principles of corporate governance implies that managers go beyond in satisfying the stated and unstated needs of the multiple stakeholders. Corporate governance aims to reduce the principal-agent problem present in most professional managed organizations through appropriate forms of accountability and control mechanisms.
shareholders can diversify their portfolio at a much lesser risk and cost. also known as the principal-agent problem or agency dilemma. From the strategic point of view managers tend to diversify into unrelated businesses as it provides higher returns hence a more favourable appraisal. However. 313 . According to the agency theory top managers and shareholders interests are usually conflicting in nature and tend to pull in opposite directions. not present in portfolio diversifications.AGENCY THEORY The root of Corporate Governance goes back to the Agency Theory. This exposes the shareholders to additional risks and higher costs.
SEBI Report – 2005. defines corporate governance (headed by Kumar Mangalam Birla) as the acceptance by management of the inalienable rights of shareholders as the true owners of the corporation and of their own role as trustees on behalf of the 314 shareholders. . the US government passed the Sarbanes – Oxley Act. After the Enron downfall. various laws were enacted to ensure proper usage of these funds. 2002 to restore public confidence in corporate governance.ORIGIN & CONTEXT Since the early 20th century since a large part of public funds were held by publicly traded firms in the US.
including the society at large.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. Interests of other stakeholders: Recognize the legal and other obligations of all legitimate stakeholders. 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 .
assessment and mitigation of risks and retirement by rotation over a fixed period of time.. Disclosure and transparency: Disclosure of information should be timely and balanced to ensure that investors have clear access to data and facts. 316 316 . They should also implement systems to independently verify and safeguard the integrity of the company's financial reporting.GOVERNANCE PRINCIPLES Integrity and ethical behaviour: Organizations should develop a code of conduct for their top management that promotes ethical and responsible decision making. Independence of the entity's auditors: Identification.
safeguards invested capital. fire and compensate top management. with its legal authority to hire. discussed and resolved. Remuneration: Performance-based remuneration is designed to relate some proportion of salary to individual performance. 317 .GOVERNANCE STRATEGIES Monitoring by the board of directors: The board of directors. Balance of power: The simplest balance of power is very common. Regular board meetings allow potential problems to be identified. However. a person benefitting from a decision should abstain from it. they should provide no mechanism or scope for opportunistic behaviour.
from 10% for companies where the regulatory backdrop was least certain (those in Morocco. 318 . Egypt and Russia) to around 40% for Canadian & European companies. McKinsey found that 80% of the respondents would pay a premium for wellgoverned companies. and was responsive to investors' requests for information on governance issues. who had no management ties. The size of the premium varied by market. They defined a well-governed company as one that had mostly out-side directors. undertook formal evaluation of its directors.GOVERNANCE & PERFORMANCE In its “Global Investor Opinion Survey” of over 200 institutional investors in 2002.
today economic institutions are considered as a major drivers of improvement in quality of life in general and therefore needs to include multiple stakeholders.SHAREHODER – STAKE HOLDER THEORY Till the early part of the 20th the basic objective of modern organizations was to provide goods and services for public consumption for profit maximisation. Over a period of time. The basic premise is that firms cannot exist in vacuum. 319 . Therefore. the short-term view of profit maximisation gave way to a more broader and mediumterm view wealth maximisation of the shareholders. corporate philanthropy should be a part of every corporate mission. However.
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. “a healthy business cannot exist in a sick and impoverished society”. economic and social responsibilities cannot be mutually exclusive. However. Therefore. in fact a large part of it is significantly overlapping.CORPORATE SOCIAL RESPONSIBILITY As Peter Drucker rightly pointed out that. CSR can be defined as. the debate on CRS still continues whether firms should detract its focus from its business? 320 .
MRTP). people are becoming increasingly aware of their right to a decent and healthy life.GROWING CONCERN FOR CSR Awareness due to education: With growing literacy. Public image: Entrepreneurs are increasingly relying on public image as a source of competitive advantage and a higher financial discounting. Fear of government interference: Excessive quench for profits may lead to build up of adverse public opinion compelling the government to intervene (Eg. 321 . The role of media: The media and various consumer organizations have come up in protecting consumer rights and exposing mal-practices.
Education. eco efficiency. Literacy & Training Programs – (Eg.Paper packaging. Aditya Birla Research Centre – LBS).CSR STRATEGIES Green Supply Chain Management: It includes environmentally preferable purchasing. and extended producer responsibility (Eg. Exide – Product take back). Cement . designing eco-friendly products. Tata Steel – Life Line Express). Health & Hygiene – Attending the health hazards due to wastes and by-products to employees and society in proximity (Eg. 322 . Refrigerators – CFC.
Prahalad notes that future markets exist collectively. C. They represent an enormous opportunity for companies who learn how to serve them. K. across the world's billions of poor people having immense untapped buying power.BOTTOM OF THE PYRAMID With the market across most developed markets including the US getting saturated. In turn companies by serving these markets. 323 . they're helping millions of the world's poorest people to escape poverty. Strategic innovations leading to disruptive business models can show the way out.
BLUE OCEAN STRATEGY 324 .
MARKETSPACE .TWO WORLDS 325 .
battled over market-share. where most industries are saturated. They have fought for profits. and struggled for differentiation (cost or product). one companies gain is always at the 326 cost of another companies loss. Yet in today’s overcrowded industries. . profitable growth. competing head on results in nothing but a bloody red ocean of rivals fighting over a shrinking profit pool.WHAT IS RED OCEAN? Companies have long engaged in head-to-head competition in search of sustained. In today’s red oceans.
Blue Ocean’s have existed in the past. it will exist 327 in the future as well.WHAT IS BLUE OCEAN? Tomorrow’s leading companies will succeed not by battling in red oceans. rendering rivals obsolete and unleashing new demand. It helps in creating powerful leaps in value for both the firm and its buyers. It is only the frames of the . Such strategic moves are possible through the pursuit of product differentiation and low cost simultaneously. but by creating blue oceans of uncontested market space ripe for growth .
RED OCEAN Vs BLUE OCEAN Compete in existing markets Compete in uncontested markets Beat the competition Exploit existing demand Make the competition irrelevant Create and capture demand Make the value-cost trade off Break the value-cost trade off Demand is the limiting factor Supply is the limiting factor 328 .
.BLUE OCEAN STRATEGY IMPERATIVES Prospects in most established market spaces – red oceans – are shrinking steadily. Population shrinkage across a no. Technological advances have substantially 329 improved industrial productivity. Demand across developed markets reaching a plateau. Niche markets & monopoly havens are continuing to disappear. As trade barriers between nations & regions fall. information imperfections atrophy instantly. of European nations.
Incumbents often create blue oceans within the ambit of their core business. They are not necessarily about technology. Company & industry are the wrong units of 330 strategic analysis. the underlying technology was often already in existence. History indicates that blue oceans exist in three basic industries – automobiles (how people get to work) – computers (what people use at work) – entertainment (what people do after work).CONCEPTUAL UNDERPINNINGS Blue oceans have existed in the past and will exist in the future as well. managerial moves are. .
BLUE OCEAN .IMPLEMENTATION Reduce Which factors to be reduced below the industry standard Eliminate Which of the industry factors that the industry takes for granted should be eliminated Create VI Which factors should be created that the industry has not offered Raise Which of the factors should be raised above the industry’s standard 331 .
IMPLEMENTATION SEQUENCE Buyer Utility (1) Is there exceptional buyer utility in your business idea? Price (2) Is your price easily accessible to the mass of buyers? Blue Ocean Strategy Adoption (4) What are the adoption hurdles in actualizing your business idea? Are you addressing them up front? Cost (3) Can you attain your cost target to profit at your strategic price? 332 .
.SOME GLARING EXAMPLES In the last century authors Kim and Mauborgne have documented the creation of more than 150 blue ocean creations across 30 industries – Virgin Atlantic: Fractional jet ownership or travel to space. Citibank – Automated teller machines & credit 333 cards. Southwest Airlines: Pioneering the concept of LCC. 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. All they need to do is change their managerial frames. According to this view managers need not be constrained to act within the confines of their industry. greater than themselves.WHAT THEN IS THE HANDICAP? Most of the traditional views in strategy having its origin in (Economic Theory) led to what is called the – structuralist paradigm. companies & managers are largely at the mercy of economic forces. 334 . According to this view.