This action might not be possible to undo. Are you sure you want to continue?
Course Code: 611 & 612 Dr. Subir Sen – Faculty Member, IBS
E-Mail: email@example.com, 9830697368 1) Crafting & Executing Strategy – Thompson & Strickland. 2) Strategic Management – Pearce & Robinson. 3) Strategic Management – Fred. R. David. 4) Exploring Corporate Strategy – Johnson & Scholes. 5) Competitive Advantage – Michael E. Porter. 6) HBR – Articles & Case Studies.
STRATEGY - DEFINITION
Strategy is all about making trade-offs between what to do and more importantly what not to do; consciously choosing to differentiate. It reflects a congruence between external opportunities and internal capabilities. Types of strategies – Corporate Strategies – It is all about making choices across various businesses and allocating resources among them. Business Strategies – It is all about developing leveraging and sustaining competitive advantage. Functional Strategies – It is all about finding newer ways to perform existing processes, or 3 better still adopting new processes altogether.
STRATEGIC MANAGEMENT DEFINITION
Strategic management attempts to integrate the traditional management functions and align the organization as a whole with the broader environment to make resource allocations in a way to achieve the strategic intent of the organization. This alignment is called strategic fit. It serves as a road-map for the organization in its growth trajectory. It provides the direction – extent – pace – timing. It depends on the turbulence of the environment and the aggressiveness of the organization. It distinguishes the winners from the losers.
PILLARS OF STRATEGIC MANAGEMENT
Differentiation – Differentiation of key inputs and technologies helps a firm to consciously move away from homogeneous to heterogeneous markets enabling them to earn super-normal profits from normal profits. Integration – Whenever dealing with a complex task of managing a business (i.e. involving a no. of variables with cross linkages) it is in the interest of simplicity that the task be broken up in smaller components. However, for effective control, integration is essential. Alignment – Since differentiation is prone to replication, it is in the interest of the firm to differentiate continuously by aligning the resources with environmental opportunities.
STRATEGIC MANAGEMENT FRAMEWORK
Economic al Strategic Finance Fit Political Strategic Intent Fit Political Marketin g Manageme nt Social & Cultural
It is long-term in nature. It involves substantial resource outlay. It is irreversible. It is about adaptation and response to the same. It requires full commitment of the top management. 7 . It provides broad guidelines. It is a holistic and integrated approach.FEATURES It forms the core activity of the top management.STRATEGIC MANAGEMENT . It is all about creativity and innovation.
It brings instant success. It is about forecasting. It is rocket science. 8 . It involves nitty-gritty's. It is fool-proof in nature. It about mere data and facts. It is about a definite formula. It involves only the top management.STRATEGIC MANAGEMENT – MYTHS It involves short-cuts. It attempts to minimize risk. It a bundle of techniques or even tricks.
. To tap markets across boundaries. To innovate. again and again ……. To be proactive. To be future oriented. scale and scope. 9 To develop core–competencies. To be insulated against environmental threats.STRATEGIC MANAGEMENT IMPERATIVES To be continuously alert. To leverage size. rather than reactive. To assimilate change faster. To generate large resource pool. To gain expertise in technologies.
In contrast. In the ancient days battles were won not by virtue of size of the army or armory. whose origin can be traced to some of the greatest battles fought in the ancient days. battles fought on the market front are won by companies by virtue of their obsession & strategies. obsession. 10 .STRATEGY . It is an old wine in a new bottle. and more importantly . but with a lot a rigour and robustness. Even in today’s markets. but by virtue of their courage. In the ancient days battles were fought over land.ORIGIN The word strategy has its origin from the Greek word strategia meaning Military Commander.strategies. today's battles are fought over markets.
– Toyota’s entry in the US. challenging GM and Ford. US attack of Morocco to capture Germany – Strategy: Pin-hole strategy – Wal-Mart challenging Sears by entering small towns. 11 . – Yahoo and Microsoft challenging Google. – Reliance’s entry into telecom. Napoleon’s attack on Russia – Strategy: Waiting for the right time. Allied Forces Vs Germany (WW-II) – Strategy: Forging alliances.SOME PARALLELS Japan’s attack on Pearl Harbour – Strategy: Attack where it hurts the most.
A paradigm is a dominant belief about how the business and its environment operates. 1910).Industrial Revolution. – Mass Production Organization Size – Complicated Processes – Complex Structures Evolving of an emerging paradigm – survival of the fittest (Fayol & Taylor. 12 . The first major discontinuity in the history of global business environment was the .EVOLUTION OF MANAGEMENT As Peter Drucker refers to it. The things happening around the firm when totally disconnected from the past leads to a paradigm shift. a radical change in the business environment brings about discontinuity.
– Affluence of the new customer (i. push to pull).e. Efficiency and effectiveness are no longer sufficient. From uniform performance. – Global market place. performance across firms became differentiated. – Changes in the technology fore-front.EVOLUTION OF STRATEGIC MANAGEMENT The second major discontinuity in the history of global economic environment – World War II. The question of outperforming the benchmark became the new buzzword. – Homogeneous to heterogeneous products. 1960). Survival of the most adaptable becomes a new management paradigm (Ansoff. 13 .
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 .
APPROACHES TO STRATEGY Analytical Approach – Igor H. – Biases and prejudices has a very little role to play in strategic choices pursued by managers. – The choice of product-market mix is based on conscious evaluation of risk – return factors. 15 . Ansoff (1960) – Strategy can be segregated into certain mutually exclusive and inter-related components aimed at managing the growth of an organization. Learning always begin on a clean sheet of paper. – It is primarily the top management’s prerogative. – The choice of strategy is primarily concerned with external ones rather than internal ones.
The organization initially decides which industry to enter. – Organization structure will precede and cause changes in strategy. – The top managers then decide on the type of organization structure & systems to be in place. everything else follows. who will be the top managers. 16 . how it will compete. Successful organizations align authority and responsibility of various departments in way to reach overall objectives. Once the control systems are in place.APPROACHES TO STRATEGY Design Approach – Alfred Chandler (1970) – Structure follows strategy. – Management control systems has a dominating role in influencing firm performance.
– The organization will outperform the industry where environmental forces are weak and vice-versa. customer. new entrant. 17 . substitutes.APPROACHES TO STRATEGY Positioning Approach – Michael E. competitors. – A firms performance is inversely related with the bargaining power of environmental forces to which it is exposed. – An organization is seldom in a position to influence the larger business environment. – The environmental forces comprises of – supplier. Porter (1980) – Choose a consumer segment and position your product accordingly.
K.APPROACHES TO STRATEGY Core Competence – C. locating in most attractive industries and pursuing the same strategy. They are complex resources and undermines a firms competitive advantage. Prahalad (1990) – The key to superior performance is not doing the same as other organizations. – It enables a firm to deliver unimaginable value ahead of time. – Organizations can significantly alter the way an industry functions. but exploiting the resource differences among them. – Core competencies are a set of skills that are unique and can be leveraged. 18 .
STRATEGIC MANAGEMENT PROCESS Strategic Intent Strategic Planning Strategic Gap – Environmental Scanning – Internal Appraisal of the Firm Strategy Formulation – Corporate Strategy – Business Strategy Strategic Choices – Functional Strategy Strategy Implementation Strategy Performance Strategy Evaluation & Control 19 .
TOP MANAGEMENT PERSPECTIVE 20 .
It provides a sense of direction and destiny. A gap that consciously manages between stagnation and atrophy. you cannot reach there. A substantial gap between its resources and aspirations. It involves an obsession to be the best or outperform the best.STRATEGIC INTENT If you cannot see the future. It is the cornerstone of an organizations strategic architecture reflecting its desired future state or its aspirations. 21 . It implies a significant stretch. A strategic intent is a statement of purpose of existence. It’s a philosophy that distinguishes it from its competitors.
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 .
e. when radical changes in the internal and external environment (i. To put it more simply. it can be perceived as a set of working rules (similar to thumb rules) that enables the top management to decide what can be done and more importantly what cannot be done. 23 . strategic variety) is apparent. It is core to the strategic intent of the firm. Dominant logic changes.DOMINANT LOGIC A dominant logic can be defined as the way in which the top management team conceptualizes its various businesses and make critical resource allocation decisions.
– It represents the company’s audacious. It enables the top management to remain focused. beyond just making money. It ensures that the company does not wander off into unrelated zones or fall into an activity trap. 24 .VISION It is a dream (not a forecast) about what the company wants to become in the foreseeable future. It provides an unity of purpose amidst diversity of personal goals. It is a combination of three basic elements – – An organizations fundamental reason for existence. – It stands for the unchanging core values of the company. but achievable aspirations.
Brevity – It should be short.VISION . clear. and memorizable.CHARACTERISTICS Reliance – Where growth is a way of life. Sharing – The company across all hierarchies should have faith in it. 25 . Empathy – It should reflect the company’s beliefs to which it is sensitive. not an utopian dream. Reachable – It should be within a reasonable target in the known future. In Reliance when a new project becomes operational top managers hand over charge to the SBU heads and move on to a new project. Clarity – Vividly descriptive image of what the company wants to be known for in the future.
It facilitates development of skills & capabilities. It makes strategic alignment easier. It fosters risk taking and experimentation. It gives a shared platform. It gives the impression of a forward-looking organisation. To prevent the fall in a activity trap. It gives enlightment.VISION .ADVANTAGES To stay focused on the right track. It lends integrity and genuineness. 26 . It provides a holistic picture.
its reason for existence. 27 . It enables the firm to define its business landscape and identify its competitive forces.MISSION Mission defines the space that a business wants to create for itself in a competitive terrain. A broad mission statement helps in fending competitors. It is intuitive for managers to conceive their business in terms of the customer needs they are serving – What business are we in? – Which customer needs are we serving? It should be broad based and relevant to all stake-holders. It serves as a road map to reach the vision. Although the purpose may change over time.
We offer strength. We offer comfort. ………………….MISSION – SOME IDEAS Reliance – We are in the business of integration. We offer solutions. – We do not offer insurance. All the businesses of the company are strongly integrated with their main business. Some other examples – We do not offer shoes. – We do not offer software's. – We do not offer steel. …………………. …………………. …………………. We offer security. 28 . though some may seem unrelated in nature.
– It is based on Management by Objectives (MBO). – It prevents deviation. – It keeps the mid management pre-occupied.100K crore company by the year 2005. 29 . – It adds legitimacy and motivation. – It helps identifying key success factors. – It provides a benchmark for evaluation.GOALS & OBJECTIVES Reliance – We want to become a Rs. It provides a quantitative feel to an abstract proposition. It is an end result (quantifiable) something a firm aims and tries to reach in a time bound frame. – It lends direction – time frame in the medium term.
– Use price-elasticity to break market barriers. – Acquire a market share of indomitable position.PLANS Reliance – Desire to invest 25K crore in telecom business by circa 2010. – Leverage economies of size and scale. The details of the plan Reliance Telecom adopted were – Backward integrate process technologies. It is the process of garnering necessary inputs. 30 . and gaining access to desired markets to achieve the desired goals and objectives. It is specific to a particular business. – Compress project times. coordinating appropriate technologies.
Historical studies have shown that most organizations tend to continue with their existing strategies. This state of affairs is known as strategic drift. In such a context. This tendency to restore continuity is known as inertia (resistance to change). However. 31 . equilibrium is maintained. radical change may lead to disequilibrium. It often leads to an organizational crisis. strategies lose touch with the emerging realities. When changes in the environment is incremental. past strategies tend to have a bearing on future strategies.STRATEGIC DRIFT Due to top management commitment.
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 .
– Creating obligations of reciprocity. – Creating a favourable image. – Developing a platform of support. – Hiding vulnerability. – Using covert tactics to pursue self interests. Organizational politics involves intentional acts of influence to enhance or protect the self-interest of individuals or groups over organizational goals. Some instances of organizational politics – Formation of powerful groups or coteries.ORGANIZATIONAL POLITICS Strategic drift often leads to organizational politics. – Distorting information to gain mileage. 33 .
Other causes – – The plans are unworkable and utopian. – The environment context has changed. – Influential stake-holders back out. – Persons responsible for strategy conceptualization and implementation are34 divergent. . A realized strategy is what the top management actually translates into practice. Usually there is wide gap between the two when organizational politics is evident.INTENDED & REALISED STRATEGIES An intended strategy is an expression of interest of a desired strategic direction.
LOGICAL INCREMENTALISM According to the incrementalism approach (contrary to integrated approach) practitioners simply do not arrive at goals and announce them in crafted and well defined packages. but the master scheme of the rational comprehensive scheme is not apparent. However. Strategy formulation and implementation are linked together in a continuous improvement cycle. They simply unfold the particulars of the sub-system in stages. Learning is an integral part of logical incrementalism. but as a defensible response to the complexities of a large organization that mitigate against publicizing goals. this is not to be treated as “muddling”. 35 .
The broader objective should serve the overall interest of the organization. Leveraging Crisis – A sudden crisis or an opportunity should be used as a trigger to facilitate acceptance and implementation of change. Adaptation – As implementation progresses. 36 .IMPLEMENTING INCREMENTALISM General Concern – A vaguely felt awareness of an issue or opportunity. Agent of Change – Formal ratification of a change plan through MBO. Macro Broadcasting – The broad idea is floated without details to invite pros and cons leading to finer refinements.
Tampering with surface level factors often leads to atrophy. . Dominant logic’s are the cornerstones of change when strategic transformation is apparent. Strategic transformation becomes smooth through a change in top leadership.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. As it brings 37 with it a different dominant logic. It creates blinders.
LEARNING ORGANIZATION A learning organization is capable of continual regeneration from knowledge. experience. – Experimentation – Fosters a culture of risk taking. – Organisational Slack – Enough free space. It helps prevent a strategic drift from occurring at the first place. – Informal Networks – Emerging of new ideas. Factors that fosters a learning organization – Pluralistic – An environment where different and even conflicting ideas are welcome. A learning organization must continuously focus on unlearning as well. and skills that fosters experimentation and questioning and challenge around a shared purpose. – Constructive Bargaining – Agree to disagree. 38 .
ENVIRONMENTAL CONDITIONS Dynamic Scenario Planning Learning Organization Static Forecasting Decentralization Simple Complex 39 .
ANALYZING BUSINESS ENVIRONMENT 40 .
Strategic gap basically points towards a vacuum of where the organisation wants to be and where it is. Competitive advantage provides the surest way to fulfill the strategic gap. It requires a quantum leap (i. It is pro-active in nature.e. It points to a position of superiority with relation to competition. It is based on the assumption of radical change. Strategic planning is a function of discounting the future. gap analysis). 41 . It is reactive in nature.PLANNING & STRATEGIC PLANNING Formal planning is a function of extrapolating the past. It is based on the assumption of incremental change.
It is exploratory in nature. Environmental scanning is very important component of strategic planning.ENVIRONMENTAL SCANNING The environment is defined as the aggregate of conditions. 42 . and influences that affect an organizations way of doing things. not guided by any boundaries. The world is flat. resources and ideas move unhindered. events. Environmental factors can be external as well as internal to the organization. The segments of the environment a top manager scans selectively depends upon his dominant logics. A manager has to continuously scan the environment to ensure alignment of the strategies with the radically changing environment.
for which a holistic picture is required. Understanding the composite effect is critical.PESTEL PESTEL attempts to provide a broad framework on how the broader environmental forces affects an organization and influences the way it practices strategy. 43 . but also to analyze the complex linkages across them. It is important not only to identify the structural drivers of change. which may be different from the past impact. It is particularly important that PESTEL be used to look at the future impact of environmental factors. It is not intended to be used as an exhaustive list.
Capital Market & Forex Reserves. Social Values. Infra-Structural Investments. Economic Cycles. Economic – GDP. Savings & Investment. Social – Population Diversity. Government Attitude. Economic Model. Subsidies & Protection. Literacy Levels. Language Barriers. Income & Age Distribution. Inflation & Interest Rates. Central – State Co-alignment. Currency Stability. Licensing & Quotas. Monsoon & Food Grains Reserves. 44 . Religious Sentiments. FDI Inflows. Fiscal Deficit.PESTEL FRAMEWORK Political – Government Stability.
Research & Development. Legal – Monopolies Legislation. Employment Laws. Carbon Credits. Obsolescence Rate. Environmentally Preferable Purchasing. Waste Disposal & Emissions. ERP. Environmental – Global Warming & CSR. Patents. Consumer Protection Laws. Technological Convergence.PESTEL FRAMEWORK Technological – Innovation. Pollution Control Laws. 45 . Patent Laws. Product Design. Extended Producer Responsibility. Non-Fossil & Alternative Fuels. Direct & Indirect Taxes. Product Safety & Health Hazards.
Abolition of import licenses.VRS. New Trade Policy (NTP) – Lowering import tariffs. PSU Disinvestments. Structural Adjustments – Phasing out subsidies. 46 . Capital Market Reforms.ECONOMIC LIBERALISATION New Industrial Policy (NIP) – Liberalizing industrial licensing. Economic Reforms – Fiscal & Monetary Reforms. Curtailment of PSU’s. Encouraging FDI. Exit Policy. Banking Sector Reforms. FERA Liberalization. Encouraging exports. Rupee convertibility. MRTP Liberalization. Dismantling price controls.
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.
DISCONTINUITY Hyper Competition – MNC’s . Consumerism Challenges on the technology front – Competencies become technology based – Investment in R&D become inescapable 48 .Globalization – Cheap Imports & Dumping – Push to Pull Marketing Buyers exacting demands – Shortage to surplus – Price competition – Life-style changes – Stress on quality.
DISCONTINUITY 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 .
profit potential) per se. 51 . the forces are subject to changes. incremental or otherwise.e. but also used to understand how they can be countered and overcome. It is even wiser to apply the same at the product – market level.FIVE FORCES MODEL ASSUMPTIONS The model is to be used at the SBU level and not at the industry level. It depicts the attractiveness of an industry (i. The five forces have strong cross-linkages. The model should not be used as a snapshot in time. It should not only be used to understand the forces.
Resource profile & fear of retaliation. Scope for backward integration. Presence of substitutes or unorganized sector. High switching costs. Low customer switching costs. 52 . Undifferentiated product. Learning curve advantages. Low relative importance of the segment.PORTERS FIVE FORCES ANALYSIS Threat to Entry – Economies of size and scale. Government policy. Product differentiation through proprietary technology or brand power. Access to distribution channels. Low margins & stagnancy. Threat of Customers – Buyer concentration and volumes. Capital requirements. Industry stagnation. Unimportance of product quality.
Unorganised sector. Industry stagnancy. Product perishability. High customer switching costs. Low level of differentiation. Buyer’s propensity to substitute. Piracy and counterfeits. Diversity of players. Threat of Substitutes – Improvement in price -performance trade-off. High exit barriers. Scope for forward integration. Jockeying for position – Fragmented market. Intermittent overcapacity. Lack of substitute inputs. Differentiated inputs. 53 . Produced by industries earning high profits. Low relative importance of the segment.PORTERS FIVE FORCES ANALYSIS Threat of Suppliers – Supplier monopoly.
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. Inertia – Excessive commitment to past strategies prevents firms from tapping emerging opportunities. Reliance). Resource Profile – It highlights the capabilities (generic) or competencies (business specific) of the firm. Business Scope – The intention whether the firm wants to be in a single. Cohesiveness – Degree of bonding existing across affiliated firms. 54 . Tata).
which further reduces costs. However.EXPERIENCE CURVE The cost of performing an activity declines on per-unit basis as a firm becomes more efficient. With lower costs. an E-Curve can prove to be futile during discontinuity. leverage it as a competitive advantage. Matured firms will always be positioned advantageously on the ECurve than new entrants. Experience curve has strong linkages with performance. The E-Curve thus enables organisations to build entry barriers. and with lower prices it can increase its sales volume. it can price its products more competitively. 55 . experience teaches better and more effective way of doing things.
EXPERIENCE CURVE Cost per unit of output Decreases at an increasing rate Point of inflexion Decreases at a constant rate Decreases at a decreasing rate Production / Volume 56 .
TRADITIONAL VIEW Efficiency = Lower Costs 2 3 1 Experience = Efficiency Lower Costs = Higher Sales Entry Barrier = Better Performance 4 6 5 Higher Sales = Lower Costs Lower Costs = Entry Barrier 57 .EXPERIENCE CURVE .
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 .
Case Studies – Structured Questionnaires. 59 Analysts. . It is one of the earliest models in environmental scanning. Suppliers. Press Clippings & Interviews. A SWOT audit involves – Company Records – Annual Reports. Interviews. It helps an organisation to capitalize on the opportunities by maximizing its strengths and neutralizing the threats minimizing the weaknesses. Acronym for Strengths – Weaknesses – Opportunities – Threats. Customers. Observation. Business Intelligence – Bankers. Competitors.VULNERABILITY ANALYSIS . Websites.SWOT The framework was originally conceptualized by Kenneth Andrews in 1970.
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 .
Large resource pool – Eg. 61 .SOURCES OF STRENGTH Strong brand identity – Eg. Strong after sales & service network – Eg. Biocon. Tata. Tata Steel. SBI. Caterpillar. Volkswagen. Toyota. ITC. Ranbaxy. Honda. Reddy’s. Engineering Skills – Eg. Reliance. Siemens. Infosys. Dr. Strong R&D base – Eg. Economies of scale – Eg. Aditya Birla. Good credit rating – Eg. Motivated employees & cordial industrial relations – Eg. HUL. Infosys. Reliance. Excellent penetration – Eg. Sony. High quality products – Eg.
Strategic myopia – Eg. Group . Inertia – Eg.SOURCES OF WEAKNESSES Outdated technology – Eg. Organizational Politics – Eg. Hindustan Motors. CMC (Tata Group) 62 . B. Procter & Gamble. Excessive diversification – Eg. Nirma. Ballarpur Inds. Bijoligrill. Lacking experimentation culture – Eg. J. Single product syndrome – Eg. Modi Group. Lack of product / brand clout – Eg. CESC. Narrow business scope – Eg. Excess manpower – Eg.Raymond. K. Tatas. K. SAIL. Inefficient top management – Eg.
Growing population – Eg. Retailing. Middle-class buying power. GDR’s. Maruti.SOURCES OF OPPORTUNITIES Delicensing of Industries – Eg. Market driven Pricing – Eg. Fertilizers. Exit Policy – Eg. ECB’s. Collaborations & Joint Ventures – Bharti & WalMart. Abolishing MRTP – Eg. Sugar.Tata Motors. Capital market reforms – Eg. Telecom. 63 . Fertilizer. Sugar. Free pricing – Eg. Globalization – Eg. Market driven Interest rates – Eg. VRS. Abolishing CCI. Life style changes – Eg. Insurance. Banking.
(1985–1990). Onida. Foreign Direct Investment (FDI) – Eg. Dumping from China. Tsunami. Terrorist attacks – Eg. Natural disaster – Eg. Satyam. Nationalisation – Eg. Earth Quake. Hostile take-over – Eg. Lack of Corporate Governance – Eg. Singur SEZ.SOURCES OF THREATS Political instability – Eg. 64 . Import relaxation – Eg.Social activism – Eg. Reliance. Economic recession – Eg. Group disintegration – Eg. (2008). Land acquisition . Tata Steel. Bajoria – Bombay Dyeing. 26/11. 11/9.
Stages in ETOP analysis – List the aspects of the environment that has a bearing on the organization. Assess the extent of impact of the factors. 65 . Forecasting – Predict the future (i. time series.ETOP Acronym for Environment – Threat – Opportunity – Profile. Holistic view – Prepare a complete overall picture. It represents a summary picture of the external environmental factors and their likely impact on the organization.e. Delphi's technique. Strategic responses (including adaptation) to opportunities and threats is critical for survival and success. scenario analysis).
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. It is also a form of assessing vulnerability through longitudinal analysis. Relative attractiveness of the market. . 66 Vertical integration is a powerful strategy. selectively. An organization can draw upon the experience of its peers in similar situations. Some key findings on major performance drivers that explains 75% deviations in performance – Product quality and relative market share.
– Contexts may vary over time.LIMITATIONS The analysis is based on historical data and it does not take care of future challenges. Managers should be particularly cautious while referring to such data during times of discontinuity as it makes past patterns futile. – Contexts may vary across countries. Authenticity of data is of prime importance – Contexts drawn across one organization may not be applicable to another. when radical changes in the economy takes place. .PIMS . therefore 67 validity may be a question. As every organization is unique in its own way.
KSF helps organizations spot early opportunities and convert them into value adding business propositions. It enables the top management to draw focus.KEY SUCCESS FACTORS (KSF) KSF relates to identification and putting concentrated effort on a particular activity or process which forms the very basis of competitive advantage. It involves a three-stage process – Identify KSF – What does it take to be successful in a business? Drawing KSF – What should be the organizations response to the same? Benchmarking KSF – How do we evaluate organization success on this factor? 68 .
IDENTIFYING ALTERNATIVE STRATEGIES 69 .
It reflects the customer needs it intends to satisfy. It indicates the quality of growth an organization is looking for. national. related. It provides broad direction to the groups vision and mission.CORPORATE . global) of a firm and deals with choices of allocating resources across them. 70 .GRAND STRATEGY It is concerned with the overall business scope (single. unrelated) and geographical scope (local. A corporate strategy identifies and fixes the strategic gap it proposes to fill. It determines the locus a firm encounters with internal and external environment. dominant.
CORPORATE STRATEGY MATRIX Corporate Strategy Stability Stability Growth Growth Combination Diversification Divestment Intensification Market Penetration Related Vertical Market Development Product Development Unrelated Horizontal 71 .
(Eg. The scale and scope of present operations remains almost intact. does not relate to do-nothing (Eg. – Why disturb the existing equilibrium set up? – Limited resource position. Citibank). Stability however. Even during adverse times firms need to adopt a strategy to sustain current performance levels. The reasons for stability strategy – – Lack of attractive opportunities. 72 . – The firm may not be willing to take additional risk associated with new projects. – To stop for a while and assess past records. erosion of capabilities. Hindustan Motors).STABILITY It involves maintaining status-quo or growing in a slow and selective manner.
GROWTH . 73 .ANSOFF’S MODEL New Product Existing Product Existing Market Market Penetration (+) Product Development (++) New Market Market Development (++) Diversificatio n (+++) Note: (+) indicates degree of growth and risk involved.
within a well defined market segment. – Suitable for industries where scope for technological breakthrough is limited. Britannia). – The company carries a risk of product obsolescence. Ujjala.MARKET PENETRATION It is a strategy where a firm directs its entire resources to the growth of a single product or a closely knit product set. convert competitors customers. direct non-users to users. – Helps firms which are not comfortable with unfamiliar terrain. 74 . (Eg. Market penetration can be achieved by – increasing sales to current customers. – Elongated product life-cycle. Nirma.
– Immense customer reach & flexible advertising. Du Pont – Nylon: parachutes.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. socks & stockings. – Creativity and innovation – thinking out of the box. – Stretches product life cycles. – Moves across geographical boundaries. tyres. fabrics. – Unconventional and flexible distribution channels.…… or Teflon: aircraft technologies to cutlery to paints or Raytheon Corp – Microwaves: radars to kitchen appliances). (Eg. upholstery. carpets. 75 .
– Leverage on customer and brand loyalty. – Leveraging through – innovation.Strolleys). aesthetics. – Deliverable through – redesigning or reengineering.PRODUCT DEVELOPMENT It is a strategy where a firm tries to achieve growth through a radical new product (Eg. – Substitutes that serve the same needs (Eg. features. perception. Close Up: Fluoride – Gel toothpaste or VIP . reliability. durability. Refills) 76 . Microsoft: DOS to Windows) or a substantial improved version (incremental) of an existing product to repeatedly enter the same market (Eg. – Areas of product improvement – performance. conformance. serviceability.
industrial embassies).e. – High transaction costs and institutional gaps. thereby creating a new business. 77 . From the traditional point of view. From the modern point of view they are strategically dissimilar. – Internal capital market. – Permits: quotas. licenses (i.e.DIVERSIFICATION It marks the entry of a firm into newer markets with new products. – Conglomerate or market power (i. the new business is distinct from the existing business in terms of – inputs – technologies – markets. dominance). – Risk reduction. Why do firms diversify in the Indian context? – Shift the growth trajectory or opportunistic.
Let us assume that there are two businesses constituting the entire market – coffee and icecream.HOW DIVERSIFICATION REDUCES RISK? Consider a hypothetical planet. while the coffee business would register a return of 30%. ice-cream business would register a return of 10%. cold wave dominates the planet. while the coffee business would register a return of 10%. either of which is equally likely to prevail. What would be your ideal diversification strategy through optimization? 78 . in which a given year is either under hot or cold wave. the ice-cream 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.
and out-sources the noncore activities (Eg. Ranbaxy.A firm produces part of its own requirements and buys the rest from outside suppliers with a variable degree of ownership and control. Reliance). Reddy’s). Tapered integration . Quasi-integration . Dr. Usually the firm concentrates on its core activities. 85 .Where one firm has full ownership and control over all the stages of a value-chain in the manufacturing of a product (Eg.A firm gets most of its requirements from one or more outside suppliers that is under its partial control through value chain partnerships (Eg.QUASI & TAPERED INTEGRATION Full Integration . Maruti – Sona Steering).
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 .
core business).CONGLOMERATE DIVERSIFICATION It relates to entry of firms into businesses which are distinct in terms of – inputs – technologies – markets.e. and are also strategically dissimilar.e.e. myopia). lack of strategic intent. lack of knowledge of competitive forces).e. Firms usually engage in conglomerate diversification when emerging opportunities are very attractive and offers potential growth opportunities. synergies pulling in opposite directions). 87 . Drawbacks of unrelated diversification – – Cost of failure (i. – Cost of dysynergy (i. – Cost of ignorance (i. – Cost of neglect (i.
CONGLOMERATE DIVERSIFICATION Paper & Packaging Edible Oils Tobacco Hotels Food & Confectionary 88 .
Glaxo’s “Glucon-D” to Heinz). Tata Pharma. It taken into account when performance is disappointing (i. It may also involve a SBU (Eg. where a company simply exits because the business no longer contribute to or fit its dominant logic. Tata Press). L&TCement Division to Aditya Birla Group) technically known as divestiture or a product (Eg. In strategy there is no scope for sentimentality with divestment.DIVESTMENT Divestment is a defensive strategy involving the sale of entire stake (Eg. Tatas sale of Goodlass Nerolac. ACC) in full to an independent entity.e. reactive) and survival is at stake and the firm does not have resources to fend off competitive forces. 89 . It is may also be a pro-active strategy. (Eg.
ROUTES Outright Sale – Popularly known as the asset route.3 billion. However. (Eg. Hive-Off – A hive off is the creation of a new entity followed by transfer of assets. (Eg. 1956 does not permit this mode. involving 608 pence per share). 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.DIVESTMENT . 90 . Sale of Diamond Beverages to Coca-Cola for US $ 40 million). the Companies Act. Tatas buy-out of Corus for US $ 11. Leveraged Buy-Out (LBO) – Here the company’s shareholders are bought out through a negotiated deal using borrowed funds.
e. mergers and acquisition. It is usually pursued by a business group with diverse interests across multiple industries. A combination strategy can be implemented through green-field projects (i. There can be no ideal strategy for every business. because every business has its own unique external and internal environment. and divestment strategies applied simultaneously or sequentially for a portfolio of businesses.e. joint ventures). developing facilities right from the scratch) or through brown-field projects (i.COMBINATION STRATEGY It is a mixture of stability. 91 . growth.
STRATEGY CHOICE & PORTFOLIO ANALYSIS 92 .
In most cases the trade-off is between resources and opportunities. What then is the magical number? 93 . It attempts to answer the following questions – How effective has the existing strategy been? How effective will that strategy be in the future? What will be the effectiveness of alternative strategies? It is impossible for a manager to assess all the alternatives.STRATEGIC CHOICE A strategic choice seeks to determine the alternative courses of action available before top managers to achieve its strategic intent. Dominant logic enables top managers to selectively scan the environment and make trade-offs.
The key task before a top manager is to identify the right problems.SELECTIVITY IS THE KEY The role of a top manager is not to solve a problem. nor is to a define a problem for others to solve. To identify the right problems. will help the firm achieve its intent. managers need to ask the right questions. if addressed. 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 . They must choose problems which will lead to the right kind of opportunities.
BUSINESS GROUP . Resource sharing. . chaebols in Korea.DEFINITION A business group is known by various names in various countries – guanxique in China. 95 Succession planning is critical to continuity. Their origins can be traced back to market imperfections existing in an economy (MRTP Laws. Proximity to the corridors of power (i. business houses in India. embassies). Licenses & Quotas. Their roots can be traced to a single family or clan and share broad similarities. BRC).e. keiretsus in Japan. High degree of centralized control (GEO. formal and informal ties. Managing Agency).
RESOURCE SHARING ACROSS FIRMS Parent Company Firm 1 Firm 5 Firm 3 Firm 2 Firm 4 96 .
STRATEGIC CHOICE – MACRO TIMING Recession (Stability) Prosperity (Diversificatio n) Depression (Divestmen t) Recovery (Intensification ) 97 .
STRATEGIC CHOICE – MICRO TIMING ReEngineering Growth (%) Maturity Stability Growth Diversification Decline .Divestment Duration (Yrs) Inception Intensification 98 .
next only to choice of business. there are high costs associated with entry and exit. Power and resources often goes hand in hand.PORTFOLIO ANALYSIS Resource allocation across a portfolio of businesses is an important strategic choice. sometimes impossible. therefore. Rules of the game are different. Relatedness across resources are difficult to realize. Redeployment of resources upsets the established power bases of a group. Why? Businesses are not about liquid assets. 99 . Investing in emerging businesses may not actually be so simple as it appears to be.
BCG GROWTH MODEL Relative Market Share (%) Industry Growth (%) Low High High Low Stars Question Mark ? Cash Cow Dogs 100 .
market penetration. Stars – They achievers in the near term. 101 . market development. which remains a big? These businesses are net users of resources.e. diversification). provided the company is able to build up on its market-share (i. and their risk profile is high (Eg. provided the industry growth rate continues and the company is able to maintain its growth (i. Tata-AIG).e. product development).BUSINESS ANALYSIS – TATA GROUP Question Marks – They have potentials in the long term. TCS. These businesses are also net users of resources (Eg. Tata Steel). but to larger extent than a question mark. Trent. Tata Telecom.
divest) as achieving a dominant position in these businesses is a difficult task. However. Tata Press). Tata Pharma. harvest.e.e. Tata Motors.BUSINESS ANALYSIS – TATA GROUP Cash Cow – These are matured businesses. and the company dominates the industry ahead of competition (i. Groups prefer to dispose off such businesses (i. stability). Nelco. Given that the growth potential in the business is low. cash cows may also need to invest provided the industry takes an upswing (Eg. Tata Chemicals). Tata Tea. and they lack on competencies to take on competition and are basically cash traps (Eg. Dogs – They are a drag on the group. 102 . Indian Hotels. they are generators of resources.
The model does not provide specific solutions within a particular category.BCG .LIMITATIONS It does not address the concerns of a business which is in the average category (usually the majority).e. neither in high or low. Certain businesses in the low market share category may be the result of a conscious strategy (i. factors are limited. 103 . Mercedes Benz. The terminologies used are somewhat prohibitive. Data may be prohibitive. Armani). Cash cows may actually need substantial investments to retain their market position (Eg. HUL). niche – Rolex. Cartier.
GE .-) 104 .MATRIX Distinctive Capabilities Strong High Medium Weak Stability Industry Attractiveness Diversify (++) Intensify (+) Med Intensify(+) Stability Harvest (-) Low Stability Harvest (-) Divest (.
ARTHUR’ D. LITTLE Inception Dominant Strong Favourable Tenable Weak Growth Maturity Decline Improve Selective Niche Abandon Industry Life-Cycle Divest Harvest 105 Competitive Position Invest Consolidate Hold .
SHELL – DIRECTIONAL POLICY MATRIX Business Sector Prospects Attractive Average Unattractive Generate Cash Phased Withdrawal Distinctive Capabilities Strong Market Leadership Try Harder Double Or Quit Growth Average Custodial Weak Phased Expand Withdrawal Divest 106 .
Divest – Selling a part or the entire business at one go. Portfolio – An organization is perceived as a portfolio of businesses. SBU – A business unit which is strategically different from another and also shares a different SIC code. Disinvestment involves selling in phases. Gap Analysis – It emphasizes what a firm wants to achieve. 107 . BCG – Boston Consulting Group.TERMINOLOGIES Harvest – It entails minimizing investments while trying to maximize short-run profits and cash flow with the intention to exit the business in the near future.
BUSINESS STRATEGY & COMPETITION 108 .
and earning super-normal profits (i. Such resources or activities should be distinctive and sustainable over time. 109 . building market-share. Competitive advantage refers to a firms resources or activities in which it is way ahead of competition.COMPETITIVE STRATEGY A competitive strategy deals with how a firm competes in a particular business or product-market segment.e. rent). The strength of a firm in a particular business usually stems from its competitive advantage. Competitive advantage is the back-bone of strategy. The principal focus is on meeting competition.
leveraging (Prahalad). involving harmonizing and integrating multiple streams of technologies. identifying critical success factors. Blue Ocean – Consciously moving away from overcrowded industries to uncharted territories and making competition irrelevant (Kim & Mauborgne).BUSINESS STRATEGY FRAMEWORKS How to be distinctive and yet sustainable – Differentiation – Understanding of the dynamics of competition. Delta Lock In – Two dominant players co-opt to selfreinforce and create or escalate an entry barrier. developing competitive advantage (Porter). 110 . Resource Based View – Obsession with competence building. preventing new entry and/or competition (Hax & Wilde).
preferential access to raw materials. Ayur. The firm may retain the benefits of cost advantage by enjoying higher margins (Eg. Sources of cost advantage are varied and depends on the structure of the industry – Economies of size. Compress project duration through crashing.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. backward integration. T-Series). Steep experience curve effects. Locational or early entry advantage. proprietary technology. Nirma. 111 . Reliance) or may pass it to customers to increase market-share (Eg.
Focus on brand loyalty. 112 . Intel. Sony. Feeling the pulse of the customer. Successful product differentiation is often followed by premium pricing. and sufficient slack. avoiding brand dilution. innovation and out of the box thinking. (Eg. Creativity. It selects one or more attributes that buyers perceive as important. undeterred attention to quality. Rayban).PORTERS – PRODUCT DIFFERENTIATION Product Differentiation – It is a strategy that attempts to provide products or services that are differentiated from competitive products in terms of its value proposition and uniqueness. Means of product differentiation are peculiar to each industry. Culture of experimentation.
113 . They are poorly served by mainstream players. A focuser seeks to achieve a competitive advantage in its target segment.PORTERS NICHE OR FOCUS Focus / Niche – It is a variant strategy of cost leadership or product differentiation targeting a specific market or buyer sub-segment with the exclusion of others (Eg. Cartier. coupled with fear of structural erosion. Armani). Mont-Blanc. Sub optimization alone may not be a source of superior performance. The target segment must have unusual needs or the delivery system catering to this segment must be unique. though it may not possess an overall competitive advantage. Maybach. Rolex.
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 .
Firms focusing on a hybrid strategy typically aim at shifting the productivity frontier and recreating a new product-market segment altogether (Eg. 115 .e. in a hyper competitive context the two strategies need not be mutually exclusive. Tata Nano).HYBRID STRATEGY A hybrid strategy is the simultaneous pursuit of cost leadership and differentiation. Though cost leadership and differentiation are inconsistent. and usually outperforms a stand alone generic strategy. jugaad or frugal engineering). similarly differentiation may not always lead to rising costs (i. Reducing cost does not always involve a sacrifice in differentiation.
Industry maturity will usually widen the gap. It is usually the result of a firm not willing to make trade offs. but achieves none. 116 .stuck in the middle.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 . unless such a player is capable of discovering a profitable segment. The positioning therefore gets – blurred. It will have a competitive disadvantage vis-à-vis a clearly positioned generic player. It tries to compete through every means. leading to what is called – straddling.
radical environmental changes. 117 . Nano technology.EMERGING INDUSTRY Emerging Industry – An evolving industry characterized by . There is a lot of scope to define the rules of competition. It is characterized by – High level of technological uncertainty. technological innovations. Market segmentation not well defined. Eg. coupled with low penetration levels. changing customer needs. Speech recognition software's. ending in a differential cost economics. First-time buyers. Artificial intelligence). leading to a blurred productivity frontier and steep learning curve. (Eg. Consumer behaviour pattern unstable and evolving. 3D imaging.) Excessive turbulence in the dynamics of the environment.
High exit barriers because of huge investment in CAPEX. Eg. leading to clear fragmentation.GROWTH / FRAGMENTED INDUSTRY Growth Industry – An industry characterized by high growth potential in the long run and where no firm has a significant market share (an edge over another). Air Conditioning. Consumer durables. Eg. because of lack of economies of size and scale. IT. 118 . Government regulations in the form Eg. Retail and telecom. It is characterized by – Low entry barriers. MRTP may also cause fragmentation. Eg. Scope for players to change the rules of the game. Diverse customer needs. Paints.
because of economies of size and learning curve effects. Strong entry barriers. Cartel among existing players through collusion.MATURED INDUSTRY Matured Industry – An industry characterized by saturation in growth rates. distribution networks. collaboration and co-option. technological maturity.technological maturity. early entry and location advantages. Limited scope for innovation . Firms are rule takers in the segment as productivity frontier is well defined. established industry dynamics. well defined consumer behavioral patterns and imperfect competition leading to near monopoly. 119 .
120 . backed by corporate espionage. Nature of competition extremely high. with little or no signs of recovery. Firms facing a declining phase are characterized by inertia and slow to react to environmental changes. dot-matrix printers). and costly price wars. scooters. Learning abilities have been stunted and firms adverse to investment in R&D and make fresh investments. Typewriters. (Eg. Exit barriers are extremely high because of limited prospective buyers.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.
Declining Industry – Redesign. regenerate. recreate new markets. mergers and acquisition. 121 . move beyond boundaries. branding and promotion. Matured Industry – Sophisticated cost analysis. increasing scope. process innovation. strictly cost differentiation. Fragmented Industry – Identify. strictly product differentiation and not standardization. premium pricing. or else exit the segment. reengineer. assess and overcome fragmentation. focus more on product differentiation or even a hybrid one. strike alliances.COMPETITIVE STRATEGIES Emerging Industry – Set benchmarks. aggressive building of distribution networks. Locate a defendable position.
brands. Intangible – These refer to goodwill. and complex learning experiences in integrating and harmonizing technologies (distinctive capabilities) that play an important role in delivering competitive advantage through “causal ambiguity”. 122 . patents. positions based on resources which are unique and inimitable are far more sustainable even in the long term. However. They are a standard in nature.RESOURCE BASED VIEW Differentiation based on cost or products saturates and ceases to exist beyond the medium term. hence very rarely confer competitive advantage as can be easily acquired or replicated. A firms resources can be classified into – Tangible – These refer to real assets.
e. Therefore firms should concentrate on developing complex resources that forms the very basis of differentiation. differentiation based on capabilities can be sustained even in the long run.CAPABILITIES & COPMPETENCIES These include a complex combinations of tangible and intangible resources that organizations use to convert inputs to outputs. Hence. There is a high degree of internal and external causal ambiguity involved in it. Capabilities can be generic (i. they are woven around technologies. but not necessarily. 123 . They play a very critical role in shaping competitive advantage. can be leveraged across businesses) or specific to a particular business. Typically.
COMPETITIVE ADVANTAGE 124 .
125 . Strategy drives competitive advantage. It results in a distinct differentiation advantage or a cost advantage or hybrid as well. not absolute) to competition. competitive advantage subsequently becomes the back bone for a competitive strategy.e. A portfolio of competitive advantage comprises strategic advantage profile (SAP). and results in well springs of new business development. It enlarges the scope of an organization.COMPETITIVE ADVANTAGE A competitive advantage is a position of superiority relative (i. Success of a strategy critically depends on SAP.
In most cases SAP is hidden and dormant. Most successful organizations around the world have a well balanced SAP. In today's world of discontinuity. Identification of SAP is critical for and stretching and leveraging of resources. Internal strategic fit between its strategy and dominant logics is essential for the top management to stretch and leverage SAP.STRATEGIC ADVANTAGE PROFILE (SAP) Organizations have to systematically and continuously conduct exercises to identify its SAP. SAP changes from time to time. 126 .
Today SCM is integrated with greening the environment as CSR practices. kaizen or internal customer). and enhanced customer tracking – higher market share. A VC is often compared with a relay team. faster product launches. each of the players need to be efficient backed by sufficient coordination at the contact points (i. VC pay-offs: better product availability. Substantial cost reductions also follow.VALUE CHAIN ANALYSIS A value-chain segregates a firm into strategically relevant activities to understand its composite behaviour. Competitive advantage arises not from an individual activity but a stream of inter-related activities. 127 .e. Inventory Mgt to Logistics Mgt to Supply Chain Mgt (SCM).
THE VALUE CHAIN Support Infrastructure n gi ar M Human Resource Management Technology Development Procurement Out Logistics Mktg & Sales In Logistics Operations Primary Service M ar gi n 128 .
129 .STRATEGIC FIT – THE PORTER WAY The sustainability of the value chain depends on the degree of fit between the activities. – Second order fit occurs when activities are reinforcing amongst them. – Third order fit refers to optimization of effort. Fit is important because discrete activities result in negative synergy and can also be easily copied by competitors. A high fit involving a complex chain of activities drives both competitive advantage and its sustainability. A learning organization helps create strategic fit. – First order fit refers to simple consistency between each activity and the overall strategy. Operational effectiveness is not strategy.
– Can be sustained even in the long run. but not necessarily. It forms the very basis of competitive advantage.CORE COMPETENCE A core competence represents the collective learning's of an organization around diverse streams of technologies. It should satisfy the following conditions – Contributes significantly to customer benefits. These skills results in distinctive activities and processes. – Cannot be easily imitated or substituted. – Can be leveraged across businesses. . Core competence has a high degree of external and 130 internal causal ambiguity embedded in it. A core competence usually has its roots in technology.
CORE COMPETENCE A competitive advantage does not necessarily imply a core competence. Majority of the firms have competitive advantage. a core competence is sustainable even in the long-term. A competitive advantage is sustainable in the shortmedium term. a core competence usually does. 131 . a core competence always implies a competitive advantage. only global leaders possess a core competence. A competitive advantage manifests from a function. a core competence has its roots in a set of skills. A competitive advantage may or may not lead to superior performance.
illustrations depicting a win-win situation. A game is a contest involving two or more players. Here the magnitude of gain offsets the magnitude of loss equally. 132 . each of whom wants to win.GAME THEORY The game theory was developed in 1944 by Oscar Morgenstern. This is known as a zero-sum game. Subsequent work on game theory by John Nash led him to win the Nobel prize in 1994. the stringent assumptions of game theory and difficulty in ascertaining of pay-offs makes game theory application difficult in business. However. In fact there are no. In a game (similar to a business) one players win is always another's loss.
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 . An unbiased game is one where both the players have equal chances of winning.BIASED AND UNBIASED GAME A game is said to be biased when one of the players have a disproportionate chance of winning.
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.
Repeated Games – In this situation the players interact repeatedly with each other sub-optimizing the outcome possibilities.g. iteration) rather than through collusion (E. Coke Vs Pepsi). This is usually through learning by “experience or observation” (i. However. collaboration or cooption. 135 . It represents the classical “prisoner’s dilemma”. Yahoo Vs Microsoft).TYPES OF GAMES Simultaneous Games – This is a situation where the players have an option to choose to cooperate or not through collusion.e. there is likely to be temptation by any of the players to try to steal the advantage over the other by breaking the rules of the game (Eg.
– Making pricing more transparent. – Building incentives for customer loyalty. but 136 players do not always behave rationally.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. Game theory relies on the principle of rationality. . 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.
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.
– Resource commitment from top management. – Development of capabilities & competencies. A high strategic fit (co alignment) is useful because it enables – – Appropriate and timely response. – Unlearning & learning of new skill sets. – Better strategic and operational control.IMPORTANCE OF STRATEGIC FIT Strategic fit has a central role to play in strategic management. internal strategic fit (strategy – dominant logic) is critical to strategy implementation. – Changing the rules of the game. 143 . While external strategic fit (strategy – environment) is relevant for strategy formulation.
learning levels are very high. 144 .FORMULATION Vs IMPLEMENTATION Traditionally. In such a situation. In such a situation. strategy formulation and implementation has been perceived to be distinct & independent.e. at the cost of sacrificing a lesser degree of control. According to Mintzberg. formulation & implementation can occur simultaneously. emergent strategy vis-à-vis intended & realized). In fact. learning levels are very low. Some of the key strategic learning's exists at the contact point between the organization and its customer. while control is very effective. effective strategies are better crafted when there is a subtle overlapping between the two (i.
145 . Install a system of shared beliefs and values. bring about transparency. A transactional leader is usually confined to allocating tasks & responsibilities and extracting performance. He should be an agent of change. companies depend more on transformational leaders than transactional leaders. Pragmatism is the ability to make things happen. transformational leaders go one step beyond – Design a well crafted and designed strategic intent of the organization. In contrast. shift from compliance to commitment.ROLE OF TOP MANAGEMENT To bring about change and to implement strategies successfully.
patents. Performance Budget – SBU managers need to justify the distinctive resources in terms of the opportunity it is pursuing yields the highest possible pay-offs. machines) referred to as threshold resources (i. skills) also includes complex resources like capabilities and competencies.e. Intangible resources (Eg. land. The various methods of resource allocation includes Historical Budget – The budgets framed by HQ for a particular SBU keeping in mind past trends. 146 .RESOURCE ALLOCATION Resources allocation includes tangible resources (Eg. labour. brands. minimum requirement). Zero Based Budget – In this case the budget of a SBU has to be worked out right from the scratch.
these capabilities are sustainable even in the medium to long term. Mobiles). Flat Screen Displays. Distinctive capabilities are complex set of skills woven around technologies. 147 . Distinctive capabilities helps in stretching and leveraging resources thereby overcoming two major constraints involved in strategy implementation – times & costs. Due to causal ambiguity (complexity). though not necessarily in the case of emerging markets. Moreover. convergence of multiple streams of technologies at the product – market level is becoming increasingly evident (Eg.CAPABILITIES & COMPETENCIES Technology and business are slowly becoming in – separable.
An appropriate organization structure & adequate control systems are essential to implement strategies and achieve stated goals. Once the structure is in place. A firm in several unrelated businesses usually employs a SBU structure. processes become people independent. A single product or a dominant business firm usually employs a functional structure.STRATEGY & STRUCTURE It is a framework within which individual efforts are coordinated to bring synergy. The level of centralization and decentralization is decisive. 148 . A firm in several related businesses usually employs a divisional structure.
Project / Matrix Structure – A formal but temporary framework initiated for the completion of a particular project/crisis. with team members having dual line of control. processes. or geographical locations. Team Structure – An informal group formed for a crisis. SBU Structure – Businesses segregated in terms of strategic dissimilarities (Eg. Output). based on skills and competencies. 149 . Virtual Structure – A boundary less or hollow organization. disbanded subsequently. Marketing. Finance). Divisional Structure – Units grouped together in terms of products. Inputs .TYPES OF STRUCTURES Functional Structure – Activities grouped together by a common function (Eg.Technology.
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 . facing challenges & crises. It includes the desire for independence. as span is broader. leading to a tall structure. structures are becoming flatter and more simpler. Environment & People – Economic and political conditions have a major bearing on structure coupled with the attitude and aspirations of the people in the organization. Technology – With more and more convergence of technologies in business. assuming responsibility.
Changes in top management and unlearning helps overcome inertia. there is a tendency to continue along the same lines. irrespective whether it is from worse to good or good to worse.e. Top managers resist change. . Inertia is a characteristic of a firm that endures status quo (i.INERTIA When a firm has been operating in a certain fashion for a long time. Common sources of 151 inertia – complacency with past successes. Inertia acts as an impediment in strategy implementation. Most firms undergo periods of strategic continuity rather than strategic discontinuity. co0ntinuity).
strategies need to be evaluated on an ongoing basis to prevent deviations of fit. However. Deviation of fit is detrimental to performance and may lead to strategic failure. certain authors propose misfit as a source of superior 152 performance. Since the internal and external environment is in a state of continuous flux. To prevent deviation of fit. firms should move beyond financial performance to strategic performance as organization systems are becoming complex.STRATEGY EVALUATION Strategy evaluation centers around assessment of strategic fit. .
competitive advantages becoming disadvantages? Has the company acquired any new competency? Has the company been able to overcome the 153 environmental threats. It attempts to answer the following questions – Is the strategic intent appropriate to the changing context? Are the organizations capabilities still holding good.STRATEGY CONTROL It is concerned with trafficking a strategy as it is being implemented. detecting changes in the external and internal environment and taking corrective action wherever necessary. .
It involves assessing – strategic thrusts and milestones. checking every premise is costly as well as difficult.STRATEGY CONTROL IMPLEMENTATION It involves steering the company towards its original growth trajectory & stated goals. However. Special Alert Control – It intends to uncover unanticipated information having critical impact 154 on strategies. Implementation Control – It aims at assessing whether key activities are proceeding as per schedule. Premise Control – Checking the validity of the assumptions on which a strategy was based. It is open-ended as well as .
Performance measures are defective – What to evaluate against? How to measure the 155 construct? As a saying goes. low strategic fit due to consultants intervention. “If you cannot . Strategy not linked to resource allocation & capabilities – Lacking commitment of top management.BARRIERS TO STRATEGY EXECUTION Vision and strategy not actionable – Utopian ideas. Strategy intent not linked with goals and objectives – Lack of coordination at lower levels leading to negative synergy. difficult to translate into practice.
to be sure of successful implementation of a strategy. Large or small. Managers should take into account all seven of these factors. 156 . important or not they're all interdependent. On top of that. the relative importance of each factor may vary over time and context. so if one fails to pay proper attention to one of them.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. this may effect all others as well. Together these factors determine the way in which a corporation operates. Today it is considered one of the most powerful tools for strategy implementation determining success or failure.
They had been investigating how Japanese industry had been so successful. At around the same time in the US Tom Peters and Robert Waterman were exploring what made a company excellent. It appeared also in "In Search of Excellence" by Peters and Waterman. Since then it is known as their 7-S model and is extensively used by corporations worldwide to implement their strategies. 157 .BACKGROUND & ORIGIN The 7-S Framework was first mentioned in "The Art Of Japanese Management" by Richard Pascale and Anthony Athos in 1981. and was taken up as a basic tool by the global management consultancy company McKinsey. The 7-S model was born at a meeting of these four authors in 1982.
Structure – The way in which the organization's units relate to each other in terms of their commonalities. formal & informal . Strategy – Trade-offs for the allocation of a firms scarce resources. over time. Style – The way in which the top management influences the functioning of an organization. 158 . Skills – An organizations capabilities and competencies. processes and routines that characterize how work should be done. to reach identified & stated goals.THE 7’S Shared Values – It represents what the organization stands for and what the top management believes in. Systems – The procedures. Staff – Human inter-relationships.
STRATEGIC FIT Strategy Structure Shared Values Systems Skills Staff Style 1st Order Fit 2nd Order Fit 3rd Order Fit 159 .
structure.A CRITIC OF THE 7S MODEL While the hard S’s (strategy. A choice of an alphabet often limits the scope and skews the interpretation of a model. their Japanese counterparts focus more on the soft S’s for their early success and sustainability. the soft S’s (skill. Ineffective in case of a virtual company. because most often they are culturally embedded and often neglected. In contrast. shared values) are very malleable and comparatively more difficult to identify & influence. 160 . systems) are comparatively easy to identify and influence. Consider the 4P’s of marketing or 3R’s of SCM. staff. While the American co’s focuses on the hard S’s. style.
STRATEGY IMPLEMENTATION ROUTES Strategic Fit .High Organic Growth Strategic Alliance Joint Venture Mergers & Acquisition Strategic Fit .Low Take Overs 161 .
.e. tax holidays. The entire infra-structural facilities are set up afresh having its own gestation and break-even. soft loans.ORGANIC GROWTH Here a firm builds up its facilities right from the scratch and continues to do so without any external participation. i. concessions are available for green-field projects. subsidized power). Long gestation leads to delayed market entry.e. and markets. technologies. the entire value chain. Reliance Industries). i. green-field projects. (Eg. SEZ’s. 162 Risk of cost and time overruns. (Eg. Govt. It has complete control over inputs.
. Alliances are usually short-lived and disbanded once the purpose is achieved. There is no funding or equity participation from the alliance partner & both the firms continue to operate independently.STRATEGIC ALLIANCE It involves a pro-active collaboration between two or more firms on a particular domain or function for mutual gain. 163 It is a form of competitive collaboration. Tata Motors & Fiat). It touches upon a limited aspects of a firms value chain. It has limited intervention power and usually lacks holistic commitment from the alliance partner. Alliances are usually in the areas of technologies or markets (Eg.
Selecting the right partner is critical for success. Tata – AIG. Dominant logic of both the companies should be complimentary. . A comprehensive MOU is essential. It is a win-win situation for both the companies. Hero .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. Degree and extent of management control must be clearly 164 laid down. (Eg. leaving minimum scope of overlapping.Honda).
Revival of a sick-unit through better management practices is a major motive behind an acquisition 165 strategy. Acquisition is an outright purchase of a firm assets by another independent entity (Eg. Economies in scale leading to lowering of costs.MERGERS & ACQUISITION It refers to the fusion of two or more firms into a single entity. with the individual firms ceasing to exist any more (Eg. Brooke Bond & Lipton). Coca Cola – Thums Up). Integrated distribution channel leads to better market penetration and overall synergy. Integration of assets and other financial resources. . ITC Tribeni Tissues.
Most countries have stringent laws that prevents hostile take over. Consolidation in a fragmented industry. Make a public offer of not less than . Tata Steel . often the new firm is “left alone”. Instant access to capacities and markets. Integration of organization structure & cultures is difficult. Larger geo-graphical diversity. Inform SEBI / Stock Exchange after 5% stake is 166 acquired.TAKE OVERS It refers to the acquisition of significant management control by buying out majority stake in a firm through due diligence or hostility (Eg.Corus).
MANAGEMENT TOOLS IN STRATEGY 167 .
every time. Some tools to ensure that – Benchmarking – Adopt certain best practices. The past is ceasing to be an indication of the future. Balanced Scorecard – Tracking strategy 3600. Companies therefore need to ensure competitive advantages doesn’t become competitive disadvantages. 168 . it is also a source of potential threat. TQM – Doing the right thing the first time.WHY MANAGEMENT TOOLS? Change is becoming pertinent in the business environment. or better still create next practices Reengineering – Redesigning work processes right from the scratch. Radical change is superseding incremental change. Change provides enormous opportunities.
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
e. Benchmarking is useful for bringing about operational efficiency. clustering). It can at best complement it.LIMITATIONS More and more companies benchmark.BENCHMARKING . but it cannot be used as a strategic decision making tool. the more similar they end up looking. Strategy is more of creating best practices rather than copying them. While strategy is all about differentiation and not looking alike. . 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.
for achieving performance improvement (E.e. Re-engineering involves complete reconstruction and overhauling of job descriptions from the scratch (i. Re-engineering attempts to radically change an organizational products or process by challenging the basic assumptions surrounding it.RE-ENGINEERING Redesigning leads to identification of superfluous activities or product features (i. Windows 95 to 97). .e. process mapping) and eliminating or improving them (E. DOS to Windows). The task demands a total change in organisational 176 culture and mindset.g. clean sheet).g.
REENGINEERING – KEY TENETS Ambition Focus Attitude Enabler Performance Large scale improvement by questioning basic assumptions about how work is done Micro Vs Macro Business Processes Vs Organisational Processes Starting right from the scratch Not historical More IT driven. than people driven Innovative Vs Traditional Customer centric Vs Organisational centric 177 .
BPR). resource allocation and prepares the organization for the future through a reorientation of the entire strategic architecture.REENGINEERING . products. customers and suppliers and protects the organization from the future (i. etc) and supports the organization for the present. 178 .e.LEVELS Reengineering can be successfully leveraged at all levels of an organization with varying degree of results. It can be of the following types – Functional – It looks into the flow of operations (i.e. processes. Business – It looks into markets. Strategic – It looks into the process of strategic planning. structures. .
– High cost and time acts as a deterrent. While traditional manufacturing is a bottom-up approach. protection can be had in the following ways – – Patenting. reverse engineering is a top-bottom approach. learning curve advantage. – Causal Ambiguity. with an intention to copy it (Eg. 179 .REVERSE ENGINEERING It is a process by which a product is dismantled and analyzed in order to understand how the product was designed and manufactured. However. Indonesia). It generally acts as a threat to innovation. Cheaper versions of Intel chips and mother-boards manufactured in Taiwan. – Early entry advantages.
designing facilities.STAGES IN REVERSE ENGINEERING Awareness – Recognizing whether the product is found to be worth the time. Introduction – Launching the product in the market. machine tools to convert ideas into a marketable product (i.e. Usually in such cases segmentation and pricing is different from the original innovator. nano-technology). cost and effort necessary for the purpose of reverse engineering. Implementation – Developing of a prototype. Actualization – Obtaining and dismantling of the product to assess how it functions. Inaccurate assessment at this stage may lead to a failure of the entire project. 180 .
Euro IV. More and more companies are moving towards meeting implied rather than stated needs. Air bags. – Reliability – Consistency in mileage.WHAT IS QUALITY? It involves the totality of a product or service in meeting certain stated or implied needs. – Perception – Customer notions. Car) – – Performance – Mileage of 14 kms to a litre of fuel. – Features – Anti-lock braking systems. It has eight dimensions (Eg. – Aesthetics – Appeal in design. of service stations. – Durability – 1980 manufactured cars still on road. – Serviceability – Large no. 181 . – Conformance – Emission standards .
. TQM is a way of creating an organization culture committed to the continuous improvement of work processes – Deming. which ensures good market standing.fix it in nature. Management of quality was traditionally inspect it . touching upon a limited aspect of a value chain. It is deeply embedded as an aspect of 182 organisational life & culture.TOTAL QUALITY MANAGEMENT Objective – Management of quality ensures conformance to certain pre-set standards. It had little impact on improving overall productivity. zero defects.
183 . Looking at quality as an endless journey. Be customer centric – Generate the concept of internal customer (Ishikawa).TQM – KEY TENETS Do it right. provided with all relevant information and best possible tools. fully involved in decision-making and fairly rewarded for results. the first time – From reactively fixing error in products to proactively preventing errors from occurring at the first place (Juran). not a final destination. Kaizen – Make continuous improvement a way of life. Empowerment – It takes place when employees are properly trained.
184 . 6-Sigma). It is based on the principles of MBO (i. saving precious top management time.TQM . equal participation). of units meet preset standards (Eg. Quality Circles – It a small group of shop-floor employees who meet periodically to take decisions regarding operational problems and crises. enabling the firm to concentrate on core activities essential to customer satisfaction. SQC – It is a process used to determine how many units of a product should be inspected to calculate a probability that the total no.e.STRATEGIES Outsourcing – It is the process of self-contracting services and operations which are routine and mundane.
. – In the majority of failures – we estimate 70% – the real problem isn’t (bad strategy) . it’s bad execution... – Efficiency and effectiveness is passé...BALANCED SCORE CARD Some interesting comments .... Source: Fortune Magazine Why CEO’s fail? 185 .. – Less than 10% of strategies effectively formulated are effectively executed. strategy implementation has never been more important....
Focus more on causes. rather than effects.BSC . These measures worked well when organizational systems were simple and unidirectional and more importantly the environment was static. 186 .CONCEPTUALISATION A company’s performance depends on how it measures performance. 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. Most managers tend to rely on traditional measures of performance having its origin in finance as they are well tried and tested.
because they have too many. 187 .BSC – KAPLAN & NORTON (1992) A BSC helps a manager to track and communicate the different elements of company’s strategy. and distinguish strategic problems from operational ones. It has four dimensions – – How do customers see us? – What must we excel at? – Can we continue to improve and create value? – How do we look to shareholders? Firms more often have problems. The most critical element of a BSC is to measure these four dimensions.
e. of visits or calls made % of NPA’s 188 . ageing schedule) % of key customer transactions Ranking of key customer accounts No.CUSTOMER PERSPECTIVE GOALS Products Supply Preference Relationship MEASURES Relative market share (%) % of sales from new Vs proprietary products Timely deliveries and service Customer credit analysis (i.
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 .
The BSC brings together the different elements of a company’s strategy at a glance. As a result. they don’t know . doing right things instead of doing things right). Focus on cause not effects. 194 performance will automatically follow.e.BSC .what they don’t know.e. It helps translating strategy into practice (i. Seek excellence. Modern managers should be poised to ask the right questions.ADVANTAGES Most often top managers face information overload. sharing of vision). . Shift from control to strategy (i.
EFFICIENCY Vs EFFECTIVENESS Ineffective Effective Inefficient Goes out of Business quickly Survives Efficient Dies Slowly Thrives 195 .
Michael E. not only thrives. but also sustains it.EFFECTIVENESS + STRATEGY A company which is effective as well as strategic. Porter 196 . .
CORPORATE RESTRUCTURING 197 .
To adapt to the changing environment. Tata Group). Restructuring involves consciously driving significant changes in the way an organizations thinks and looks (Eg.. Radical change brings about strategic variety. Strategic variety may be caused by changes in the as external well as internal environment. “every organization must be prepared to abandon everything it does..” 198 . to survival of the most adaptable....CORPORATE RESTRUCTURING The only thing constant in today's business environment is change. Strategic variety brings paradigm shift.. firms use restructuring strategies. from survival of the fittest . As Peter Drucker pointed out.
Fax. and dividing the core businesses into SBU’s (i.e. etc). Company’s should go beyond just asking what he expects. . downscoping).RESTRUCTURING – BASIC TENETS Customer Focus – Restructuring ideally begins and ends with the customer. downsizing or rightsizing).e. Structural Changes – Conventional hierarchical structures should be disbanded in favour of more 199 flexible ones (i. Internal customers should also not be neglected. ATM. they should strive to provide unimaginable value ahead of its time (Eg. Core Business – Company’s should introspect – What business are we in? Business evolved out of opportunism or myopia should be divested. Walkman. Instead.
RESTRUCTURING – BASIC TENETS Cultural Changes – A culture represents the values and beliefs of the people about the organization. the Tatas were considered a benevolent and charitable organization..) The Aditya Birla group typically relied on the “marwari” community for key management positions . Restructuring also requires cultural reorientation.) Reliance dismantled their industrial embassies . started focusing on their capabilities... . 200 ....... Ratan Tata now drives the point the group means business... It is created and institutionalized by the top management.. Kumar Birla today is more dependent on professionals. During the times of JRD.
MOVING CLOSER TO THE CUSTOMER As companies evolve. they tend to move away from the customer. Getting feedback & addressing customer complaints. Honda’s ad says. Organizing customer and supplier meets. “ … one reason our customers are satisfied is that we aren’t. Carry out PR campaigns. Communicating to the media about organization efforts to deliver quality products. Use the reach of networking technologies. Restructuring provides a platform to close this gap.” 201 . Publicizing welfare projects to demonstrate CSR.
It may include brands as well.ASSET RESTRUCTURING Asset Restructuring – The asset composition of a firm undergoes a major change. Asset Swaps – It entails divesting and acquisition simultaneously by two companies. 202 . Glaxo – Heinz). spin-off and equity carve. Further. Hive Off – It involves siphoning of assets under control. where the difference in valuation is settled off through cash or equity (Eg. It can have two forms. horizontal. it may be smooth (Eg. Mittal – Arcelor) and can take various forms. Further spin-off can be classified as split-off and split-up. including its intangibles – Mergers – It may be vertical. Tata – Corus) or hostile (Eg. or conglo-merate.
HIVE OFF Spin-Off – A spin off is the creation of a new entity. Reliance Ent). Equity Carve – It involves selling a minority stake to a third party while retaining control (Eg. 203 . – Split-Off – In a split-off. – Split-Up – In a split-up. 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. in which the equity is allotted amongst the existing shareholders on a pro-rata basis (Eg. Tata Industries selling 20% stake to Jardine Matheson). Most of these practices are not in consonance with Indian laws.
for a specified market or in general with full management control. L&T sold its cements division to Aditya Birla group. In 1995. strategic misfit. In 2005. repay long-term debts. but retained its engineering division. – Poor performance. Generic motives include – – Raise working capital. A complete sell-out is known as divestment (TOMCO). 204 .DIVESTITURE It involves the sale of a brand or a division of a company to a third party. Parle sold its Thums Up brand to Coke for $40 million apprehending fierce competition. Selling out in phases is called disinvestment (IPCL).
It provides greater leverage as well as management control. Share Buyback – It is a process of cancellation of shares out of free reserves to the extent of 25% of paid-up capital (Eg. 205 . involving 608 pence per share). Wipro).CAPITAL RESTRUCTURING Capital Restructuring . Conversion – Replacing debt with equity or vice-versa or costlier with cheaper debt or cross currency debt.The internal & external liability composition undergoes a major change – LBO – Acquiring control over a substantially larger company through borrowed funds (Eg.3 billion. Tatas take-over of Corus for US $11.
1170 cr Goodlass Nerolac – Rs.Rs. 1700 cr Trent – Rs. 42 cr Voltas . 256 cr ACC – Rs. 250 cr Tata Tetley – Rs. 230 cr Diversifications Tata Motors – Rs. 1860 cr .Rs. 150 cr VSNL – Rs. 1439 cr 206 Tata Timken – Rs 120 cr Tata Telecom – Rs. 120 cr Tata AIG – Rs. 1890 cr CMC – Rs. 99 cr Tata Power – Rs.BUSINESS RESTRUCTURING – TATAS Divestments Lakme – Rs. 950 cr Merind .
Rightsizing – It is phasing of excess and redundant employees resulted out of faulty internal planning (SAIL). Downscoping – It involves reducing the business and/or geographical scope of a firm (Aditya Birla group).ORGANIZATIONAL RESTRUCTURING Organizational structure and systems calls for a change when strategic variety is apparent. 207 . It can be carried out in the following ways – Downsizing – It is a systematic one-time reduction in the no. Survival is the primary motive. of a firm’s employees and sometimes in the no. Turnaround is the primary motive. of operating units. keeping the composition of business intact (Jet Airways). usually as a result external turbulence.
208 . Strategy change is unviable without a preceding change in its dominant logics. The dominant logic represents the perceptions and biases (i.e. as strategies are based on such beliefs and biases. Dominant logic becomes deep-rooted in organizational contexts depending on the period it is in place (tenure of the CEO). inertia). the more difficult it becomes to uproot the paradigm (i. The longer the period.STRATEGIC CHANGE One of the most difficult components of organization restructuring is the mindset of the top management represented through its dominant logic and its shared values reflected in cultural orientation. thumb rules) of the top management.e.
Successful transformation requires – incorporating employees fully into the process – leading from a different place so as to maintain employee involvement – instill mental disciplines that will enable employees to behave differently.e. In most organizations. Companies achieve real agility only when people at every level rise above the ordinary to face the challenges – revitalization or transformation.FORCES AGAINST STRATEGIC CHANGE The problem with strategic change is that the whole burden typically rests on few people (i. 20% of the people carry out 80% of the changes). the factor that stifled change & performance was – culture. 209 .
Promote inventive accountability. process ownership. The best way is to alter the institutional point of view. Understand and deliver the quid pro quo. it is not about winning but about learning.SUCCESSFUL TRANSFORMATION Build an intricate understanding of the business model at all levels of the organization. Manage from the future. Create relentless discomfort with the status quo. Harness setbacks. never take no for an answer. Questioning every basic action of the organization. 210 . Encourage uncompromising straight talk.
by identifying forces for and against change. also known as cultural-web. Identify and implement facilitators of cultural change. Aspects of current culture which needs to be overcome. 211 . It involves diagnosing a change situation – systems & structures. It involves identifying – Aspects of current culture which needs to be reinforced.FORCE-FIELD ANALYSIS A force-field analysis provides an initial overview of change problems that needs to tackled. that can be both enablers and blockages to change and restructuring. Culture and style of management are two main impediments in force-field analysis.
RESTRUCTURING .Term Loss of human capital Lower performance Higher performance Capital .Term Reduced labour costs Reduced debt costs Emphasis on strategic control Business High debt costs Higher risk 212 Long .OUTCOMES Alternatives Organizational Short .
NUMERATOR & DENOMINATOR MGT Most firms across emerging markets undergo strategic discontinuity and as a result are forced to restructure their businesses. the second one is a more viable strategy and sustainable option in the long run. In order to put back the company on the right track they are resort to – Denominator – It assumes that turnover cannot be increased. 213 . hence go in for downsizing. reverse engineering and regenerating. focuses on reengineering. While the first strategy produces results instantaneously. Numerator – It assumes that turnover is not a barrier or constraint. down-scoping or asset stripping.
TURNAROUND MANAGEMENT 214 .
– Less than 10% of the Fortune 500 companies as first published in 1955. – Only seven of the first fifty Indian business groups in 1947 were even in business by the turn of this century. 215 (Govindarajan and Trimble. still exist as on 2005. Source: Why do firms atrophy? (Business Today. ...WHY TURN AROUND MANAGEMENT? Some interesting insights .. and that the thirty-two of the country’s largest business groups in 1969 are no longer among the top fifty today... January 1997)..
process focuses on – A logic to explain a causal relationship between intervening variables. and capabilities. and achieves sustainable performance recovery. skills. While content focuses on endogenous and exogenous variables. As a sequence of events describing how things change and why they change (i. 216 .e. A category of underlying principles and concepts. systems.TURN AROUND MANAGEMENT A turnaround is said to occur when a firm perseveres through an existence threatening performance decline. ends the threat with a combination of strategies. Stage Theory). Both content (what) and process (how) are equally important for a successful turnaround.
unavailability or radical lowering of substitute costs or technological obsolescence. 217 . especially in key positions. Substantial shifts in consumer preferences. Low employee morale leading to high employee attrition at all levels. suppliers and bankers. Low stakeholder confidence. Some indicators Continuous cash flow crises as a result of dwindling market-share and profits. Uncompetitive products or services. leading to lack of acceptability from distributors and customers. Rising input costs.TURNAROUND INDICATORS Most firms atrophy simply because they fail to diagnose the indicators that acts as threat to organizational existence.
Common approaches adopted Change in key positions.TURNAROUND ILLUSION The first step to a successful turnaround is the basic acceptance of the fact that …. based on elasticity. they adopt surface level measures (disprin popping) which most often fail. Revamp product portfolio. Extending work hours. which most top managers fail to appreciate. Recalibrate prices. be more customer centric. liquidating dead assets. prune work-force. Product redesigning or reengineering. Emphasis on advertising and market penetration. consider extension.. focus on power brands. Hence. “all is not well”. 218 .
TURNAROUND STAGE THEORY Stage 1 Decline Stage 2 Stage 3 Stage 4 Outcome Response Transition Performance Equilibrium Line Success Failure Indeterminate Nadir Time 219 .
DECLINE Decline is the first stage in the turnaround process. primarily dwindling resources and capabilities are responsible for decline. 220 . It has its origin in “environment led fit” that subscribes to the view that a firm has little control over external factors. It has its origin in “resource led stretch” and subscribes to the view that a firm has substantial power to override the context. It involves the identification of the theoretical perspectives that explains performance decline – K-Extinction – It suggests that macro economic and industry wide factors are responsible for decline. Identification of the stimulus leads to the arrest of the downfall. R-Extinction – It suggests that organization factors.
If the underlying cause is internal efficiency. new market initiatives. asset reduction. Operating responses typically focuses on the way the firm conducts business and involves tactics geared towards – cost cutting and process redesigning (BPR). the response should be strategic. diversification. If the decline stems from structural shifts. the response should be operational. 221 . 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.RESPONSE INITIATION Turnaround responses are typically categorized as operating or strategic.
222 .RESPONSE DICHOTOMY The response initiation is somewhat dichotomous and cannot be universally applicable. Similarly new market initiatives is feasible only for multi-product firms. when decline deepens shifts in strategic position becomes essential. Untangling this question brings into focus three events – Domain – Many of the strategic cures have limited applicability for an affiliated firm. Scope – A diversified conglomerate may acquire a distressed business to turn it around and gain valuable synergies. Contour – It is easier to reverse decline in the earlier stages through operational measures. which may be unavailable to a focused firm.
However.e. Empirical studies show that average time is 7. confidence building measures. many a times early signs of recovery fades out. transparency. consensus). Sustenance is the key factor in this stage. 223 .TRANSITION Transition usually reflects the first signs of recovery. Effective levers of transition. role model. participative management (i. lead – lag). The top management has a key role to play through empowerment.e. substantial amount of time usually passes before results begin to show (i. However. Support from all the stake holders through resource commitment.7 years with a range of (4-16) years.
Commanding a premium in the market. Instead of focusing on financial parameters alone. Regaining lost market share and distributor confidence. Revival of key customers and new product launches. Failure is an indication that initial momentum was not sustainable characterized by irreversibility. 224 . Cut off points must be unequivocal. it should adopt a holistic approach. Share price indications and media coverage.OUTCOME Outcome is said to be successful when a firm breaches the equilibrium performance level. Supplier and banker confidence.
COOPERATIVE STRATEGIES & ALLIANCES 225 .
226 . It can assume any of the following forms – franchising. licensing. or joint venture. More and more companies worldwide are moving away from competition to co-option to leverage their resources and enhance bargaining power. and globalization . strategic alliance. supply-chain partnership. technology. 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. In the cooperative strategy continuum as firms move up the value order. the commitment and the involvement between the firms increases manifold. consortia.
It is an effective strategy to penetrate markets in a shortest possible time at a minimum cost. Switz Foods.FRANCHISING Franchising – It is a contractual agreement between two legally independent firms whereby the franchiser grants the right to the franchisee to sell the franchisor’s product or service or do business under its brand-name in a given location for a specified period of time for a consideration. owners of the brand Tanishq allows its franchisees to sell its jewellery products. 227 . Titan Inds. Branding is critical to franchising. owners of the brand Monginis allows its franchisees to sell its confectionary products.
Become a systems integrator (CKD). refine processes and adopt necessary technologies (SKD). Different levels of licensing Manufacturing without embracing any technology (CBU). HM manufacturing GM range of cars in India with a buy-back arrangement is a perfect example of CBU. Develop a product through its crude stage. 228 . as in Tata Indica.LICENSING Licensing – It is a contractual agreement between two legally independent firms whereby the licensor grants the right to the licensee to manufacture the licensor’s product and do business under its brand-name in a given location for a specified period of time for a consideration.
229 .CONSORTIA Consortia – They are defined as large inter-locking relationships & cross holdings between businesses in a similar industry. Cross Holdings – A maze of equity holdings through centralised control to ensure earnings stability & threshold resources for critical mass (Eg. Tata. leverage upon size to preempt competition by escalating entry barriers (Eg. It can be of the following types – Multipartner – Intends to share an underlying technology or asset. Collusion – Few firms in a matured industry collude to reduce industry output below the equilibrium level. Coke – Pepsi). Hyundai). Airbus – Boeing). enabling them to increase prices (Eg.
. Companies in different industries with different but complimentary skills. link their capabilities to create value for end users. It usually provides a platform to sort out differences between conceptualization and implementation to suit local market needs. otherwise it 230 becomes routine outsourcing. Continuous sharing of knowledge is critical to the success of a supply chain partnership.SUPPLY CHAIN PARTNERSHIP It is a pro-active & collaborative arrangement between supplier and customer aimed at achieving better control over the value chain (Eg. Tata Motors – IDEA).
preempt competition. to gain knowledge and to obtain access to new markets (Eg. 231 . Firm’s should undertake a long courtship with potential partners. Generic motives involved are . instead of hurrying into a relationship. Partner selection is one of the critical success factors.learning organization. Tata Motors – Fiat. enter newer markets. Despite their popularity (50-60)% of the alliances fail to accomplish their stated objectives. enhance credibility. design next generation products. effective R&D management.STRATEGIC ALLIANCE It is an short to medium term understanding between two or more firms to share knowledge and risk. Reliance – Du Pont).
Coke – Pepsi). Bootstrap – An alliance between a weak and a strong company with an intention to acquire it.TYPES Collusion – Tacit top management understanding to neutralize price wars (Eg. Alliances of the Weak – An alliance is entered into to preempt competition (Eg. Bajaj – Castrol). Complementary Equals – Two firms mutually promoting each others complimentary products (Eg. Whirlpool – Tide. Airbus – Boeing). Maruti).STRATEGIC ALLIANCE . Backward – An alliance (quasi or tapered) with a supplier of critical components seeking commitment (Eg. 232 .
Too much stress on financials & structure be avoided. Differences in level of economic development can produce differences in alliances motives.PARTNER SELECTION CRITERIA It is likely that partners will not have complete consent on alliance objectives because the institutional context in which the alliance embedded varies from country to country. 233 . – Japan Vs US). Cultural orientation has been found to have a profound effect on top management’s strategic orientation (Eg. Firms from developed markets seek access to markets and firms from emerging markets seeking access to technology.
Managerial capabilities. Intangible Assets – Move beyond the financials of the firm. Experience related to previous alliances.PARTNER CHARACTERISTICS Complimentarity of Capabilities – The degree to which partners resources can be used in conjunction. Partner’s ability to acquire fresh skills. Dominant Logic’s – Similarity in beliefs & biases. Unique Resources – Abilities or skills which cannot be easily duplicated. Willingness to share knowledge and skills. including ability to provide quality products and services. 234 .
the value chain. incorporating clear signs of continuing independence for all partners. operational & cultural integration. Learning to collaborate – strategic. Getting Engaged – It should incorporate a specific joint activity. Setting up the housekeeping. Changing within. instead of focusing controlling the relationship.MANAGING ALLIANCES Alliances are more than just a deal. 235 . differences not anticipated earlier. degree of compatibility. Selection & Courtship – It involves self analyzing. partners should nurture it. understanding the chemistry. vows to include commitment to expand the relationship.
It lasts till the vision is reached.JOINT VENTURE A joint venture is a long term association between two equal partners to create an independent firm (SPV) by complementing their resources and capabilities to explore newer businesses or markets for achieving a shared vision. combining parts). whilst the partners continue to operate independently. a joint venture is a selection among modes by which two or more firms can transact. There are substantial linkages in the value-chain. synergy) rather than mere exchange (i.e. It aims at creating new value (i. Conceptually. separation is very 236 bitter.e. .
in addition to a high degree of asset specificity. The market fails as sellers are unwilling to reveal their technology and buyers are unwilling to purchase in the absence of inspection. though more profitable alternative to other choices. 237 . Organizational Learning – It is a means through which a firm learns or seeks to retain their capabilities.JOINT VENTURE – GENERIC MOTIVES Transaction Cost – The situational characteristics best suited for a JV are high performance uncertainty. Strategic Behaviour – Firms may override transaction costs. It may also be linked to deterring entry or eroding competitors position.
Endorsement from government authorities. – Eg. Yamaha – Escorts. – Eg. Renault – Nissan (Minivans – Cars). – Eg. – Eg. Daimler – Chrysler (Premium Cars) 238 . Define future industry standards. Maruti – Suzuki. TVS – Suzuki (4-Stroke Engines) Fill gaps in existing product lines.OTHER MOTIVES Entry into newer markets. Eli Lily – Ranbaxy. Essar – Hutch (Vodafone). – Eg. – Eg. Sharing of resources. Learning new technologies.
– Eg. PAL – Fiat If the cost of continuing exceeds the exit costs? – Eg. Risk of over dependence. LML – Piaggio Differences in size and resource base. – Godrej – Procter & Gamble. – Eg.Enka.RISKS INVOLVED Incompatibility – Differences in cultural background. Tata – Aditya Birla in Idea Cellular 239 .e. technology) drain. Century . – Maruti – Suzuki. Modi – Telstra What after exit (parenting disadvantage)? – Eg. Risk of brain (i.
Focus – Avoid strategic myopia. Equality – Lack of dominance. 240 . Incompatibility – Performance expectations. Partner – Avoid duplication of skills and capabilities. Culture – Reconcile gaps. respect. Costs – Other modes of transaction becomes cheaper. Inertia – Differences in age and evolution patterns.PRE-REQUISITES FOR SUCCESS Commitment – Mutual trust. Agreement – Clarity on operational control. time sharing. Objectives – Shared vision. Flexibility – Sufficient space to breathe and adjust.
MERGERS & ACQUISITION 241 .
Ranbaxy . Most countries have stringent laws that prevents hostile takeovers (Eg. An acquisition is the purchase of a firm by a firm (of larger size. SEBI Takeover Code. 242 .Daichi) and hostile if it is without the consent of the management (Eg. Mittal Arcelor). however. HLL – Tomco). Brooke Bond – Lipton). An acquisition is said be smooth if it is with the consent of the management (Eg. reverses are also taking place through LBO) with a view to acquire conglomerate power and induce synergy (Eg. The larger objective is to leverage on size. 2002).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.
Acquirer – Someone (individual or firm) who picks up an atleast 5% stake without mandatory disclosure having an intention to wrest management control (i. Hike – An acquirer who has already picked up a 5% has to make a mandatory disclosure for every additional 1% stake that it acquires. Control – A special resolution of 75% of the share 243 holders approving the change of guard. . 2002 Promoter – A person who has a clear control of atleast 51% of the voting rights of the company and confidence of all the major stakeholders. Preferential – A preferential allottee ending up acquiring 5% stake also comes under its purview. creeping acquisition).e.SEBI TAKEOVER CODE.
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. whichever is higher as an exit route (Eg. Grasim – L&T Cement. SEBI – In case of a hostile take over. 244 . Gujarat Ambuja – ACC).SEBI TAKEOVER CODE. and/or does not enjoy the confidence of the different stake holders.e. 2002 Pricing – Acquirers will have to offer minority shareholders (at least 20%) the past 26 weeks or past 2 weeks average price. credentials or track record is at stake. the SEBI can intervene and block share transfers if: the acquirer has ulterior motives (i. asset stripping).
Kelvinator). The type of merger is depends on the degree of relatedness (strategic) between the two businesses.TYPES OF MERGERS A business is an activity that involves procuring of desired inputs to transform it to an output by using appropriate technologies and thereby creating value for its stake holders in the process. Conglomerate – It involves integration of two distinctly unrelated businesses. Reliance). usually opportunistic (Eg. Vertical – It involves complimentarily (partially related) in terms of supply of inputs or marketing activities (Eg. 245 . Godrej. ITC). Electrolux . Horizontal – It involves integration of two highly related businesses (Eg.
quick access). Global image (Eg. Tax benefits (Eg. Asset Stripping – Shaw Wallace). Economies of size. ITC Bhadrachalam). Acquiring assets or capabilities (Eg. ICICI –ITC Classic). Reduction in risk. Access to newer segments (Eg. Tata Steel – Corus).MOTIVES Increased market / conglomerate power. Mittal – Arcelor).e.MERGERS & ACQUISITION . Overcoming entry barriers (Eg. Avoiding risk of new product development. 246 . Reduced gestation (i. Ulterior motives – (Eg. Coinsurance effect – Higher debt raising capability. scale and scope. Ranbaxy – Crosslands).
Top management overtly focused on due diligence exercise and negotiations. neglecting core business. Overvaluation of buying firms (Eg. Managing over-diversification. Inability to achieve synergy. Tata – Corus).MERGERS & ACQUISITIONS PITFALLS Cultural differences (Eg. Managing size. When Tata Steel started negotiations with Corus. Overvaluation is often as a result of an ego drive and substantially affects future returns. 247 . Merging of organisational structures. while the ultimate acquisition was made at 607 pence/share). their initial offer was around 420 pence/share.
Kingfisher – Air Deccan). Brooke Bond – Lipton). Decline – Horizontal mergers are undertaken to ensure survival. Growth – This stage may witness parallel merger of two firms of similar size.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. with an objective to reinforce its growth trajectory or to take on the might of a comparatively larger player (Eg. Maturity – A larger firm acquires a smaller firm with an objective to achieve economies of scale and experience curve effects (Eg. Tata Steel – Corus). vertical to save transactions costs. 248 .
Left alone syndrome.FRAMEWORK Positive contribution to the acquired company. A common shared vision. Strong differences may stifle plans and its execution. A concern of respect and trust for the business of the acquired company. Immediate attempts to super impose structure and culture may cause bottle necks. Blanket promotions across entities and confidence building exercises needs to be practiced. active top management intervention in phases. An acquisition just for the sake of it or reputation yields very little value in the long term.INTERNATIONAL M&A . 249 .
. Shift attention from business portfolio to people and processes.BLUEPRINT Take the media into confidence. They can carry the message to the various stake holders. Determine business strategy. It will enable focus on customers and key people. 250 Do not ignore the “people factor”. promptly. Decide upon management control systems. Integrating work processes.INTEGRATION . Redefine responsibilities and authority. Decide on the new hierarchy.
The process takes (6-12) months. Valuation decisions are arrived through a due diligence process when the prospective acquirer gets access to the books of accounts of acquiring company.M&A . – Unstated reasons – Personal self interest and hubris. While under valuation may be a significant opportunity. operational & financial). over valuation can become a curse.VALUATION The process of valuation is central to M&A.e. – Synergy – Potential value gain from combining operations (i. Financial motives – Undervaluation relative to true value. – Market for corporate control. 251 .
or from increased market power which increases sales and margins. – Conglomerate Synergy – Gains come when one firm complements the resources or capabilities of another (Eg.VALUING OPERATIONAL SYNERGY Synergy – It refers to the potential value gain where the whole is greater than the sum of the parts. – Vertical Synergy – Gains come from controlling the supplychain and savings in transaction costs. 252 . Synergy can be negative as well. when the “fit” between the two entities is very poor. Sources of operational synergy – Horizontal Synergy – Gains come from economies of scale which reduces costs. Innovative product – Good distribution network).
Hotmail). ITC – Bhadrachalam Paper). and without paying take-over premiums. but availed after being merged with a profitable firm (Eg. Cash Slack – It reduces asymmetry between cash starved firms with deserving projects and cash cows with no investment opportunities. Synergy comes from projects which would not have been undertaken if the two firms stayed apart (Eg. shareholders can accomplish the same at a much lesser cost.VALUING FINANCIAL SYNERGY Diversification – Reduce variability in earnings by diversifying into unrelated industries. 253 . However. Tax Benefits – Tax benefits may accrue from tax entitlements and depreciation benefits unutilized by a loss making firm.
the cash flow the merged firm will be less variable than the individual firms. 254 . – Coupon rates may also be negotiated at lower rates. – Default risk comes down and credit rating improves. hence better performance. This will induce higher debt capacity. 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. It relates to the concept of diversification.VALUING FINANCIAL SYNERGY Co-Insurance Effect – If the cash flows of the two firms are less than perfectly correlated. higher leverage. as risky debt is spread across the new firm's operations.
While value of corporate control is negligible for firms that are operating close to their optimal value.VALUING CORPORATE CONTROL Premium of M&A are often justified to control the management of the firm. 255 . The value of control can be substantial for firms that are operating well below optimal value. Assessment of perceived quality is critical. 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. – – Value of Control = Value of firm after restructuring Value of firm before restructuring.
256 . debt component) at the time of buyout and rapid changes in capital structure over time. LBO facilitates a relatively smaller firm to bid for a comparatively larger firm in the bid for management control.e. sometimes in combination with the assets of the acquiring company. The assets of the acquired company are used as collateral for the borrowed capital. It is a very costly and risky proposition.LEVERAGE BUYOUT (LBO) The basic difference between a take-over and a LBO is the high inherent leverage (i. Confidence of investment bankers and the international financial community is essential.
– Separation of ownership from management. liquidity. 257 . The increased benefit showed in the following way – reduced costs and increased revenue.access to financial markets. off-late many publicly traded firms have gone private keeping in mind the following – – The fear of LBO. – The need to satisfy analysts and shareholders.TO GO PUBLIC OR NOT? However. on-going valuation. the advantages of going public includes . However. A research study showed that 30% of the publicly listed firms reported above average returns after going private. – Increased information needs.
258 . – It is a temporary phenomenon.e. – Managers cannot be trusted to invest free cash flows wisely. – Debts repaid off from increased value after successful restructuring and wresting management control. 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). – Cost of debt coming down (i. – Cash trapped company unable to utilize opportunities. co-insurance effect).
A LBO has to pass two tests to be viable – – Restructuring to pay-off increased debt. – Increase equity valuation. initial rise in leverage is anticipated. 259 . As the firm liquidates / pledges assets and pays off debt. leverage is expected to decrease over time.EFFECT OF HIGH LEVERAGE Increases the riskiness of dividend flows to shareholders by increasing the interest cost to debt holders. Any discounting has to reflect these changing cost of capital. Therefore. Lack of sufficient cash flows to repay costly debts resulting in a possible debt trap.
– Facilitates better valuation and forthcoming offerings.e. – Tax shelter. time-barred. – Prevents dilution of equity.REVERSE MERGER Reverse Merger – The acquisition of a public company. or costly. shell company) by a private company. which has discontinued its operations (i. 260 . Objectives – – Traditional route of filing prospectus and undergoing an IPO is costly. – Automatic listing in major exchanges. small in size but having a promising business. allowing the private company to bypass the usually lengthy and complex process of going public.
takeover failures have only initial negative effects on stock prices. During bearish periods excess returns were 19%. Excess returns also vary across time periods. Most target firms are taken over within (6090) days.EFFECT OF TAKE-OVER ANNOUNCEMENT The shareholders of target firms are the clear winners. Initial anomaly in stock prices usually normalizes over a period of time (6-12) months. 261 . However. and 35% during bullish periods. – Merger announcements reported 20% excess returns. – Takeover announcements reported 30% excess returns.
Brickley. as stock markets become more and more perfect such anomalies would reduce Source: Jensen and Ruback.EFFECT OF TAKE-OVER ANNOUNCEMENT The effect of take-over announcement on bidder firm’s stock prices are not clear cut. 1983. 1983. Bradley. and Kim. in the event of take-over failure negative returns to the extent of 5% on bidder firm stock prices is reflected. Desai. – However. 262 Jarrel. – Most studies reported insignificant excess returns around take-over offers or merger announcements. and Netter. 1988 . over time. – However.
DEFENSIVE STRATEGIES Golden Parachute – An employment contract that compensates top managers for loss of jobs as a result of change in management control. 263 . so that nothing is left for the raider to strip off. Asset Stripping – The targeted company hives off its key assets to another subsidiary. Poison Put – Premature retirement of bonds at attractive rates to pour surplus cash and make target investment unattractive. Poison Pill – An offer to existing shareholders to buy shares at a substantial discount to increase their voting rights (Eg. Rights).
264 . Green Mail – The targeted company buys large blocks from holders either through premium or through pressure tactics (Eg. Pac Man – The target company makes a counter bid to take over the raider company. East India Hotels – Reliance Industries – ITC).DEFENSIVE STRATEGIES White Knight – It is the placing of stocks to a cash rich investor and bargaining for protection in return. But often the White Knight turns a betrayer himself (Eg. thus thwarting the raider company’s attention. 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 .
were spending 99% of their precious time dealing with present. Compaq overpowering IBM. The reverse was true for the companies overpowering. Nokia overpowering Motorola. Honda overpowering Volkswagen. Most companies were too preoccupied with the present than the future? 99% of the companies overpowered. Honda overpowering GM.GETTING OFF THE TREADMILL Canon overpowering Xerox. Wal-Mart overpowering Sears. What went wrong???? What were they doing with the present? What were they pre-occupied with? 266 . British Air overpowering Pan Am. Hitachi overpowering Westinghouse.
declining margins. most often they ended up cutting corporate muscle as well and became anorexic. falling market share). decluttering. Thus efficiency was grievously hurt. Not knowing when to stop. These denominator based managers stuck to their restructuring strategies (like building pyramids) and didn't know what to do next? Thus they became history? (like the pharaohs) 267 . CEO’s brutally pick up the knife and ruthlessly carve away layers of corporate flab (delayering.THE PAST OF COMPETITION Beyond Restructuring – When a competitiveness become inescapable problem (stagnant growth. downsizing).
THE PRESENT OF COMPETITION Beyond Reengineering – Numerator based managers (innovation) at least offers some hope.S. On the contrary only 20% of Japanese managers believed that quality will be a source of competitive advantage of the future. 268 . A poll in circa 2000 revealed that 80% of the U. but forging ahead in competition. The future is not about catching up with competition. incrementalism or nominal innovation has almost reached a plateau. but not of the future. top managers believed that quality will be a source of competitive advantage of the future. However. ensuring only survival of the present.
THE FUTURE OF COMPETITION Regenerating – Leaner. don’t predict. Creating the future requires industry foresight. Transform the industry. and regenerate its strategies (breaking its – managerial frames). they are not enough to get a company to the future. reinvent its industry. faster. Empower from bottom to top. not the other way. 269 . Create a potential gap. not just the organization. Companies need to fundamentally reconcieve itself. as important as these may be. aspirations and resources. It involves Dream about the company’s future. It is based on deep insights into trends in technology. better. demographics and lifestyles.
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 .
Change in at least one fundamental way the rules of engagement in an industry. It drives a hunger and a passion to transform. they do not need to restructure. blue oceans). Create entirely new industries (i. It is about deliberately creating a strategic misfit.ABOUT THE TRANSFORMATION The future does not belong to those who take the industry for granted. Redraw the boundaries between industries. Therefore. 271 . Successful companies have a complete grip over the industry. hence do not fall sick in the first place.e. by converging technologies complex.
the revolution must start at the bottom and spread in all directions of the organization.ABOUT THE EMPOWERMENT Bring about a revolution (a paradigm shift) in the organization. 272 . A revolution that is thrust upon from the top seldom sustains. Such a process is called institutionalization (from people centric to organisational centric). The middle management plays a strong moderating role. Transformational leaders merely lead the way. More importantly. Most successful revolutions (Gandhi to Mandela) rose from the dispossessed.
Companies need to strategize (think ahead of times). 273 . Get to the future first. Toshiba – LCD. without taking undue risk. South West Airlines – LCC. Apple – iphone). An ability to energize the company. It requires a lot of common sense and a little bit of out of the box thinking. What does it take to get to the future first? Understanding how competition for the future is different.THE FUTURE OF STRATEGY A company must get to the future not only first but also for less. A process for finding and gaining insight into tomorrows opportunities (Eg. Apply the 40 – 30 – 20 principle.
We are in the midst of a 3600 vacuum. As there is no one future.HOW DOES THE FUTURE LOOK LIKE? There is no rule which says that for every leader there will be a follower. the farther it will be away from competition. The farther one can see in this endless space. 274 . but hundreds. greatness from mediocrity. as on their aspirations. Companies of the future will be not based so much on the strength of their resources. What distinguishes a leader from a laggard. is the ability to imagine in a different way what the future could be. each point in space represents a unique business opportunity.
THE EMERGING STRATEGY PARADIGM Not Only Reengineering Processes But Also Regenerating Strategy The Competitive Challenge Organizational Transformation Industry Transformation Competing for Market Share Competing for Opportunity Share Finding the Future Strategy as Learning Strategy as Positioning Strategy as Engineering Strategy as Unlearning Strategy as Dream Strategy as Architecture 275 .
THE EMERGING STRATEGY PARADIGM Not Only But Also Mobilising for the Future Strategic Fit Resource Allocation Strategic Misfit Resource Stretch & Leverage Getting to the Future First Existing Industry Structure Product Leadership Single Entity Product Hits & Timing Future Industry Structure Competency Leadership Dominant Coalitions / Co-option Market Learning & Preemption 276 .
Degree of Learning Unlearning Curve P2: Unlearning in previous period does not necessarily ensure learning in the current period. Learning Curve t1 t2 t3 Time t4 t5 277 .LEARNING TO FORGET P1: The degree of learning in current period is directly proportional to the degree of unlearning in the previous period.
Leverage – They are the gateways to future markets.CORE COMPETENCE A core competence relates to a bundle of skills (not an asset or a business) that revolves around activities or processes and critically underpins a firm’s competitive advantage. Inimitable & Insubstitutable – A high degree causal ambiguity between these skills yield sustainable competitive advantage. 278 . It cannot be matched even by its closest competitors. It is characterized by the following – Unique – It provides unimaginable customer value ahead of its times. It represents the collective learning's of an organization centering around diverse streams of technologies.
Toyota – lean manufacturing.MORE ABOUT CORE COMPETENCE Sony – miniaturization. 279 . leaders have one. Core competencies are the roots of the organization. it is deeply embedded in the heart of the organization. Canon – imaging. A core competency cannot be outsourced. Nike – designing. it gets more refined and valuable through use. Toshiba – flat screen displays. Although a core competence may lose value over time. Coca Cola – brand. Honda – engines. Intel – nano-electronics. SKF – antifriction and precision. Wal-Mart – logistics. at the most three to four. Most companies around the world do not possess one.
ROOTS OF COMPETITIVENESS End Products 1 2 3 4 5 6 7 8 9 10 Core Businesses Core Business 1 Core Business 2 Core Business 3 Core Business 4 Core Product 2 Core Products Core Competencies Core Product 1 Competence 1 Competence 2 Competence 3 Competence 4 280 .
RESOURCE STRETCH & LEVERAGE
Initial resource position is a very poor indicator of future performance. It leads to atrophy and stagnation. Successful companies consciously create a potential gap between aspirations and resources. Resource crunch is a common factor among firms that faces a wealthy rival, and outperforms them. Leveraging what a company already has, rather than allocating it is a more creative response to scarcity. – By concentrating existing resources. – By accumulating existing resources. – By complementing existing resources. – By conserving existing resources. – By recovering existing resources.
Concentrating – It involves effectively directing portfolio of resources on key strategic goals in which individual efforts converge over time. It is a balance between individual mediocrity and collective brilliance. It is achieved through – Converging – Redirecting multiple diverging (i.e. fragmented) short term goals into one long term goal. It is then resources can be stretched over time. Focusing – Making trade-offs and preventing dilution of resources at a particular point of time. Targeting – Focusing on the right innovations that are likely to have the biggest impact on customer value.
Accumulating – Using existing reservoir of resources to build new resources. Each and every individual is a rich & potential source of learning, discover better ways of doing things. It is achieved through Mining – Extracting learning experiences from existing body of each additional experience (i.e. success or failure). It is an attitude that can be acquired, but never learnt. It leads to a substantial jump in the experience curve. Borrowing – Utilizing resources outside the firm through licensing, alliances, joint ventures. A firms absorptive capacity is as important as its inventive capacity.
Complementing – Using resources of one type with another that aligns smoothly to create higher order value. In a way it produces an accelerating effect on each individual resource. It is achieved through – Blending – Interweaving discrete capabilities to create world class technologies (GM – Honda) through integration and imagination. Different functional skills can also be blended to create a world class end products (Yamaha – Keyboard). Balancing – An ability to exploit excellence in one area is never imperiled by mediocrity in another (GE acquiring the CT scanning rights from EMI because of its inadequate market reach).
Conserving – Sustaining competencies over time through frequent usage. Resources are never abandoned; they are always preserved for future use. Recycling – Increasing the velocity of use of a competencies over time. As a result core competencies can be leveraged across an array of products (Sony - Betamax). It includes brand extensions as well. Co-Opting – Enticing resources of potential competitors to exercise influence in an industry (Fujitsu – IBM). Shielding – It involves identifying competitors blind spots and then attacking without having the fear of retaliation.
Recovering - It is the process of reducing the elapsed time between investing in resources and the recovery of those resources in the form of revenues via the market. Speeding – Prior to the 1980’s Detroit’s majors took an average of 8 years to develop an entirely new model; the Japanese reduced it to less than 4.5 years, with major new variants in 2 years. This envisaged Japanese players in giving customers more opportunities to switch allegiance and loyalty (Toyota). Protecting – It uses competitors strength to one’s own advantage, by deflecting it, rather than absorbing it as practiced in Judo.
INTERNATIONAL BUSINESS ENVIRONMENT 287 .
Diversified groups in operating in emerging markets therefore benefit from unrelated diversification. institutional gaps. Therefore focused strategies based on core competence may not be suitable for emerging markets (Khanna & Palepu. Emerging markets are characterised by infrastructural bottlenecks. China. Korea. 1997). high levels of market imperfection).e. Chile) provide a different context (i. 288 .EMERGING MARKETS Emerging markets (India. strategies suited for the developed markets may not be appropriate for emerging markets. and high transaction costs. Therefore.
subsequently negatively related across developed markets. Entropy). Synergy. Optimum level of diversification Performance Diversity is initially positively related with performance. Concentric.DIVERSITY . et al. (2000) 289 .PERFORMANCE (I) Diversity attempts to measure the degree and extent of diversification (Herfindahl. Experience Strategic Fit Diversity Palich. Size & Scale.
DIVERSITY . Huge initial investment. brand building Risk diversification. conglomerate power Threshold level of diversification Performance Diversity (Khanna & Palepu.PERFORMANCE (II) Diversity is initially negatively related with performance. 2001) 290 . subsequently positively related across emerging markets.
It should have a spread of manufacturing facilities. 291 . HSBC). act locally (Eg. Characteristics – It should have a spread of affiliates or subsidiaries. It should think globally. It should have a spread of assets. It should have a spread of interest groups / stake holders.INTERNATIONAL IDENTITY MNC’s consciously engage in FDI in different parts of the globe to forge resource diversity as a distinct competitive advantage. revenues and profits.
low group scale in developed markets and vice versa for emerging markets).It reflects the relative role of team building (Eg.GLOBAL BUSINESS ENVIRONMENT Power Distance – It reflects the disparities in income and intellectual development (Eg. low risk profile in developed markets and vice versa for emerging markets). high feminity index in developed markets and vice versa for emerging markets). 292 . Group Scale . Feminity Index . low power distance in developed markets and vice versa for emerging markets). Risk Profile – It reflects the risk attitude of the top management (Eg.It reflects the disparities in women in workforce (Eg.
code of conduct. customs. low country risk in developed markets and vice versa for emerging markets). attitude. way of life. currency. credit rating. inflation. judiciary) of doing business in a particular country (Eg. FOREX reserves. terrorism (9/11).GLOBAL BUSINESS ENVIRONMENT Cultural Adaptability – It reflects the adaptive ability to a changing environment . political stability. corruption.culture. dress sense. Country Risk – It reflects the political and economic risk (Eg. high cultural adaptability in developed markets and vice versa for emerging markets). flexibility (Eg. time value. interest rates. 293 .
however. High levels of ethnocentrism usually has a negative effect on business.GLOBAL BUSINESS ENVIRONMENT Time Sensitiveness – Developed country managers regard time as precious. Other factors – local celebrations. Language Barriers – Developed country managers expect foreign partners to communicate in their languages. 294 . and vice-versa. in most emerging markets meetings are delayed and lasts unusually long. in most emerging markets use of an interpreter may be a standard protocol. time-zones. Ethnocentrism – Developed country managers tend to regard their own culture as superior.
It a multi-lateral treaty with 143 (as on 2002) member countries to reduce tariff and non-tariff (quota) barriers. trademarks). The 1999 (Seattle Round) saw a lot of protest amidst bringing agriculture under the purview of TRIPS.GATT GATT was a bi-lateral treaty initiated between US and some member countries in 1947 to promote free trade. In 1995 (Uruguay Round) GATT was renamed to WTO. ASEAN. It also highlighted the nexus between US & WTO. It focused largely on TRIPS (patents. The 2001 (Doha Round) focused on power blocks (NAFTA. It also initiated provisions on anti-dumping. 295 . copyrights. BRIC).
296 . The Euro was significantly devalued against the Dollar till 2002. Euro).Pound). However. Sterling .e. three countries joined in 2002 increasing it to fifteen members as of 2008. the Dollar still remains the most preferred currency globally.e. However with current recession in the US 2002 onwards. The notable exception was Great Britain which still continues with its local currency (i.EURO – SINGLE CURRENCY In 1999 twelve member countries in Europe joined hands to move over to a single currency (i. primarily the OPEC countries. the Euro slowly started outperforming the Dollar.
it helps avoiding transaction costs associated with a multiple currency. Rate Uncertainty – A single currency eliminates the risk of competitive devaluations. but it may have spill-over effects. a multiple currency is preferable where the business cycles of member nations are different.SINGLE Vs MULTIPLE CURRENCY Transaction Costs – Though the initial cost of introduction of a single currency is very complicated and costly. 297 . Trade Block – It will strengthen the EU identity which would not have been possible otherwise. However. Transparency – A single currency is transparent and competitive.
the gain of one country is loss of another). – FII (transfer of intangible resources) is fast but may have strong repercussions (i. – FDI (transfer of tangible resources) is slow but steady for the purpose of economic growth.e. hot money). 298 . Neo classical economists believe that foreign investment may in fact be a win-win game. It is short-medium term with comparatively low levels of commitment. It is long term with high levels of commitment.e.FII Vs FDI INVESTMENT Classical economists believed that foreign investment (in any form) is basically a zero sum game (i.
Pricing – It depends on the competitive structure (PLC – Kellogg's). technology (microchip).culture (food habits). promotion (surrogate advertising).INTERNATION MARKETING Product – The various attributes of a product may receive different degrees of emphasis depending on differences in . customer awareness (microwaves). . lifestyle (petroleum 299 outlets – departmental stores). buying patterns (spread). usage (talk time). economic (middle class buying power). Distribution – It depends on the market characteristics (fragmented – concentrated).
Accounting Norms – The accounting norms of one country (AS .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). Leverage – The leverage may vary across countries depending upon money and capital market conditions (Eg. equity is cheap in India). Cost Structure – Companies in India need to investment in fixed costs due to poor infra-structure 300 compared to developed markets. . debt is cheap in US.
technology (convergence. Training – It is a pre-requisite for international business to reduce language. in most cases it is not desirable nor practiced. labour laws. skills are more important that cultural fit and vice-versa. shortened life cycles). Recruitment – In local recruitment. double taxation. and cultural barriers (language) vis-à-vis emerging markets. 301 . however. Compensation – Differential pay packages exists because of differences in purchasing power. social security.INTERNATIONAL HR An uniform HR policy is idealistic to enable parity in performance appraisal.
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. . Bosch spark plugs are used by car manufacturers worldwide). Technology – The cost to be evaluated in terms of latest technology (Euro VI) vis-à-vis effective cost of appropriate technology (Euro II). reduce power costs) vis-à-vis infrastructural bottlenecks. Outsourcing – A company having a core competence may be the source of global outsourcing (Eg.
CONTEMPORARY TOPICS 303 .
Innovations typically paves the way for more secured and improved lifestyle for consumers in general. 304 . Innovation is all about staying ahead of competition.INNOVATION An invention is the first occurrence of an idea for a new product or process. it has destructive effects as well. Innovation is the most preferred strategy today to maintain competitive advantage in the present turbulent business environment. While innovation typically adds value for organizations. but has inherent risks involved as well. innovation is the first attempt to carry it out in practice.
Process innovation usually follows product innovation. However. Tangible impact of product innovation on performance is significantly higher than process innovation. 305 . Strategic innovation has the potential to change the rules of the game. process innovation is necessary to sustain the competitive advantage of product innovation.TYPES OF INNOVATION A key challenge is maintaining a balance between process and product innovations. process innovations are organizational driven. While product innovations are typically customer driven.
Drug Development (Bio Chemicals). Processors (Pentium).e. Telecom (CDMA Technology). It leads to a shift in the price – performance envelope.BUSINESS MODEL It is a simplified description and representation of a complex real world. 306 . a paradigm shift). about how an organization makes money (i. Medical Surgery (Lasik). Disruptive business models brings in a new frame of reference (i. putting an idea into practice). Data Storage (Pen Drives). Innovations are the back-bone of successful business models .e.
The key resources and capabilities required. The channels to reach out to the clients.NINE BUILDING BLOCKS Value proposition offered to the market. The revenue streams generated by the activities. The proposed relationships established with clients. The key partners involved in the activities. The segment(s) of clients to be addressed. 307 . The key activities / processes necessary for execution. The cost structure resulting from the business model.
BUSINESS MODEL FRAMEWORK 308 .
innovative companies to carve out unique business models to fend off competition.REVENUE MODEL Positioning is just not sufficient. With the rapid erosion of certain industries (IT. 309 . It is just one piece of the puzzle. The revenue model described here are the means to generate revenues. Investment Banking. Real Estate) companies need to untangle and understand the intricacies of their business model. It involves – Product Visualization – Product Prototype – Product Test – Capacity – Pricing – Distribution.
Promote the culture of experimentation.HOW TO MAKE INNOVATIVE CO’S Innovative company’s are a matter of culture and aspirations rather than tangible resources. 310 . Allow the workforce idiosyncrasies for their errors. Have a lean and a flat organization structure. Provide reasonable incentives (not necessarily monetary). A favourable intellectual property (IP) climate. Promote the grape-vine. Allow the management sufficient slack to be future oriented.
311 311 . The most preferred strategy of internal protection includes imbibing “causal ambiguity” in the production process to make reverse engineering difficult.HOW TO PROTECT INNOVATION? Without adequate protection (external or otherwise) the effects of innovation does not translate to performance. Collusion with the judiciary is also another distinct possibility in emerging markets. however that possibility is slowly atrophying. companies are increasingly relying on internal protection to sustain innovation effects. In most emerging markets where the IP climate is not so favorable.
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 . Corporate governance aims to reduce the principal-agent problem present in most professional managed organizations through appropriate forms of accountability and control mechanisms.
AGENCY THEORY The root of Corporate Governance goes back to the Agency Theory. not present in portfolio diversifications. According to the agency theory top managers and shareholders interests are usually conflicting in nature and tend to pull in opposite directions. This exposes the shareholders to additional risks and higher costs. However. also known as the principal-agent problem or agency dilemma. shareholders can diversify their portfolio at a much lesser risk and cost. 313 . From the strategic point of view managers tend to diversify into unrelated businesses as it provides higher returns hence a more favourable appraisal.
SEBI Report – 2005. defines corporate governance (headed by Kumar Mangalam Birla) as the acceptance by management of the inalienable rights of shareholders as the true owners of the corporation and of their own role as trustees on behalf of the 314 shareholders. After the Enron downfall.ORIGIN & CONTEXT Since the early 20th century since a large part of public funds were held by publicly traded firms in the US. 2002 to restore public confidence in corporate governance. various laws were enacted to ensure proper usage of these funds. the US government passed the Sarbanes – Oxley Act. .
GOVERNANCE PRINCIPLES Rights and equitable treatment of shareholders: Help shareholders exercise their rights by effectively communicating information in transparent ways that is understandable and accessible and encouraging shareholders to participate in general meetings. Role and responsibilities of the board: It deals with issues about an appropriate mix of executive and nonexecutive directors. The key roles of chairperson and CEO should not be held by the same person and their offices be clearly separated. 315 . including the society at large. Interests of other stakeholders: Recognize the legal and other obligations of all legitimate stakeholders.
. They should also implement systems to independently verify and safeguard the integrity of the company's financial reporting. 316 316 . Independence of the entity's auditors: Identification. assessment and mitigation of risks and retirement by rotation over a fixed period of time.GOVERNANCE PRINCIPLES Integrity and ethical behaviour: Organizations should develop a code of conduct for their top management that promotes ethical and responsible decision making. Disclosure and transparency: Disclosure of information should be timely and balanced to ensure that investors have clear access to data and facts.
Regular board meetings allow potential problems to be identified. discussed and resolved. Remuneration: Performance-based remuneration is designed to relate some proportion of salary to individual performance. a person benefitting from a decision should abstain from it. 317 . fire and compensate top management. However. safeguards invested capital. they should provide no mechanism or scope for opportunistic behaviour. with its legal authority to hire. Balance of power: The simplest balance of power is very common.GOVERNANCE STRATEGIES Monitoring by the board of directors: The board of directors.
They defined a well-governed company as one that had mostly out-side directors. undertook formal evaluation of its directors.GOVERNANCE & PERFORMANCE In its “Global Investor Opinion Survey” of over 200 institutional investors in 2002. Egypt and Russia) to around 40% for Canadian & European companies. from 10% for companies where the regulatory backdrop was least certain (those in Morocco. and was responsive to investors' requests for information on governance issues. 318 . The size of the premium varied by market. who had no management ties. McKinsey found that 80% of the respondents would pay a premium for wellgoverned companies.
today economic institutions are considered as a major drivers of improvement in quality of life in general and therefore needs to include multiple stakeholders.SHAREHODER – STAKE HOLDER THEORY Till the early part of the 20th the basic objective of modern organizations was to provide goods and services for public consumption for profit maximisation. Therefore. 319 . corporate philanthropy should be a part of every corporate mission. Over a period of time. the short-term view of profit maximisation gave way to a more broader and mediumterm view wealth maximisation of the shareholders. However. The basic premise is that firms cannot exist in vacuum.
“an enterprises decisions and actions being taken for reasons at least partially beyond its immediate economic interests”.CORPORATE SOCIAL RESPONSIBILITY As Peter Drucker rightly pointed out that. 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”. in fact a large part of it is significantly overlapping. CSR can be defined as. economic and social responsibilities cannot be mutually exclusive. Therefore. However. giving a very important message that one cannot exist without the other. Therefore.
The role of media: The media and various consumer organizations have come up in protecting consumer rights and exposing mal-practices. MRTP). Fear of government interference: Excessive quench for profits may lead to build up of adverse public opinion compelling the government to intervene (Eg. 321 . people are becoming increasingly aware of their right to a decent and healthy life. Public image: Entrepreneurs are increasingly relying on public image as a source of competitive advantage and a higher financial discounting.GROWING CONCERN FOR CSR Awareness due to education: With growing literacy.
Paper packaging. designing eco-friendly products. Education. Cement . Refrigerators – CFC. Aditya Birla Research Centre – LBS). Tata Steel – Life Line Express). Literacy & Training Programs – (Eg. Exide – Product take back). 322 . and extended producer responsibility (Eg. eco efficiency. Health & Hygiene – Attending the health hazards due to wastes and by-products to employees and society in proximity (Eg.CSR STRATEGIES Green Supply Chain Management: It includes environmentally preferable purchasing.
323 . In turn companies by serving these markets. C. They represent an enormous opportunity for companies who learn how to serve them.BOTTOM OF THE PYRAMID With the market across most developed markets including the US getting saturated. across the world's billions of poor people having immense untapped buying power. Strategic innovations leading to disruptive business models can show the way out. Prahalad notes that future markets exist collectively. K. they're helping millions of the world's poorest people to escape poverty.
BLUE OCEAN STRATEGY 324 .
TWO WORLDS 325 .MARKETSPACE .
In today’s red oceans. competing head on results in nothing but a bloody red ocean of rivals fighting over a shrinking profit pool. profitable growth.WHAT IS RED OCEAN? Companies have long engaged in head-to-head competition in search of sustained. They have fought for profits. and struggled for differentiation (cost or product). one companies gain is always at the 326 cost of another companies loss. Yet in today’s overcrowded industries. . where most industries are saturated. battled over market-share.
Blue Ocean’s have existed in the past. It helps in creating powerful leaps in value for both the firm and its buyers.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 . rendering rivals obsolete and unleashing new demand. Such strategic moves are possible through the pursuit of product differentiation and low cost simultaneously. It is only the frames of the . it will exist 327 in the future as well.
RED OCEAN Vs BLUE OCEAN Compete in existing markets Compete in uncontested markets Beat the competition Exploit existing demand Make the competition irrelevant Create and capture demand Make the value-cost trade off Break the value-cost trade off Demand is the limiting factor Supply is the limiting factor 328 .
Demand across developed markets reaching a plateau. Population shrinkage across a no. As trade barriers between nations & regions fall. Technological advances have substantially 329 improved industrial productivity. .BLUE OCEAN STRATEGY IMPERATIVES Prospects in most established market spaces – red oceans – are shrinking steadily. information imperfections atrophy instantly. Niche markets & monopoly havens are continuing to disappear. of European nations.
the underlying technology was often already in existence. Company & industry are the wrong units of 330 strategic analysis.CONCEPTUAL UNDERPINNINGS Blue oceans have existed in the past and will exist in the future as well. managerial moves are. Incumbents often create blue oceans within the ambit of their core business. . 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). They are not necessarily about technology.
BLUE OCEAN .IMPLEMENTATION Reduce Which factors to be reduced below the industry standard Eliminate Which of the industry factors that the industry takes for granted should be eliminated Create VI Which factors should be created that the industry has not offered Raise Which of the factors should be raised above the industry’s standard 331 .
IMPLEMENTATION SEQUENCE Buyer Utility (1) Is there exceptional buyer utility in your business idea? Price (2) Is your price easily accessible to the mass of buyers? Blue Ocean Strategy Adoption (4) What are the adoption hurdles in actualizing your business idea? Are you addressing them up front? Cost (3) Can you attain your cost target to profit at your strategic price? 332 .
Sony Play Station: Redefining machine-human interface in entertainment and targeting an altogether new user base. 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. .
greater than themselves. companies & managers are largely at the mercy of economic forces. All they need to do is change their managerial frames. According to this view managers need not be constrained to act within the confines of their industry.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. 334 . Off late emerging views in strategy having its origin in (Organization Theory) led to a paradigm shift to what is called the – reconstructionist view. According to this view.
This action might not be possible to undo. Are you sure you want to continue?
We've moved you to where you read on your other device.
Get the full title to continue reading from where you left off, or restart the preview.