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 is about adaptation and response to the same. It is all about creativity and innovation. It involves substantial resource outlay. It is a holistic and integrated approach. It requires full commitment of the top management.
.STRATEGIC MANAGEMENT . It is irreversible. It provides broad guidelines.FEATURES
It forms the core activity of the top management.
STRATEGIC MANAGEMENT – MYTHS
It involves short-cuts. It involves nitty-gritty's. It is rocket science. It is about forecasting. It is about a definite formula.
. It about mere data and facts. It involves only the top management. It a bundle of techniques or even tricks. It brings instant success. It is fool-proof in nature. It attempts to minimize risk.
scale and scope. To innovate. 9 To develop core–competencies. To generate large resource pool. To be insulated against environmental threats. To be future oriented. To be proactive. rather than reactive. To gain expertise in technologies.STRATEGIC MANAGEMENT IMPERATIVES
To be continuously alert. To tap markets across boundaries. To leverage size.
. again and again ……. To assimilate change faster.
In the ancient days battles were won not by virtue of size of the army or armory.STRATEGY .ORIGIN
The word strategy has its origin from the Greek word strategia meaning Military Commander.
. Even in today’s markets.strategies. but by virtue of their courage. whose origin can be traced to some of the greatest battles fought in the ancient days. today's battles are fought over markets. In the ancient days battles were fought over land. but with a lot a rigour and robustness. and more importantly . obsession. In contrast. battles fought on the market front are won by companies by virtue of their obsession & strategies. It is an old wine in a new bottle.
Napoleon’s attack on Russia – Strategy: Waiting for the right time. US attack of Morocco to capture Germany – Strategy: Pin-hole strategy – Wal-Mart challenging Sears by entering small towns. Allied Forces Vs Germany (WW-II) – Strategy: Forging alliances. challenging GM and Ford.
. – Yahoo and Microsoft challenging Google. – Reliance’s entry into telecom.SOME PARALLELS
Japan’s attack on Pearl Harbour – Strategy: Attack where it hurts the most. – Toyota’s entry in the US.
The things happening around the firm when totally disconnected from the past leads to a paradigm shift. The first major discontinuity in the history of global business environment was the .Industrial Revolution. 1910). – Mass Production Organization Size – Complicated Processes – Complex Structures Evolving of an emerging paradigm – survival of the fittest (Fayol & Taylor.EVOLUTION OF MANAGEMENT
As Peter Drucker refers to it.
. a radical change in the business environment brings about discontinuity. A paradigm is a dominant belief about how the business and its environment operates.
. – Changes in the technology fore-front. – Global market place.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. performance across firms became differentiated.e. push to pull). From uniform performance. 1960). Survival of the most adaptable becomes a new management paradigm (Ansoff. – Affluence of the new customer (i. – Homogeneous to heterogeneous products. Efficiency and effectiveness are no longer sufficient.
Phase IV: Horizon of Scenarios 2
Phase I: Extrapolation of the past
1 2 1 3 1A 1B 2A
Prior to 1950 Phase II: Discrete Scenarios
Phase III: Range of Scenarios
1970 to 1990
1950 to 1970
– Biases and prejudices has a very little role to play in strategic choices pursued by managers. – The choice of strategy is primarily concerned with external ones rather than internal ones. Ansoff (1960) – Strategy can be segregated into certain mutually exclusive and inter-related components aimed at managing the growth of an organization.APPROACHES TO STRATEGY
Analytical Approach – Igor H.
. Learning always begin on a clean sheet of paper. – It is primarily the top management’s prerogative. – The choice of product-market mix is based on conscious evaluation of risk – return factors.
who will be the top managers. everything else follows.
. – Management control systems has a dominating role in influencing firm performance. – The top managers then decide on the type of organization structure & systems to be in place. Successful organizations align authority and responsibility of various departments in way to reach overall objectives. Once the control systems are in place. – Organization structure will precede and cause changes in strategy. how it will compete. The organization initially decides which industry to enter.APPROACHES TO STRATEGY
Design Approach – Alfred Chandler (1970) – Structure follows strategy.
– 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. new entrant. competitors. substitutes.
. – The organization will outperform the industry where environmental forces are weak and vice-versa. Porter (1980) – Choose a consumer segment and position your product accordingly. – The environmental forces comprises of – supplier.APPROACHES TO STRATEGY
Positioning Approach – Michael E. customer.
K. locating in most attractive industries and pursuing the same strategy.
. – Organizations can significantly alter the way an industry functions. Prahalad (1990) – The key to superior performance is not doing the same as other organizations. – It enables a firm to deliver unimaginable value ahead of time.APPROACHES TO STRATEGY
Core Competence – C. They are complex resources and undermines a firms competitive advantage. – Core competencies are a set of skills that are unique and can be leveraged. but exploiting the resource differences among them.
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
If you cannot see the future. It provides a sense of direction and destiny. It’s a philosophy that distinguishes it from its competitors. It implies a significant stretch. A substantial gap between its resources and aspirations. It involves an obsession to be the best or outperform the best.
. It is the cornerstone of an organizations strategic architecture reflecting its desired future state or its aspirations. A strategic intent is a statement of purpose of existence. A gap that consciously manages between stagnation and atrophy. you cannot reach there.
m Do an in
Visio n Mission Dominant Objective s Goal s Plans
Lo g ic
.STRATEGIC INTENT .
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. To put it more simply. strategic variety) is apparent.e. when radical changes in the internal and external environment (i. It is core to the strategic intent of the firm. Dominant logic changes.
. 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.
. but achievable aspirations. It ensures that the company does not wander off into unrelated zones or fall into an activity trap.VISION
It is a dream (not a forecast) about what the company wants to become in the foreseeable future. It is a combination of three basic elements – – An organizations fundamental reason for existence. – It stands for the unchanging core values of the company. beyond just making money. It provides an unity of purpose amidst diversity of personal goals. It enables the top management to remain focused. – It represents the company’s audacious.
Empathy – It should reflect the company’s beliefs to which it is sensitive. In Reliance when a new project becomes operational top managers hand over charge to the SBU heads and move on to a new project.
. Clarity – Vividly descriptive image of what the company wants to be known for in the future. clear. not an utopian dream. Reachable – It should be within a reasonable target in the known future.VISION . Sharing – The company across all hierarchies should have faith in it.CHARACTERISTICS
Reliance – Where growth is a way of life. Brevity – It should be short. and memorizable.
It provides a holistic picture.ADVANTAGES
To stay focused on the right track. It facilitates development of skills & capabilities. It lends integrity and genuineness.
. It gives the impression of a forward-looking organisation. It gives a shared platform. It fosters risk taking and experimentation. It gives enlightment.VISION . It makes strategic alignment easier. To prevent the fall in a activity trap.
It enables the firm to define its business landscape and identify its competitive forces. A broad mission statement helps in fending competitors. Although the purpose may change over time. its reason for existence. It serves as a road map to reach the vision.
Mission defines the space that a business wants to create for itself in a competitive terrain. 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.
All the businesses of the company are strongly integrated with their main business. …………………. …………………. We offer solutions. Some other examples – We do not offer shoes. We offer strength. though some may seem unrelated in nature. We offer security. – We do not offer software's.MISSION – SOME IDEAS
Reliance – We are in the business of integration. …………………. …………………. – We do not offer insurance. We offer comfort. – We do not offer steel.
– It lends direction – time frame in the medium term. – It is based on Management by Objectives (MBO). – It adds legitimacy and motivation.
.100K crore company by the year 2005. – It prevents deviation. – It helps identifying key success factors. It is an end result (quantifiable) something a firm aims and tries to reach in a time bound frame. – It provides a benchmark for evaluation. – It keeps the mid management pre-occupied.GOALS & OBJECTIVES
Reliance – We want to become a Rs. It provides a quantitative feel to an abstract proposition.
– Acquire a market share of indomitable position. – Compress project times. and gaining access to desired markets to achieve the desired goals and objectives. coordinating appropriate technologies.
. It is specific to a particular business. – 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.PLANS
Reliance – Desire to invest 25K crore in telecom business by circa 2010. – Use price-elasticity to break market barriers.
radical change may lead to disequilibrium. However.
. This tendency to restore continuity is known as inertia (resistance to change). In such a context.STRATEGIC DRIFT
Due to top management commitment. strategies lose touch with the emerging realities. When changes in the environment is incremental. Historical studies have shown that most organizations tend to continue with their existing strategies. equilibrium is maintained. past strategies tend to have a bearing on future strategies. It often leads to an organizational crisis. This state of affairs is known as strategic drift.
STRATEGIC DRIFT FRAMEWORK
Degree of change
Incremental Change State of Flux Continuity
Stage of Transformation Strategic Drift Stage of Atrophy
– Creating a favourable image.ORGANIZATIONAL POLITICS
Strategic drift often leads to organizational politics. – Distorting information to gain mileage. Organizational politics involves intentional acts of influence to enhance or protect the self-interest of individuals or groups over organizational goals. – Hiding vulnerability. Some instances of organizational politics – Formation of powerful groups or coteries. – Creating obligations of reciprocity.
. – Using covert tactics to pursue self interests. – Developing a platform of support.
– Influential stake-holders back out. – The environment context has changed. – Persons responsible for strategy conceptualization and implementation are34 divergent. Other causes – – The plans are unworkable and utopian.INTENDED & REALISED STRATEGIES
An intended strategy is an expression of interest of a desired strategic direction. Usually there is wide gap between the two when organizational politics is evident. A realized strategy is what the top management actually translates into practice.
but as a defensible response to the complexities of a large organization that mitigate against publicizing goals. However. but the master scheme of the rational comprehensive scheme is not apparent. They simply unfold the particulars of the sub-system in stages.LOGICAL INCREMENTALISM
According to the incrementalism approach (contrary to integrated approach) practitioners simply do not arrive at goals and announce them in crafted and well defined packages. Strategy formulation and implementation are linked together in a continuous improvement cycle. Learning is an integral part of logical incrementalism. this is not to be treated as “muddling”.
. Adaptation – As implementation progresses.IMPLEMENTING INCREMENTALISM
General Concern – A vaguely felt awareness of an issue or opportunity. Macro Broadcasting – The broad idea is floated without details to invite pros and cons leading to finer refinements. The broader objective should serve the overall interest of the organization. Agent of Change – Formal ratification of a change plan through MBO. Leveraging Crisis – A sudden crisis or an opportunity should be used as a trigger to facilitate acceptance and implementation of change.
Dominant logic’s are the cornerstones of change when strategic transformation is apparent. Strategic transformation becomes smooth through a change in top leadership. As it brings 37 with it a different dominant logic.STRATEGIC TRANSFORMATION
Strategic transformation (a complete overhauling of the strategic architecture) becomes inevitable whenever a strategic drift takes place. It creates blinders. Tampering with surface level factors often leads to atrophy.
. Dominant logic’s are very rigid and sticky and prone to inertia.
– Organisational Slack – Enough free space. It helps prevent a strategic drift from occurring at the first place. – Experimentation – Fosters a culture of risk taking. – Informal Networks – Emerging of new ideas. experience. – Constructive Bargaining – Agree to disagree. A learning organization must continuously focus on unlearning as well.
A learning organization is capable of continual regeneration from knowledge. and skills that fosters experimentation and questioning and challenge around a shared purpose. Factors that fosters a learning organization – Pluralistic – An environment where different and even conflicting ideas are welcome.
ANALYZING BUSINESS ENVIRONMENT
It is based on the assumption of radical change.e. It is pro-active in nature. Strategic gap basically points towards a vacuum of where the organisation wants to be and where it is. It requires a quantum leap (i. It points to a position of superiority with relation to competition. It is reactive in nature. gap analysis). It is based on the assumption of incremental change. Strategic planning is a function of discounting the future.
. Competitive advantage provides the surest way to fulfill the strategic gap.PLANNING & STRATEGIC PLANNING
Formal planning is a function of extrapolating the past.
resources and ideas move unhindered.ENVIRONMENTAL SCANNING
The environment is defined as the aggregate of conditions. and influences that affect an organizations way of doing things. It is exploratory in nature. The world is flat. Environmental scanning is very important component of strategic planning. not guided by any boundaries. A manager has to continuously scan the environment to ensure alignment of the strategies with the radically changing environment. 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.
. It is important not only to identify the structural drivers of change. 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. for which a holistic picture is required. but also to analyze the complex linkages across them. It is not intended to be used as an exhaustive list. 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.
Language Barriers. Economic – GDP. Social – Population Diversity. Savings & Investment. Literacy Levels. Religious Sentiments. Economic Cycles. Infra-Structural Investments. Social Values. Fiscal Deficit. Inflation & Interest Rates. Central – State Co-alignment. Economic Model. FDI Inflows. Subsidies & Protection. Government Attitude. Capital Market & Forex Reserves.
. Income & Age Distribution.PESTEL FRAMEWORK
Political – Government Stability. Monsoon & Food Grains Reserves. Currency Stability. Licensing & Quotas.
Pollution Control Laws. Legal – Monopolies Legislation. Consumer Protection Laws. Environmental – Global Warming & CSR. Environmentally Preferable Purchasing. Technological Convergence. Carbon Credits. Employment Laws.PESTEL FRAMEWORK
Technological – Innovation. Product Design. Non-Fossil & Alternative Fuels. Waste Disposal & Emissions. Research & Development. Extended Producer Responsibility. Patents. Product Safety & Health Hazards. ERP.
. Direct & Indirect Taxes. Obsolescence Rate. Patent Laws.
VRS. PSU Disinvestments. Banking Sector Reforms. Capital Market Reforms. Abolition of import licenses. Exit Policy.ECONOMIC LIBERALISATION
New Industrial Policy (NIP) – Liberalizing industrial licensing. New Trade Policy (NTP) – Lowering import tariffs. Encouraging exports. MRTP Liberalization. Curtailment of PSU’s. Encouraging FDI. Economic Reforms – Fiscal & Monetary Reforms. Rupee convertibility. Structural Adjustments – Phasing out subsidies. Dismantling price controls.
. FERA Liberalization.
Destabilization due to entrepreneurial freedom – Cocoon of protection disappears – Diversification spree – Existing notions of size shaken – Industry structures change radically – Economic Darwinism .Survival of the fittest MNC Onslaught – Enhancing stakes – Power Equation – Joint Ventures – Technological Alliances – Take-over threat. Mergers & Acquisitions
Globalization – Cheap Imports & Dumping – Push to Pull Marketing Buyers exacting demands – Shortage to surplus – Price competition – Life-style changes – Stress on quality.DISCONTINUITY
Hyper Competition – MNC’s . Consumerism Challenges on the technology front – Competencies become technology based – Investment in R&D become inescapable
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
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
The model should not be used as a snapshot in time.FIVE FORCES MODEL ASSUMPTIONS
The model is to be used at the SBU level and not at the industry level. incremental or otherwise.
. It should not only be used to understand the forces. but also used to understand how they can be countered and overcome. the forces are subject to changes.e. profit potential) per se. It is even wiser to apply the same at the product – market level. It depicts the attractiveness of an industry (i. The five forces have strong cross-linkages.
Scope for backward integration. Undifferentiated product. Industry stagnation. Threat of Customers – Buyer concentration and volumes. Low relative importance of the segment. Government policy. Unimportance of product quality. Access to distribution channels.
. Product differentiation through proprietary technology or brand power. Low margins & stagnancy. Learning curve advantages. Capital requirements. Low customer switching costs. Resource profile & fear of retaliation. Presence of substitutes or unorganized sector. High switching costs.PORTERS FIVE FORCES ANALYSIS
Threat to Entry – Economies of size and scale.
PORTERS FIVE FORCES ANALYSIS
Threat of Suppliers – Supplier monopoly. Industry stagnancy. Diversity of players. Lack of substitute inputs. Piracy and counterfeits. Low level of differentiation. Scope for forward integration. High customer switching costs. Threat of Substitutes – Improvement in price -performance trade-off. High exit barriers.
. Jockeying for position – Fragmented market. Differentiated inputs. Intermittent overcapacity. Buyer’s propensity to substitute. Unorganised sector. Low relative importance of the segment. Product perishability. Produced by industries earning high profits.
Inertia – Excessive commitment to past strategies prevents firms from tapping emerging opportunities.FIRM ENVIRONMENT
Size and Scale of Operations – It is a very important component of competitiveness in today's global context (Bharti – MTN. Cohesiveness – Degree of bonding existing across affiliated firms. Business Scope – The intention whether the firm wants to be in a single.
. dominant or related diversified or unrelated diversified businesses (Infosys. Resource Profile – It highlights the capabilities (generic) or competencies (business specific) of the firm. Tata). Reliance).
and with lower prices it can increase its sales volume. which further reduces costs. experience teaches better and more effective way of doing things. Experience curve has strong linkages with performance. it can price its products more competitively. leverage it as a competitive advantage. However. an E-Curve can prove to be futile during discontinuity. Matured firms will always be positioned advantageously on the ECurve than new entrants. With lower costs. The E-Curve thus enables organisations to build entry barriers.EXPERIENCE CURVE
The cost of performing an activity declines on per-unit basis as a firm becomes more efficient.
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
EXPERIENCE CURVE .TRADITIONAL VIEW
Efficiency = Lower Costs
Experience = Efficiency
Lower Costs = Higher Sales
Entry Barrier = Better Performance
Higher Sales = Lower Costs Lower Costs = Entry Barrier
Inertia = Limited Growth Experience = Inertia
Limited Growth = Diversification
Strategic Failure = Poor Performance
Diversification = New Experience
≠ Old Experience
.EXPERIENCE CURVE .
Case Studies – Structured Questionnaires. It helps an organisation to capitalize on the opportunities by maximizing its strengths and neutralizing the threats minimizing the weaknesses.SWOT
The framework was originally conceptualized by Kenneth Andrews in 1970. Competitors. Websites. 59 Analysts.VULNERABILITY ANALYSIS . Observation. A SWOT audit involves – Company Records – Annual Reports. Suppliers. Press Clippings & Interviews. Interviews. Acronym for Strengths – Weaknesses – Opportunities – Threats. Customers.
. It is one of the earliest models in environmental scanning. Business Intelligence – Bankers.
Nullify weaknesses which prevents you from exploiting opportunities
Leverage strengths to make use of opportunities
Weaknesses Minimize weaknesses which prevents you from countering threats
Utilise strengths to counter threats (?)
.SWOT ANALYSIS .
Aditya Birla. Reddy’s. HUL. Honda. Large resource pool – Eg. Caterpillar. Economies of scale – Eg. Toyota.SOURCES OF STRENGTH
Strong brand identity – Eg. Reliance. Infosys. Infosys. Siemens. Tata Steel. Motivated employees & cordial industrial relations – Eg. ITC. Volkswagen. Excellent penetration – Eg. Strong after sales & service network – Eg. Good credit rating – Eg. Biocon. Engineering Skills – Eg. Strong R&D base – Eg. Dr. Tata. SBI. High quality products – Eg. Sony. Ranbaxy. Reliance.
Bijoligrill. Tatas. Nirma. B. Lack of product / brand clout – Eg. Lacking experimentation culture – Eg. Inertia – Eg. Single product syndrome – Eg. Strategic myopia – Eg. Ballarpur Inds. Modi Group.Raymond. K. Excessive diversification – Eg. K. SAIL. Inefficient top management – Eg. Procter & Gamble.SOURCES OF WEAKNESSES
Outdated technology – Eg. Organizational Politics – Eg. Hindustan Motors. Excess manpower – Eg. Narrow business scope – Eg. CESC. CMC (Tata Group)
. Group . J.
Maruti. Insurance. Fertilizers. Abolishing MRTP – Eg. GDR’s. Sugar. Telecom. Retailing. Market driven Pricing – Eg. Collaborations & Joint Ventures – Bharti & WalMart.Tata Motors. Globalization – Eg.SOURCES OF OPPORTUNITIES
Delicensing of Industries – Eg. Capital market reforms – Eg. Free pricing – Eg. Growing population – Eg. VRS. Fertilizer. Exit Policy – Eg. Sugar. Banking. Market driven Interest rates – Eg.
. Life style changes – Eg. Abolishing CCI. Middle-class buying power. ECB’s.
. Hostile take-over – Eg. Lack of Corporate Governance – Eg. (2008). Dumping from China. Nationalisation – Eg. Singur SEZ. Tsunami. 26/11. Tata Steel. Import relaxation – Eg. Economic recession – Eg. Natural disaster – Eg. Reliance.Social activism – Eg. Bajoria – Bombay Dyeing. Satyam. Foreign Direct Investment (FDI) – Eg. Terrorist attacks – Eg. Land acquisition . Onida. (1985–1990). 11/9. Earth Quake.SOURCES OF THREATS
Political instability – Eg. Group disintegration – Eg.
Acronym for Environment – Threat – Opportunity – Profile. It represents a summary picture of the external environmental factors and their likely impact on the organization. Strategic responses (including adaptation) to opportunities and threats is critical for survival and success. Stages in ETOP analysis – List the aspects of the environment that has a bearing on the organization. Forecasting – Predict the future (i. time series. Delphi's technique.
. Assess the extent of impact of the factors. Holistic view – Prepare a complete overall picture.
It is also a form of assessing vulnerability through longitudinal analysis.PROFIT IMPACT OF MARKET STRATEGY
PIMS is a database model developed by GE and later extended by HBS to examine the impact of a wide range of strategy variables on business performance. 66 Vertical integration is a powerful strategy.
. selectively. High investment intensity acts as a drag. Relative attractiveness of the market. Some key findings on major performance drivers that explains 75% deviations in performance – Product quality and relative market share. An organization can draw upon the experience of its peers in similar situations.
As every organization is unique in its own way.
. therefore 67 validity may be a question. when radical changes in the economy takes place. – Contexts may vary over time. Authenticity of data is of prime importance – Contexts drawn across one organization may not be applicable to another. – Contexts may vary across countries.PIMS .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.
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
. It enables the top management to draw focus. KSF helps organizations spot early opportunities and convert them into value adding business propositions.
IDENTIFYING ALTERNATIVE STRATEGIES
.CORPORATE . It reflects the customer needs it intends to satisfy. unrelated) and geographical scope (local. dominant. It determines the locus a firm encounters with internal and external environment. related. It indicates the quality of growth an organization is looking for.GRAND STRATEGY
It is concerned with the overall business scope (single. national. A corporate strategy identifies and fixes the strategic gap it proposes to fill. It provides broad direction to the groups vision and mission. global) of a firm and deals with choices of allocating resources across them.
CORPORATE STRATEGY MATRIX
Corporate Strategy Stability Stability Growth Growth Combination Diversification Divestment
Intensification Market Penetration Related Vertical
Market Development Product Development Unrelated Horizontal
erosion of capabilities. does not relate to do-nothing (Eg.STABILITY
It involves maintaining status-quo or growing in a slow and selective manner. (Eg. The scale and scope of present operations remains almost intact. – The firm may not be willing to take additional risk associated with new projects. Stability however. The reasons for stability strategy – – Lack of attractive opportunities. Citibank). Even during adverse times firms need to adopt a strategy to sustain current performance levels.
. Hindustan Motors). – To stop for a while and assess past records. – Why disturb the existing equilibrium set up? – Limited resource position.
New Product Existing Product
Existing Market Market Penetration (+) Product Development (++) New Market Market Development (++)
Diversificatio n (+++)
Note: (+) indicates degree of growth and risk involved.
(Eg. – Helps firms which are not comfortable with unfamiliar terrain. – The company carries a risk of product obsolescence. direct non-users to users.MARKET PENETRATION
It is a strategy where a firm directs its entire resources to the growth of a single product or a closely knit product set. Market penetration can be achieved by – increasing sales to current customers. convert competitors customers. – Elongated product life-cycle. within a well defined market segment. – Suitable for industries where scope for technological breakthrough is limited. Britannia). Nirma.
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. tyres. – Unconventional and flexible distribution channels. fabrics. Du Pont – Nylon: parachutes. carpets.
. – Moves across geographical boundaries.…… or Teflon: aircraft technologies to cutlery to paints or Raytheon Corp – Microwaves: radars to kitchen appliances). upholstery. – Immense customer reach & flexible advertising. (Eg. socks & stockings. – Stretches product life cycles. – Creativity and innovation – thinking out of the box.
features. – Leveraging through – innovation. – Substitutes that serve the same needs (Eg. conformance. aesthetics. serviceability. Microsoft: DOS to Windows) or a substantial improved version (incremental) of an existing product to repeatedly enter the same market (Eg. reliability. Close Up: Fluoride – Gel toothpaste or VIP . perception. – Areas of product improvement – performance. – Leverage on customer and brand loyalty.Strolleys). durability. – Deliverable through – redesigning or reengineering.PRODUCT DEVELOPMENT
It is a strategy where a firm tries to achieve growth through a radical new product (Eg. Refills)
. industrial embassies). – Internal capital market. – Permits: quotas. Why do firms diversify in the Indian context? – Shift the growth trajectory or opportunistic.DIVERSIFICATION
It marks the entry of a firm into newer markets with new products. dominance). licenses (i. – Risk reduction. thereby creating a new business. From the traditional point of view. From the modern point of view they are strategically dissimilar. – High transaction costs and institutional gaps. the new business is distinct from the existing business in terms of – inputs – technologies – markets.e. – Conglomerate or market power (i.
cold wave dominates the planet. If the hot wave dominates the planet. ice-cream business would register a return of 10%. Let us assume that there are two businesses constituting the entire market – coffee and icecream.HOW DIVERSIFICATION REDUCES RISK?
Consider a hypothetical planet. either of which is equally likely to prevail. the ice-cream business would register a return of 30%. What would be your ideal diversification strategy through optimization?
. If on the other hand. in which a given year is either under hot or cold wave. while the coffee business would register a return of 30%. while the coffee business would register a return of 10%.
If we diversified in either of the two businesses, our expected return will be 20%, with a possible risk of 10%. If, we split our investment between the two businesses in equal proportion, half of our investment will earn a return of 30%, while the other half would earn 10%, so our expected return would still be 20%. But in the second instance there is no possibility of deviation of returns (i.e. risk). Diversification results in 20% expected return with zero risk, whereas investing in individual businesses was yielding an expected return of 20% with a risk factor of 10%. The pivotal point is that the two businesses are negatively correlated. 79
It takes place when a company increases the breadth of a firms business or geographical scope by getting into product – market segments which compliments its existing businesses (Eg. Reliance). Alternatively, existing business may recreate new businesses, which are distinct, but supplements its existing business (Eg. Bajaj – scooters to motorcycles, Dove – soaps to shampoo). – It results in increased market power. – Leveraging existing capabilities. – Resources can be shared for mutual benefit. – Reduces economic risk (i.e. business cycles). – Enables brand or product line extension.
It increases the depth of its business scope either in a backward business process or in a forward one. Backward integration occurs when the company starts manufacturing its inputs or catalysts. In forward integration a firm moves into marketing of its products and services. Advantages of backward integration – – Cost competitiveness – entry barrier. – Better operational control – timely supplies, quality control, coordination – JIT, savings in indirect taxes. Disadvantages of backward integration – – It may spark of a chain reaction - contagion effect. – Long gestation & break even - investment in CAPEX.
Oil & Gas exploration Naptha-cracking Acetic Acid Paraxylene (PX)
Purified tetra-pthalic acid
Polyester Filament Polyester Staple Fibre (PSF) Yarn (PFY) Textiles 83
DIVERSIFICATION SUCCESS ?
While diversifying into new businesses, the scope of relatedness or unrelatedness should not be judged from the traditional static view, but from the modern dynamic view which incorporates strategic factors like capabilities and dominant logic. Countermanding reasons – Potential to reap economies of scope across SBU’s that can share the same strategic asset. Potential to use an existing capability to help improve the quality of a strategic asset in another business. Potential to use an existing capability to create a new strategic asset in another business. Potential to expand the existing pool of capabilities. Dominant logic ensures timely & appropriate response.
QUASI & TAPERED INTEGRATION
Full Integration . Reddy’s). Reliance).Where one firm has full ownership and control over all the stages of a value-chain in the manufacturing of a product (Eg. Dr.A firm gets most of its requirements from one or more outside suppliers that is under its partial control through value chain partnerships (Eg. Tapered integration . Usually the firm concentrates on its core activities. Ranbaxy. and out-sources the noncore activities (Eg.A firm produces part of its own requirements and buys the rest from outside suppliers with a variable degree of ownership and control.
. Quasi-integration . Maruti – Sona Steering).
A CASE OF TAPERED INTEGRATION
Partial Ownershi p
Transmission Engine Design Electricals
Steering 86 Seats & Carpets Windscreen
Ordinary Components Zero Ownership
Very Critical Component s Full Ownership
Critical Component s
e. core business). and are also strategically dissimilar. Drawbacks of unrelated diversification – – Cost of failure (i. lack of knowledge of competitive forces). – Cost of dysynergy (i.e. Firms usually engage in conglomerate diversification when emerging opportunities are very attractive and offers potential growth opportunities. lack of strategic intent. – Cost of neglect (i. synergies pulling in opposite directions). myopia).e.
. – Cost of ignorance (i.CONGLOMERATE DIVERSIFICATION
It relates to entry of firms into businesses which are distinct in terms of – inputs – technologies – markets.e.
Paper & Packaging
Food & Confectionary
Glaxo’s “Glucon-D” to Heinz). L&TCement Division to Aditya Birla Group) technically known as divestiture or a product (Eg. It may also involve a SBU (Eg. 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. Tata Press). It taken into account when performance is disappointing (i. where a company simply exits because the business no longer contribute to or fit its dominant logic. (Eg. Tatas sale of Goodlass Nerolac. It is may also be a pro-active strategy.DIVESTMENT
Divestment is a defensive strategy involving the sale of entire stake (Eg. Tata Pharma. In strategy there is no scope for sentimentality with divestment.
Tatas buy-out of Corus for US $ 11. 1956 does not permit this mode. (Eg.DIVESTMENT . involving 608 pence per share). where the equity is allotted amongst the existing shareholders on a pro-rata basis. Hive-Off – A hive off is the creation of a new entity followed by transfer of assets. where 100% of the assets (including intangibles) are valued and paid for. the Companies Act.
. (Eg. However. Leveraged Buy-Out (LBO) – Here the company’s shareholders are bought out through a negotiated deal using borrowed funds.3 billion.ROUTES
Outright Sale – Popularly known as the asset route. Sale of Diamond Beverages to Coca-Cola for US $ 40 million).
It is usually pursued by a business group with diverse interests across multiple industries. joint ventures).e. growth. and divestment strategies applied simultaneously or sequentially for a portfolio of businesses. A combination strategy can be implemented through green-field projects (i. There can be no ideal strategy for every business. developing facilities right from the scratch) or through brown-field projects (i. 91
. mergers and acquisition.e. because every business has its own unique external and internal environment.COMBINATION STRATEGY
It is a mixture of stability.
STRATEGY CHOICE & PORTFOLIO ANALYSIS
In most cases the trade-off is between resources and opportunities. It attempts to answer the following questions – How effective has the existing strategy been? How effective will that strategy be in the future? What will be the effectiveness of alternative strategies? It is impossible for a manager to assess all the alternatives. Dominant logic enables top managers to selectively scan the environment and make trade-offs.STRATEGIC CHOICE
A strategic choice seeks to determine the alternative courses of action available before top managers to achieve its strategic intent. What then is the magical number?
The key task before a top manager is to identify the right problems. 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?
. if addressed. To identify the right problems. managers need to ask the right questions.SELECTIVITY IS THE KEY
The role of a top manager is not to solve a problem. They must choose problems which will lead to the right kind of opportunities. will help the firm achieve its intent. nor is to a define a problem for others to solve.
A business group is known by various names in various countries – guanxique in China. Their roots can be traced to a single family or clan and share broad similarities. Managing Agency). Proximity to the corridors of power (i. 95 Succession planning is critical to continuity.e. business houses in India. formal and informal ties. High degree of centralized control (GEO. Their origins can be traced back to market imperfections existing in an economy (MRTP Laws. BRC). Resource sharing.BUSINESS GROUP . embassies).
. chaebols in Korea. keiretsus in Japan. Licenses & Quotas.
RESOURCE SHARING ACROSS FIRMS
Firm 5 Firm 3
STRATEGIC CHOICE – MACRO TIMING
Recession (Stability) Prosperity (Diversificatio n) Depression (Divestmen t)
Recovery (Intensification )
STRATEGIC CHOICE – MICRO TIMING
Maturity Stability Growth Diversification
Duration (Yrs) Inception Intensification
Relatedness across resources are difficult to realize.
. Why? Businesses are not about liquid assets. Redeployment of resources upsets the established power bases of a group. sometimes impossible. there are high costs associated with entry and exit. Investing in emerging businesses may not actually be so simple as it appears to be. Power and resources often goes hand in hand. therefore. next only to choice of business. Rules of the game are different.PORTFOLIO ANALYSIS
Resource allocation across a portfolio of businesses is an important strategic choice.
BCG GROWTH MODEL
Relative Market Share (%)
Industry Growth (%) Low High
e. Trent. Tata Telecom.e. which remains a big? These businesses are net users of resources. but to larger extent than a question mark. diversification). provided the company is able to build up on its market-share (i. Stars – They achievers in the near term. Tata Steel).
. provided the industry growth rate continues and the company is able to maintain its growth (i. product development). TCS. Tata-AIG). These businesses are also net users of resources (Eg. and their risk profile is high (Eg.BUSINESS ANALYSIS – TATA GROUP
Question Marks – They have potentials in the long term. market penetration. market development.
. Tata Motors. they are generators of resources. Groups prefer to dispose off such businesses (i.e. and they lack on competencies to take on competition and are basically cash traps (Eg.e. divest) as achieving a dominant position in these businesses is a difficult task. Nelco. stability). Indian Hotels.BUSINESS ANALYSIS – TATA GROUP
Cash Cow – These are matured businesses. and the company dominates the industry ahead of competition (i. Tata Press). Dogs – They are a drag on the group. harvest. However. cash cows may also need to invest provided the industry takes an upswing (Eg. Tata Tea. Given that the growth potential in the business is low. Tata Chemicals). Tata Pharma.
Data may be prohibitive. Armani). neither in high or low. The model does not provide specific solutions within a particular category. Certain businesses in the low market share category may be the result of a conscious strategy (i.
. factors are limited. HUL).e. The terminologies used are somewhat prohibitive. Mercedes Benz.BCG . Cartier. niche – Rolex. Cash cows may actually need substantial investments to retain their market position (Eg.LIMITATIONS
It does not address the concerns of a business which is in the average category (usually the majority).
Diversify (++) Intensify (+)
Inception Dominant Strong Favourable Tenable Weak Growth Maturity Decline
Improve Selective Niche Abandon Industry Life-Cycle Divest Harvest
SHELL – DIRECTIONAL POLICY MATRIX
Business Sector Prospects
Attractive Average Unattractive Generate Cash Phased Withdrawal
Market Leadership Try Harder Double Or Quit
Phased Expand Withdrawal
SBU – A business unit which is strategically different from another and also shares a different SIC code. Gap Analysis – It emphasizes what a firm wants to achieve. Divest – Selling a part or the entire business at one go.
. BCG – Boston Consulting Group.TERMINOLOGIES
Harvest – It entails minimizing investments while trying to maximize short-run profits and cash flow with the intention to exit the business in the near future. Disinvestment involves selling in phases. Portfolio – An organization is perceived as a portfolio of businesses.
BUSINESS STRATEGY & COMPETITION
The strength of a firm in a particular business usually stems from its competitive advantage.COMPETITIVE STRATEGY
A competitive strategy deals with how a firm competes in a particular business or product-market segment.
. The principal focus is on meeting competition. Competitive advantage is the back-bone of strategy. rent). building market-share.e. and earning super-normal profits (i. Competitive advantage refers to a firms resources or activities in which it is way ahead of competition. Such resources or activities should be distinctive and sustainable over time.
identifying critical success factors. Blue Ocean – Consciously moving away from overcrowded industries to uncharted territories and making competition irrelevant (Kim & Mauborgne). developing competitive advantage (Porter). Delta Lock In – Two dominant players co-opt to selfreinforce and create or escalate an entry barrier.BUSINESS STRATEGY FRAMEWORKS
How to be distinctive and yet sustainable – Differentiation – Understanding of the dynamics of competition. involving harmonizing and integrating multiple streams of technologies.
. leveraging (Prahalad). preventing new entry and/or competition (Hax & Wilde). Resource Based View – Obsession with competence building.
preferential access to raw materials. T-Series). Nirma. Locational or early entry advantage. Sources of cost advantage are varied and depends on the structure of the industry – Economies of size. The firm may retain the benefits of cost advantage by enjoying higher margins (Eg.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. Reliance) or may pass it to customers to increase market-share (Eg. Steep experience curve effects. backward integration. proprietary technology. Ayur.
. Compress project duration through crashing.
Rayban). avoiding brand dilution. Culture of experimentation. Intel. (Eg.
. Successful product differentiation is often followed by premium pricing. Creativity. Focus on brand loyalty.PORTERS – PRODUCT DIFFERENTIATION
Product Differentiation – It is a strategy that attempts to provide products or services that are differentiated from competitive products in terms of its value proposition and uniqueness. It selects one or more attributes that buyers perceive as important. innovation and out of the box thinking. undeterred attention to quality. Feeling the pulse of the customer. Means of product differentiation are peculiar to each industry. Sony. and sufficient slack.
The target segment must have unusual needs or the delivery system catering to this segment must be unique. Mont-Blanc. Armani).
. Cartier. They are poorly served by mainstream players.PORTERS NICHE OR FOCUS
Focus / Niche – It is a variant strategy of cost leadership or product differentiation targeting a specific market or buyer sub-segment with the exclusion of others (Eg. Rolex. though it may not possess an overall competitive advantage. coupled with fear of structural erosion. Sub optimization alone may not be a source of superior performance. A focuser seeks to achieve a competitive advantage in its target segment. Maybach.
Cost Differentiation Product Differentiation
Cost Leadership (Toyota)
Product Differentiation (General Motors)
Cost Focus (Hyundai)
Differentiation Focus (Mercedes)
e. Firms focusing on a hybrid strategy typically aim at shifting the productivity frontier and recreating a new product-market segment altogether (Eg. Though cost leadership and differentiation are inconsistent. in a hyper competitive context the two strategies need not be mutually exclusive. and usually outperforms a stand alone generic strategy.HYBRID STRATEGY
A hybrid strategy is the simultaneous pursuit of cost leadership and differentiation. jugaad or frugal engineering). Reducing cost does not always involve a sacrifice in differentiation.
. Tata Nano). similarly differentiation may not always lead to rising costs (i.
unless such a player is capable of discovering a profitable segment. The positioning therefore gets – blurred. It is usually the result of a firm not willing to make trade offs. leading to what is called – straddling.
. It tries to compete through every means. It will have a competitive disadvantage vis-à-vis a clearly positioned generic player. Industry maturity will usually widen the gap.STUCK IN THE MIDDLE
A firm that engages in a hybrid strategy and fails to achieve a competitive advantage because it was ill conceived will be . but achieves none.stuck in the middle.
Eg. Speech recognition software's. Consumer behaviour pattern unstable and evolving. changing customer needs.radical environmental changes. First-time buyers. leading to a blurred productivity frontier and steep learning curve. Nano technology. There is a lot of scope to define the rules of competition.
. ending in a differential cost economics. It is characterized by – High level of technological uncertainty. (Eg. coupled with low penetration levels.EMERGING INDUSTRY
Emerging Industry – An evolving industry characterized by . technological innovations. Market segmentation not well defined. Artificial intelligence). 3D imaging.) Excessive turbulence in the dynamics of the environment.
leading to clear fragmentation. Air Conditioning. because of lack of economies of size and scale. Consumer durables.GROWTH / FRAGMENTED INDUSTRY
Growth Industry – An industry characterized by high growth potential in the long run and where no firm has a significant market share (an edge over another). Scope for players to change the rules of the game. Diverse customer needs. MRTP may also cause fragmentation. It is characterized by – Low entry barriers. High exit barriers because of huge investment in CAPEX. Paints. Eg. Retail and telecom.
. Eg. Eg. Government regulations in the form Eg. IT.
technological maturity. early entry and location advantages. Cartel among existing players through collusion. collaboration and co-option. well defined consumer behavioral patterns and imperfect competition leading to near monopoly. because of economies of size and learning curve effects. Strong entry barriers. Limited scope for innovation . technological maturity. distribution networks. Firms are rule takers in the segment as productivity frontier is well defined. established industry dynamics.MATURED INDUSTRY
Matured Industry – An industry characterized by saturation in growth rates. 119
and costly price wars. Nature of competition extremely high.
. Learning abilities have been stunted and firms adverse to investment in R&D and make fresh investments. (Eg. Typewriters. scooters. with little or no signs of recovery. backed by corporate espionage. Exit barriers are extremely high because of limited prospective buyers. Firms facing a declining phase are characterized by inertia and slow to react to environmental changes.DECLINING INDUSTRY
Declining Industry – An industry which has outlived its utility due to the entry of close substitutes and or radical product innovations which results in a shift of the productivity frontier. dot-matrix printers).
Declining Industry – Redesign. regenerate. recreate new markets. assess and overcome fragmentation.COMPETITIVE STRATEGIES
Emerging Industry – Set benchmarks. increasing scope. branding and promotion. premium pricing. focus more on product differentiation or even a hybrid one. strictly product differentiation and not standardization. move beyond boundaries. or else exit the segment. aggressive building of distribution networks. Locate a defendable position. process innovation. strictly cost differentiation. Fragmented Industry – Identify. reengineer. Matured Industry – Sophisticated cost analysis. strike alliances.
. mergers and acquisition.
positions based on resources which are unique and inimitable are far more sustainable even in the long term. and complex learning experiences in integrating and harmonizing technologies (distinctive capabilities) that play an important role in delivering competitive advantage through “causal ambiguity”. However.RESOURCE BASED VIEW
Differentiation based on cost or products saturates and ceases to exist beyond the medium term. brands. They are a standard in nature. hence very rarely confer competitive advantage as can be easily acquired or replicated. patents. A firms resources can be classified into – Tangible – These refer to real assets. Intangible – These refer to goodwill.
They play a very critical role in shaping competitive advantage. they are woven around technologies. can be leveraged across businesses) or specific to a particular business.CAPABILITIES & COPMPETENCIES
These include a complex combinations of tangible and intangible resources that organizations use to convert inputs to outputs. There is a high degree of internal and external causal ambiguity involved in it. Typically.
. Capabilities can be generic (i. Therefore firms should concentrate on developing complex resources that forms the very basis of differentiation. Hence. but not necessarily.e. differentiation based on capabilities can be sustained even in the long run.
e. It enlarges the scope of an organization. It results in a distinct differentiation advantage or a cost advantage or hybrid as well.
. Success of a strategy critically depends on SAP. competitive advantage subsequently becomes the back bone for a competitive strategy. Strategy drives competitive advantage. not absolute) to competition. A portfolio of competitive advantage comprises strategic advantage profile (SAP).COMPETITIVE ADVANTAGE
A competitive advantage is a position of superiority relative (i. and results in well springs of new business development.
Most successful organizations around the world have a well balanced SAP. SAP changes from time to time. Internal strategic fit between its strategy and dominant logics is essential for the top management to stretch and leverage SAP. In most cases SAP is hidden and dormant. Identification of SAP is critical for and stretching and leveraging of resources.
. In today's world of discontinuity.STRATEGIC ADVANTAGE PROFILE (SAP)
Organizations have to systematically and continuously conduct exercises to identify its SAP.
kaizen or internal customer). Inventory Mgt to Logistics Mgt to Supply Chain Mgt (SCM).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.
. faster product launches. Today SCM is integrated with greening the environment as CSR practices. A VC is often compared with a relay team.e. and enhanced customer tracking – higher market share. Substantial cost reductions also follow. VC pay-offs: better product availability. each of the players need to be efficient backed by sufficient coordination at the contact points (i.
THE VALUE CHAIN
n gi ar M
Human Resource Management Technology Development Procurement
Mktg & Sales
ar gi n
A learning organization helps create strategic fit. Operational effectiveness is not strategy. – Second order fit occurs when activities are reinforcing amongst them.
.STRATEGIC FIT – THE PORTER WAY
The sustainability of the value chain depends on the degree of fit between the activities. Fit is important because discrete activities result in negative synergy and can also be easily copied by competitors. – First order fit refers to simple consistency between each activity and the overall strategy. A high fit involving a complex chain of activities drives both competitive advantage and its sustainability. – Third order fit refers to optimization of effort.
A core competence usually has its roots in technology. These skills results in distinctive activities and processes. – Can be leveraged across businesses. but not necessarily. It should satisfy the following conditions – Contributes significantly to customer benefits. – Cannot be easily imitated or substituted. Core competence has a high degree of external and 130 internal causal ambiguity embedded in it.
. – Can be sustained even in the long run. 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.
. A competitive advantage manifests from a function. Majority of the firms have competitive advantage. A competitive advantage may or may not lead to superior performance. a core competence usually does. a core competence has its roots in a set of skills. only global leaders possess a core competence. A competitive advantage is sustainable in the shortmedium term. a core competence is sustainable even in the long-term.CORE COMPETENCE
A competitive advantage does not necessarily imply a core competence. a core competence always implies a competitive advantage.
A game is a contest involving two or more players. each of whom wants to win. In a game (similar to a business) one players win is always another's loss. illustrations depicting a win-win situation. This is known as a zero-sum game.GAME THEORY
The game theory was developed in 1944 by Oscar Morgenstern. Here the magnitude of gain offsets the magnitude of loss equally. In fact there are no.
. Subsequent work on game theory by John Nash led him to win the Nobel prize in 1994. However. the stringent assumptions of game theory and difficulty in ascertaining of pay-offs makes game theory application difficult in business.
BIASED AND UNBIASED GAME
A game is said to be biased when one of the players have a disproportionate chance of winning. Firm Y’s Strategy Use Radio Use Radio +2 +6 Use Newspaper +7 -4
Firm X’s Strategy
Firm X’s Pay-Off Matrix
. An unbiased game is one where both the players have equal chances of winning.
A saddle point is a situation where both the players are facing pure strategies. Firm Y’s Strategy Use Radio +3 +1 Use Newspaper +7 -2
Firm X’s Strategy
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.
However.g. Repeated Games – In this situation the players interact repeatedly with each other sub-optimizing the outcome possibilities. It represents the classical “prisoner’s dilemma”. Coke Vs Pepsi). iteration) rather than through collusion (E. This is usually through learning by “experience or observation” (i.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. collaboration or cooption. 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.
– Making pricing more transparent. Game theory relies on the principle of rationality.
. – Building incentives for customer loyalty. It results in a shift in the productivity frontier.CHANGING THE RULES OF THE GAME
In a situation where a player is unable to compete with the existing rules of the game may attempt to change the rules of the game altogether. but 136 players do not always behave rationally. 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.
– Unlearning & learning of new skill sets.
. A high strategic fit (co alignment) is useful because it enables – – Appropriate and timely response. internal strategic fit (strategy – dominant logic) is critical to strategy implementation. – Resource commitment from top management. – Changing the rules of the game. – Development of capabilities & competencies. – Better strategic and operational control. While external strategic fit (strategy – environment) is relevant for strategy formulation.IMPORTANCE OF STRATEGIC FIT
Strategic fit has a central role to play in strategic management.
emergent strategy vis-à-vis intended & realized). formulation & implementation can occur simultaneously. effective strategies are better crafted when there is a subtle overlapping between the two (i. learning levels are very low. learning levels are very high. Some of the key strategic learning's exists at the contact point between the organization and its customer.e. In such a situation.
. According to Mintzberg. strategy formulation and implementation has been perceived to be distinct & independent.FORMULATION Vs IMPLEMENTATION
Traditionally. at the cost of sacrificing a lesser degree of control. while control is very effective. In fact. In such a situation.
transformational leaders go one step beyond – Design a well crafted and designed strategic intent of the organization. shift from compliance to commitment.ROLE OF TOP MANAGEMENT
To bring about change and to implement strategies successfully. In contrast. companies depend more on transformational leaders than transactional leaders.
. bring about transparency. A transactional leader is usually confined to allocating tasks & responsibilities and extracting performance. He should be an agent of change. Pragmatism is the ability to make things happen. Install a system of shared beliefs and values.
machines) referred to as threshold resources (i. brands. minimum requirement). Performance Budget – SBU managers need to justify the distinctive resources in terms of the opportunity it is pursuing yields the highest possible pay-offs. labour. land.e. skills) also includes complex resources like capabilities and competencies.
. patents. Zero Based Budget – In this case the budget of a SBU has to be worked out right from the scratch. The various methods of resource allocation includes Historical Budget – The budgets framed by HQ for a particular SBU keeping in mind past trends.RESOURCE ALLOCATION
Resources allocation includes tangible resources (Eg. Intangible resources (Eg.
Flat Screen Displays. Due to causal ambiguity (complexity). Mobiles). Distinctive capabilities helps in stretching and leveraging resources thereby overcoming two major constraints involved in strategy implementation – times & costs. convergence of multiple streams of technologies at the product – market level is becoming increasingly evident (Eg. these capabilities are sustainable even in the medium to long term. though not necessarily in the case of emerging markets.CAPABILITIES & COMPETENCIES
Technology and business are slowly becoming in – separable.
. Distinctive capabilities are complex set of skills woven around technologies. Moreover.
. A single product or a dominant business firm usually employs a functional structure. An appropriate organization structure & adequate control systems are essential to implement strategies and achieve stated goals. The level of centralization and decentralization is decisive. A firm in several unrelated businesses usually employs a SBU structure. A firm in several related businesses usually employs a divisional structure. Once the structure is in place.STRATEGY & STRUCTURE
It is a framework within which individual efforts are coordinated to bring synergy. processes become people independent.
.TYPES OF STRUCTURES
Functional Structure – Activities grouped together by a common function (Eg. Team Structure – An informal group formed for a crisis. processes. or geographical locations. based on skills and competencies. Output). Project / Matrix Structure – A formal but temporary framework initiated for the completion of a particular project/crisis. SBU Structure – Businesses segregated in terms of strategic dissimilarities (Eg. Virtual Structure – A boundary less or hollow organization. with team members having dual line of control. Finance). Marketing. disbanded subsequently. Inputs . Divisional Structure – Units grouped together in terms of products.
facing challenges & crises. assuming responsibility. It includes the desire for independence. as span is broader. leading to a tall structure. Technology – With more and more convergence of technologies in business.FACTORS INFLUENCING STRUCTURE
Size – As an organizations size increases there is more specialization and differentiation leading to the top management moving away from operational issues and control. 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.
When a firm has been operating in a certain fashion for a long time. Common sources of 151 inertia – complacency with past successes. Most firms undergo periods of strategic continuity rather than strategic discontinuity. irrespective whether it is from worse to good or good to worse. Changes in top management and unlearning helps overcome inertia. Inertia is a characteristic of a firm that endures status quo (i.
. Top managers resist change.e. co0ntinuity). there is a tendency to continue along the same lines. Inertia acts as an impediment in strategy implementation.
Deviation of fit is detrimental to performance and may lead to strategic failure. However. strategies need to be evaluated on an ongoing basis to prevent deviations of fit. firms should move beyond financial performance to strategic performance as organization systems are becoming complex. certain authors propose misfit as a source of superior 152 performance.STRATEGY EVALUATION
Strategy evaluation centers around assessment of strategic fit.
. Since the internal and external environment is in a state of continuous flux. To prevent deviation of fit.
It attempts to answer the following questions – Is the strategic intent appropriate to the changing context? Are the organizations capabilities still holding good. detecting changes in the external and internal environment and taking corrective action wherever necessary.STRATEGY CONTROL
It is concerned with trafficking a strategy as it is being implemented. competitive advantages becoming disadvantages? Has the company acquired any new competency? Has the company been able to overcome the 153 environmental threats.
It involves assessing – strategic thrusts and milestones. It is open-ended as well as
. 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. However.STRATEGY CONTROL IMPLEMENTATION
It involves steering the company towards its original growth trajectory & stated goals. Special Alert Control – It intends to uncover unanticipated information having critical impact 154 on strategies. checking every premise is costly as well as difficult.
low strategic fit due to consultants intervention.BARRIERS TO STRATEGY EXECUTION
Vision and strategy not actionable – Utopian ideas. Performance measures are defective – What to evaluate against? How to measure the 155 construct? As a saying goes. Strategy intent not linked with goals and objectives – Lack of coordination at lower levels leading to negative synergy. Strategy not linked to resource allocation & capabilities – Lacking commitment of top management. “If you cannot
. difficult to translate into practice.
Large or small.
. the relative importance of each factor may vary over time and context. On top of that.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. Today it is considered one of the most powerful tools for strategy implementation determining success or failure. important or not they're all interdependent. Managers should take into account all seven of these factors. so if one fails to pay proper attention to one of them. to be sure of successful implementation of a strategy. Together these factors determine the way in which a corporation operates. this may effect all others as well.
It appeared also in "In Search of Excellence" by Peters and Waterman. They had been investigating how Japanese industry had been so successful. The 7-S model was born at a meeting of these four authors in 1982.
. and was taken up as a basic tool by the global management consultancy company McKinsey. Since then it is known as their 7-S model and is extensively used by corporations worldwide to implement their strategies. At around the same time in the US Tom Peters and Robert Waterman were exploring what made a company excellent.BACKGROUND & ORIGIN
The 7-S Framework was first mentioned in "The Art Of Japanese Management" by Richard Pascale and Anthony Athos in 1981.
Strategy – Trade-offs for the allocation of a firms scarce resources.THE 7’S
Shared Values – It represents what the organization stands for and what the top management believes in. formal & informal . Staff – Human inter-relationships. Systems – The procedures. over time. to reach identified & stated goals. Skills – An organizations capabilities and competencies.
. Structure – The way in which the organization's units relate to each other in terms of their commonalities. Style – The way in which the top management influences the functioning of an organization. processes and routines that characterize how work should be done.
Strategy Structure Shared Values Systems
1st Order Fit 2nd Order Fit 3rd Order Fit
Ineffective in case of a virtual company. Consider the 4P’s of marketing or 3R’s of SCM. In contrast.
. While the American co’s focuses on the hard S’s. A choice of an alphabet often limits the scope and skews the interpretation of a model. systems) are comparatively easy to identify and influence.A CRITIC OF THE 7S MODEL
While the hard S’s (strategy. because most often they are culturally embedded and often neglected. style. the soft S’s (skill. shared values) are very malleable and comparatively more difficult to identify & influence. staff. their Japanese counterparts focus more on the soft S’s for their early success and sustainability. structure.
High Organic Growth Strategic Alliance Joint Venture Mergers & Acquisition Strategic Fit .STRATEGY IMPLEMENTATION ROUTES
Strategic Fit .Low Take Overs
It has complete control over inputs. (Eg. and markets. 162 Risk of cost and time overruns. tax holidays. the entire value chain. technologies. subsidized power). The entire infra-structural facilities are set up afresh having its own gestation and break-even.e.e. SEZ’s. i. (Eg. green-field projects. Long gestation leads to delayed market entry.
. Govt. concessions are available for green-field projects.ORGANIC GROWTH
Here a firm builds up its facilities right from the scratch and continues to do so without any external participation. Reliance Industries). i. soft loans.
There is no funding or equity participation from the alliance partner & both the firms continue to operate independently. Alliances are usually short-lived and disbanded once the purpose is achieved.
. Tata Motors & Fiat). 163 It is a form of competitive collaboration. It touches upon a limited aspects of a firms value chain. Alliances are usually in the areas of technologies or markets (Eg.STRATEGIC ALLIANCE
It involves a pro-active collaboration between two or more firms on a particular domain or function for mutual gain. It has limited intervention power and usually lacks holistic commitment from the alliance partner.
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.
.Honda). leaving minimum scope of overlapping. Tata – AIG. Dominant logic of both the companies should be complimentary. It is a win-win situation for both the companies. (Eg. Selecting the right partner is critical for success. A comprehensive MOU is essential.
Integration of assets and other financial resources.
.MERGERS & ACQUISITION
It refers to the fusion of two or more firms into a single entity. Integrated distribution channel leads to better market penetration and overall synergy. Revival of a sick-unit through better management practices is a major motive behind an acquisition 165 strategy. Brooke Bond & Lipton). with the individual firms ceasing to exist any more (Eg. Economies in scale leading to lowering of costs. Coca Cola – Thums Up). Acquisition is an outright purchase of a firm assets by another independent entity (Eg. ITC Tribeni Tissues.
Make a public offer of not less than
. Tata Steel . Consolidation in a fragmented industry.TAKE OVERS
It refers to the acquisition of significant management control by buying out majority stake in a firm through due diligence or hostility (Eg. Integration of organization structure & cultures is difficult. often the new firm is “left alone”. Instant access to capacities and markets. Larger geo-graphical diversity.Corus). Most countries have stringent laws that prevents hostile take over. Inform SEBI / Stock Exchange after 5% stake is 166 acquired.
MANAGEMENT TOOLS IN STRATEGY
Change provides enormous opportunities. Some tools to ensure that – Benchmarking – Adopt certain best practices. Radical change is superseding incremental change. every time.
. The past is ceasing to be an indication of the future. Companies therefore need to ensure competitive advantages doesn’t become competitive disadvantages. or better still create next practices Reengineering – Redesigning work processes right from the scratch. TQM – Doing the right thing the first time. Balanced Scorecard – Tracking strategy 3600.WHY MANAGEMENT TOOLS?
Change is becoming pertinent in the business environment. it is also a source of potential threat.
A best practice is defined as an activity performed by a company in a particular domain or function which distinguishes it from others and making them world-class. These exemplary practices involves the stakeholders of the company and helps achieve its strategic intent. Best practices centers around looking at a different way to satisfy various stakeholders. Benchmarking involves the identification, understanding and adapting of certain best practices and implementing them to enhance performance. Firms are moving towards next practices as best practices make firms look more and more homogeneous.
SOME BEST PRACTICES
Dell: Customized configuration of computers. Caterpillar: 48 hours delivery anywhere in the world. Citi Bank : Priority banking services. Maruti: Certified “true value” pre-owned cars. Microsoft: ESOP to employees. Infosys: Customized work-stations. TCS: Referencing potential new recruits. ITC: Shareholders factory visit. AmEx: Outsourcing data warehousing mining. MARG: Set-top box to study viewing patterns. Honda: CEO’s visit to dealers.
TYPES OF BENCHMARKING
Functional – Used by companies to improve a particular management activity. Eg. Motorola learnt delivery scheduling from Domino’s. Process – Improving specific key processes and operations from experiences in similar businesses. Eg. Ford adopting assembly lay-out plan of Toyota. Competitive – It involves assessing the sources of competitive advantage and imitating them. Eg. Samsung leveraging miniaturization skills of Sony. Strategic – It involves assessing business models and replicating them in a different market. Eg. Reliance replicating AT&T business model.
HOW TO BENCHMARK?
Phase 1: Planning – What to benchmark? Whom to benchmark? – Identify key performance indicators & Data source. Phase 2: Analysis – Assessment of performance gaps. – Predict future performance levels. Phase 3: Integration – Communicate findings and gain acceptance. – Establish functional goals and its implementation. Phase 4: Action – Implement and monitor progress. – Measure results against stakeholder wants and needs. – Recalibrate or outperform benchmarks.
WHOM TO BENCHMARK?
Selecting the benchmarking partner is critical to solving the problem. Firms should generally avoid selecting the industry leader, because it may not always adopt the best practices for every process or activity. Benchmarking partners may also be from different industries. Types – – Internal – It involves benchmarking against its own branches, divisions, SBU’s. Proximity to data and cooperation is taken care of automatically. – External – It involves benchmarking against firms that succeeded on account of their best practices. It may also involve benchmarking against world-class firms. Friction may arise due to presence in competing industries.
BENCHMARKING - ADVANTAGES
Finding better ways of meeting stakeholder needs. Organizational learning comes from internal as well as external sources. Establishing goals based on formal assessment of external conditions. Defining effective measure of indicators, facilitate comparison, adopt from other organizations. Ensuring a continuous learning organization. Reducing competitive disadvantage. Organizational turnaround, especially effective in case of a wide strategic drift when differentiation strategies fail to work. 174
It can at best complement it.LIMITATIONS
More and more companies benchmark. 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.BENCHMARKING . Strategy is more of creating best practices rather than copying them. Benchmarking is useful for bringing about operational efficiency.
.e. the more similar they end up looking. It does not shifts the growth 175 trajectory of the industry as a whole. clustering). but it cannot be used as a strategic decision making tool.
clean sheet). Windows 95 to 97).RE-ENGINEERING
Redesigning leads to identification of superfluous activities or product features (i. Re-engineering attempts to radically change an organizational products or process by challenging the basic assumptions surrounding it. The task demands a total change in organisational 176 culture and mindset.e.g. for achieving performance improvement (E.g.e. DOS to Windows).
. process mapping) and eliminating or improving them (E. Re-engineering involves complete reconstruction and overhauling of job descriptions from the scratch (i.
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
It can be of the following types – Functional – It looks into the flow of operations (i. BPR). customers and suppliers and protects the organization from the future (i. Business – It looks into markets. Strategic – It looks into the process of strategic planning.e. etc) and supports the organization for the present. . processes.REENGINEERING .e.LEVELS
Reengineering can be successfully leveraged at all levels of an organization with varying degree of results. products. resource allocation and prepares the organization for the future through a reorientation of the entire strategic architecture. structures.
Indonesia). While traditional manufacturing is a bottom-up approach. It generally acts as a threat to innovation. protection can be had in the following ways – – Patenting. However. – Early entry advantages. – Causal Ambiguity. reverse engineering is a top-bottom approach. Cheaper versions of Intel chips and mother-boards manufactured in Taiwan. – High cost and time acts as a deterrent.
. with an intention to copy it (Eg.REVERSE ENGINEERING
It is a process by which a product is dismantled and analyzed in order to understand how the product was designed and manufactured. learning curve advantage.
.e. machine tools to convert ideas into a marketable product (i. Usually in such cases segmentation and pricing is different from the original innovator. Implementation – Developing of a prototype. designing facilities. nano-technology). Introduction – Launching the product in the market. Inaccurate assessment at this stage may lead to a failure of the entire project. cost and effort necessary for the purpose of reverse engineering. Actualization – Obtaining and dismantling of the product to assess how it functions.STAGES IN REVERSE ENGINEERING
Awareness – Recognizing whether the product is found to be worth the time.
– Perception – Customer notions.
.Euro IV. Car) – – Performance – Mileage of 14 kms to a litre of fuel. of service stations.WHAT IS QUALITY?
It involves the totality of a product or service in meeting certain stated or implied needs. – Serviceability – Large no. – Conformance – Emission standards . – Features – Anti-lock braking systems. – Durability – 1980 manufactured cars still on road. Air bags. – Aesthetics – Appeal in design. – Reliability – Consistency in mileage. It has eight dimensions (Eg. More and more companies are moving towards meeting implied rather than stated needs.
. It had little impact on improving overall productivity. which ensures good market standing.TOTAL QUALITY MANAGEMENT
Objective – Management of quality ensures conformance to certain pre-set standards. TQM is a way of creating an organization culture committed to the continuous improvement of work processes – Deming. zero defects. It is deeply embedded as an aspect of 182 organisational life & culture.fix it in nature. Management of quality was traditionally inspect it . touching upon a limited aspect of a value chain.
the first time – From reactively fixing error in products to proactively preventing errors from occurring at the first place (Juran). provided with all relevant information and best possible tools. Be customer centric – Generate the concept of internal customer (Ishikawa).TQM – KEY TENETS
Do it right. Empowerment – It takes place when employees are properly trained. Looking at quality as an endless journey. Kaizen – Make continuous improvement a way of life. fully involved in decision-making and fairly rewarded for results. not a final destination. 183
It is based on the principles of MBO (i. 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.STRATEGIES
Outsourcing – It is the process of self-contracting services and operations which are routine and mundane. 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. equal participation). 6-Sigma).TQM .
. saving precious top management time.
. it’s bad execution. – In the majority of failures – we estimate 70% – the real problem isn’t (bad strategy) ... strategy implementation has never been more important.... – Efficiency and effectiveness is passé..BALANCED SCORE CARD
Some interesting comments . – Less than 10% of strategies effectively formulated are effectively executed.
Source: Fortune Magazine Why CEO’s fail?
A company’s performance depends on how it measures performance. Organizations need to move from financial to strategic performance. These measures worked well when organizational systems were simple and unidirectional and more importantly the environment was static. Focus more on causes. In today’s context when organizational systems have become complex and multi-directional we need to have a holistic view of performance to cut the lag effects.BSC . Most managers tend to rely on traditional measures of performance having its origin in finance as they are well tried and tested. rather than effects.
BSC – KAPLAN & NORTON (1992)
A BSC helps a manager to track and communicate the different elements of company’s strategy. because they have too many. and distinguish strategic problems from operational ones. The most critical element of a BSC is to measure these four dimensions.
. 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.
e. of visits or calls made % of NPA’s
. 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 new product launches Vs competition Product pricing Vs competition
. 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 patents registered Time to develop next generation products Average and spread in operating cycle % of products that equal 2/3 sales No. of product innovations
GOALS Technology Manufacturing Focus Timing
GOALS Survival Success Prosper Divestment
MEASURES Cash flows Growth in Sales and Profits EPS. Return on Investment Market Capitalization / PE ratio
2 Translate strategy into operational terms 1 Mobilize change through effective leadership
Make strategy a continual process
3 Align the organization to the strategy
4 Make strategy everyone’s job
Most often top managers face information overload.e. Shift from control to strategy (i. Modern managers should be poised to ask the right questions. It helps translating strategy into practice (i. Focus on cause not effects. doing right things instead of doing things right).
. they don’t know . The BSC brings together the different elements of a company’s strategy at a glance. 194 performance will automatically follow.what they don’t know. sharing of vision).BSC . As a result. Seek excellence.
EFFICIENCY Vs EFFECTIVENESS
Goes out of Business quickly
.EFFECTIVENESS + STRATEGY
A company which is effective as well as strategic. but also sustains it.Michael E. Porter
. not only thrives.
. from survival of the fittest . to survival of the most adaptable. “every organization must be prepared to abandon everything it does... Strategic variety may be caused by changes in the as external well as internal environment. Tata Group).. firms use restructuring strategies. Restructuring involves consciously driving significant changes in the way an organizations thinks and looks (Eg. Strategic variety brings paradigm shift. To adapt to the changing environment.. As Peter Drucker pointed out.CORPORATE RESTRUCTURING
The only thing constant in today's business environment is change.. Radical change brings about strategic variety.”
and dividing the core businesses into SBU’s (i. they should strive to provide unimaginable value ahead of its time (Eg. downsizing or rightsizing).
. Internal customers should also not be neglected. Core Business – Company’s should introspect – What business are we in? Business evolved out of opportunism or myopia should be divested. downscoping). Instead. Structural Changes – Conventional hierarchical structures should be disbanded in favour of more 199 flexible ones (i. Walkman. ATM. Fax. etc).e.e. Company’s should go beyond just asking what he expects.RESTRUCTURING – BASIC TENETS
Customer Focus – Restructuring ideally begins and ends with the customer.
.... started focusing on their capabilities. .. It is created and institutionalized by the top management. Ratan Tata now drives the point the group means business.....RESTRUCTURING – BASIC TENETS
Cultural Changes – A culture represents the values and beliefs of the people about the organization. Restructuring also requires cultural reorientation..
.. Kumar Birla today is more dependent on professionals. the Tatas were considered a benevolent and charitable organization.) Reliance dismantled their industrial embassies . During the times of JRD..) The Aditya Birla group typically relied on the “marwari” community for key management positions .
MOVING CLOSER TO THE CUSTOMER
As companies evolve.”
. Carry out PR campaigns. Communicating to the media about organization efforts to deliver quality products. Honda’s ad says. “ … one reason our customers are satisfied is that we aren’t. Publicizing welfare projects to demonstrate CSR. Use the reach of networking technologies. Getting feedback & addressing customer complaints. they tend to move away from the customer. Organizing customer and supplier meets. Restructuring provides a platform to close this gap.
or conglo-merate. including its intangibles – Mergers – It may be vertical. Further spin-off can be classified as split-off and split-up. Mittal – Arcelor) and can take various forms. spin-off and equity carve. Hive Off – It involves siphoning of assets under control. horizontal. Tata – Corus) or hostile (Eg. Asset Swaps – It entails divesting and acquisition simultaneously by two companies. It may include brands as well. it may be smooth (Eg. Glaxo – Heinz). Further. It can have two forms.
. where the difference in valuation is settled off through cash or equity (Eg.ASSET RESTRUCTURING
Asset Restructuring – The asset composition of a firm undergoes a major change.
. Reliance Ent). Most of these practices are not in consonance with Indian laws. Tata Industries selling 20% stake to Jardine Matheson). – Split-Off – In a split-off. – Split-Up – In a split-up.HIVE OFF
Spin-Off – A spin off is the creation of a new entity. in which the equity is allotted amongst the existing shareholders on a pro-rata basis (Eg. the existing shareholders receive equity in the subsidiary in exchange for the stocks of the parent company. the entire parent company loses its identity after being split into a number of subsidiaries. Equity Carve – It involves selling a minority stake to a third party while retaining control (Eg.
Selling out in phases is called disinvestment (IPCL). for a specified market or in general with full management control.DIVESTITURE
It involves the sale of a brand or a division of a company to a third party. strategic misfit. – Poor performance. Generic motives include – – Raise working capital. In 1995. but retained its engineering division. L&T sold its cements division to Aditya Birla group. In 2005.
. Parle sold its Thums Up brand to Coke for $40 million apprehending fierce competition. repay long-term debts. A complete sell-out is known as divestment (TOMCO).
Share Buyback – It is a process of cancellation of shares out of free reserves to the extent of 25% of paid-up capital (Eg. Conversion – Replacing debt with equity or vice-versa or costlier with cheaper debt or cross currency debt.The internal & external liability composition undergoes a major change – LBO – Acquiring control over a substantially larger company through borrowed funds (Eg.CAPITAL RESTRUCTURING
Capital Restructuring . It provides greater leverage as well as management control.
. involving 608 pence per share).3 billion. Wipro). Tatas take-over of Corus for US $11.
1890 cr CMC – Rs. 256 cr ACC – Rs. 1170 cr Goodlass Nerolac – Rs. 99 cr Tata Power – Rs. 42 cr Voltas . 250 cr Tata Tetley – Rs. 1860 cr
.Rs. 950 cr Merind . 1700 cr Trent – Rs. 150 cr VSNL – Rs.BUSINESS RESTRUCTURING – TATAS
Divestments Lakme – Rs.Rs. 1439 cr
Tata Timken – Rs 120 cr Tata Telecom – Rs. 230 cr Diversifications Tata Motors – Rs. 120 cr Tata AIG – Rs.
of a firm’s employees and sometimes in the no.
Organizational structure and systems calls for a change when strategic variety is apparent. usually as a result external turbulence. Survival is the primary motive. of operating units. It can be carried out in the following ways – Downsizing – It is a systematic one-time reduction in the no. Rightsizing – It is phasing of excess and redundant employees resulted out of faulty internal planning (SAIL). Turnaround is the primary motive. Downscoping – It involves reducing the business and/or geographical scope of a firm (Aditya Birla group). keeping the composition of business intact (Jet Airways).
.e. The longer the period.e. inertia). as strategies are based on such beliefs and biases.STRATEGIC CHANGE
One of the most difficult components of organization restructuring is the mindset of the top management represented through its dominant logic and its shared values reflected in cultural orientation. the more difficult it becomes to uproot the paradigm (i. thumb rules) of the top management. The dominant logic represents the perceptions and biases (i. Dominant logic becomes deep-rooted in organizational contexts depending on the period it is in place (tenure of the CEO). Strategy change is unviable without a preceding change in its dominant logics.
. 20% of the people carry out 80% of the changes). Companies achieve real agility only when people at every level rise above the ordinary to face the challenges – revitalization or transformation.e.FORCES AGAINST STRATEGIC CHANGE
The problem with strategic change is that the whole burden typically rests on few people (i. In most organizations. the factor that stifled change & performance was – culture. 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.
Manage from the future. process ownership. The best way is to alter the institutional point of view. Create relentless discomfort with the status quo.
. Questioning every basic action of the organization. never take no for an answer. Understand and deliver the quid pro quo. Encourage uncompromising straight talk. Harness setbacks. Promote inventive accountability. it is not about winning but about learning.SUCCESSFUL TRANSFORMATION
Build an intricate understanding of the business model at all levels of the organization.
by identifying forces for and against change. Identify and implement facilitators of cultural change. also known as cultural-web.FORCE-FIELD ANALYSIS
A force-field analysis provides an initial overview of change problems that needs to tackled. Culture and style of management are two main impediments in force-field analysis. that can be both enablers and blockages to change and restructuring. Aspects of current culture which needs to be overcome.
. It involves diagnosing a change situation – systems & structures. It involves identifying – Aspects of current culture which needs to be reinforced.
Alternatives Organizational Short .RESTRUCTURING .Term Reduced labour costs Reduced debt costs Emphasis on strategic control Business High debt costs Higher risk
Long .Term Loss of human capital Lower performance Higher performance
reverse engineering and regenerating. While the first strategy produces results instantaneously. focuses on reengineering. In order to put back the company on the right track they are resort to – Denominator – It assumes that turnover cannot be increased. the second one is a more viable strategy and sustainable option in the long run.
.NUMERATOR & DENOMINATOR MGT
Most firms across emerging markets undergo strategic discontinuity and as a result are forced to restructure their businesses. hence go in for downsizing. down-scoping or asset stripping. Numerator – It assumes that turnover is not a barrier or constraint.
1997). and that the thirty-two of the country’s largest business groups in 1969 are no longer among the top fifty today.WHY TURN AROUND MANAGEMENT?
Some interesting insights . – Only seven of the first fifty Indian business groups in 1947 were even in business by the turn of this century.
. still exist as on 2005. Source: Why do firms atrophy? (Business Today. 215 (Govindarajan and Trimble... – Less than 10% of the Fortune 500 companies as first published in 1955..
ends the threat with a combination of strategies. systems. While content focuses on endogenous and exogenous variables. skills. and achieves sustainable performance recovery. As a sequence of events describing how things change and why they change (i.TURN AROUND MANAGEMENT
A turnaround is said to occur when a firm perseveres through an existence threatening performance decline. A category of underlying principles and concepts. process focuses on – A logic to explain a causal relationship between intervening variables.
. Stage Theory).e. and capabilities. Both content (what) and process (how) are equally important for a successful turnaround.
Substantial shifts in consumer preferences. Uncompetitive products or services. Low employee morale leading to high employee attrition at all levels. Rising input costs. suppliers and bankers.TURNAROUND INDICATORS
Most firms atrophy simply because they fail to diagnose the indicators that acts as threat to organizational existence. Low stakeholder confidence. unavailability or radical lowering of substitute costs or technological obsolescence. especially in key positions. Some indicators Continuous cash flow crises as a result of dwindling market-share and profits. 217
. leading to lack of acceptability from distributors and customers.
Revamp product portfolio. they adopt surface level measures (disprin popping) which most often fail. Common approaches adopted Change in key positions. Hence. prune work-force. Emphasis on advertising and market penetration. “all is not well”. consider extension. based on elasticity. Extending work hours. be more customer centric.
. Product redesigning or reengineering. focus on power brands. which most top managers fail to appreciate.TURNAROUND ILLUSION
The first step to a successful turnaround is the basic acceptance of the fact that ….. liquidating dead assets. Recalibrate prices.
TURNAROUND STAGE THEORY
Stage 1 Decline Stage 2 Stage 3 Stage 4 Outcome
Success Failure Indeterminate
primarily dwindling resources and capabilities are responsible for decline.
. It has its origin in “resource led stretch” and subscribes to the view that a firm has substantial power to override the context. Identification of the stimulus leads to the arrest of the downfall. It has its origin in “environment led fit” that subscribes to the view that a firm has little control over external factors. R-Extinction – It suggests that organization factors.DECLINE
Decline is the first stage in the turnaround process. It involves the identification of the theoretical perspectives that explains performance decline – K-Extinction – It suggests that macro economic and industry wide factors are responsible for decline.
the response should be strategic. the response should be operational.
. Strategic responses focus on changing or adjusting the business the firm is engaged in through long term moves such as – integration. If the decline stems from structural shifts. new market initiatives. diversification. asset reduction. Operating responses typically focuses on the way the firm conducts business and involves tactics geared towards – cost cutting and process redesigning (BPR). If the underlying cause is internal efficiency. The response must match the cause of the decline.RESPONSE INITIATION
Turnaround responses are typically categorized as operating or strategic.
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.RESPONSE DICHOTOMY
The response initiation is somewhat dichotomous and cannot be universally applicable.
. Similarly new market initiatives is feasible only for multi-product firms. which may be unavailable to a focused firm. when decline deepens shifts in strategic position becomes essential. Untangling this question brings into focus three events – Domain – Many of the strategic cures have limited applicability for an affiliated firm.
Empirical studies show that average time is 7. Sustenance is the key factor in this stage. consensus). lead – lag).e.TRANSITION
Transition usually reflects the first signs of recovery. However. confidence building measures. many a times early signs of recovery fades out. Support from all the stake holders through resource commitment.
. role model. substantial amount of time usually passes before results begin to show (i. Effective levers of transition. transparency.7 years with a range of (4-16) years.e. The top management has a key role to play through empowerment. However. participative management (i.
Regaining lost market share and distributor confidence. Supplier and banker confidence. Cut off points must be unequivocal.
. Instead of focusing on financial parameters alone. Failure is an indication that initial momentum was not sustainable characterized by irreversibility. it should adopt a holistic approach. Share price indications and media coverage. Revival of key customers and new product launches. Commanding a premium in the market.OUTCOME
Outcome is said to be successful when a firm breaches the equilibrium performance level.
COOPERATIVE STRATEGIES & ALLIANCES
strategic alliance. or joint venture. and globalization .COOPERATIVE STRATEGIES
Cooperative strategies are a logical and timely response to changes in business dynamics. the commitment and the involvement between the firms increases manifold. supply-chain partnership. licensing. Any cooperative strategy maybe between firms within the same country or cross border as well. consortia. In the cooperative strategy continuum as firms move up the value order. It can assume any of the following forms – franchising. More and more companies worldwide are moving away from competition to co-option to leverage their resources and enhance bargaining power.
Branding is critical to franchising. It is an effective strategy to penetrate markets in a shortest possible time at a minimum cost. owners of the brand Tanishq allows its franchisees to sell its jewellery products.
Franchising – It is a contractual agreement between two legally independent firms whereby the franchiser grants the right to the franchisee to sell the franchisor’s product or service or do business under its brand-name in a given location for a specified period of time for a consideration. Titan Inds. owners of the brand Monginis allows its franchisees to sell its confectionary products. Switz Foods.
refine processes and adopt necessary technologies (SKD). Become a systems integrator (CKD). as in Tata Indica. 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.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.
enabling them to increase prices (Eg. Tata. Airbus – Boeing). Coke – Pepsi). Cross Holdings – A maze of equity holdings through centralised control to ensure earnings stability & threshold resources for critical mass (Eg.
. Hyundai). It can be of the following types – Multipartner – Intends to share an underlying technology or asset. leverage upon size to preempt competition by escalating entry barriers (Eg.CONSORTIA
Consortia – They are defined as large inter-locking relationships & cross holdings between businesses in a similar industry. Collusion – Few firms in a matured industry collude to reduce industry output below the equilibrium level.
It usually provides a platform to sort out differences between conceptualization and implementation to suit local market needs.SUPPLY CHAIN PARTNERSHIP
It is a pro-active & collaborative arrangement between supplier and customer aimed at achieving better control over the value chain (Eg. Tata Motors – IDEA).
. link their capabilities to create value for end users. Companies in different industries with different but complimentary skills. otherwise it 230 becomes routine outsourcing. Continuous sharing of knowledge is critical to the success of a supply chain partnership.
It is an short to medium term understanding between two or more firms to share knowledge and risk. enter newer markets. instead of hurrying into a relationship.
. Generic motives involved are . Partner selection is one of the critical success factors.learning organization. Reliance – Du Pont). design next generation products. Firm’s should undertake a long courtship with potential partners. Tata Motors – Fiat. Despite their popularity (50-60)% of the alliances fail to accomplish their stated objectives. preempt competition. effective R&D management. to gain knowledge and to obtain access to new markets (Eg. enhance credibility.
Airbus – Boeing).
. Maruti). Coke – Pepsi). Bajaj – Castrol).STRATEGIC ALLIANCE . Backward – An alliance (quasi or tapered) with a supplier of critical components seeking commitment (Eg. Whirlpool – Tide.TYPES
Collusion – Tacit top management understanding to neutralize price wars (Eg. Alliances of the Weak – An alliance is entered into to preempt competition (Eg. Bootstrap – An alliance between a weak and a strong company with an intention to acquire it. Complementary Equals – Two firms mutually promoting each others complimentary products (Eg.
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. Firms from developed markets seek access to markets and firms from emerging markets seeking access to technology. Too much stress on financials & structure be avoided.
. – Japan Vs US). Cultural orientation has been found to have a profound effect on top management’s strategic orientation (Eg.
including ability to provide quality products and services. Intangible Assets – Move beyond the financials of the firm. Unique Resources – Abilities or skills which cannot be easily duplicated. Dominant Logic’s – Similarity in beliefs & biases. Partner’s ability to acquire fresh skills. Willingness to share knowledge and skills. Managerial capabilities.
Complimentarity of Capabilities – The degree to which partners resources can be used in conjunction. Experience related to previous alliances.
Learning to collaborate – strategic. differences not anticipated earlier. incorporating clear signs of continuing independence for all partners.
. Setting up the housekeeping.MANAGING ALLIANCES
Alliances are more than just a deal. vows to include commitment to expand the relationship. degree of compatibility. the value chain. operational & cultural integration. Getting Engaged – It should incorporate a specific joint activity. partners should nurture it. instead of focusing controlling the relationship. Changing within. understanding the chemistry. Selection & Courtship – It involves self analyzing.
whilst the partners continue to operate independently. There are substantial linkages in the value-chain. separation is very 236 bitter.e. It lasts till the vision is reached.e. combining parts).
. It aims at creating new value (i. Conceptually. synergy) rather than mere exchange (i.JOINT VENTURE
A joint venture is a long term association between two equal partners to create an independent firm (SPV) by complementing their resources and capabilities to explore newer businesses or markets for achieving a shared vision. a joint venture is a selection among modes by which two or more firms can transact.
. Organizational Learning – It is a means through which a firm learns or seeks to retain their capabilities. It may also be linked to deterring entry or eroding competitors position.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. though more profitable alternative to other choices. 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.
– Eg. – Eg. Maruti – Suzuki. Essar – Hutch (Vodafone). TVS – Suzuki (4-Stroke Engines) Fill gaps in existing product lines. Renault – Nissan (Minivans – Cars). Define future industry standards. – Eg. – Eg. Daimler – Chrysler (Premium Cars)
. – Eg. Learning new technologies.OTHER MOTIVES
Entry into newer markets. Endorsement from government authorities. – Eg. Eli Lily – Ranbaxy. Sharing of resources. Yamaha – Escorts.
Incompatibility – Differences in cultural background. Century . Risk of over dependence. – Godrej – Procter & Gamble. – Eg. Tata – Aditya Birla in Idea Cellular
.Enka. technology) drain. Risk of brain (i. Modi – Telstra What after exit (parenting disadvantage)? – Eg. – Eg. – Maruti – Suzuki.e. PAL – Fiat If the cost of continuing exceeds the exit costs? – Eg. LML – Piaggio Differences in size and resource base.
Inertia – Differences in age and evolution patterns. Costs – Other modes of transaction becomes cheaper.PRE-REQUISITES FOR SUCCESS
Commitment – Mutual trust. Incompatibility – Performance expectations. Culture – Reconcile gaps.
. respect. Focus – Avoid strategic myopia. Agreement – Clarity on operational control. time sharing. Flexibility – Sufficient space to breathe and adjust. Partner – Avoid duplication of skills and capabilities. Equality – Lack of dominance. Objectives – Shared vision.
MERGERS & ACQUISITION
SEBI Takeover Code.
. Mittal Arcelor).Daichi) and hostile if it is without the consent of the management (Eg. however. The larger objective is to leverage on size. HLL – Tomco). Most countries have stringent laws that prevents hostile takeovers (Eg.MERGERS & ACQUISITION
A merger is a mutually beneficial consent between two or more firms (usually of similar size) to form a newly evolved entity by absolving their individual entities to preempt competition (Eg. Ranbaxy . reverses are also taking place through LBO) with a view to acquire conglomerate power and induce synergy (Eg. An acquisition is the purchase of a firm by a firm (of larger size. Brooke Bond – Lipton). An acquisition is said be smooth if it is with the consent of the management (Eg. 2002).
Promoter – A person who has a clear control of atleast 51% of the voting rights of the company and confidence of all the major stakeholders. creeping acquisition).SEBI TAKEOVER CODE. Preferential – A preferential allottee ending up acquiring 5% stake also comes under its purview. Hike – An acquirer who has already picked up a 5% has to make a mandatory disclosure for every additional 1% stake that it acquires. Control – A special resolution of 75% of the share 243 holders approving the change of guard.
. Acquirer – Someone (individual or firm) who picks up an atleast 5% stake without mandatory disclosure having an intention to wrest management control (i.
SEBI TAKEOVER CODE. SEBI – In case of a hostile take over.e. 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. credentials or track record is at stake. and/or does not enjoy the confidence of the different stake holders. Grasim – L&T Cement.
. Gujarat Ambuja – ACC). the SEBI can intervene and block share transfers if: the acquirer has ulterior motives (i. asset stripping). 2002
Pricing – Acquirers will have to offer minority shareholders (at least 20%) the past 26 weeks or past 2 weeks average price.
usually opportunistic (Eg. Electrolux .
. Reliance). Vertical – It involves complimentarily (partially related) in terms of supply of inputs or marketing activities (Eg.Kelvinator).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. The type of merger is depends on the degree of relatedness (strategic) between the two businesses. Conglomerate – It involves integration of two distinctly unrelated businesses. Godrej. ITC). Horizontal – It involves integration of two highly related businesses (Eg.
MERGERS & ACQUISITION .
. Access to newer segments (Eg. Ulterior motives – (Eg. Tata Steel – Corus).e. Ranbaxy – Crosslands). Acquiring assets or capabilities (Eg. ITC Bhadrachalam). Mittal – Arcelor). Asset Stripping – Shaw Wallace). Global image (Eg. scale and scope. ICICI –ITC Classic). Coinsurance effect – Higher debt raising capability. Tax benefits (Eg. quick access). Reduced gestation (i.MOTIVES
Increased market / conglomerate power. Overcoming entry barriers (Eg. Avoiding risk of new product development. Reduction in risk. Economies of size.
Overvaluation is often as a result of an ego drive and substantially affects future returns. their initial offer was around 420 pence/share.
. Tata – Corus). Managing size. neglecting core business.MERGERS & ACQUISITIONS PITFALLS
Cultural differences (Eg. Merging of organisational structures. while the ultimate acquisition was made at 607 pence/share). Inability to achieve synergy. Managing over-diversification. Top management overtly focused on due diligence exercise and negotiations. Overvaluation of buying firms (Eg. When Tata Steel started negotiations with Corus.
Brooke Bond – Lipton). Kingfisher – Air Deccan). Growth – This stage may witness parallel merger of two firms of similar size. Decline – Horizontal mergers are undertaken to ensure survival.
. vertical to save transactions costs. Tata Steel – Corus). Maturity – A larger firm acquires a smaller firm with an objective to achieve economies of scale and experience curve effects (Eg.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.
A common shared vision.INTERNATIONAL M&A . Immediate attempts to super impose structure and culture may cause bottle necks. Left alone syndrome. active top management intervention in phases. An acquisition just for the sake of it or reputation yields very little value in the long term. Strong differences may stifle plans and its execution. A concern of respect and trust for the business of the acquired company.
Positive contribution to the acquired company. Blanket promotions across entities and confidence building exercises needs to be practiced.
Integrating work processes.INTEGRATION .
. promptly. Decide on the new hierarchy. Decide upon management control systems. Determine business strategy. Redefine responsibilities and authority. It will enable focus on customers and key people. Shift attention from business portfolio to people and processes. They can carry the message to the various stake holders. 250 Do not ignore the “people factor”.BLUEPRINT
Take the media into confidence.
While under valuation may be a significant opportunity. – Market for corporate control.
. over valuation can become a curse. – Synergy – Potential value gain from combining operations (i.VALUATION
The process of valuation is central to M&A. Financial motives – Undervaluation relative to true value. operational & financial).M&A . Valuation decisions are arrived through a due diligence process when the prospective acquirer gets access to the books of accounts of acquiring company.e. The process takes (6-12) months. – Unstated reasons – Personal self interest and hubris.
or from increased market power which increases sales and margins. when the “fit” between the two entities is very poor.VALUING OPERATIONAL SYNERGY
Synergy – It refers to the potential value gain where the whole is greater than the sum of the parts. Innovative product – Good distribution network). – Vertical Synergy – Gains come from controlling the supplychain and savings in transaction costs. Synergy can be negative as well. Sources of operational synergy – Horizontal Synergy – Gains come from economies of scale which reduces costs.
. – Conglomerate Synergy – Gains come when one firm complements the resources or capabilities of another (Eg.
and without paying take-over premiums. However.
. Tax Benefits – Tax benefits may accrue from tax entitlements and depreciation benefits unutilized by a loss making firm. shareholders can accomplish the same at a much lesser cost. ITC – Bhadrachalam Paper). 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.VALUING FINANCIAL SYNERGY
Diversification – Reduce variability in earnings by diversifying into unrelated industries. but availed after being merged with a profitable firm (Eg. Hotmail).
– Default risk comes down and credit rating improves. 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. as risky debt is spread across the new firm's operations. It relates to the concept of diversification. hence better performance. – Coupon rates may also be negotiated at lower rates. higher leverage. the cash flow the merged firm will be less variable than the individual firms.
.VALUING FINANCIAL SYNERGY
Co-Insurance Effect – If the cash flows of the two firms are less than perfectly correlated.
The value of control can be substantial for firms that are operating well below optimal value. – – Value of Control = Value of firm after restructuring Value of firm before restructuring. Assessment of perceived quality is critical.
. 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. The value of wrestling control is inversely proportional to the perceived quality of that management. since a restructuring can lead to significant increase in value.
LBO facilitates a relatively smaller firm to bid for a comparatively larger firm in the bid for management control. It is a very costly and risky proposition.LEVERAGE BUYOUT (LBO)
The basic difference between a take-over and a LBO is the high inherent leverage (i. The assets of the acquired company are used as collateral for the borrowed capital.
. Confidence of investment bankers and the international financial community is essential. sometimes in combination with the assets of the acquiring company.e. debt component) at the time of buyout and rapid changes in capital structure over time.
The increased benefit showed in the following way – reduced costs and increased revenue. However.TO GO PUBLIC OR NOT?
However. – Separation of ownership from management.access to financial markets.
. – Increased information needs. A research study showed that 30% of the publicly listed firms reported above average returns after going private. off-late many publicly traded firms have gone private keeping in mind the following – – The fear of LBO. – The need to satisfy analysts and shareholders. liquidity. the advantages of going public includes . on-going valuation.
– Cash trapped company unable to utilize opportunities. – Cost of debt coming down (i. – Debts repaid off from increased value after successful restructuring and wresting management control. – It is a temporary phenomenon.RATIONALE FOR HIGH LEVERAGE
The high leverage in a LBO can be justified by – – If the target firm has too little debt (relative to its optimal capital structure). – Managers cannot be trusted to invest free cash flows wisely. which disappears once assets are liquidated and significant portion of debt is paid off.
. co-insurance effect).e.
Lack of sufficient cash flows to repay costly debts resulting in a possible debt trap. initial rise in leverage is anticipated. As the firm liquidates / pledges assets and pays off debt. leverage is expected to decrease over time. Any discounting has to reflect these changing cost of capital. Therefore. – Increase equity valuation.EFFECT OF HIGH LEVERAGE
Increases the riskiness of dividend flows to shareholders by increasing the interest cost to debt holders.
. A LBO has to pass two tests to be viable – – Restructuring to pay-off increased debt.
– Tax shelter. allowing the private company to bypass the usually lengthy and complex process of going public. Objectives – – Traditional route of filing prospectus and undergoing an IPO is costly. small in size but having a promising business.
. shell company) by a private company. – Prevents dilution of equity.REVERSE MERGER
Reverse Merger – The acquisition of a public company. – Facilitates better valuation and forthcoming offerings. time-barred. – Automatic listing in major exchanges. which has discontinued its operations (i. or costly.e.
takeover failures have only initial negative effects on stock prices. Initial anomaly in stock prices usually normalizes over a period of time (6-12) months. Excess returns also vary across time periods.
. and 35% during bullish periods. However. – Takeover announcements reported 30% excess returns.EFFECT OF TAKE-OVER ANNOUNCEMENT
The shareholders of target firms are the clear winners. – Merger announcements reported 20% excess returns. During bearish periods excess returns were 19%. Most target firms are taken over within (6090) days.
Desai. 1983.EFFECT OF TAKE-OVER ANNOUNCEMENT
The effect of take-over announcement on bidder firm’s stock prices are not clear cut. Bradley.
Jarrel. and Kim. Brickley. and Netter. 1983. – Most studies reported insignificant excess returns around take-over offers or merger announcements. – However. 1988
. in the event of take-over failure negative returns to the extent of 5% on bidder firm stock prices is reflected. over time. – However. as stock markets become more and more perfect such anomalies would reduce Source: Jensen and Ruback.
Asset Stripping – The targeted company hives off its key assets to another subsidiary. Poison Pill – An offer to existing shareholders to buy shares at a substantial discount to increase their voting rights (Eg. so that nothing is left for the raider to strip off. Poison Put – Premature retirement of bonds at attractive rates to pour surplus cash and make target investment unattractive. Rights). 263
Golden Parachute – An employment contract that compensates top managers for loss of jobs as a result of change in management control.
Pac Man – The target company makes a counter bid to take over the raider company. Shapoorji Pallonji). thus thwarting the raider company’s attention. 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. Gray Knight – The target company takes the help of friendly company to buy the shares of the raiding company. Green Mail – The targeted company buys large blocks from holders either through premium or through pressure tactics (Eg. But often the White Knight turns a betrayer himself (Eg.
COMPETING FOR THE FUTURE
Wal-Mart overpowering Sears. The reverse was true for the companies overpowering. Honda overpowering GM. Most companies were too preoccupied with the present than the future? 99% of the companies overpowered. British Air overpowering Pan Am.GETTING OFF THE TREADMILL
Canon overpowering Xerox. Nokia overpowering Motorola. were spending 99% of their precious time dealing with present. Hitachi overpowering Westinghouse. Honda overpowering Volkswagen. Compaq overpowering IBM. What went wrong???? What were they doing with the present? What were they pre-occupied with?
most often they ended up cutting corporate muscle as well and became anorexic. Not knowing when to stop. decluttering.THE PAST OF COMPETITION
Beyond Restructuring – When a competitiveness become inescapable problem (stagnant growth. downsizing). falling market share). 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)
. declining margins. CEO’s brutally pick up the knife and ruthlessly carve away layers of corporate flab (delayering. Thus efficiency was grievously hurt.
top managers believed that quality will be a source of competitive advantage of the future. On the contrary only 20% of Japanese managers believed that quality will be a source of competitive advantage of the future. but forging ahead in competition. However. ensuring only survival of the present.
.THE PRESENT OF COMPETITION
Beyond Reengineering – Numerator based managers (innovation) at least offers some hope. but not of the future.S. The future is not about catching up with competition. A poll in circa 2000 revealed that 80% of the U. incrementalism or nominal innovation has almost reached a plateau.
. demographics and lifestyles. reinvent its industry. faster. It involves Dream about the company’s future. Create a potential gap. Creating the future requires industry foresight. and regenerate its strategies (breaking its – managerial frames). not the other way. Empower from bottom to top. aspirations and resources.THE FUTURE OF COMPETITION
Regenerating – Leaner. It is based on deep insights into trends in technology. they are not enough to get a company to the future. as important as these may be. not just the organization. Companies need to fundamentally reconcieve itself. Transform the industry. better. don’t predict.
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?
It is about deliberately creating a strategic misfit. Redraw the boundaries between industries. blue oceans). hence do not fall sick in the first place. by converging technologies complex.ABOUT THE TRANSFORMATION
The future does not belong to those who take the industry for granted. Successful companies have a complete grip over the industry. Create entirely new industries (i.
. Change in at least one fundamental way the rules of engagement in an industry. Therefore.e. It drives a hunger and a passion to transform. they do not need to restructure.
. A revolution that is thrust upon from the top seldom sustains. Most successful revolutions (Gandhi to Mandela) rose from the dispossessed. Transformational leaders merely lead the way. The middle management plays a strong moderating role.ABOUT THE EMPOWERMENT
Bring about a revolution (a paradigm shift) in the organization. Such a process is called institutionalization (from people centric to organisational centric). the revolution must start at the bottom and spread in all directions of the organization. More importantly.
It requires a lot of common sense and a little bit of out of the box thinking. Toshiba – LCD. South West Airlines – LCC. Companies need to strategize (think ahead of times). Apply the 40 – 30 – 20 principle. An ability to energize the company.
.THE FUTURE OF STRATEGY
A company must get to the future not only first but also for less. Apple – iphone). A process for finding and gaining insight into tomorrows opportunities (Eg. Get to the future first. without taking undue risk. What does it take to get to the future first? Understanding how competition for the future is different.
We are in the midst of a 3600 vacuum. as on their aspirations. the farther it will be away from competition. As there is no one future. What distinguishes a leader from a laggard.
. Companies of the future will be not based so much on the strength of their resources. The farther one can see in this endless space. greatness from mediocrity. is the ability to imagine in a different way what the future could be. each point in space represents a unique business opportunity.HOW DOES THE FUTURE LOOK LIKE?
There is no rule which says that for every leader there will be a follower. but hundreds.
THE EMERGING STRATEGY PARADIGM
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
.LEARNING TO FORGET
P1: The degree of learning in current period is directly proportional to the degree of unlearning in the previous period.
A core competence relates to a bundle of skills (not an asset or a business) that revolves around activities or processes and critically underpins a firm’s competitive advantage. It cannot be matched even by its closest competitors. Inimitable & Insubstitutable – A high degree causal ambiguity between these skills yield sustainable competitive advantage. It represents the collective learning's of an organization centering around diverse streams of technologies. Leverage – They are the gateways to future markets. It is characterized by the following – Unique – It provides unimaginable customer value ahead of its times.
Honda – engines.MORE ABOUT CORE COMPETENCE
Sony – miniaturization. SKF – antifriction and precision. Coca Cola – brand. Most companies around the world do not possess one. Although a core competence may lose value over time.
. Nike – designing. Canon – imaging. A core competency cannot be outsourced. Wal-Mart – logistics. Toyota – lean manufacturing. leaders have one. Core competencies are the roots of the organization. at the most three to four. it is deeply embedded in the heart of the organization. Toshiba – flat screen displays. Intel – nano-electronics. it gets more refined and valuable through use.
ROOTS OF COMPETITIVENESS
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
institutional gaps. Diversified groups in operating in emerging markets therefore benefit from unrelated diversification.EMERGING MARKETS
Emerging markets (India. Therefore. China. strategies suited for the developed markets may not be appropriate for emerging markets. Therefore focused strategies based on core competence may not be suitable for emerging markets (Khanna & Palepu. Emerging markets are characterised by infrastructural bottlenecks. 1997). high levels of market imperfection). Chile) provide a different context (i.
.e. and high transaction costs. Korea.
subsequently negatively related across developed markets. Size & Scale.DIVERSITY . (2000)
. Experience Strategic Fit
Palich. Entropy). Synergy.PERFORMANCE (I)
Diversity attempts to measure the degree and extent of diversification (Herfindahl. et al. Optimum level of diversification
Diversity is initially positively related with performance. Concentric.
Huge initial investment. subsequently positively related across emerging markets. brand building Risk diversification. 2001)
Diversity is initially negatively related with performance. conglomerate power Threshold level of diversification
(Khanna & Palepu.DIVERSITY .
It should think globally. It should have a spread of assets. Characteristics – It should have a spread of affiliates or subsidiaries.INTERNATIONAL IDENTITY
MNC’s consciously engage in FDI in different parts of the globe to forge resource diversity as a distinct competitive advantage. act locally (Eg.
. It should have a spread of manufacturing facilities. It should have a spread of interest groups / stake holders. HSBC). revenues and profits.
It reflects the relative role of team building (Eg. low group scale in developed markets and vice versa for emerging markets). Group Scale .It reflects the disparities in women in workforce (Eg. high feminity index in developed markets and vice versa for emerging markets). Risk Profile – It reflects the risk attitude of the top management (Eg.
. low power distance in developed markets and vice versa for emerging markets). low risk profile in developed markets and vice versa for emerging markets).GLOBAL BUSINESS ENVIRONMENT
Power Distance – It reflects the disparities in income and intellectual development (Eg. Feminity Index .
high cultural adaptability in developed markets and vice versa for emerging markets). terrorism (9/11). corruption. customs. time value. inflation. attitude. low country risk in developed markets and vice versa for emerging markets). FOREX reserves. code of conduct.GLOBAL BUSINESS ENVIRONMENT
Cultural Adaptability – It reflects the adaptive ability to a changing environment . interest rates.culture. way of life. flexibility (Eg. judiciary) of doing business in a particular country (Eg. Country Risk – It reflects the political and economic risk (Eg. political stability. currency. credit rating.
. dress sense.
Ethnocentrism – Developed country managers tend to regard their own culture as superior. however.
. Other factors – local celebrations. and vice-versa. in most emerging markets use of an interpreter may be a standard protocol. in most emerging markets meetings are delayed and lasts unusually long.GLOBAL BUSINESS ENVIRONMENT
Time Sensitiveness – Developed country managers regard time as precious. High levels of ethnocentrism usually has a negative effect on business. time-zones. Language Barriers – Developed country managers expect foreign partners to communicate in their languages.
The 1999 (Seattle Round) saw a lot of protest amidst bringing agriculture under the purview of TRIPS. trademarks). It a multi-lateral treaty with 143 (as on 2002) member countries to reduce tariff and non-tariff (quota) barriers. copyrights. ASEAN. It also initiated provisions on anti-dumping. The 2001 (Doha Round) focused on power blocks (NAFTA. In 1995 (Uruguay Round) GATT was renamed to WTO. It focused largely on TRIPS (patents.GATT
GATT was a bi-lateral treaty initiated between US and some member countries in 1947 to promote free trade. It also highlighted the nexus between US & WTO. BRIC).
However with current recession in the US 2002 onwards. three countries joined in 2002 increasing it to fifteen members as of 2008. The notable exception was Great Britain which still continues with its local currency (i.e. However. Euro). Sterling .
. primarily the OPEC countries.e.EURO – SINGLE CURRENCY
In 1999 twelve member countries in Europe joined hands to move over to a single currency (i. The Euro was significantly devalued against the Dollar till 2002. the Euro slowly started outperforming the Dollar.Pound). the Dollar still remains the most preferred currency globally.
it helps avoiding transaction costs associated with a multiple currency. Trade Block – It will strengthen the EU identity which would not have been possible otherwise. but it may have spill-over effects.
. Rate Uncertainty – A single currency eliminates the risk of competitive devaluations. Transparency – A single currency is transparent and competitive.SINGLE Vs MULTIPLE CURRENCY
Transaction Costs – Though the initial cost of introduction of a single currency is very complicated and costly. However. a multiple currency is preferable where the business cycles of member nations are different.
e. hot money). It is long term with high levels of commitment. – FII (transfer of intangible resources) is fast but may have strong repercussions (i.e. Neo classical economists believe that foreign investment may in fact be a win-win game.
. – FDI (transfer of tangible resources) is slow but steady for the purpose of economic growth. the gain of one country is loss of another). It is short-medium term with comparatively low levels of commitment.FII Vs FDI INVESTMENT
Classical economists believed that foreign investment (in any form) is basically a zero sum game (i.
.culture (food habits). economic (middle class buying power). buying patterns (spread). Distribution – It depends on the market characteristics (fragmented – concentrated). lifestyle (petroleum 299 outlets – departmental stores). promotion (surrogate advertising). customer awareness (microwaves). technology (microchip).INTERNATION MARKETING
Product – The various attributes of a product may receive different degrees of emphasis depending on differences in . usage (talk time). Pricing – It depends on the competitive structure (PLC – Kellogg's).
. Cost Structure – Companies in India need to investment in fixed costs due to poor infra-structure 300 compared to developed markets.INTERNATION FINANCE
Currency Risk – Many Indian IT companies (Rs) having business in US (Dollar) are asking for quotes in (Euro) or are shifting bases out of US to avoid risk of devaluation of Dollar. Accounting Norms – The accounting norms of one country (AS . debt is cheap in US.India) may be different from that another trading country (US – GAAP or IRS). equity is cheap in India). Leverage – The leverage may vary across countries depending upon money and capital market conditions (Eg.
double taxation. Training – It is a pre-requisite for international business to reduce language. shortened life cycles). skills are more important that cultural fit and vice-versa. Compensation – Differential pay packages exists because of differences in purchasing power.INTERNATIONAL HR
An uniform HR policy is idealistic to enable parity in performance appraisal. and cultural barriers (language) vis-à-vis emerging markets. technology (convergence.
. however. in most cases it is not desirable nor practiced. Recruitment – In local recruitment. labour laws. social security.
Outsourcing – A company having a core competence may be the source of global outsourcing (Eg.
. SCM – Use of ERP to network the extended enterprise 302 across the globe. reduce power costs) vis-à-vis infrastructural bottlenecks.INTERNATIONAL OPERATIONS
Location Incentives – FDI in emerging markets should explore options for SEZ’s to explore benefits (tax holidays. Technology – The cost to be evaluated in terms of latest technology (Euro VI) vis-à-vis effective cost of appropriate technology (Euro II). Bosch spark plugs are used by car manufacturers worldwide).
An invention is the first occurrence of an idea for a new product or process. Innovation is all about staying ahead of competition. it has destructive effects as well.
. Innovations typically paves the way for more secured and improved lifestyle for consumers in general. While innovation typically adds value for organizations. innovation is the first attempt to carry it out in practice. Innovation is the most preferred strategy today to maintain competitive advantage in the present turbulent business environment. but has inherent risks involved as well.
. Tangible impact of product innovation on performance is significantly higher than process innovation. While product innovations are typically customer driven.TYPES OF INNOVATION
A key challenge is maintaining a balance between process and product innovations. However. Strategic innovation has the potential to change the rules of the game. process innovations are organizational driven. Process innovation usually follows product innovation. process innovation is necessary to sustain the competitive advantage of product innovation.
a paradigm shift). about how an organization makes money (i. Processors (Pentium). Data Storage (Pen Drives). Medical Surgery (Lasik). Disruptive business models brings in a new frame of reference (i. It leads to a shift in the price – performance envelope.e. Drug Development (Bio Chemicals). putting an idea into practice). Innovations are the back-bone of successful business models .
It is a simplified description and representation of a complex real world. Telecom (CDMA Technology).e.
. The segment(s) of clients to be addressed. The channels to reach out to the clients. The revenue streams generated by the activities. The cost structure resulting from the business model. The key partners involved in the activities. The key activities / processes necessary for execution.NINE BUILDING BLOCKS
Value proposition offered to the market. The proposed relationships established with clients. The key resources and capabilities required.
BUSINESS MODEL FRAMEWORK
. The revenue model described here are the means to generate revenues. Investment Banking. With the rapid erosion of certain industries (IT.REVENUE MODEL
Positioning is just not sufficient. It is just one piece of the puzzle. It involves – Product Visualization – Product Prototype – Product Test – Capacity – Pricing – Distribution. innovative companies to carve out unique business models to fend off competition. Real Estate) companies need to untangle and understand the intricacies of their business model.
Provide reasonable incentives (not necessarily monetary). Promote the grape-vine.
. Have a lean and a flat organization structure. Allow the management sufficient slack to be future oriented.HOW TO MAKE INNOVATIVE CO’S
Innovative company’s are a matter of culture and aspirations rather than tangible resources. A favourable intellectual property (IP) climate. Promote the culture of experimentation. Allow the workforce idiosyncrasies for their errors.
HOW TO PROTECT INNOVATION?
Without adequate protection (external or otherwise) the effects of innovation does not translate to performance. companies are increasingly relying on internal protection to sustain innovation effects. In most emerging markets where the IP climate is not so favorable. The most preferred strategy of internal protection includes imbibing “causal ambiguity” in the production process to make reverse engineering difficult.
. however that possibility is slowly atrophying. Collusion with the judiciary is also another distinct possibility in emerging markets.
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. In fact the principles of corporate governance implies that managers go beyond in satisfying the stated and unstated needs of the multiple stakeholders. Corporate governance aims to reduce the principal-agent problem present in most professional managed organizations through appropriate forms of accountability and control mechanisms.
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.
. shareholders can diversify their portfolio at a much lesser risk and cost. This exposes the shareholders to additional risks and higher costs. However. also known as the principal-agent problem or agency dilemma. From the strategic point of view managers tend to diversify into unrelated businesses as it provides higher returns hence a more favourable appraisal.
.ORIGIN & CONTEXT
Since the early 20th century since a large part of public funds were held by publicly traded firms in the US. SEBI Report – 2005. 2002 to restore public confidence in corporate governance. defines corporate governance (headed by Kumar Mangalam Birla) as the acceptance by management of the inalienable rights of shareholders as the true owners of the corporation and of their own role as trustees on behalf of the 314 shareholders. various laws were enacted to ensure proper usage of these funds. the US government passed the Sarbanes – Oxley Act. After the Enron downfall.
. Interests of other stakeholders: Recognize the legal and other obligations of all legitimate stakeholders. The key roles of chairperson and CEO should not be held by the same person and their offices be clearly separated.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. including the society at large.
Integrity and ethical behaviour: Organizations should develop a code of conduct for their top management that promotes ethical and responsible decision making.
.. Independence of the entity's auditors: Identification. Disclosure and transparency: Disclosure of information should be timely and balanced to ensure that investors have clear access to data and facts. assessment and mitigation of risks and retirement by rotation over a fixed period of time. They should also implement systems to independently verify and safeguard the integrity of the company's financial reporting.
Balance of power: The simplest balance of power is very common. fire and compensate top management.GOVERNANCE STRATEGIES
Monitoring by the board of directors: The board of directors. Remuneration: Performance-based remuneration is designed to relate some proportion of salary to individual performance. However. a person benefitting from a decision should abstain from it. discussed and resolved. safeguards invested capital. Regular board meetings allow potential problems to be identified. they should provide no mechanism or scope for opportunistic behaviour.
. with its legal authority to hire.
undertook formal evaluation of its directors. The size of the premium varied by market.GOVERNANCE & PERFORMANCE
In its “Global Investor Opinion Survey” of over 200 institutional investors in 2002. from 10% for companies where the regulatory backdrop was least certain (those in Morocco. They defined a well-governed company as one that had mostly out-side directors. and was responsive to investors' requests for information on governance issues. who had no management ties.
. McKinsey found that 80% of the respondents would pay a premium for wellgoverned companies. Egypt and Russia) to around 40% for Canadian & European companies.
However. Over a period of time. today economic institutions are considered as a major drivers of improvement in quality of life in general and therefore needs to include multiple stakeholders.
. Therefore. The basic premise is that firms cannot exist in vacuum.SHAREHODER – STAKE HOLDER THEORY
Till the early part of the 20th the basic objective of modern organizations was to provide goods and services for public consumption for profit maximisation. corporate philanthropy should be a part of every corporate mission. the short-term view of profit maximisation gave way to a more broader and mediumterm view wealth maximisation of the shareholders.
Therefore. the debate on CRS still continues whether firms should detract its focus from its business?
. giving a very important message that one cannot exist without the other. “an enterprises decisions and actions being taken for reasons at least partially beyond its immediate economic interests”. Therefore. in fact a large part of it is significantly overlapping. “a healthy business cannot exist in a sick and impoverished society”. CSR can be defined as. However.CORPORATE SOCIAL RESPONSIBILITY
As Peter Drucker rightly pointed out that. economic and social responsibilities cannot be mutually exclusive.
Fear of government interference: Excessive quench for profits may lead to build up of adverse public opinion compelling the government to intervene (Eg. people are becoming increasingly aware of their right to a decent and healthy life.GROWING CONCERN FOR CSR
Awareness due to education: With growing literacy. MRTP).
. Public image: Entrepreneurs are increasingly relying on public image as a source of competitive advantage and a higher financial discounting. The role of media: The media and various consumer organizations have come up in protecting consumer rights and exposing mal-practices.
and extended producer responsibility (Eg. Aditya Birla Research Centre – LBS). Education.CSR STRATEGIES
Green Supply Chain Management: It includes environmentally preferable purchasing.Paper packaging. Refrigerators – CFC. designing eco-friendly products. eco efficiency.
. Cement . Literacy & Training Programs – (Eg. Health & Hygiene – Attending the health hazards due to wastes and by-products to employees and society in proximity (Eg. Tata Steel – Life Line Express). Exide – Product take back).
Prahalad notes that future markets exist collectively.BOTTOM OF THE PYRAMID
With the market across most developed markets including the US getting saturated. In turn companies by serving these markets. C.
. they're helping millions of the world's poorest people to escape poverty. Strategic innovations leading to disruptive business models can show the way out. across the world's billions of poor people having immense untapped buying power. K. They represent an enormous opportunity for companies who learn how to serve them.
BLUE OCEAN STRATEGY
MARKETSPACE .TWO WORLDS
In today’s red oceans. They have fought for profits.WHAT IS RED OCEAN?
Companies have long engaged in head-to-head competition in search of sustained. profitable growth. one companies gain is always at the 326 cost of another companies loss. where most industries are saturated. Yet in today’s overcrowded industries.
. battled over market-share. and struggled for differentiation (cost or product). competing head on results in nothing but a bloody red ocean of rivals fighting over a shrinking profit pool.
WHAT IS BLUE OCEAN?
Tomorrow’s leading companies will succeed not by battling in red oceans. Such strategic moves are possible through the pursuit of product differentiation and low cost simultaneously. Blue Ocean’s have existed in the past. but by creating blue oceans of uncontested market space ripe for growth . it will exist 327 in the future as well. It is only the frames of the
. rendering rivals obsolete and unleashing new demand. It helps in creating powerful leaps in value for both the firm and its buyers.
RED OCEAN Vs BLUE OCEAN
Compete in existing markets Compete in uncontested markets Beat the competition Exploit existing demand Make the competition irrelevant Create and capture demand
Make the value-cost trade off Break the value-cost trade off Demand is the limiting factor Supply is the limiting factor
Technological advances have substantially 329 improved industrial productivity.
. As trade barriers between nations & regions fall. of European nations. Niche markets & monopoly havens are continuing to disappear.BLUE OCEAN STRATEGY IMPERATIVES
Prospects in most established market spaces – red oceans – are shrinking steadily. Population shrinkage across a no. Demand across developed markets reaching a plateau. information imperfections atrophy instantly.
the underlying technology was often already in existence. They are not necessarily about technology. Incumbents often create blue oceans within the ambit of their core business. 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). Company & industry are the wrong units of 330 strategic analysis. managerial moves are.
Blue oceans have existed in the past and will exist in the future as well.
BLUE OCEAN .IMPLEMENTATION
Which factors to be reduced below the industry standard
Which of the industry factors that the industry takes for granted should be eliminated
Which factors should be created that the industry has not offered
Which of the factors should be raised above the industry’s standard
Buyer Utility (1)
Is there exceptional buyer utility in your business idea?
Is your price easily accessible to the mass of buyers?
Blue Ocean Strategy
What are the adoption hurdles in actualizing your business idea? Are you addressing them up front?
Can you attain your cost target to profit at your strategic price?
Citibank – Automated teller machines & credit 333 cards. Sony Play Station: Redefining machine-human interface in entertainment and targeting an altogether new user base.SOME GLARING EXAMPLES
In the last century authors Kim and Mauborgne have documented the creation of more than 150 blue ocean creations across 30 industries – Virgin Atlantic: Fractional jet ownership or travel to space. Southwest Airlines: Pioneering the concept of LCC.
. According to this view. greater than themselves. Off late emerging views in strategy having its origin in (Organization Theory) led to a paradigm shift to what is called the – reconstructionist view. According to this view managers need not be constrained to act within the confines of their industry. companies & managers are largely at the mercy of economic forces.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. All they need to do is change their managerial frames.