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Course Code: 611 & 612 Dr. Subir Sen – Faculty Member, IBS
E-Mail: firstname.lastname@example.org, 9830697368 1) Crafting & Executing Strategy – Thompson & Strickland. 2) Strategic Management – Pearce & Robinson. 3) Strategic Management – Fred. R. David. 4) Exploring Corporate Strategy – Johnson & Scholes. 5) Competitive Advantage – Michael E. Porter. 6) HBR – Articles & Case Studies.
STRATEGY - DEFINITION
Strategy is all about making trade-offs between what to do and more importantly what not to do; consciously choosing to differentiate. It reflects a congruence between external opportunities and internal capabilities. Types of strategies – Corporate Strategies – It is all about making choices across various businesses and allocating resources among them. Business Strategies – It is all about developing leveraging and sustaining competitive advantage. Functional Strategies – It is all about finding newer ways to perform existing processes, or 3 better still adopting new processes altogether.
STRATEGIC MANAGEMENT DEFINITION
Strategic management attempts to integrate the traditional management functions and align the organization as a whole with the broader environment to make resource allocations in a way to achieve the strategic intent of the organization. This alignment is called strategic fit. It serves as a road-map for the organization in its growth trajectory. It provides the direction – extent – pace – timing. It depends on the turbulence of the environment and the aggressiveness of the organization. It distinguishes the winners from the losers.
PILLARS OF STRATEGIC MANAGEMENT
Differentiation – Differentiation of key inputs and technologies helps a firm to consciously move away from homogeneous to heterogeneous markets enabling them to earn super-normal profits from normal profits. Integration – Whenever dealing with a complex task of managing a business (i.e. involving a no. of variables with cross linkages) it is in the interest of simplicity that the task be broken up in smaller components. However, for effective control, integration is essential. Alignment – Since differentiation is prone to replication, it is in the interest of the firm to differentiate continuously by aligning the resources with environmental opportunities.
STRATEGIC MANAGEMENT FRAMEWORK
Economic al Strategic Finance Fit Political Strategic Intent Fit Political Marketin g Manageme nt Social & Cultural
It is irreversible. It requires full commitment of the top management.FEATURES It forms the core activity of the top management. It is about adaptation and response to the same. It is long-term in nature. It provides broad guidelines. It is a holistic and integrated approach. It is all about creativity and innovation. It involves substantial resource outlay. 7 .STRATEGIC MANAGEMENT .
It is rocket science. It a bundle of techniques or even tricks. It brings instant success.STRATEGIC MANAGEMENT – MYTHS It involves short-cuts. It is about forecasting. It attempts to minimize risk. It about mere data and facts. It involves nitty-gritty's. It involves only the top management. It is about a definite formula. It is fool-proof in nature. 8 .
STRATEGIC MANAGEMENT IMPERATIVES To be continuously alert. . scale and scope. To assimilate change faster. To be future oriented. To generate large resource pool. To innovate. To tap markets across boundaries. To be proactive. again and again ……. To leverage size. To be insulated against environmental threats. To gain expertise in technologies. 9 To develop core–competencies. rather than reactive.
It is an old wine in a new bottle. In the ancient days battles were fought over land.strategies. 10 . but with a lot a rigour and robustness. today's battles are fought over markets.ORIGIN The word strategy has its origin from the Greek word strategia meaning Military Commander.STRATEGY . Even in today’s markets. In contrast. battles fought on the market front are won by companies by virtue of their obsession & strategies. In the ancient days battles were won not by virtue of size of the army or armory. but by virtue of their courage. obsession. and more importantly . whose origin can be traced to some of the greatest battles fought in the ancient days.
– Yahoo and Microsoft challenging Google. Napoleon’s attack on Russia – Strategy: Waiting for the right time. – Toyota’s entry in the US. US attack of Morocco to capture Germany – Strategy: Pin-hole strategy – Wal-Mart challenging Sears by entering small towns.SOME PARALLELS Japan’s attack on Pearl Harbour – Strategy: Attack where it hurts the most. Allied Forces Vs Germany (WW-II) – Strategy: Forging alliances. challenging GM and Ford. 11 . – Reliance’s entry into telecom.
a radical change in the business environment brings about discontinuity.Industrial Revolution. 1910).EVOLUTION OF MANAGEMENT As Peter Drucker refers to it. – Mass Production Organization Size – Complicated Processes – Complex Structures Evolving of an emerging paradigm – survival of the fittest (Fayol & Taylor. The first major discontinuity in the history of global business environment was the . A paradigm is a dominant belief about how the business and its environment operates. 12 . The things happening around the firm when totally disconnected from the past leads to a paradigm shift.
– Homogeneous to heterogeneous products.EVOLUTION OF STRATEGIC MANAGEMENT The second major discontinuity in the history of global economic environment – World War II.e. performance across firms became differentiated. – Global market place. – Affluence of the new customer (i. From uniform performance. Survival of the most adaptable becomes a new management paradigm (Ansoff. The question of outperforming the benchmark became the new buzzword. 1960). 13 . – Changes in the technology fore-front. Efficiency and effectiveness are no longer sufficient. push to pull).
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. 15 .APPROACHES TO STRATEGY Analytical Approach – Igor H. – The choice of product-market mix is based on conscious evaluation of risk – return factors. – It is primarily the top management’s prerogative. – Biases and prejudices has a very little role to play in strategic choices pursued by managers. Learning always begin on a clean sheet of paper. – The choice of strategy is primarily concerned with external ones rather than internal ones.
APPROACHES TO STRATEGY Design Approach – Alfred Chandler (1970) – Structure follows strategy. who will be the top managers. Once the control systems are in place. 16 . The organization initially decides which industry to enter. how it will compete. – Organization structure will precede and cause changes in strategy. everything else follows. – The top managers then decide on the type of organization structure & systems to be in place. 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.
APPROACHES TO STRATEGY Positioning Approach – Michael E. new entrant. customer. Porter (1980) – Choose a consumer segment and position your product accordingly. substitutes. – The organization will outperform the industry where environmental forces are weak and vice-versa. – The environmental forces comprises of – supplier. competitors. 17 . – An organization is seldom in a position to influence the larger business environment. – A firms performance is inversely related with the bargaining power of environmental forces to which it is exposed.
Prahalad (1990) – The key to superior performance is not doing the same as other organizations. 18 . – Core competencies are a set of skills that are unique and can be leveraged.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. but exploiting the resource differences among them. They are complex resources and undermines a firms competitive advantage. – Organizations can significantly alter the way an industry functions. K.
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 .
21 . A substantial gap between its resources and aspirations. It implies a significant stretch.STRATEGIC INTENT If you cannot see the future. A gap that consciously manages between stagnation and atrophy. you cannot reach there. It provides a sense of direction and destiny. It involves an obsession to be the best or outperform the best. A strategic intent is a statement of purpose of existence. It’s a philosophy that distinguishes it from its competitors. It is the cornerstone of an organizations strategic architecture reflecting its desired future state or its aspirations.
HIERARCHY Integrativ e m Do an in Visio n Mission Dominant Objective s Goal s Plans Lo g ic Single Specifi c Man y 22 t .STRATEGIC INTENT .
DOMINANT LOGIC A dominant logic can be defined as the way in which the top management team conceptualizes its various businesses and make critical resource allocation decisions. strategic variety) is apparent. when radical changes in the internal and external environment (i. It is core to the strategic intent of the firm. it can be perceived as a set of working rules (similar to thumb rules) that enables the top management to decide what can be done and more importantly what cannot be done. Dominant logic changes.e. 23 . To put it more simply.
but achievable aspirations. It provides an unity of purpose amidst diversity of personal goals. It ensures that the company does not wander off into unrelated zones or fall into an activity trap.VISION It is a dream (not a forecast) about what the company wants to become in the foreseeable future. – It represents the company’s audacious. It is a combination of three basic elements – – An organizations fundamental reason for existence. – It stands for the unchanging core values of the company. 24 . It enables the top management to remain focused. beyond just making money.
Reachable – It should be within a reasonable target in the known future. not an utopian dream. Brevity – It should be short. Empathy – It should reflect the company’s beliefs to which it is sensitive. and memorizable. In Reliance when a new project becomes operational top managers hand over charge to the SBU heads and move on to a new project.VISION . 25 . clear.CHARACTERISTICS Reliance – Where growth is a way of life. Clarity – Vividly descriptive image of what the company wants to be known for in the future. Sharing – The company across all hierarchies should have faith in it.
26 . It lends integrity and genuineness. It gives enlightment. It makes strategic alignment easier.ADVANTAGES To stay focused on the right track. It gives the impression of a forward-looking organisation. It provides a holistic picture.VISION . It gives a shared platform. To prevent the fall in a activity trap. It fosters risk taking and experimentation. It facilitates development of skills & capabilities.
A broad mission statement helps in fending competitors. Although the purpose may change over time. 27 . 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 enables the firm to define its business landscape and identify its competitive forces. It serves as a road map to reach the vision.MISSION Mission defines the space that a business wants to create for itself in a competitive terrain. its reason for existence.
Some other examples – We do not offer shoes. 28 . …………………. …………………. – We do not offer insurance. – We do not offer steel. All the businesses of the company are strongly integrated with their main business. We offer solutions. – We do not offer software's. …………………. We offer comfort.MISSION – SOME IDEAS Reliance – We are in the business of integration. We offer strength. We offer security. …………………. though some may seem unrelated in nature.
100K crore company by the year 2005. – It lends direction – time frame in the medium term. – It keeps the mid management pre-occupied. – It helps identifying key success factors. – It is based on Management by Objectives (MBO). 29 . – It adds legitimacy and motivation. It is an end result (quantifiable) something a firm aims and tries to reach in a time bound frame. – It prevents deviation. – It provides a benchmark for evaluation. It provides a quantitative feel to an abstract proposition.GOALS & OBJECTIVES Reliance – We want to become a Rs.
– Use price-elasticity to break market barriers.PLANS Reliance – Desire to invest 25K crore in telecom business by circa 2010. It is the process of garnering necessary inputs. The details of the plan Reliance Telecom adopted were – Backward integrate process technologies. – Leverage economies of size and scale. – Acquire a market share of indomitable position. coordinating appropriate technologies. and gaining access to desired markets to achieve the desired goals and objectives. 30 . – Compress project times. It is specific to a particular business.
STRATEGIC DRIFT Due to top management commitment. In such a context. It often leads to an organizational crisis. strategies lose touch with the emerging realities. past strategies tend to have a bearing on future strategies. When changes in the environment is incremental. Historical studies have shown that most organizations tend to continue with their existing strategies. This tendency to restore continuity is known as inertia (resistance to change). This state of affairs is known as strategic drift. However. radical change may lead to disequilibrium. 31 . equilibrium is maintained.
STRATEGIC DRIFT FRAMEWORK Environmental Change Degree of change Strategic Change Radical Change Incremental Change State of Flux Continuity Stage of Transformation Strategic Drift Stage of Atrophy Time 32 .
ORGANIZATIONAL POLITICS Strategic drift often leads to organizational politics. Some instances of organizational politics – Formation of powerful groups or coteries. – Hiding vulnerability. – Distorting information to gain mileage. 33 . Organizational politics involves intentional acts of influence to enhance or protect the self-interest of individuals or groups over organizational goals. – Creating obligations of reciprocity. – Creating a favourable image. – Using covert tactics to pursue self interests. – Developing a platform of support.
– Influential stake-holders back out.INTENDED & REALISED STRATEGIES An intended strategy is an expression of interest of a desired strategic direction. – The environment context has changed. A realized strategy is what the top management actually translates into practice. – Persons responsible for strategy conceptualization and implementation are34 divergent. . Other causes – – The plans are unworkable and utopian. Usually there is wide gap between the two when organizational politics is evident.
Strategy formulation and implementation are linked together in a continuous improvement cycle. this is not to be treated as “muddling”. However. but the master scheme of the rational comprehensive scheme is not apparent. They simply unfold the particulars of the sub-system in stages. Learning is an integral part of logical incrementalism. 35 . but as a defensible response to the complexities of a large organization that mitigate against publicizing goals.LOGICAL INCREMENTALISM According to the incrementalism approach (contrary to integrated approach) practitioners simply do not arrive at goals and announce them in crafted and well defined packages.
Leveraging Crisis – A sudden crisis or an opportunity should be used as a trigger to facilitate acceptance and implementation of change. 36 . Agent of Change – Formal ratification of a change plan through MBO.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. The broader objective should serve the overall interest of the organization.
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. Tampering with surface level factors often leads to atrophy. Strategic transformation becomes smooth through a change in top leadership. . It creates blinders. Dominant logic’s are the cornerstones of change when strategic transformation is apparent. As it brings 37 with it a different dominant logic.
Factors that fosters a learning organization – Pluralistic – An environment where different and even conflicting ideas are welcome. It helps prevent a strategic drift from occurring at the first place. – Experimentation – Fosters a culture of risk taking. 38 . – Organisational Slack – Enough free space. experience. A learning organization must continuously focus on unlearning as well. – Constructive Bargaining – Agree to disagree. and skills that fosters experimentation and questioning and challenge around a shared purpose.LEARNING ORGANIZATION A learning organization is capable of continual regeneration from knowledge. – Informal Networks – Emerging of new ideas.
ENVIRONMENTAL CONDITIONS Dynamic Scenario Planning Learning Organization Static Forecasting Decentralization Simple Complex 39 .
ANALYZING BUSINESS ENVIRONMENT 40 .
It is pro-active in nature.e. It is based on the assumption of radical change. gap analysis).PLANNING & STRATEGIC PLANNING Formal planning is a function of extrapolating the past. It is based on the assumption of incremental change. It is reactive in nature. 41 . It requires a quantum leap (i. Strategic planning is a function of discounting the future. It points to a position of superiority with relation to competition. Competitive advantage provides the surest way to fulfill the strategic gap. Strategic gap basically points towards a vacuum of where the organisation wants to be and where it is.
events. A manager has to continuously scan the environment to ensure alignment of the strategies with the radically changing environment. Environmental factors can be external as well as internal to the organization. 42 .ENVIRONMENTAL SCANNING The environment is defined as the aggregate of conditions. not guided by any boundaries. Environmental scanning is very important component of strategic planning. and influences that affect an organizations way of doing things. The segments of the environment a top manager scans selectively depends upon his dominant logics. It is exploratory in nature. resources and ideas move unhindered. The world is flat.
for which a holistic picture is required. but also to analyze the complex linkages across them.PESTEL PESTEL attempts to provide a broad framework on how the broader environmental forces affects an organization and influences the way it practices strategy. It is important not only to identify the structural drivers of change. 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. 43 . which may be different from the past impact.
Infra-Structural Investments. Central – State Co-alignment. Religious Sentiments. Economic Model.PESTEL FRAMEWORK Political – Government Stability. Licensing & Quotas. Government Attitude. Social – Population Diversity. Subsidies & Protection. Monsoon & Food Grains Reserves. Inflation & Interest Rates. Economic – GDP. Capital Market & Forex Reserves. FDI Inflows. Economic Cycles. 44 . Language Barriers. Currency Stability. Social Values. Savings & Investment. Literacy Levels. Fiscal Deficit. Income & Age Distribution.
Legal – Monopolies Legislation. Consumer Protection Laws. Environmentally Preferable Purchasing. Direct & Indirect Taxes. Extended Producer Responsibility. Non-Fossil & Alternative Fuels. Technological Convergence. Product Design. Obsolescence Rate. Product Safety & Health Hazards. Research & Development. Carbon Credits. Environmental – Global Warming & CSR. Patents. ERP. Employment Laws.PESTEL FRAMEWORK Technological – Innovation. 45 . Pollution Control Laws. Patent Laws. Waste Disposal & Emissions.
Rupee convertibility. Economic Reforms – Fiscal & Monetary Reforms.VRS. FERA Liberalization. New Trade Policy (NTP) – Lowering import tariffs.ECONOMIC LIBERALISATION New Industrial Policy (NIP) – Liberalizing industrial licensing. Banking Sector Reforms. Exit Policy. MRTP Liberalization. Abolition of import licenses. Curtailment of PSU’s. Structural Adjustments – Phasing out subsidies. Capital Market Reforms. Dismantling price controls. Encouraging exports. Encouraging FDI. 46 . PSU Disinvestments.
DISCONTINUITY Destabilization due to entrepreneurial freedom – Cocoon of protection disappears – Diversification spree – Existing notions of size shaken – Industry structures change radically – Economic Darwinism . Mergers & Acquisitions 47 .Survival of the fittest MNC Onslaught – Enhancing stakes – Power Equation – Joint Ventures – Technological Alliances – Take-over threat.
Consumerism Challenges on the technology front – Competencies become technology based – Investment in R&D become inescapable 48 .DISCONTINUITY Hyper Competition – MNC’s .Globalization – Cheap Imports & Dumping – Push to Pull Marketing Buyers exacting demands – Shortage to surplus – Price competition – Life-style changes – Stress on quality.
DISCONTINUITY Compulsion to find export markets – Identifying competitive advantage – Technological gap – Global presence – Depreciating currency – Exports Corporate vulnerability – It is no longer business as usual – Capital inadequacy – Lack of product clout and brand power – One product syndrome – Loss of monopoly 49 .
FIVE FORCES MODEL .PORTER Threat of New Entrants Bargainin g power of Suppliers Competition from Existing Players Bargainin gBargainin power g of power of Suppliers Customer s Threat of Substitutes 50 .
The model should not be used as a snapshot in time. 51 . but also used to understand how they can be countered and overcome. profit potential) per se. It should not only be used to understand the forces. It is even wiser to apply the same at the product – market level.e. It depicts the attractiveness of an industry (i.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. the forces are subject to changes. incremental or otherwise.
Capital requirements.PORTERS FIVE FORCES ANALYSIS Threat to Entry – Economies of size and scale. High switching costs. Unimportance of product quality. Undifferentiated product. Scope for backward integration. Learning curve advantages. Presence of substitutes or unorganized sector. Government policy. Low margins & stagnancy. Industry stagnation. Low customer switching costs. Threat of Customers – Buyer concentration and volumes. 52 . Resource profile & fear of retaliation. Product differentiation through proprietary technology or brand power. Low relative importance of the segment. Access to distribution channels.
Low level of differentiation. Produced by industries earning high profits. High exit barriers. Buyer’s propensity to substitute. High customer switching costs. Product perishability. 53 . Intermittent overcapacity. Industry stagnancy. Scope for forward integration. Low relative importance of the segment. Lack of substitute inputs.PORTERS FIVE FORCES ANALYSIS Threat of Suppliers – Supplier monopoly. Differentiated inputs. Diversity of players. Jockeying for position – Fragmented market. Unorganised sector. Piracy and counterfeits. Threat of Substitutes – Improvement in price -performance trade-off.
Reliance). Business Scope – The intention whether the firm wants to be in a single. Cohesiveness – Degree of bonding existing across affiliated firms. Tata). Inertia – Excessive commitment to past strategies prevents firms from tapping emerging opportunities. 54 . Resource Profile – It highlights the capabilities (generic) or competencies (business specific) of the firm.FIRM ENVIRONMENT Size and Scale of Operations – It is a very important component of competitiveness in today's global context (Bharti – MTN. dominant or related diversified or unrelated diversified businesses (Infosys.
55 . leverage it as a competitive advantage. The E-Curve thus enables organisations to build entry barriers. However. Matured firms will always be positioned advantageously on the ECurve than new entrants. which further reduces costs. an E-Curve can prove to be futile during discontinuity. experience teaches better and more effective way of doing things. With lower costs.EXPERIENCE CURVE The cost of performing an activity declines on per-unit basis as a firm becomes more efficient. it can price its products more competitively. and with lower prices it can increase its sales volume. Experience curve has strong linkages with performance.
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 .
Acronym for Strengths – Weaknesses – Opportunities – Threats. . Observation. Business Intelligence – Bankers. Competitors. Case Studies – Structured Questionnaires. Press Clippings & Interviews. Websites. 59 Analysts. Customers. It helps an organisation to capitalize on the opportunities by maximizing its strengths and neutralizing the threats minimizing the weaknesses.SWOT The framework was originally conceptualized by Kenneth Andrews in 1970. Interviews. A SWOT audit involves – Company Records – Annual Reports. Suppliers. It is one of the earliest models in environmental scanning.VULNERABILITY ANALYSIS .
FRAMEWORK Opportunities Nullify weaknesses which prevents you from exploiting opportunities Leverage strengths to make use of opportunities Weaknesses Minimize weaknesses which prevents you from countering threats Strengths Threats Utilise strengths to counter threats (?) 60 .SWOT ANALYSIS .
ITC. Tata Steel. HUL. Strong R&D base – Eg. Tata. Reliance. Caterpillar. Reddy’s. Volkswagen. Infosys. Sony. Aditya Birla. Honda. 61 . High quality products – Eg. Ranbaxy. Dr. Excellent penetration – Eg. Toyota. Siemens. Economies of scale – Eg. Strong after sales & service network – Eg. Good credit rating – Eg. Reliance. Biocon. Large resource pool – Eg.SOURCES OF STRENGTH Strong brand identity – Eg. Motivated employees & cordial industrial relations – Eg. Infosys. Engineering Skills – Eg. SBI.
Inefficient top management – Eg. Organizational Politics – Eg. Bijoligrill. Modi Group. Ballarpur Inds. Narrow business scope – Eg. SAIL. K. Procter & Gamble. Single product syndrome – Eg. J. K. Nirma. CESC. Lack of product / brand clout – Eg. Group .Raymond. Hindustan Motors. Inertia – Eg. B. CMC (Tata Group) 62 .SOURCES OF WEAKNESSES Outdated technology – Eg. Tatas. Excessive diversification – Eg. Strategic myopia – Eg. Excess manpower – Eg. Lacking experimentation culture – Eg.
Sugar. Exit Policy – Eg. Retailing. Capital market reforms – Eg. Market driven Pricing – Eg. VRS. Telecom. Sugar. Fertilizer. Market driven Interest rates – Eg. Middle-class buying power.Tata Motors. ECB’s. GDR’s. Abolishing CCI. Abolishing MRTP – Eg. Globalization – Eg. Collaborations & Joint Ventures – Bharti & WalMart. Fertilizers. Growing population – Eg. Maruti. Life style changes – Eg. 63 .SOURCES OF OPPORTUNITIES Delicensing of Industries – Eg. Insurance. Free pricing – Eg. Banking.
Import relaxation – Eg. Satyam. (1985–1990). Onida. 64 .Social activism – Eg. Hostile take-over – Eg. Dumping from China.SOURCES OF THREATS Political instability – Eg. Nationalisation – Eg. Singur SEZ. Bajoria – Bombay Dyeing. Economic recession – Eg. Foreign Direct Investment (FDI) – Eg. Terrorist attacks – Eg. Reliance. Land acquisition . Lack of Corporate Governance – Eg. Tata Steel. Earth Quake. Tsunami. 26/11. (2008). Group disintegration – Eg. 11/9. Natural disaster – Eg.
Delphi's technique.e. Forecasting – Predict the future (i. time series.ETOP Acronym for Environment – Threat – Opportunity – Profile. Holistic view – Prepare a complete overall picture. scenario analysis). It represents a summary picture of the external environmental factors and their likely impact on the organization. Strategic responses (including adaptation) to opportunities and threats is critical for survival and success. Stages in ETOP analysis – List the aspects of the environment that has a bearing on the organization. 65 . Assess the extent of impact of the factors.
. Relative attractiveness of the market. 66 Vertical integration is a powerful strategy. High investment intensity acts as a drag.PROFIT IMPACT OF MARKET STRATEGY PIMS is a database model developed by GE and later extended by HBS to examine the impact of a wide range of strategy variables on business performance. selectively. Some key findings on major performance drivers that explains 75% deviations in performance – Product quality and relative market share. An organization can draw upon the experience of its peers in similar situations. It is also a form of assessing vulnerability through longitudinal analysis.
LIMITATIONS The analysis is based on historical data and it does not take care of future challenges. As every organization is unique in its own way. . Authenticity of data is of prime importance – Contexts drawn across one organization may not be applicable to another. – Contexts may vary over time. therefore 67 validity may be a question.PIMS . when radical changes in the economy takes place. – Contexts may vary across countries. Managers should be particularly cautious while referring to such data during times of discontinuity as it makes past patterns futile.
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 .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.
IDENTIFYING ALTERNATIVE STRATEGIES 69 .
A corporate strategy identifies and fixes the strategic gap it proposes to fill. related.CORPORATE . It reflects the customer needs it intends to satisfy. 70 . It determines the locus a firm encounters with internal and external environment. dominant. It indicates the quality of growth an organization is looking for. global) of a firm and deals with choices of allocating resources across them. national. It provides broad direction to the groups vision and mission. unrelated) and geographical scope (local.GRAND STRATEGY It is concerned with the overall business scope (single.
CORPORATE STRATEGY MATRIX Corporate Strategy Stability Stability Growth Growth Combination Diversification Divestment Intensification Market Penetration Related Vertical Market Development Product Development Unrelated Horizontal 71 .
(Eg. – The firm may not be willing to take additional risk associated with new projects. The reasons for stability strategy – – Lack of attractive opportunities. Citibank). – Why disturb the existing equilibrium set up? – Limited resource position. Hindustan Motors).STABILITY It involves maintaining status-quo or growing in a slow and selective manner. 72 . – To stop for a while and assess past records. Even during adverse times firms need to adopt a strategy to sustain current performance levels. does not relate to do-nothing (Eg. Stability however. erosion of capabilities. The scale and scope of present operations remains almost intact.
73 .GROWTH .ANSOFF’S MODEL New Product Existing Product Existing Market Market Penetration (+) Product Development (++) New Market Market Development (++) Diversificatio n (+++) Note: (+) indicates degree of growth and risk involved.
Market penetration can be achieved by – increasing sales to current 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. – Elongated product life-cycle. Britannia). (Eg. – The company carries a risk of product obsolescence. convert competitors customers. Ujjala. 74 . Nirma. within a well defined market segment. – Suitable for industries where scope for technological breakthrough is limited. – Helps firms which are not comfortable with unfamiliar terrain.
upholstery.MARKET DEVELOPMENT It is a strategy where a firm tries to achieve growth by finding new uses of existing products or its close variants and tap a new potential customer base altogether. (Eg. tyres.…… or Teflon: aircraft technologies to cutlery to paints or Raytheon Corp – Microwaves: radars to kitchen appliances). 75 . – Moves across geographical boundaries. fabrics. socks & stockings. – Immense customer reach & flexible advertising. – Unconventional and flexible distribution channels. Du Pont – Nylon: parachutes. – Stretches product life cycles. – Creativity and innovation – thinking out of the box. carpets.
– Deliverable through – redesigning or reengineering. – Areas of product improvement – performance. – 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.Strolleys). Close Up: Fluoride – Gel toothpaste or VIP . aesthetics. Microsoft: DOS to Windows) or a substantial improved version (incremental) of an existing product to repeatedly enter the same market (Eg. Refills) 76 . – Leveraging through – innovation. conformance. serviceability. features. – Leverage on customer and brand loyalty. reliability. perception. durability.
From the traditional point of view. From the modern point of view they are strategically dissimilar. – Risk reduction.DIVERSIFICATION It marks the entry of a firm into newer markets with new products.e. licenses (i. 77 . Why do firms diversify in the Indian context? – Shift the growth trajectory or opportunistic. the new business is distinct from the existing business in terms of – inputs – technologies – markets. dominance). – Permits: quotas. – High transaction costs and institutional gaps.e. thereby creating a new business. – Internal capital market. – Conglomerate or market power (i. industrial embassies).
ice-cream business would register a return of 10%. while the coffee business would register a return of 10%.HOW DIVERSIFICATION REDUCES RISK? Consider a hypothetical planet. either of which is equally likely to prevail. Let us assume that there are two businesses constituting the entire market – coffee and icecream. the ice-cream business would register a return of 30%. cold wave dominates the planet. in which a given year is either under hot or cold wave. What would be your ideal diversification strategy through optimization? 78 . while the coffee business would register a return of 30%. If the hot wave dominates the planet. If on the other hand.
If we diversified in either of the two businesses, our expected return will be 20%, with a possible risk of 10%. If, we split our investment between the two businesses in equal proportion, half of our investment will earn a return of 30%, while the other half would earn 10%, so our expected return would still be 20%. But in the second instance there is no possibility of deviation of returns (i.e. risk). Diversification results in 20% expected return with zero risk, whereas investing in individual businesses was yielding an expected return of 20% with a risk factor of 10%. The pivotal point is that the two businesses are negatively correlated. 79
It takes place when a company increases the breadth of a firms business or geographical scope by getting into product – market segments which compliments its existing businesses (Eg. Reliance). Alternatively, existing business may recreate new businesses, which are distinct, but supplements its existing business (Eg. Bajaj – scooters to motorcycles, Dove – soaps to shampoo). – It results in increased market power. – Leveraging existing capabilities. – Resources can be shared for mutual benefit. – Reduces economic risk (i.e. business cycles). – Enables brand or product line extension.
It increases the depth of its business scope either in a backward business process or in a forward one. Backward integration occurs when the company starts manufacturing its inputs or catalysts. In forward integration a firm moves into marketing of its products and services. Advantages of backward integration – – Cost competitiveness – entry barrier. – Better operational control – timely supplies, quality control, coordination – JIT, savings in indirect taxes. Disadvantages of backward integration – – It may spark of a chain reaction - contagion effect. – Long gestation & break even - investment in CAPEX.
Oil & Gas exploration Naptha-cracking Acetic Acid Paraxylene (PX)
Purified tetra-pthalic acid
Polyester Filament Polyester Staple Fibre (PSF) Yarn (PFY) Textiles 83
DIVERSIFICATION SUCCESS ?
While diversifying into new businesses, the scope of relatedness or unrelatedness should not be judged from the traditional static view, but from the modern dynamic view which incorporates strategic factors like capabilities and dominant logic. Countermanding reasons – Potential to reap economies of scope across SBU’s that can share the same strategic asset. Potential to use an existing capability to help improve the quality of a strategic asset in another business. Potential to use an existing capability to create a new strategic asset in another business. Potential to expand the existing pool of capabilities. Dominant logic ensures timely & appropriate response.
A firm gets most of its requirements from one or more outside suppliers that is under its partial control through value chain partnerships (Eg. and out-sources the noncore activities (Eg. Maruti – Sona Steering).A firm produces part of its own requirements and buys the rest from outside suppliers with a variable degree of ownership and control. 85 . Reliance). Usually the firm concentrates on its core activities. Reddy’s).Where one firm has full ownership and control over all the stages of a value-chain in the manufacturing of a product (Eg. Ranbaxy. Tapered integration . Dr. Quasi-integration .QUASI & TAPERED INTEGRATION Full Integration .
A CASE OF TAPERED INTEGRATION Partial Ownershi p Transmission Engine Design Electricals Steering 86 Seats & Carpets Windscreen Ordinary Components Zero Ownership Very Critical Component s Full Ownership Critical Component s .
e. – Cost of neglect (i.e. – Cost of dysynergy (i. myopia).e. lack of strategic intent. – Cost of ignorance (i. and are also strategically dissimilar. Firms usually engage in conglomerate diversification when emerging opportunities are very attractive and offers potential growth opportunities. core business). Drawbacks of unrelated diversification – – Cost of failure (i. lack of knowledge of competitive forces).CONGLOMERATE DIVERSIFICATION It relates to entry of firms into businesses which are distinct in terms of – inputs – technologies – markets. 87 .e. synergies pulling in opposite directions).
CONGLOMERATE DIVERSIFICATION Paper & Packaging Edible Oils Tobacco Hotels Food & Confectionary 88 .
It is may also be a pro-active strategy.DIVESTMENT Divestment is a defensive strategy involving the sale of entire stake (Eg. ACC) in full to an independent entity. L&TCement Division to Aditya Birla Group) technically known as divestiture or a product (Eg. Tatas sale of Goodlass Nerolac. (Eg. In strategy there is no scope for sentimentality with divestment. It may also involve a SBU (Eg. 89 .e. It taken into account when performance is disappointing (i. Tata Pharma. 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. Glaxo’s “Glucon-D” to Heinz). Tata Press).
Tatas buy-out of Corus for US $ 11. 90 . where 100% of the assets (including intangibles) are valued and paid for. where the equity is allotted amongst the existing shareholders on a pro-rata basis. However. (Eg.3 billion. Leveraged Buy-Out (LBO) – Here the company’s shareholders are bought out through a negotiated deal using borrowed funds. (Eg. Hive-Off – A hive off is the creation of a new entity followed by transfer of assets. 1956 does not permit this mode.DIVESTMENT . involving 608 pence per share).ROUTES Outright Sale – Popularly known as the asset route. Sale of Diamond Beverages to Coca-Cola for US $ 40 million). the Companies Act.
A combination strategy can be implemented through green-field projects (i. growth.COMBINATION STRATEGY It is a mixture of stability. mergers and acquisition. It is usually pursued by a business group with diverse interests across multiple industries.e. 91 . because every business has its own unique external and internal environment. joint ventures).e. There can be no ideal strategy for every business. developing facilities right from the scratch) or through brown-field projects (i. and divestment strategies applied simultaneously or sequentially for a portfolio of businesses.
STRATEGY CHOICE & PORTFOLIO ANALYSIS 92 .
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. It attempts to answer the following questions – How effective has the existing strategy been? How effective will that strategy be in the future? What will be the effectiveness of alternative strategies? It is impossible for a manager to assess all the alternatives.STRATEGIC CHOICE A strategic choice seeks to determine the alternative courses of action available before top managers to achieve its strategic intent. What then is the magical number? 93 .
They must choose problems which will lead to the right kind of opportunities. managers need to ask the right questions. To identify the right problems. if addressed. will help the firm achieve its intent.SELECTIVITY IS THE KEY The role of a top manager is not to solve a problem. For an optimal choice the following four issues need to be resolved – Is the strategy clearly identifiable? Is it consistent with the resources of the firm? Will it be able to exploit the opportunities in full? Is it in tune with the values and beliefs of the firm? 94 . The key task before a top manager is to identify the right problems. nor is to a define a problem for others to solve.
Proximity to the corridors of power (i.BUSINESS GROUP . formal and informal ties. Resource sharing. High degree of centralized control (GEO. BRC). Managing Agency). 95 Succession planning is critical to continuity. .e.DEFINITION A business group is known by various names in various countries – guanxique in China. business houses in India. chaebols in Korea. keiretsus in Japan. Their roots can be traced to a single family or clan and share broad similarities. embassies). Licenses & Quotas. Their origins can be traced back to market imperfections existing in an economy (MRTP Laws.
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 .
Rules of the game are different. sometimes impossible. Power and resources often goes hand in hand. therefore. 99 . Redeployment of resources upsets the established power bases of a group. there are high costs associated with entry and exit. next only to choice of business. Why? Businesses are not about liquid assets.PORTFOLIO ANALYSIS Resource allocation across a portfolio of businesses is an important strategic choice. Investing in emerging businesses may not actually be so simple as it appears to be. Relatedness across resources are difficult to realize.
BCG GROWTH MODEL Relative Market Share (%) Industry Growth (%) Low High High Low Stars Question Mark ? Cash Cow Dogs 100 .
Tata Telecom. 101 . market development. Stars – They achievers in the near term. provided the industry growth rate continues and the company is able to maintain its growth (i. provided the company is able to build up on its market-share (i. but to larger extent than a question mark. Tata-AIG). and their risk profile is high (Eg. diversification).BUSINESS ANALYSIS – TATA GROUP Question Marks – They have potentials in the long term. These businesses are also net users of resources (Eg. TCS. Tata Steel).e. which remains a big? These businesses are net users of resources. market penetration. product development). Trent.e.
they are generators of resources. and they lack on competencies to take on competition and are basically cash traps (Eg.e. Groups prefer to dispose off such businesses (i. Indian Hotels. Tata Chemicals). stability). Nelco. and the company dominates the industry ahead of competition (i. Tata Motors. cash cows may also need to invest provided the industry takes an upswing (Eg. Tata Tea. Tata Press). Tata Pharma.BUSINESS ANALYSIS – TATA GROUP Cash Cow – These are matured businesses. 102 . However. Given that the growth potential in the business is low.e. Dogs – They are a drag on the group. harvest. divest) as achieving a dominant position in these businesses is a difficult task.
Cash cows may actually need substantial investments to retain their market position (Eg.LIMITATIONS It does not address the concerns of a business which is in the average category (usually the majority).e. The model does not provide specific solutions within a particular category. niche – Rolex. Mercedes Benz. neither in high or low. The terminologies used are somewhat prohibitive. HUL). Certain businesses in the low market share category may be the result of a conscious strategy (i. 103 .BCG . Armani). Cartier. factors are limited. Data may be prohibitive.
GE .MATRIX Distinctive Capabilities Strong High Medium Weak Stability Industry Attractiveness Diversify (++) Intensify (+) Med Intensify(+) Stability Harvest (-) Low Stability Harvest (-) Divest (.-) 104 .
ARTHUR’ D. LITTLE Inception Dominant Strong Favourable Tenable Weak Growth Maturity Decline Improve Selective Niche Abandon Industry Life-Cycle Divest Harvest 105 Competitive Position Invest Consolidate Hold .
SHELL – DIRECTIONAL POLICY MATRIX Business Sector Prospects Attractive Average Unattractive Generate Cash Phased Withdrawal Distinctive Capabilities Strong Market Leadership Try Harder Double Or Quit Growth Average Custodial Weak Phased Expand Withdrawal Divest 106 .
TERMINOLOGIES Harvest – It entails minimizing investments while trying to maximize short-run profits and cash flow with the intention to exit the business in the near future. Portfolio – An organization is perceived as a portfolio of businesses. BCG – Boston Consulting Group. 107 . Gap Analysis – It emphasizes what a firm wants to achieve. SBU – A business unit which is strategically different from another and also shares a different SIC code. Disinvestment involves selling in phases. Divest – Selling a part or the entire business at one go.
BUSINESS STRATEGY & COMPETITION 108 .
COMPETITIVE STRATEGY A competitive strategy deals with how a firm competes in a particular business or product-market segment. The principal focus is on meeting competition. and earning super-normal profits (i. Competitive advantage refers to a firms resources or activities in which it is way ahead of competition.e. building market-share. Such resources or activities should be distinctive and sustainable over time. rent). Competitive advantage is the back-bone of strategy. The strength of a firm in a particular business usually stems from its competitive advantage. 109 .
Delta Lock In – Two dominant players co-opt to selfreinforce and create or escalate an entry barrier. Blue Ocean – Consciously moving away from overcrowded industries to uncharted territories and making competition irrelevant (Kim & Mauborgne). preventing new entry and/or competition (Hax & Wilde).BUSINESS STRATEGY FRAMEWORKS How to be distinctive and yet sustainable – Differentiation – Understanding of the dynamics of competition. developing competitive advantage (Porter). Resource Based View – Obsession with competence building. leveraging (Prahalad). involving harmonizing and integrating multiple streams of technologies. identifying critical success factors. 110 .
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. preferential access to raw materials. Steep experience curve effects. 111 . backward integration. Nirma. Reliance) or may pass it to customers to increase market-share (Eg. The firm may retain the benefits of cost advantage by enjoying higher margins (Eg. T-Series). Ayur. Locational or early entry advantage. Compress project duration through crashing. proprietary technology. Sources of cost advantage are varied and depends on the structure of the industry – Economies of size.
(Eg. Means of product differentiation are peculiar to each industry. innovation and out of the box thinking. Successful product differentiation is often followed by premium pricing. and sufficient slack. 112 . avoiding brand dilution. Rayban). Feeling the pulse of the customer. Intel. Sony. Focus on brand loyalty.PORTERS – PRODUCT DIFFERENTIATION Product Differentiation – It is a strategy that attempts to provide products or services that are differentiated from competitive products in terms of its value proposition and uniqueness. undeterred attention to quality. It selects one or more attributes that buyers perceive as important. Creativity. Culture of experimentation.
Rolex. Mont-Blanc. They are poorly served by mainstream players. 113 . though it may not possess an overall competitive advantage. A focuser seeks to achieve a competitive advantage in its target segment. Cartier. The target segment must have unusual needs or the delivery system catering to this segment must be unique. Armani). coupled with fear of structural erosion. Maybach. 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.
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 .
and usually outperforms a stand alone generic strategy. 115 . jugaad or frugal engineering). Reducing cost does not always involve a sacrifice in differentiation. 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. Tata Nano).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.e. similarly differentiation may not always lead to rising costs (i.
unless such a player is capable of discovering a profitable segment. It will have a competitive disadvantage vis-à-vis a clearly positioned generic player. It tries to compete through every means.stuck in the middle. It is usually the result of a firm not willing to make trade offs. Industry maturity will usually widen the gap. but achieves none. leading to what is called – straddling.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 . The positioning therefore gets – blurred. 116 .
117 .radical environmental changes. Nano technology. technological innovations. Eg. First-time buyers. (Eg. Consumer behaviour pattern unstable and evolving. There is a lot of scope to define the rules of competition. Market segmentation not well defined. coupled with low penetration levels. 3D imaging.) Excessive turbulence in the dynamics of the environment. Artificial intelligence). leading to a blurred productivity frontier and steep learning curve. changing customer needs. It is characterized by – High level of technological uncertainty. Speech recognition software's.EMERGING INDUSTRY Emerging Industry – An evolving industry characterized by . ending in a differential cost economics.
leading to clear fragmentation. Air Conditioning. Eg. Retail and telecom. Scope for players to change the rules of the game. Consumer durables. IT. Diverse customer needs.GROWTH / FRAGMENTED INDUSTRY Growth Industry – An industry characterized by high growth potential in the long run and where no firm has a significant market share (an edge over another). MRTP may also cause fragmentation. Paints. High exit barriers because of huge investment in CAPEX. It is characterized by – Low entry barriers. Eg. 118 . Government regulations in the form Eg. Eg. because of lack of economies of size and scale.
Strong entry barriers. distribution networks. Limited scope for innovation . 119 .technological maturity. established industry dynamics. collaboration and co-option. early entry and location advantages. because of economies of size and learning curve effects. Cartel among existing players through collusion. well defined consumer behavioral patterns and imperfect competition leading to near monopoly. Firms are rule takers in the segment as productivity frontier is well defined. technological maturity.MATURED INDUSTRY Matured Industry – An industry characterized by saturation in growth rates.
Learning abilities have been stunted and firms adverse to investment in R&D and make fresh investments. with little or no signs of recovery. 120 . (Eg. backed by corporate espionage. Nature of competition extremely high. Typewriters. Firms facing a declining phase are characterized by inertia and slow to react to environmental changes.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. and costly price wars. scooters. Exit barriers are extremely high because of limited prospective buyers. dot-matrix printers).
process innovation. move beyond boundaries. recreate new markets. Declining Industry – Redesign. strictly product differentiation and not standardization. or else exit the segment. aggressive building of distribution networks. 121 . Matured Industry – Sophisticated cost analysis. reengineer. increasing scope. assess and overcome fragmentation. premium pricing. Locate a defendable position. branding and promotion. regenerate. Fragmented Industry – Identify. strictly cost differentiation.COMPETITIVE STRATEGIES Emerging Industry – Set benchmarks. strike alliances. mergers and acquisition. focus more on product differentiation or even a hybrid one.
A firms resources can be classified into – Tangible – These refer to real assets. patents. brands. 122 . hence very rarely confer competitive advantage as can be easily acquired or replicated. and complex learning experiences in integrating and harmonizing technologies (distinctive capabilities) that play an important role in delivering competitive advantage through “causal ambiguity”.RESOURCE BASED VIEW Differentiation based on cost or products saturates and ceases to exist beyond the medium term. Intangible – These refer to goodwill. They are a standard in nature. However. positions based on resources which are unique and inimitable are far more sustainable even in the long term.
e. Hence. but not necessarily. Typically. they are woven around technologies. 123 . They play a very critical role in shaping competitive advantage. can be leveraged across businesses) or specific to a particular business. There is a high degree of internal and external causal ambiguity involved in it. Capabilities can be generic (i.CAPABILITIES & COPMPETENCIES These include a complex combinations of tangible and intangible resources that organizations use to convert inputs to outputs. differentiation based on capabilities can be sustained even in the long run. Therefore firms should concentrate on developing complex resources that forms the very basis of differentiation.
COMPETITIVE ADVANTAGE 124 .
Success of a strategy critically depends on SAP.e. It enlarges the scope of an organization. A portfolio of competitive advantage comprises strategic advantage profile (SAP). and results in well springs of new business development.COMPETITIVE ADVANTAGE A competitive advantage is a position of superiority relative (i. not absolute) to competition. 125 . competitive advantage subsequently becomes the back bone for a competitive strategy. Strategy drives competitive advantage. It results in a distinct differentiation advantage or a cost advantage or hybrid as well.
Most successful organizations around the world have a well balanced SAP. Internal strategic fit between its strategy and dominant logics is essential for the top management to stretch and leverage SAP. 126 . In most cases SAP is hidden and dormant.STRATEGIC ADVANTAGE PROFILE (SAP) Organizations have to systematically and continuously conduct exercises to identify its SAP. Identification of SAP is critical for and stretching and leveraging of resources. SAP changes from time to time. In today's world of discontinuity.
127 . Inventory Mgt to Logistics Mgt to Supply Chain Mgt (SCM). and enhanced customer tracking – higher market share. Today SCM is integrated with greening the environment as CSR practices. kaizen or internal customer).e. Competitive advantage arises not from an individual activity but a stream of inter-related activities. VC pay-offs: better product availability. faster product launches.VALUE CHAIN ANALYSIS A value-chain segregates a firm into strategically relevant activities to understand its composite behaviour. each of the players need to be efficient backed by sufficient coordination at the contact points (i. A VC is often compared with a relay team. Substantial cost reductions also follow.
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 .
Fit is important because discrete activities result in negative synergy and can also be easily copied by competitors. – Second order fit occurs when activities are reinforcing amongst them. 129 . – First order fit refers to simple consistency between each activity and the overall strategy. – Third order fit refers to optimization of effort.STRATEGIC FIT – THE PORTER WAY The sustainability of the value chain depends on the degree of fit between the activities. A learning organization helps create strategic fit. A high fit involving a complex chain of activities drives both competitive advantage and its sustainability. Operational effectiveness is not strategy.
CORE COMPETENCE A core competence represents the collective learning's of an organization around diverse streams of technologies. – Can be sustained even in the long run. . 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. – Cannot be easily imitated or substituted. These skills results in distinctive activities and processes. but not necessarily. – Can be leveraged across businesses. A core competence usually has its roots in technology. It forms the very basis of competitive advantage.
a core competence usually does. A competitive advantage may or may not lead to superior performance. Majority of the firms have competitive advantage. only global leaders possess a core competence. a core competence has its roots in a set of skills. A competitive advantage is sustainable in the shortmedium term. 131 . A competitive advantage manifests from a function.CORE COMPETENCE A competitive advantage does not necessarily imply a core competence. a core competence always implies a competitive advantage. a core competence is sustainable even in the long-term.
132 . each of whom wants to win.GAME THEORY The game theory was developed in 1944 by Oscar Morgenstern. In a game (similar to a business) one players win is always another's loss. In fact there are no. However. This is known as a zero-sum game. A game is a contest involving two or more players. illustrations depicting a win-win situation. Here the magnitude of gain offsets the magnitude of loss equally. 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.
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 .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.
A saddle point is a situation where both the players are facing pure strategies. 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 .PURE STRATEGY GAME The strategy each player follows will always be the same regardless of the other players strategy.
This is usually through learning by “experience or observation” (i. 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.g. However. Yahoo Vs Microsoft).e. iteration) rather than through collusion (E.TYPES OF GAMES Simultaneous Games – This is a situation where the players have an option to choose to cooperate or not through collusion. 135 . collaboration or cooption. Coke Vs Pepsi). Repeated Games – In this situation the players interact repeatedly with each other sub-optimizing the outcome possibilities. It represents the classical “prisoner’s dilemma”.
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. but 136 players do not always behave rationally. – Making pricing more transparent. It results in a shift in the productivity frontier. In a market dominated by price-based differentiation one may attempt to change the rules of the game by/when – – Bases of differentiation dependent on clear identification of what customer wants or value. Game theory relies on the principle of rationality. .
DELTA MODEL & LOCK-IN
Its a systematic approach where-in two or more industry majors, who by default has achieved a proprietary position (Microsoft – Software / IBM – Computers) which are not necessarily best-products in the industry, co-opt to create a lock-in. A lock-in implies that other players has to conform or relate to that standard in order to prosper. Becoming the industry standard requires – strong brand, causal ambiguity, and close relationship with other companies offering complimentary services. Lock-in is self reinforcing and escalating (i.e. accelerating effect).
THE THREE STRATEGIC POSITIONS
System Economics Market Dominance Complementary Share
Enabled through effective use of technology
Total Customer Solutions
Customer Economics Cooperation Customer Share
Product Economics Rivalry Product Share 138
Bill Gates is the richest man in the world not necessarily because he has developed the world’s best software's or excels at customer satisfaction; but he has got an army of people working for him who are not on his payroll – all the application software providers who are writing programs based on “Windows” compatible operating platform. Once you create the lock-in it is sustainable because of the “network effects”; which creates the proverbial “virtuous cycle” – customers want to buy the computer with largest set of applications and software developers want to write programs for the computers with the largest installed base.
The proponents (Hax & Wilde) believe that every organization has the ability to create and sustain a “lock-in” positioning (though in varying degree). This “system lock-in” is referred to as “delta” – delta being the Greek letter that stands for transformation and change amongst the players. The lock-in once created becomes very difficult for a firm to penetrate, and becomes a distinct entry barrier. The model is based on the belief that it compliments Porter’s differentiation model and RBV framework instead of contradicting them. In a lock-in strategy the performance outcomes are dependent on the success of another.
It relates to translating strategy formulations into practice. Performance realization of a strategy depends on the implementation effort. Successful implementation also depends on the appropriateness of the strategy. Since strategy implementation is a time bound process, alignment (i.e. strategic fit) is a key variable during times of radical change. Some of the other levers of successful strategy implementation are – Transformational leadership and motivating power. Resource allocation; its stretching and leveraging. Compatible organization structure & control systems. Inertia & resistance to change.
– Unlearning & learning of new skill sets. internal strategic fit (strategy – dominant logic) is critical to strategy implementation. – Better strategic and operational control. – Resource commitment from top management.IMPORTANCE OF STRATEGIC FIT Strategic fit has a central role to play in strategic management. While external strategic fit (strategy – environment) is relevant for strategy formulation. – Changing the rules of the game. – Development of capabilities & competencies. 143 . A high strategic fit (co alignment) is useful because it enables – – Appropriate and timely response.
learning levels are very high.FORMULATION Vs IMPLEMENTATION Traditionally. In fact. According to Mintzberg.e. effective strategies are better crafted when there is a subtle overlapping between the two (i. at the cost of sacrificing a lesser degree of control. emergent strategy vis-à-vis intended & realized). formulation & implementation can occur simultaneously. 144 . while control is very effective. learning levels are very low. In such a situation. Some of the key strategic learning's exists at the contact point between the organization and its customer. In such a situation. strategy formulation and implementation has been perceived to be distinct & independent.
Pragmatism is the ability to make things happen. Install a system of shared beliefs and values. shift from compliance to commitment. transformational leaders go one step beyond – Design a well crafted and designed strategic intent of the organization. In contrast. A transactional leader is usually confined to allocating tasks & responsibilities and extracting performance.ROLE OF TOP MANAGEMENT To bring about change and to implement strategies successfully. He should be an agent of change. 145 . bring about transparency. companies depend more on transformational leaders than transactional leaders.
Intangible resources (Eg.e. minimum requirement). patents. The various methods of resource allocation includes Historical Budget – The budgets framed by HQ for a particular SBU keeping in mind past trends. 146 . land. brands.RESOURCE ALLOCATION Resources allocation includes tangible resources (Eg. Zero Based Budget – In this case the budget of a SBU has to be worked out right from the scratch. machines) referred to as threshold resources (i. Performance Budget – SBU managers need to justify the distinctive resources in terms of the opportunity it is pursuing yields the highest possible pay-offs. labour. skills) also includes complex resources like capabilities and competencies.
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. these capabilities are sustainable even in the medium to long term. Distinctive capabilities are complex set of skills woven around technologies. though not necessarily in the case of emerging markets. Distinctive capabilities helps in stretching and leveraging resources thereby overcoming two major constraints involved in strategy implementation – times & costs. Moreover. Due to causal ambiguity (complexity). Flat Screen Displays. Mobiles). 147 .
An appropriate organization structure & adequate control systems are essential to implement strategies and achieve stated goals. A firm in several unrelated businesses usually employs a SBU structure. The level of centralization and decentralization is decisive. processes become people independent.STRATEGY & STRUCTURE It is a framework within which individual efforts are coordinated to bring synergy. A single product or a dominant business firm usually employs a functional structure. Once the structure is in place. A firm in several related businesses usually employs a divisional structure. 148 .
SBU Structure – Businesses segregated in terms of strategic dissimilarities (Eg. Virtual Structure – A boundary less or hollow organization. or geographical locations. processes. disbanded subsequently. Output). Divisional Structure – Units grouped together in terms of products. Inputs . Marketing. 149 .Technology. Finance). with team members having dual line of control. based on skills and competencies. Project / Matrix Structure – A formal but temporary framework initiated for the completion of a particular project/crisis.TYPES OF STRUCTURES Functional Structure – Activities grouped together by a common function (Eg. Team Structure – An informal group formed for a crisis.
leading to a tall structure. Technology – With more and more convergence of technologies in business. structures are becoming flatter and more simpler.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 . It includes the desire for independence. as span is broader. Environment & People – Economic and political conditions have a major bearing on structure coupled with the attitude and aspirations of the people in the organization. assuming responsibility. facing challenges & crises.
Most firms undergo periods of strategic continuity rather than strategic discontinuity. irrespective whether it is from worse to good or good to worse. co0ntinuity). Inertia acts as an impediment in strategy implementation.e. there is a tendency to continue along the same lines.INERTIA When a firm has been operating in a certain fashion for a long time. . Common sources of 151 inertia – complacency with past successes. Changes in top management and unlearning helps overcome inertia. Top managers resist change. Inertia is a characteristic of a firm that endures status quo (i.
Since the internal and external environment is in a state of continuous flux. .STRATEGY EVALUATION Strategy evaluation centers around assessment of strategic fit. firms should move beyond financial performance to strategic performance as organization systems are becoming complex. Deviation of fit is detrimental to performance and may lead to strategic failure. certain authors propose misfit as a source of superior 152 performance. strategies need to be evaluated on an ongoing basis to prevent deviations of fit. To prevent deviation of fit. However.
It attempts to answer the following questions – Is the strategic intent appropriate to the changing context? Are the organizations capabilities still holding good.STRATEGY CONTROL It is concerned with trafficking a strategy as it is being implemented. competitive advantages becoming disadvantages? Has the company acquired any new competency? Has the company been able to overcome the 153 environmental threats. . 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 .STRATEGY CONTROL IMPLEMENTATION It involves steering the company towards its original growth trajectory & stated goals. However. Implementation Control – It aims at assessing whether key activities are proceeding as per schedule. Special Alert Control – It intends to uncover unanticipated information having critical impact 154 on strategies. Premise Control – Checking the validity of the assumptions on which a strategy was based. It involves assessing – strategic thrusts and milestones.
Strategy intent not linked with goals and objectives – Lack of coordination at lower levels leading to negative synergy. “If you cannot . Performance measures are defective – What to evaluate against? How to measure the 155 construct? As a saying goes. Strategy not linked to resource allocation & capabilities – Lacking commitment of top management. low strategic fit due to consultants intervention.BARRIERS TO STRATEGY EXECUTION Vision and strategy not actionable – Utopian ideas. difficult to translate into practice.
the relative importance of each factor may vary over time and context. 156 . so if one fails to pay proper attention to one of them. On top of that. Today it is considered one of the most powerful tools for strategy implementation determining success or failure. to be sure of successful implementation of a strategy. Together these factors determine the way in which a corporation operates.7S FRAMEWORK OF Mc KINSEY The 7-S Framework of McKinsey is a management model that describes 7 factors to organize a company in an holistic and effective way. Large or small. Managers should take into account all seven of these factors. this may effect all others as well. important or not they're all interdependent.
and was taken up as a basic tool by the global management consultancy company McKinsey. At around the same time in the US Tom Peters and Robert Waterman were exploring what made a company excellent. 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. It appeared also in "In Search of Excellence" by Peters and Waterman. They had been investigating how Japanese industry had been so successful. 157 .BACKGROUND & ORIGIN The 7-S Framework was first mentioned in "The Art Of Japanese Management" by Richard Pascale and Anthony Athos in 1981.
Strategy – Trade-offs for the allocation of a firms scarce resources. Skills – An organizations capabilities and competencies. processes and routines that characterize how work should be done. Staff – Human inter-relationships. 158 . Systems – The procedures. formal & informal . Structure – The way in which the organization's units relate to each other in terms of their commonalities.THE 7’S Shared Values – It represents what the organization stands for and what the top management believes in. to reach identified & stated goals. Style – The way in which the top management influences the functioning of an organization. over time.
STRATEGIC FIT Strategy Structure Shared Values Systems Skills Staff Style 1st Order Fit 2nd Order Fit 3rd Order Fit 159 .
shared values) are very malleable and comparatively more difficult to identify & influence. systems) are comparatively easy to identify and influence. In contrast. A choice of an alphabet often limits the scope and skews the interpretation of a model. 160 . staff. structure. style. Ineffective in case of a virtual company. While the American co’s focuses on the hard S’s. the soft S’s (skill. Consider the 4P’s of marketing or 3R’s of SCM. because most often they are culturally embedded and often neglected. their Japanese counterparts focus more on the soft S’s for their early success and sustainability.A CRITIC OF THE 7S MODEL While the hard S’s (strategy.
High Organic Growth Strategic Alliance Joint Venture Mergers & Acquisition Strategic Fit .Low Take Overs 161 .STRATEGY IMPLEMENTATION ROUTES Strategic Fit .
subsidized power). i. green-field projects. (Eg. Govt. SEZ’s. Long gestation leads to delayed market entry. Reliance Industries).e. tax holidays. and markets.ORGANIC GROWTH Here a firm builds up its facilities right from the scratch and continues to do so without any external participation. soft loans. i. .e. the entire value chain. (Eg. The entire infra-structural facilities are set up afresh having its own gestation and break-even. technologies. It has complete control over inputs. 162 Risk of cost and time overruns. concessions are available for green-field projects.
It has limited intervention power and usually lacks holistic commitment from the alliance partner. There is no funding or equity participation from the alliance partner & both the firms continue to operate independently. Tata Motors & Fiat). 163 It is a form of competitive collaboration. Alliances are usually short-lived and disbanded once the purpose is achieved. .STRATEGIC ALLIANCE It involves a pro-active collaboration between two or more firms on a particular domain or function for mutual gain. Alliances are usually in the areas of technologies or markets (Eg. It touches upon a limited aspects of a firms value chain.
Honda). Degree and extent of management control must be clearly 164 laid down. Dominant logic of both the companies should be complimentary. Hero . leaving minimum scope of overlapping. Tata – AIG. . A comprehensive MOU is essential.JOINT VENTURES A joint venture involves an equivalent equity participation between two firms usually of similar strategic intent and comparable size to enter a particular market through a newly formed entity. (Eg. It is a win-win situation for both the companies. Selecting the right partner is critical for success.
Integrated distribution channel leads to better market penetration and overall synergy. . 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. ITC Tribeni Tissues. Integration of assets and other financial resources. Coca Cola – Thums Up). Acquisition is an outright purchase of a firm assets by another independent entity (Eg. Revival of a sick-unit through better management practices is a major motive behind an acquisition 165 strategy.
Inform SEBI / Stock Exchange after 5% stake is 166 acquired.Corus). Most countries have stringent laws that prevents hostile take over. Larger geo-graphical diversity.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. Consolidation in a fragmented industry. Instant access to capacities and markets. often the new firm is “left alone”. Tata Steel . Integration of organization structure & cultures is difficult. Make a public offer of not less than .
MANAGEMENT TOOLS IN STRATEGY 167 .
TQM – Doing the right thing the first time.WHY MANAGEMENT TOOLS? Change is becoming pertinent in the business environment. Radical change is superseding incremental change. it is also a source of potential threat. every time. 168 . Companies therefore need to ensure competitive advantages doesn’t become competitive disadvantages. The past is ceasing to be an indication of the future. Some tools to ensure that – Benchmarking – Adopt certain best practices. or better still create next practices Reengineering – Redesigning work processes right from the scratch. Change provides enormous opportunities. Balanced Scorecard – Tracking strategy 3600.
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 can at best complement it. While strategy is all about differentiation and not looking alike.LIMITATIONS More and more companies benchmark. Benchmarking merely reorients profits in the hands of few to profits in the hands in the hands of many (i. It does not shifts the growth 175 trajectory of the industry as a whole. clustering). Benchmarking is useful for bringing about operational efficiency.BENCHMARKING . but it cannot be used as a strategic decision making tool.e. the more similar they end up looking.
.g. Re-engineering attempts to radically change an organizational products or process by challenging the basic assumptions surrounding it.e.g. process mapping) and eliminating or improving them (E. DOS to Windows).e. Re-engineering involves complete reconstruction and overhauling of job descriptions from the scratch (i. clean sheet).RE-ENGINEERING Redesigning leads to identification of superfluous activities or product features (i. Windows 95 to 97). for achieving performance improvement (E. The task demands a total change in organisational 176 culture and mindset.
than people driven Innovative Vs Traditional Customer centric Vs Organisational centric 177 .REENGINEERING – KEY TENETS Ambition Focus Attitude Enabler Performance Large scale improvement by questioning basic assumptions about how work is done Micro Vs Macro Business Processes Vs Organisational Processes Starting right from the scratch Not historical More IT driven.
e.REENGINEERING . Strategic – It looks into the process of strategic planning. customers and suppliers and protects the organization from the future (i. BPR).e. structures. products.LEVELS Reengineering can be successfully leveraged at all levels of an organization with varying degree of results. etc) and supports the organization for the present. Business – It looks into markets. processes. It can be of the following types – Functional – It looks into the flow of operations (i. . 178 . resource allocation and prepares the organization for the future through a reorientation of the entire strategic architecture.
– Early entry advantages. protection can be had in the following ways – – Patenting. However. – High cost and time acts as a deterrent.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. Cheaper versions of Intel chips and mother-boards manufactured in Taiwan. with an intention to copy it (Eg. While traditional manufacturing is a bottom-up approach. It generally acts as a threat to innovation. reverse engineering is a top-bottom approach. learning curve advantage. – Causal Ambiguity. Indonesia). 179 .
Usually in such cases segmentation and pricing is different from the original innovator.e. Implementation – Developing of a prototype. designing facilities. cost and effort necessary for the purpose of reverse engineering. Actualization – Obtaining and dismantling of the product to assess how it functions. 180 . nano-technology).STAGES IN REVERSE ENGINEERING Awareness – Recognizing whether the product is found to be worth the time. machine tools to convert ideas into a marketable product (i. Introduction – Launching the product in the market. Inaccurate assessment at this stage may lead to a failure of the entire project.
– Durability – 1980 manufactured cars still on road. – Serviceability – Large no. of service stations. 181 . Car) – – Performance – Mileage of 14 kms to a litre of fuel. – Aesthetics – Appeal in design. – Reliability – Consistency in mileage. More and more companies are moving towards meeting implied rather than stated needs. – Features – Anti-lock braking systems. It has eight dimensions (Eg. – Perception – Customer notions. Air bags.WHAT IS QUALITY? It involves the totality of a product or service in meeting certain stated or implied needs.Euro IV. – Conformance – Emission standards .
It is deeply embedded as an aspect of 182 organisational life & culture. It had little impact on improving overall productivity.fix it in nature. touching upon a limited aspect of a value chain. . Management of quality was traditionally inspect it .TOTAL QUALITY MANAGEMENT Objective – Management of quality ensures conformance to certain pre-set standards. TQM is a way of creating an organization culture committed to the continuous improvement of work processes – Deming. which ensures good market standing. zero defects.
TQM – KEY TENETS Do it right. not a final destination. Empowerment – It takes place when employees are properly trained. Kaizen – Make continuous improvement a way of life. 183 . Looking at quality as an endless journey. provided with all relevant information and best possible tools. fully involved in decision-making and fairly rewarded for results. Be customer centric – Generate the concept of internal customer (Ishikawa). the first time – From reactively fixing error in products to proactively preventing errors from occurring at the first place (Juran).
SQC – It is a process used to determine how many units of a product should be inspected to calculate a probability that the total no.TQM .STRATEGIES Outsourcing – It is the process of self-contracting services and operations which are routine and mundane. saving precious top management time. It is based on the principles of MBO (i. enabling the firm to concentrate on core activities essential to customer satisfaction. 6-Sigma).e. 184 . equal participation). Quality Circles – It a small group of shop-floor employees who meet periodically to take decisions regarding operational problems and crises. of units meet preset standards (Eg.
– Less than 10% of strategies effectively formulated are effectively executed...BALANCED SCORE CARD Some interesting comments .. strategy implementation has never been more important. it’s bad execution...... – In the majority of failures – we estimate 70% – the real problem isn’t (bad strategy) .. – Efficiency and effectiveness is passé... Source: Fortune Magazine Why CEO’s fail? 185 ..
These measures worked well when organizational systems were simple and unidirectional and more importantly the environment was static. rather than effects. Focus more on causes.CONCEPTUALISATION A company’s performance depends on how it measures performance. 186 . Most managers tend to rely on traditional measures of performance having its origin in finance as they are well tried and tested.BSC . Organizations need to move from financial to strategic performance. In today’s context when organizational systems have become complex and multi-directional we need to have a holistic view of performance to cut the lag effects.
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. and distinguish strategic problems from operational ones. because they have too many.BSC – KAPLAN & NORTON (1992) A BSC helps a manager to track and communicate the different elements of company’s strategy. 187 . The most critical element of a BSC is to measure these four dimensions.
ageing schedule) % of key customer transactions Ranking of key customer accounts No.e. of visits or calls made % of NPA’s 188 .CUSTOMER PERSPECTIVE GOALS Products Supply Preference Relationship MEASURES Relative market share (%) % of sales from new Vs proprietary products Timely deliveries and service Customer credit analysis (i.
of times covered in media No.BUSINESS PERSPECTIVE GOALS Skills Excellence Exposure Introduction MEASURES New capabilities and competencies Implementation & gestation period Bank and supplier credit limits & PLR Unit Costs / Conversion Ratio / Defect Ratio No. of new product launches Vs competition Product pricing Vs competition 189 .
of product innovations 190 .LEARNING PERSPECTIVE GOALS Technology Manufacturing Focus Timing MEASURES No. of new patents registered Time to develop next generation products Average and spread in operating cycle % of products that equal 2/3 sales No.
FINANCIAL PERSPECTIVE GOALS Survival Success Prosper Divestment MEASURES Cash flows Growth in Sales and Profits EPS. Return on Investment Market Capitalization / PE ratio 191 .
STRATEGY MAPPING 192 .
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 .
It helps translating strategy into practice (i. As a result.what they don’t know.e. sharing of vision). 194 performance will automatically follow. Shift from control to strategy (i.BSC . The BSC brings together the different elements of a company’s strategy at a glance.ADVANTAGES Most often top managers face information overload. Modern managers should be poised to ask the right questions.e. doing right things instead of doing things right). they don’t know . Focus on cause not effects. Seek excellence. .
EFFICIENCY Vs EFFECTIVENESS Ineffective Effective Inefficient Goes out of Business quickly Survives Efficient Dies Slowly Thrives 195 .
Michael E. . not only thrives.EFFECTIVENESS + STRATEGY A company which is effective as well as strategic. but also sustains it. Porter 196 .
CORPORATE RESTRUCTURING 197 .
to survival of the most adaptable. Radical change brings about strategic variety. To adapt to the changing environment. As Peter Drucker pointed out.” 198 ...... Strategic variety brings paradigm shift. “every organization must be prepared to abandon everything it does. firms use restructuring strategies. Strategic variety may be caused by changes in the as external well as internal environment.CORPORATE RESTRUCTURING The only thing constant in today's business environment is change. Tata Group).. Restructuring involves consciously driving significant changes in the way an organizations thinks and looks (Eg. from survival of the fittest .
RESTRUCTURING – BASIC TENETS Customer Focus – Restructuring ideally begins and ends with the customer. Fax. ATM. etc). and dividing the core businesses into SBU’s (i. Internal customers should also not be neglected. Company’s should go beyond just asking what he expects. Structural Changes – Conventional hierarchical structures should be disbanded in favour of more 199 flexible ones (i. Core Business – Company’s should introspect – What business are we in? Business evolved out of opportunism or myopia should be divested. Walkman. downscoping). they should strive to provide unimaginable value ahead of its time (Eg.e. downsizing or rightsizing).e. . Instead.
.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 .. Ratan Tata now drives the point the group means business.. the Tatas were considered a benevolent and charitable organization.. Restructuring also requires cultural reorientation. ... It is created and institutionalized by the top management. started focusing on their capabilities. Kumar Birla today is more dependent on professionals. During the times of JRD.....) Reliance dismantled their industrial embassies . 200 .
Use the reach of networking technologies. Organizing customer and supplier meets. Carry out PR campaigns.” 201 . Restructuring provides a platform to close this gap. they tend to move away from the customer. Publicizing welfare projects to demonstrate CSR. Honda’s ad says. Communicating to the media about organization efforts to deliver quality products.MOVING CLOSER TO THE CUSTOMER As companies evolve. “ … one reason our customers are satisfied is that we aren’t. Getting feedback & addressing customer complaints.
where the difference in valuation is settled off through cash or equity (Eg. 202 .ASSET RESTRUCTURING Asset Restructuring – The asset composition of a firm undergoes a major change. Mittal – Arcelor) and can take various forms. spin-off and equity carve. Further. Hive Off – It involves siphoning of assets under control. Further spin-off can be classified as split-off and split-up. Tata – Corus) or hostile (Eg. Asset Swaps – It entails divesting and acquisition simultaneously by two companies. It can have two forms. it may be smooth (Eg. Glaxo – Heinz). including its intangibles – Mergers – It may be vertical. or conglo-merate. horizontal. It may include brands as well.
HIVE OFF Spin-Off – A spin off is the creation of a new entity. Reliance Ent). in which the equity is allotted amongst the existing shareholders on a pro-rata basis (Eg. 203 . – Split-Up – In a split-up. Equity Carve – It involves selling a minority stake to a third party while retaining control (Eg. Tata Industries selling 20% stake to Jardine Matheson). the entire parent company loses its identity after being split into a number of subsidiaries. the existing shareholders receive equity in the subsidiary in exchange for the stocks of the parent company. – Split-Off – In a split-off. Most of these practices are not in consonance with Indian laws.
strategic misfit. but retained its engineering division.DIVESTITURE It involves the sale of a brand or a division of a company to a third party. Generic motives include – – Raise working capital. A complete sell-out is known as divestment (TOMCO). In 1995. 204 . Selling out in phases is called disinvestment (IPCL). for a specified market or in general with full management control. – Poor performance. repay long-term debts. In 2005. L&T sold its cements division to Aditya Birla group. Parle sold its Thums Up brand to Coke for $40 million apprehending fierce competition.
Tatas take-over of Corus for US $11. Conversion – Replacing debt with equity or vice-versa or costlier with cheaper debt or cross currency debt. involving 608 pence per share). Share Buyback – It is a process of cancellation of shares out of free reserves to the extent of 25% of paid-up capital (Eg.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.3 billion. 205 . Wipro).
950 cr Merind .Rs. 120 cr Tata AIG – Rs. 1860 cr . 150 cr VSNL – Rs. 250 cr Tata Tetley – Rs. 230 cr Diversifications Tata Motors – Rs. 1700 cr Trent – Rs. 1890 cr CMC – Rs. 42 cr Voltas . 99 cr Tata Power – Rs.Rs. 1170 cr Goodlass Nerolac – Rs. 1439 cr 206 Tata Timken – Rs 120 cr Tata Telecom – Rs. 256 cr ACC – Rs.BUSINESS RESTRUCTURING – TATAS Divestments Lakme – Rs.
It can be carried out in the following ways – Downsizing – It is a systematic one-time reduction in the no. Turnaround is the primary motive. keeping the composition of business intact (Jet Airways). of a firm’s employees and sometimes in the no. Rightsizing – It is phasing of excess and redundant employees resulted out of faulty internal planning (SAIL). of operating units.ORGANIZATIONAL RESTRUCTURING Organizational structure and systems calls for a change when strategic variety is apparent. 207 . Downscoping – It involves reducing the business and/or geographical scope of a firm (Aditya Birla group). Survival is the primary motive. usually as a result external turbulence.
The longer the period. Strategy change is unviable without a preceding change in its dominant logics. inertia). as strategies are based on such beliefs and biases.STRATEGIC CHANGE One of the most difficult components of organization restructuring is the mindset of the top management represented through its dominant logic and its shared values reflected in cultural orientation.e.e. the more difficult it becomes to uproot the paradigm (i. 208 . thumb rules) of the top management. The dominant logic represents the perceptions and biases (i. Dominant logic becomes deep-rooted in organizational contexts depending on the period it is in place (tenure of the CEO).
Companies achieve real agility only when people at every level rise above the ordinary to face the challenges – revitalization or transformation. Successful transformation requires – incorporating employees fully into the process – leading from a different place so as to maintain employee involvement – instill mental disciplines that will enable employees to behave differently. 20% of the people carry out 80% of the changes).FORCES AGAINST STRATEGIC CHANGE The problem with strategic change is that the whole burden typically rests on few people (i. the factor that stifled change & performance was – culture.e. 209 . In most organizations.
Understand and deliver the quid pro quo. Questioning every basic action of the organization. it is not about winning but about learning. Promote inventive accountability. The best way is to alter the institutional point of view. Manage from the future. 210 . never take no for an answer. Harness setbacks.SUCCESSFUL TRANSFORMATION Build an intricate understanding of the business model at all levels of the organization. Create relentless discomfort with the status quo. process ownership. Encourage uncompromising straight talk.
211 . It involves diagnosing a change situation – systems & structures. that can be both enablers and blockages to change and restructuring. Culture and style of management are two main impediments in force-field analysis.FORCE-FIELD ANALYSIS A force-field analysis provides an initial overview of change problems that needs to tackled. Aspects of current culture which needs to be overcome. Identify and implement facilitators of cultural change. by identifying forces for and against change. It involves identifying – Aspects of current culture which needs to be reinforced. also known as cultural-web.
Term Loss of human capital Lower performance Higher performance Capital .RESTRUCTURING .OUTCOMES Alternatives Organizational Short .Term Reduced labour costs Reduced debt costs Emphasis on strategic control Business High debt costs Higher risk 212 Long .
down-scoping or asset stripping.NUMERATOR & DENOMINATOR MGT Most firms across emerging markets undergo strategic discontinuity and as a result are forced to restructure their businesses. While the first strategy produces results instantaneously. reverse engineering and regenerating. the second one is a more viable strategy and sustainable option in the long run. 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. focuses on reengineering. Numerator – It assumes that turnover is not a barrier or constraint. 213 .
TURNAROUND MANAGEMENT 214 .
. – Less than 10% of the Fortune 500 companies as first published in 1955. and that the thirty-two of the country’s largest business groups in 1969 are no longer among the top fifty today. Source: Why do firms atrophy? (Business Today... still exist as on 2005.. January 1997).. – Only seven of the first fifty Indian business groups in 1947 were even in business by the turn of this century.. 215 (Govindarajan and Trimble..WHY TURN AROUND MANAGEMENT? Some interesting insights .
process focuses on – A logic to explain a causal relationship between intervening variables. ends the threat with a combination of strategies. 216 . and capabilities. A category of underlying principles and concepts. Both content (what) and process (how) are equally important for a successful turnaround. and achieves sustainable performance recovery.e. skills. systems.TURN AROUND MANAGEMENT A turnaround is said to occur when a firm perseveres through an existence threatening performance decline. While content focuses on endogenous and exogenous variables. Stage Theory). As a sequence of events describing how things change and why they change (i.
unavailability or radical lowering of substitute costs or technological obsolescence. especially in key positions. Low employee morale leading to high employee attrition at all levels.TURNAROUND INDICATORS Most firms atrophy simply because they fail to diagnose the indicators that acts as threat to organizational existence. 217 . leading to lack of acceptability from distributors and customers. suppliers and bankers. Rising input costs. Uncompetitive products or services. Low stakeholder confidence. Some indicators Continuous cash flow crises as a result of dwindling market-share and profits. Substantial shifts in consumer preferences.
. Hence. be more customer centric. Product redesigning or reengineering. consider extension. they adopt surface level measures (disprin popping) which most often fail. focus on power brands. Recalibrate prices. liquidating dead assets. Revamp product portfolio. Emphasis on advertising and market penetration. 218 . based on elasticity.TURNAROUND ILLUSION The first step to a successful turnaround is the basic acceptance of the fact that …. which most top managers fail to appreciate. Common approaches adopted Change in key positions. prune work-force. “all is not well”. Extending work hours.
TURNAROUND STAGE THEORY Stage 1 Decline Stage 2 Stage 3 Stage 4 Outcome Response Transition Performance Equilibrium Line Success Failure Indeterminate Nadir Time 219 .
Identification of the stimulus leads to the arrest of the downfall. It has its origin in “environment led fit” that subscribes to the view that a firm has little control over external factors. 220 .DECLINE Decline is the first stage in the turnaround process. It involves the identification of the theoretical perspectives that explains performance decline – K-Extinction – It suggests that macro economic and industry wide factors are responsible for decline. It has its origin in “resource led stretch” and subscribes to the view that a firm has substantial power to override the context. primarily dwindling resources and capabilities are responsible for decline. R-Extinction – It suggests that organization factors.
the response should be operational. the response should be strategic. If the decline stems from structural shifts. If the underlying cause is internal efficiency. asset reduction. 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. Strategic responses focus on changing or adjusting the business the firm is engaged in through long term moves such as – integration. The response must match the cause of the decline. 221 . new market initiatives. diversification.
Contour – It is easier to reverse decline in the earlier stages through operational measures. 222 . when decline deepens shifts in strategic position becomes essential. Scope – A diversified conglomerate may acquire a distressed business to turn it around and gain valuable synergies. which may be unavailable to a focused firm.RESPONSE DICHOTOMY The response initiation is somewhat dichotomous and cannot be universally applicable. Similarly new market initiatives is feasible only for multi-product firms. Untangling this question brings into focus three events – Domain – Many of the strategic cures have limited applicability for an affiliated firm.
223 .7 years with a range of (4-16) years. role model. Support from all the stake holders through resource commitment. However. many a times early signs of recovery fades out. The top management has a key role to play through empowerment. substantial amount of time usually passes before results begin to show (i.e. transparency. confidence building measures.TRANSITION Transition usually reflects the first signs of recovery. Sustenance is the key factor in this stage. Effective levers of transition. However. consensus).e. lead – lag). participative management (i. Empirical studies show that average time is 7.
it should adopt a holistic approach. Commanding a premium in the market. Failure is an indication that initial momentum was not sustainable characterized by irreversibility. Supplier and banker confidence. Cut off points must be unequivocal. Regaining lost market share and distributor confidence.OUTCOME Outcome is said to be successful when a firm breaches the equilibrium performance level. Instead of focusing on financial parameters alone. 224 . Revival of key customers and new product launches. Share price indications and media coverage.
COOPERATIVE STRATEGIES & ALLIANCES 225 .
In the cooperative strategy continuum as firms move up the value order. technology. and globalization . or joint venture. strategic alliance. Any cooperative strategy maybe between firms within the same country or cross border as well.COOPERATIVE STRATEGIES Cooperative strategies are a logical and timely response to changes in business dynamics. supply-chain partnership. licensing. 226 . consortia. It can assume any of the following forms – franchising. the commitment and the involvement between the firms increases manifold. More and more companies worldwide are moving away from competition to co-option to leverage their resources and enhance bargaining power.
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. Branding is critical to franchising. Titan Inds. owners of the brand Tanishq allows its franchisees to sell its jewellery products. 227 . Switz Foods. owners of the brand Monginis allows its franchisees to sell its confectionary products. It is an effective strategy to penetrate markets in a shortest possible time at a minimum cost.
refine processes and adopt necessary technologies (SKD). 228 . Develop a product through its crude stage.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. Become a systems integrator (CKD). as in Tata Indica. Different levels of licensing Manufacturing without embracing any technology (CBU).
Cross Holdings – A maze of equity holdings through centralised control to ensure earnings stability & threshold resources for critical mass (Eg. Airbus – Boeing).CONSORTIA Consortia – They are defined as large inter-locking relationships & cross holdings between businesses in a similar industry. Coke – Pepsi). enabling them to increase prices (Eg. Tata. Hyundai). Collusion – Few firms in a matured industry collude to reduce industry output below the equilibrium level. 229 . leverage upon size to preempt competition by escalating entry barriers (Eg. It can be of the following types – Multipartner – Intends to share an underlying technology or asset.
It usually provides a platform to sort out differences between conceptualization and implementation to suit local market needs. Tata Motors – IDEA). otherwise it 230 becomes routine outsourcing.SUPPLY CHAIN PARTNERSHIP It is a pro-active & collaborative arrangement between supplier and customer aimed at achieving better control over the value chain (Eg. 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.
Reliance – Du Pont). instead of hurrying into a relationship. Firm’s should undertake a long courtship with potential partners. 231 .learning organization.STRATEGIC ALLIANCE It is an short to medium term understanding between two or more firms to share knowledge and risk. enhance credibility. enter newer markets. Generic motives involved are . preempt competition. Despite their popularity (50-60)% of the alliances fail to accomplish their stated objectives. design next generation products. to gain knowledge and to obtain access to new markets (Eg. effective R&D management. Tata Motors – Fiat. Partner selection is one of the critical success factors.
Airbus – Boeing). Complementary Equals – Two firms mutually promoting each others complimentary products (Eg. Alliances of the Weak – An alliance is entered into to preempt competition (Eg. Coke – Pepsi). Backward – An alliance (quasi or tapered) with a supplier of critical components seeking commitment (Eg. Bajaj – Castrol). 232 . Bootstrap – An alliance between a weak and a strong company with an intention to acquire it.STRATEGIC ALLIANCE . Whirlpool – Tide.TYPES Collusion – Tacit top management understanding to neutralize price wars (Eg. Maruti).
Firms from developed markets seek access to markets and firms from emerging markets seeking access to technology. Cultural orientation has been found to have a profound effect on top management’s strategic orientation (Eg.PARTNER SELECTION CRITERIA It is likely that partners will not have complete consent on alliance objectives because the institutional context in which the alliance embedded varies from country to country. Differences in level of economic development can produce differences in alliances motives. – Japan Vs US). Too much stress on financials & structure be avoided. 233 .
234 . including ability to provide quality products and services. Experience related to previous alliances. Willingness to share knowledge and skills. Unique Resources – Abilities or skills which cannot be easily duplicated. Managerial capabilities. 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. Intangible Assets – Move beyond the financials of the firm.
the value chain. Getting Engaged – It should incorporate a specific joint activity. 235 . Setting up the housekeeping. degree of compatibility. vows to include commitment to expand the relationship.MANAGING ALLIANCES Alliances are more than just a deal. understanding the chemistry. operational & cultural integration. Learning to collaborate – strategic. Changing within. Selection & Courtship – It involves self analyzing. differences not anticipated earlier. instead of focusing controlling the relationship. incorporating clear signs of continuing independence for all partners. partners should nurture it.
a joint venture is a selection among modes by which two or more firms can transact.e. It lasts till the vision is reached. synergy) rather than mere exchange (i.JOINT VENTURE A joint venture is a long term association between two equal partners to create an independent firm (SPV) by complementing their resources and capabilities to explore newer businesses or markets for achieving a shared vision. combining parts). separation is very 236 bitter. There are substantial linkages in the value-chain. whilst the partners continue to operate independently.e. It aims at creating new value (i. . Conceptually.
though more profitable alternative to other choices. Organizational Learning – It is a means through which a firm learns or seeks to retain their capabilities. It may also be linked to deterring entry or eroding competitors position. in addition to a high degree of asset specificity. Strategic Behaviour – Firms may override transaction costs. 237 .JOINT VENTURE – GENERIC MOTIVES Transaction Cost – The situational characteristics best suited for a JV are high performance uncertainty. The market fails as sellers are unwilling to reveal their technology and buyers are unwilling to purchase in the absence of inspection.
Endorsement from government authorities. – Eg. – Eg. Essar – Hutch (Vodafone). TVS – Suzuki (4-Stroke Engines) Fill gaps in existing product lines. Sharing of resources. – Eg. Define future industry standards. Eli Lily – Ranbaxy. – Eg. Yamaha – Escorts. Learning new technologies. Daimler – Chrysler (Premium Cars) 238 .OTHER MOTIVES Entry into newer markets. Maruti – Suzuki. – Eg. Renault – Nissan (Minivans – Cars). – Eg.
Risk of brain (i. PAL – Fiat If the cost of continuing exceeds the exit costs? – Eg. – Maruti – Suzuki. Century . – Godrej – Procter & Gamble. Modi – Telstra What after exit (parenting disadvantage)? – Eg. Tata – Aditya Birla in Idea Cellular 239 . Risk of over dependence. – Eg.RISKS INVOLVED Incompatibility – Differences in cultural background. LML – Piaggio Differences in size and resource base.e. technology) drain. – Eg.Enka.
Agreement – Clarity on operational control. Focus – Avoid strategic myopia. time sharing. Inertia – Differences in age and evolution patterns. Costs – Other modes of transaction becomes cheaper. 240 . Incompatibility – Performance expectations. Equality – Lack of dominance. Culture – Reconcile gaps. Flexibility – Sufficient space to breathe and adjust.PRE-REQUISITES FOR SUCCESS Commitment – Mutual trust. respect. Partner – Avoid duplication of skills and capabilities. Objectives – Shared vision.
MERGERS & ACQUISITION 241 .
HLL – Tomco).Daichi) and hostile if it is without the consent of the management (Eg. Ranbaxy . Brooke Bond – Lipton). 2002). reverses are also taking place through LBO) with a view to acquire conglomerate power and induce synergy (Eg. 242 . SEBI Takeover Code.MERGERS & ACQUISITION A merger is a mutually beneficial consent between two or more firms (usually of similar size) to form a newly evolved entity by absolving their individual entities to preempt competition (Eg. An acquisition is the purchase of a firm by a firm (of larger size. Mittal Arcelor). Most countries have stringent laws that prevents hostile takeovers (Eg. however. An acquisition is said be smooth if it is with the consent of the management (Eg. The larger objective is to leverage on size.
creeping acquisition). Acquirer – Someone (individual or firm) who picks up an atleast 5% stake without mandatory disclosure having an intention to wrest management control (i. .e. 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.SEBI TAKEOVER CODE. Control – A special resolution of 75% of the share 243 holders approving the change of guard. Hike – An acquirer who has already picked up a 5% has to make a mandatory disclosure for every additional 1% stake that it acquires.
Gujarat Ambuja – ACC).SEBI TAKEOVER CODE. the SEBI can intervene and block share transfers if: the acquirer has ulterior motives (i. whichever is higher as an exit route (Eg. and/or does not enjoy the confidence of the different stake holders. credentials or track record is at stake. Grasim – L&T Cement. 2002 Pricing – Acquirers will have to offer minority shareholders (at least 20%) the past 26 weeks or past 2 weeks average price. asset stripping). SEBI – In case of a hostile take over.e. 244 . 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.
Kelvinator). 245 . Vertical – It involves complimentarily (partially related) in terms of supply of inputs or marketing activities (Eg. Electrolux .TYPES OF MERGERS A business is an activity that involves procuring of desired inputs to transform it to an output by using appropriate technologies and thereby creating value for its stake holders in the process. Godrej. usually opportunistic (Eg. Horizontal – It involves integration of two highly related businesses (Eg. The type of merger is depends on the degree of relatedness (strategic) between the two businesses. Reliance). Conglomerate – It involves integration of two distinctly unrelated businesses. ITC).
Global image (Eg. Overcoming entry barriers (Eg. quick access). Reduction in risk. Tax benefits (Eg. Tata Steel – Corus). Reduced gestation (i. Ranbaxy – Crosslands). Asset Stripping – Shaw Wallace). scale and scope. Acquiring assets or capabilities (Eg. ITC Bhadrachalam). 246 . Mittal – Arcelor).MOTIVES Increased market / conglomerate power. Ulterior motives – (Eg. Avoiding risk of new product development. Economies of size. Coinsurance effect – Higher debt raising capability.MERGERS & ACQUISITION . ICICI –ITC Classic). Access to newer segments (Eg.e.
Managing size. Top management overtly focused on due diligence exercise and negotiations. Overvaluation is often as a result of an ego drive and substantially affects future returns. Inability to achieve synergy. 247 . Overvaluation of buying firms (Eg. Managing over-diversification. Tata – Corus). Merging of organisational structures. When Tata Steel started negotiations with Corus. neglecting core business.MERGERS & ACQUISITIONS PITFALLS Cultural differences (Eg. their initial offer was around 420 pence/share. while the ultimate acquisition was made at 607 pence/share).
with an objective to reinforce its growth trajectory or to take on the might of a comparatively larger player (Eg. Tata Steel – Corus). Decline – Horizontal mergers are undertaken to ensure survival. vertical to save transactions costs. Growth – This stage may witness parallel merger of two firms of similar size. Brooke Bond – Lipton). Maturity – A larger firm acquires a smaller firm with an objective to achieve economies of scale and experience curve effects (Eg. Kingfisher – Air Deccan). 248 .MERGER TYPE & PLC Introduction – A larger firm may acquire a newly formed entity with an objective to preempt new competition or acquire its license (Eg.
A concern of respect and trust for the business of the acquired company. Left alone syndrome. Strong differences may stifle plans and its execution. 249 .INTERNATIONAL M&A . Blanket promotions across entities and confidence building exercises needs to be practiced. Immediate attempts to super impose structure and culture may cause bottle necks. 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. active top management intervention in phases. A common shared vision.
250 Do not ignore the “people factor”. It will enable focus on customers and key people.INTEGRATION .BLUEPRINT Take the media into confidence. . Redefine responsibilities and authority. Integrating work processes. Decide upon management control systems. They can carry the message to the various stake holders. Determine business strategy. Shift attention from business portfolio to people and processes. Decide on the new hierarchy. promptly.
251 . – Market for corporate control. operational & financial). Financial motives – Undervaluation relative to true value. – Unstated reasons – Personal self interest and hubris. While under valuation may be a significant opportunity. The process takes (6-12) months.M&A . over valuation can become a curse. – Synergy – Potential value gain from combining operations (i.VALUATION The process of valuation is central to M&A.e. Valuation decisions are arrived through a due diligence process when the prospective acquirer gets access to the books of accounts of acquiring company.
VALUING OPERATIONAL SYNERGY Synergy – It refers to the potential value gain where the whole is greater than the sum of the parts. when the “fit” between the two entities is very poor. – Conglomerate Synergy – Gains come when one firm complements the resources or capabilities of another (Eg. Synergy can be negative as well. or from increased market power which increases sales and margins. Innovative product – Good distribution network). – Vertical Synergy – Gains come from controlling the supplychain and savings in transaction costs. Sources of operational synergy – Horizontal Synergy – Gains come from economies of scale which reduces costs. 252 .
Synergy comes from projects which would not have been undertaken if the two firms stayed apart (Eg. Cash Slack – It reduces asymmetry between cash starved firms with deserving projects and cash cows with no investment opportunities. Hotmail). but availed after being merged with a profitable firm (Eg. and without paying take-over premiums. shareholders can accomplish the same at a much lesser cost. ITC – Bhadrachalam Paper). However.VALUING FINANCIAL SYNERGY Diversification – Reduce variability in earnings by diversifying into unrelated industries. 253 . Tax Benefits – Tax benefits may accrue from tax entitlements and depreciation benefits unutilized by a loss making firm.
This will induce higher debt capacity. 254 . The likelihood of default decreases when two firms' assets and liabilities are combined through a M&A compared to the likelihood of default in the individual companies.VALUING FINANCIAL SYNERGY Co-Insurance Effect – If the cash flows of the two firms are less than perfectly correlated. the cash flow the merged firm will be less variable than the individual firms. – Coupon rates may also be negotiated at lower rates. It relates to the concept of diversification. hence better performance. – Default risk comes down and credit rating improves. as risky debt is spread across the new firm's operations. higher leverage.
While value of corporate control is negligible for firms that are operating close to their optimal value. The value of control can be substantial for firms that are operating well below optimal value. Assessment of perceived quality is critical. – – Value of Control = Value of firm after restructuring Value of firm before restructuring.VALUING CORPORATE CONTROL Premium of M&A are often justified to control the management of the firm. since a restructuring can lead to significant increase in value. The value of wrestling control is inversely proportional to the perceived quality of that management. 255 .
LBO facilitates a relatively smaller firm to bid for a comparatively larger firm in the bid for management control. The assets of the acquired company are used as collateral for the borrowed capital. It is a very costly and risky proposition. 256 . debt component) at the time of buyout and rapid changes in capital structure over time. sometimes in combination with the assets of the acquiring company. Confidence of investment bankers and the international financial community is essential.LEVERAGE BUYOUT (LBO) The basic difference between a take-over and a LBO is the high inherent leverage (i.e.
However. – The need to satisfy analysts and shareholders.access to financial markets. 257 . off-late many publicly traded firms have gone private keeping in mind the following – – The fear of LBO. the advantages of going public includes .TO GO PUBLIC OR NOT? However. liquidity. The increased benefit showed in the following way – reduced costs and increased revenue. on-going valuation. – Separation of ownership from management. A research study showed that 30% of the publicly listed firms reported above average returns after going private. – Increased information needs.
co-insurance effect). – Managers cannot be trusted to invest free cash flows wisely.e. – Debts repaid off from increased value after successful restructuring and wresting management control. 258 . which disappears once assets are liquidated and significant portion of debt is paid off.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. – Cost of debt coming down (i. – It is a temporary phenomenon.
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. initial rise in leverage is anticipated. leverage is expected to decrease over time. Any discounting has to reflect these changing cost of capital. As the firm liquidates / pledges assets and pays off debt. Therefore.EFFECT OF HIGH LEVERAGE Increases the riskiness of dividend flows to shareholders by increasing the interest cost to debt holders. – Increase equity valuation. 259 .
Objectives – – Traditional route of filing prospectus and undergoing an IPO is costly. – Facilitates better valuation and forthcoming offerings. shell company) by a private company.REVERSE MERGER Reverse Merger – The acquisition of a public company. or costly. which has discontinued its operations (i. – Automatic listing in major exchanges. time-barred. small in size but having a promising business. – Prevents dilution of equity. allowing the private company to bypass the usually lengthy and complex process of going public. – Tax shelter.e. 260 .
261 . However. Initial anomaly in stock prices usually normalizes over a period of time (6-12) months. takeover failures have only initial negative effects on stock prices. – Merger announcements reported 20% excess returns. – Takeover announcements reported 30% excess returns. Most target firms are taken over within (6090) days. and 35% during bullish periods.EFFECT OF TAKE-OVER ANNOUNCEMENT The shareholders of target firms are the clear winners. Excess returns also vary across time periods. During bearish periods excess returns were 19%.
Bradley. – However. and Netter. – However. as stock markets become more and more perfect such anomalies would reduce Source: Jensen and Ruback. 1988 . 1983. – Most studies reported insignificant excess returns around take-over offers or merger announcements. 1983. Brickley. 262 Jarrel.EFFECT OF TAKE-OVER ANNOUNCEMENT The effect of take-over announcement on bidder firm’s stock prices are not clear cut. and Kim. in the event of take-over failure negative returns to the extent of 5% on bidder firm stock prices is reflected. over time. Desai.
Poison Pill – An offer to existing shareholders to buy shares at a substantial discount to increase their voting rights (Eg. Asset Stripping – The targeted company hives off its key assets to another subsidiary. 263 . Rights). Poison Put – Premature retirement of bonds at attractive rates to pour surplus cash and make target investment unattractive. so that nothing is left for the raider to strip off.DEFENSIVE STRATEGIES Golden Parachute – An employment contract that compensates top managers for loss of jobs as a result of change in management control.
264 . thus thwarting the raider company’s attention. But often the White Knight turns a betrayer himself (Eg. Green Mail – The targeted company buys large blocks from holders either through premium or through pressure tactics (Eg. East India Hotels – Reliance Industries – ITC).DEFENSIVE STRATEGIES White Knight – It is the placing of stocks to a cash rich investor and bargaining for protection in return. Pac Man – The target company makes a counter bid to take over the raider company. Shapoorji Pallonji). Gray Knight – The target company takes the help of friendly company to buy the shares of the raiding company.
COMPETING FOR THE FUTURE 265 .
Honda overpowering Volkswagen. Compaq overpowering IBM. Nokia overpowering Motorola. Hitachi overpowering Westinghouse. were spending 99% of their precious time dealing with present. The reverse was true for the companies overpowering. What went wrong???? What were they doing with the present? What were they pre-occupied with? 266 . Wal-Mart overpowering Sears. Most companies were too preoccupied with the present than the future? 99% of the companies overpowered. Honda overpowering GM. British Air overpowering Pan Am.GETTING OFF THE TREADMILL Canon overpowering Xerox.
downsizing). most often they ended up cutting corporate muscle as well and became anorexic. These denominator based managers stuck to their restructuring strategies (like building pyramids) and didn't know what to do next? Thus they became history? (like the pharaohs) 267 . CEO’s brutally pick up the knife and ruthlessly carve away layers of corporate flab (delayering. falling market share). decluttering. declining margins.THE PAST OF COMPETITION Beyond Restructuring – When a competitiveness become inescapable problem (stagnant growth. Thus efficiency was grievously hurt. Not knowing when to stop.
S. However. ensuring only survival of the present. but not of the future. On the contrary only 20% of Japanese managers believed that quality will be a source of competitive advantage of the future. A poll in circa 2000 revealed that 80% of the U. 268 . The future is not about catching up with competition. incrementalism or nominal innovation has almost reached a plateau. but forging ahead in competition.THE PRESENT OF COMPETITION Beyond Reengineering – Numerator based managers (innovation) at least offers some hope. top managers believed that quality will be a source of competitive advantage of the future.
Companies need to fundamentally reconcieve itself. Empower from bottom to top. It involves Dream about the company’s future. as important as these may be. not just the organization. faster. better. aspirations and resources. and regenerate its strategies (breaking its – managerial frames). they are not enough to get a company to the future. Create a potential gap. not the other way. Creating the future requires industry foresight. It is based on deep insights into trends in technology. reinvent its industry. 269 . don’t predict. Transform the industry. demographics and lifestyles.THE FUTURE OF COMPETITION Regenerating – Leaner.
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. by converging technologies complex. Redraw the boundaries between industries.ABOUT THE TRANSFORMATION The future does not belong to those who take the industry for granted.e. hence do not fall sick in the first place. 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. Therefore. Successful companies have a complete grip over the industry. 271 . they do not need to restructure. blue oceans).
Such a process is called institutionalization (from people centric to organisational centric). The middle management plays a strong moderating role. 272 . Transformational leaders merely lead the way. A revolution that is thrust upon from the top seldom sustains.ABOUT THE EMPOWERMENT Bring about a revolution (a paradigm shift) in the organization. the revolution must start at the bottom and spread in all directions of the organization. More importantly. Most successful revolutions (Gandhi to Mandela) rose from the dispossessed.
Get to the future first. An ability to energize the company.THE FUTURE OF STRATEGY A company must get to the future not only first but also for less. What does it take to get to the future first? Understanding how competition for the future is different. without taking undue risk. Companies need to strategize (think ahead of times). 273 . It requires a lot of common sense and a little bit of out of the box thinking. A process for finding and gaining insight into tomorrows opportunities (Eg. Apple – iphone). South West Airlines – LCC. Toshiba – LCD. Apply the 40 – 30 – 20 principle.
What distinguishes a leader from a laggard. the farther it will be away from competition. As there is no one future. greatness from mediocrity. The farther one can see in this endless space. each point in space represents a unique business opportunity. is the ability to imagine in a different way what the future could be. We are in the midst of a 3600 vacuum. Companies of the future will be not based so much on the strength of their resources. but hundreds. as on their aspirations.HOW DOES THE FUTURE LOOK LIKE? There is no rule which says that for every leader there will be a follower. 274 .
THE EMERGING STRATEGY PARADIGM Not Only Reengineering Processes But Also Regenerating Strategy The Competitive Challenge Organizational Transformation Industry Transformation Competing for Market Share Competing for Opportunity Share Finding the Future Strategy as Learning Strategy as Positioning Strategy as Engineering Strategy as Unlearning Strategy as Dream Strategy as Architecture 275 .
THE EMERGING STRATEGY PARADIGM Not Only But Also Mobilising for the Future Strategic Fit Resource Allocation Strategic Misfit Resource Stretch & Leverage Getting to the Future First Existing Industry Structure Product Leadership Single Entity Product Hits & Timing Future Industry Structure Competency Leadership Dominant Coalitions / Co-option Market Learning & Preemption 276 .
Learning Curve t1 t2 t3 Time t4 t5 277 .LEARNING TO FORGET P1: The degree of learning in current period is directly proportional to the degree of unlearning in the previous period. Degree of Learning Unlearning Curve P2: Unlearning in previous period does not necessarily ensure learning in the current period.
CORE COMPETENCE A core competence relates to a bundle of skills (not an asset or a business) that revolves around activities or processes and critically underpins a firm’s competitive advantage. It cannot be matched even by its closest competitors. Leverage – They are the gateways to future markets. 278 . It represents the collective learning's of an organization centering around diverse streams of technologies. Inimitable & Insubstitutable – A high degree causal ambiguity between these skills yield sustainable competitive advantage. It is characterized by the following – Unique – It provides unimaginable customer value ahead of its times.
it gets more refined and valuable through use. Honda – engines. Toshiba – flat screen displays. it is deeply embedded in the heart of the organization. Intel – nano-electronics. leaders have one. Coca Cola – brand. Core competencies are the roots of the organization. A core competency cannot be outsourced. Nike – designing. at the most three to four. Wal-Mart – logistics.MORE ABOUT CORE COMPETENCE Sony – miniaturization. Canon – imaging. SKF – antifriction and precision. Most companies around the world do not possess one. 279 . Although a core competence may lose value over time. Toyota – lean manufacturing.
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 .
Emerging markets are characterised by infrastructural bottlenecks. and high transaction costs. 288 . strategies suited for the developed markets may not be appropriate for emerging markets. Korea. high levels of market imperfection). institutional gaps. 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. Chile) provide a different context (i. China.e. 1997).EMERGING MARKETS Emerging markets (India. Therefore.
PERFORMANCE (I) Diversity attempts to measure the degree and extent of diversification (Herfindahl.DIVERSITY . subsequently negatively related across developed markets. Concentric. Size & Scale. Optimum level of diversification Performance Diversity is initially positively related with performance. Experience Strategic Fit Diversity Palich. et al. Synergy. Entropy). (2000) 289 .
Huge initial investment.PERFORMANCE (II) Diversity is initially negatively related with performance. 2001) 290 . brand building Risk diversification. conglomerate power Threshold level of diversification Performance Diversity (Khanna & Palepu.DIVERSITY . subsequently positively related across emerging markets.
It should have a spread of assets. Characteristics – It should have a spread of affiliates or subsidiaries. revenues and profits. act locally (Eg. 291 . It should have a spread of manufacturing facilities. It should think globally. HSBC).INTERNATIONAL IDENTITY MNC’s consciously engage in FDI in different parts of the globe to forge resource diversity as a distinct competitive advantage. It should have a spread of interest groups / stake holders.
It reflects the disparities in women in workforce (Eg. 292 . Group Scale . Feminity Index . Risk Profile – It reflects the risk attitude of the top management (Eg.GLOBAL BUSINESS ENVIRONMENT Power Distance – It reflects the disparities in income and intellectual development (Eg.It reflects the relative role of team building (Eg. low power distance in developed markets and vice versa for emerging markets). low group scale in developed markets and vice versa for emerging markets). low risk profile in developed markets and vice versa for emerging markets). high feminity index in developed markets and vice versa for emerging markets).
terrorism (9/11). judiciary) of doing business in a particular country (Eg. credit rating.culture. high cultural adaptability in developed markets and vice versa for emerging markets). time value. flexibility (Eg. FOREX reserves. interest rates. corruption. customs. currency. Country Risk – It reflects the political and economic risk (Eg. 293 . way of life. attitude. dress sense. inflation. code of conduct. political stability. low country risk in developed markets and vice versa for emerging markets).GLOBAL BUSINESS ENVIRONMENT Cultural Adaptability – It reflects the adaptive ability to a changing environment .
in most emerging markets use of an interpreter may be a standard protocol. and vice-versa. Ethnocentrism – Developed country managers tend to regard their own culture as superior. High levels of ethnocentrism usually has a negative effect on business.GLOBAL BUSINESS ENVIRONMENT Time Sensitiveness – Developed country managers regard time as precious. time-zones. 294 . Language Barriers – Developed country managers expect foreign partners to communicate in their languages. however. Other factors – local celebrations. in most emerging markets meetings are delayed and lasts unusually long.
copyrights. The 2001 (Doha Round) focused on power blocks (NAFTA. It also highlighted the nexus between US & WTO. 295 . trademarks). It also initiated provisions on anti-dumping. It a multi-lateral treaty with 143 (as on 2002) member countries to reduce tariff and non-tariff (quota) barriers.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. BRIC). It focused largely on TRIPS (patents. In 1995 (Uruguay Round) GATT was renamed to WTO. ASEAN.
However with current recession in the US 2002 onwards. the Euro slowly started outperforming the Dollar. Euro). primarily the OPEC countries. 296 . The Euro was significantly devalued against the Dollar till 2002. three countries joined in 2002 increasing it to fifteen members as of 2008. The notable exception was Great Britain which still continues with its local currency (i. Sterling . However.Pound).e.e.EURO – SINGLE CURRENCY In 1999 twelve member countries in Europe joined hands to move over to a single currency (i. the Dollar still remains the most preferred currency globally.
Trade Block – It will strengthen the EU identity which would not have been possible otherwise.SINGLE Vs MULTIPLE CURRENCY Transaction Costs – Though the initial cost of introduction of a single currency is very complicated and costly. it helps avoiding transaction costs associated with a multiple currency. However. but it may have spill-over effects. a multiple currency is preferable where the business cycles of member nations are different. Transparency – A single currency is transparent and competitive. Rate Uncertainty – A single currency eliminates the risk of competitive devaluations. 297 .
FII Vs FDI INVESTMENT Classical economists believed that foreign investment (in any form) is basically a zero sum game (i. hot money). – FII (transfer of intangible resources) is fast but may have strong repercussions (i.e. – FDI (transfer of tangible resources) is slow but steady for the purpose of economic growth.e. It is short-medium term with comparatively low levels of commitment. the gain of one country is loss of another). It is long term with high levels of commitment. Neo classical economists believe that foreign investment may in fact be a win-win game. 298 .
.culture (food habits). buying patterns (spread). customer awareness (microwaves). promotion (surrogate advertising). economic (middle class buying power).INTERNATION MARKETING Product – The various attributes of a product may receive different degrees of emphasis depending on differences in . technology (microchip). lifestyle (petroleum 299 outlets – departmental stores). Pricing – It depends on the competitive structure (PLC – Kellogg's). Distribution – It depends on the market characteristics (fragmented – concentrated). usage (talk time).
equity is cheap in India). . 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. Leverage – The leverage may vary across countries depending upon money and capital market conditions (Eg.INTERNATION FINANCE Currency Risk – Many Indian IT companies (Rs) having business in US (Dollar) are asking for quotes in (Euro) or are shifting bases out of US to avoid risk of devaluation of Dollar.India) may be different from that another trading country (US – GAAP or IRS). debt is cheap in US.
however. and cultural barriers (language) vis-à-vis emerging markets. skills are more important that cultural fit and vice-versa.INTERNATIONAL HR An uniform HR policy is idealistic to enable parity in performance appraisal. shortened life cycles). Training – It is a pre-requisite for international business to reduce language. double taxation. Recruitment – In local recruitment. technology (convergence. labour laws. Compensation – Differential pay packages exists because of differences in purchasing power. social security. 301 . in most cases it is not desirable nor practiced.
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). . Bosch spark plugs are used by car manufacturers worldwide). reduce power costs) vis-à-vis infrastructural bottlenecks.
CONTEMPORARY TOPICS 303 .
but has inherent risks involved as well. innovation is the first attempt to carry it out in practice. Innovations typically paves the way for more secured and improved lifestyle for consumers in general. Innovation is all about staying ahead of competition. While innovation typically adds value for organizations. it has destructive effects as well. Innovation is the most preferred strategy today to maintain competitive advantage in the present turbulent business environment. 304 .INNOVATION An invention is the first occurrence of an idea for a new product or process.
process innovation is necessary to sustain the competitive advantage of product innovation. However. 305 . While product innovations are typically customer driven. Process innovation usually follows product innovation. 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. Strategic innovation has the potential to change the rules of the game.
306 . Medical Surgery (Lasik). Drug Development (Bio Chemicals).BUSINESS MODEL It is a simplified description and representation of a complex real world. Telecom (CDMA Technology).e. It leads to a shift in the price – performance envelope. Innovations are the back-bone of successful business models . Data Storage (Pen Drives). a paradigm shift). Disruptive business models brings in a new frame of reference (i. about how an organization makes money (i.e. putting an idea into practice). Processors (Pentium).
The cost structure resulting from the business model. 307 . The revenue streams generated by the activities. The segment(s) of clients to be addressed. The channels to reach out to the clients. The key partners involved in the activities. The proposed relationships established with clients. The key activities / processes necessary for execution.NINE BUILDING BLOCKS Value proposition offered to the market. The key resources and capabilities required.
BUSINESS MODEL FRAMEWORK 308 .
REVENUE MODEL Positioning is just not sufficient. Investment Banking. Real Estate) companies need to untangle and understand the intricacies of their business model. innovative companies to carve out unique business models to fend off competition. With the rapid erosion of certain industries (IT. It is just one piece of the puzzle. The revenue model described here are the means to generate revenues. It involves – Product Visualization – Product Prototype – Product Test – Capacity – Pricing – Distribution. 309 .
HOW TO MAKE INNOVATIVE CO’S Innovative company’s are a matter of culture and aspirations rather than tangible resources. Provide reasonable incentives (not necessarily monetary). Promote the culture of experimentation. Promote the grape-vine. 310 . A favourable intellectual property (IP) climate. Have a lean and a flat organization structure. Allow the workforce idiosyncrasies for their errors. Allow the management sufficient slack to be future oriented.
In most emerging markets where the IP climate is not so favorable. Collusion with the judiciary is also another distinct possibility in emerging markets. companies are increasingly relying on internal protection to sustain innovation effects.HOW TO PROTECT INNOVATION? Without adequate protection (external or otherwise) the effects of innovation does not translate to performance. 311 311 . The most preferred strategy of internal protection includes imbibing “causal ambiguity” in the production process to make reverse engineering difficult. however that possibility is slowly atrophying.
Corporate governance aims to reduce the principal-agent problem present in most professional managed organizations through appropriate forms of accountability and control mechanisms. In fact the principles of corporate governance implies that managers go beyond in satisfying the stated and unstated needs of the multiple stakeholders.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 .
This exposes the shareholders to additional risks and higher costs. However. From the strategic point of view managers tend to diversify into unrelated businesses as it provides higher returns hence a more favourable appraisal.AGENCY THEORY The root of Corporate Governance goes back to the Agency Theory. also known as the principal-agent problem or agency dilemma. not present in portfolio diversifications. 313 . According to the agency theory top managers and shareholders interests are usually conflicting in nature and tend to pull in opposite directions. shareholders can diversify their portfolio at a much lesser risk and cost.
ORIGIN & CONTEXT Since the early 20th century since a large part of public funds were held by publicly traded firms in the US. various laws were enacted to ensure proper usage of these funds. SEBI Report – 2005. the US government passed the Sarbanes – Oxley Act. After the Enron downfall. . 2002 to restore public confidence in corporate governance. 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.
GOVERNANCE PRINCIPLES Rights and equitable treatment of shareholders: Help shareholders exercise their rights by effectively communicating information in transparent ways that is understandable and accessible and encouraging shareholders to participate in general meetings. The key roles of chairperson and CEO should not be held by the same person and their offices be clearly separated. Role and responsibilities of the board: It deals with issues about an appropriate mix of executive and nonexecutive directors. including the society at large. 315 . Interests of other stakeholders: Recognize the legal and other obligations of all legitimate stakeholders.
Independence of the entity's auditors: Identification. Disclosure and transparency: Disclosure of information should be timely and balanced to ensure that investors have clear access to data and facts.GOVERNANCE PRINCIPLES Integrity and ethical behaviour: Organizations should develop a code of conduct for their top management that promotes ethical and responsible decision making. 316 316 . assessment and mitigation of risks and retirement by rotation over a fixed period of time. They should also implement systems to independently verify and safeguard the integrity of the company's financial reporting..
Remuneration: Performance-based remuneration is designed to relate some proportion of salary to individual performance. fire and compensate top management. However. Balance of power: The simplest balance of power is very common. a person benefitting from a decision should abstain from it. Regular board meetings allow potential problems to be identified. with its legal authority to hire.GOVERNANCE STRATEGIES Monitoring by the board of directors: The board of directors. safeguards invested capital. 317 . they should provide no mechanism or scope for opportunistic behaviour. discussed and resolved.
who had no management ties. They defined a well-governed company as one that had mostly out-side directors. undertook formal evaluation of its directors. 318 . McKinsey found that 80% of the respondents would pay a premium for wellgoverned companies.GOVERNANCE & PERFORMANCE In its “Global Investor Opinion Survey” of over 200 institutional investors in 2002. Egypt and Russia) to around 40% for Canadian & European companies. and was responsive to investors' requests for information on governance issues. from 10% for companies where the regulatory backdrop was least certain (those in Morocco. The size of the premium varied by market.
However. the short-term view of profit maximisation gave way to a more broader and mediumterm view wealth maximisation of the shareholders. 319 . The basic premise is that firms cannot exist in vacuum. corporate philanthropy should be a part of every corporate mission. today economic institutions are considered as a major drivers of improvement in quality of life in general and therefore needs to include multiple stakeholders. Over a period of time. Therefore.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.
Therefore. the debate on CRS still continues whether firms should detract its focus from its business? 320 . “a healthy business cannot exist in a sick and impoverished society”. “an enterprises decisions and actions being taken for reasons at least partially beyond its immediate economic interests”. giving a very important message that one cannot exist without the other. in fact a large part of it is significantly overlapping. Therefore.CORPORATE SOCIAL RESPONSIBILITY As Peter Drucker rightly pointed out that. CSR can be defined as. economic and social responsibilities cannot be mutually exclusive. However.
people are becoming increasingly aware of their right to a decent and healthy life. 321 . MRTP). 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. The role of media: The media and various consumer organizations have come up in protecting consumer rights and exposing mal-practices.GROWING CONCERN FOR CSR Awareness due to education: With growing literacy.
eco efficiency. Literacy & Training Programs – (Eg. and extended producer responsibility (Eg. Education. Refrigerators – CFC. 322 . Tata Steel – Life Line Express). Health & Hygiene – Attending the health hazards due to wastes and by-products to employees and society in proximity (Eg. Aditya Birla Research Centre – LBS).CSR STRATEGIES Green Supply Chain Management: It includes environmentally preferable purchasing.Paper packaging. Cement . designing eco-friendly products. Exide – Product take back).
they're helping millions of the world's poorest people to escape poverty. Prahalad notes that future markets exist collectively. They represent an enormous opportunity for companies who learn how to serve them. Strategic innovations leading to disruptive business models can show the way out. In turn companies by serving these markets. across the world's billions of poor people having immense untapped buying power. 323 .BOTTOM OF THE PYRAMID With the market across most developed markets including the US getting saturated. K. C.
BLUE OCEAN STRATEGY 324 .
MARKETSPACE .TWO WORLDS 325 .
profitable growth. .WHAT IS RED OCEAN? Companies have long engaged in head-to-head competition in search of sustained. where most industries are saturated. They have fought for profits. and struggled for differentiation (cost or product). Yet in today’s overcrowded industries. competing head on results in nothing but a bloody red ocean of rivals fighting over a shrinking profit pool. one companies gain is always at the 326 cost of another companies loss. battled over market-share. In today’s red oceans.
WHAT IS BLUE OCEAN? Tomorrow’s leading companies will succeed not by battling in red oceans. but by creating blue oceans of uncontested market space ripe for growth . Such strategic moves are possible through the pursuit of product differentiation and low cost simultaneously. Blue Ocean’s have existed in the past. rendering rivals obsolete and unleashing new demand. It is only the frames of the . it will exist 327 in the future as well. It helps in creating powerful leaps in value for both the firm and its buyers.
RED OCEAN Vs BLUE OCEAN Compete in existing markets Compete in uncontested markets Beat the competition Exploit existing demand Make the competition irrelevant Create and capture demand Make the value-cost trade off Break the value-cost trade off Demand is the limiting factor Supply is the limiting factor 328 .
information imperfections atrophy instantly. Population shrinkage across a no. Technological advances have substantially 329 improved industrial productivity. Demand across developed markets reaching a plateau. of European nations. As trade barriers between nations & regions fall.BLUE OCEAN STRATEGY IMPERATIVES Prospects in most established market spaces – red oceans – are shrinking steadily. . Niche markets & monopoly havens are continuing to disappear.
managerial moves are.CONCEPTUAL UNDERPINNINGS Blue oceans have existed in the past and will exist in the future as well. 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). the underlying technology was often already in existence. They are not necessarily about technology. Incumbents often create blue oceans within the ambit of their core business. Company & industry are the wrong units of 330 strategic analysis. .
BLUE OCEAN .IMPLEMENTATION Reduce Which factors to be reduced below the industry standard Eliminate Which of the industry factors that the industry takes for granted should be eliminated Create VI Which factors should be created that the industry has not offered Raise Which of the factors should be raised above the industry’s standard 331 .
IMPLEMENTATION SEQUENCE Buyer Utility (1) Is there exceptional buyer utility in your business idea? Price (2) Is your price easily accessible to the mass of buyers? Blue Ocean Strategy Adoption (4) What are the adoption hurdles in actualizing your business idea? Are you addressing them up front? Cost (3) Can you attain your cost target to profit at your strategic price? 332 .
. Southwest Airlines: Pioneering the concept of LCC. Citibank – Automated teller machines & credit 333 cards.SOME GLARING EXAMPLES In the last century authors Kim and Mauborgne have documented the creation of more than 150 blue ocean creations across 30 industries – Virgin Atlantic: Fractional jet ownership or travel to space. 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. greater than themselves. All they need to do is change their managerial frames. companies & managers are largely at the mercy of economic forces. According to this view managers need not be constrained to act within the confines of their industry. 334 .WHAT THEN IS THE HANDICAP? Most of the traditional views in strategy having its origin in (Economic Theory) led to what is called the – structuralist paradigm. According to this view.
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