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Course Code: 611 & 612 Dr. Subir Sen – Faculty Member, IBS
E-Mail: firstname.lastname@example.org, 9830697368 1) Crafting & Executing Strategy – Thompson & Strickland. 2) Strategic Management – Pearce & Robinson. 3) Strategic Management – Fred. R. David. 4) Exploring Corporate Strategy – Johnson & Scholes. 5) Competitive Advantage – Michael E. Porter. 6) HBR – Articles & Case Studies.
STRATEGY - DEFINITION
Strategy is all about making trade-offs between what to do and more importantly what not to do; consciously choosing to differentiate. It reflects a congruence between external opportunities and internal capabilities. Types of strategies – Corporate Strategies – It is all about making choices across various businesses and allocating resources among them. Business Strategies – It is all about developing leveraging and sustaining competitive advantage. Functional Strategies – It is all about finding newer ways to perform existing processes, or 3 better still adopting new processes altogether.
STRATEGIC MANAGEMENT DEFINITION
Strategic management attempts to integrate the traditional management functions and align the organization as a whole with the broader environment to make resource allocations in a way to achieve the strategic intent of the organization. This alignment is called strategic fit. It serves as a road-map for the organization in its growth trajectory. It provides the direction – extent – pace – timing. It depends on the turbulence of the environment and the aggressiveness of the organization. It distinguishes the winners from the losers.
PILLARS OF STRATEGIC MANAGEMENT
Differentiation – Differentiation of key inputs and technologies helps a firm to consciously move away from homogeneous to heterogeneous markets enabling them to earn super-normal profits from normal profits. Integration – Whenever dealing with a complex task of managing a business (i.e. involving a no. of variables with cross linkages) it is in the interest of simplicity that the task be broken up in smaller components. However, for effective control, integration is essential. Alignment – Since differentiation is prone to replication, it is in the interest of the firm to differentiate continuously by aligning the resources with environmental opportunities.
STRATEGIC MANAGEMENT FRAMEWORK
Economic al Strategic Finance Fit Political Strategic Intent Fit Political Marketin g Manageme nt Social & Cultural
It is about adaptation and response to the same.STRATEGIC MANAGEMENT . It provides broad guidelines. It is a holistic and integrated approach. 7 . It requires full commitment of the top management. It is irreversible.FEATURES It forms the core activity of the top management. It is long-term in nature. It is all about creativity and innovation. It involves substantial resource outlay.
It about mere data and facts. It brings instant success. It is about forecasting. It involves nitty-gritty's. It a bundle of techniques or even tricks. It is rocket science. It is fool-proof in nature. It involves only the top management. 8 .STRATEGIC MANAGEMENT – MYTHS It involves short-cuts. It is about a definite formula. It attempts to minimize risk.
To leverage size. rather than reactive. To gain expertise in technologies.STRATEGIC MANAGEMENT IMPERATIVES To be continuously alert. To assimilate change faster. To be future oriented. To innovate. scale and scope. . To generate large resource pool. To tap markets across boundaries. To be insulated against environmental threats. again and again ……. 9 To develop core–competencies. To be proactive.
10 . but by virtue of their courage. but with a lot a rigour and robustness.STRATEGY . obsession.ORIGIN The word strategy has its origin from the Greek word strategia meaning Military Commander. whose origin can be traced to some of the greatest battles fought in the ancient days. It is an old wine in a new bottle. and more importantly .strategies. Even in today’s markets. today's battles are fought over markets. In contrast. In the ancient days battles were fought over land. In the ancient days battles were won not by virtue of size of the army or armory. battles fought on the market front are won by companies by virtue of their obsession & strategies.
Allied Forces Vs Germany (WW-II) – Strategy: Forging alliances. challenging GM and Ford. US attack of Morocco to capture Germany – Strategy: Pin-hole strategy – Wal-Mart challenging Sears by entering small towns. Napoleon’s attack on Russia – Strategy: Waiting for the right time. 11 . – Reliance’s entry into telecom. – Yahoo and Microsoft challenging Google.SOME PARALLELS Japan’s attack on Pearl Harbour – Strategy: Attack where it hurts the most. – Toyota’s entry in the US.
The first major discontinuity in the history of global business environment was the . 12 . A paradigm is a dominant belief about how the business and its environment operates. a radical change in the business environment brings about discontinuity.Industrial Revolution. – Mass Production Organization Size – Complicated Processes – Complex Structures Evolving of an emerging paradigm – survival of the fittest (Fayol & Taylor. 1910). The things happening around the firm when totally disconnected from the past leads to a paradigm shift.EVOLUTION OF MANAGEMENT As Peter Drucker refers to it.
Efficiency and effectiveness are no longer sufficient. – Affluence of the new customer (i.e. Survival of the most adaptable becomes a new management paradigm (Ansoff. performance across firms became differentiated. From uniform performance. – Changes in the technology fore-front.EVOLUTION OF STRATEGIC MANAGEMENT The second major discontinuity in the history of global economic environment – World War II. 1960). – Homogeneous to heterogeneous products. The question of outperforming the benchmark became the new buzzword. push to pull). – Global market place. 13 .
ENVIRONMENTAL CHANGE Phase IV: Horizon of Scenarios 2 1 Phase I: Extrapolation of the past 1 3 1990 onwards 1 2 1 3 1A 1B 2A Prior to 1950 Phase II: Discrete Scenarios Phase III: Range of Scenarios 1970 to 1990 2 2B 1950 to 1970 14 .
Ansoff (1960) – Strategy can be segregated into certain mutually exclusive and inter-related components aimed at managing the growth of an organization. Learning always begin on a clean sheet of paper. – Biases and prejudices has a very little role to play in strategic choices pursued by managers. 15 . – The choice of product-market mix is based on conscious evaluation of risk – return factors. – It is primarily the top management’s prerogative.APPROACHES TO STRATEGY Analytical Approach – Igor H. – The choice of strategy is primarily concerned with external ones rather than internal ones.
who will be the top managers. everything else follows. – The top managers then decide on the type of organization structure & systems to be in place. how it will compete.APPROACHES TO STRATEGY Design Approach – Alfred Chandler (1970) – Structure follows strategy. Successful organizations align authority and responsibility of various departments in way to reach overall objectives. Once the control systems are in place. The organization initially decides which industry to enter. – Organization structure will precede and cause changes in strategy. – Management control systems has a dominating role in influencing firm performance. 16 .
competitors. – A firms performance is inversely related with the bargaining power of environmental forces to which it is exposed. – The organization will outperform the industry where environmental forces are weak and vice-versa. customer. – An organization is seldom in a position to influence the larger business environment. – The environmental forces comprises of – supplier.APPROACHES TO STRATEGY Positioning Approach – Michael E. 17 . new entrant. substitutes. Porter (1980) – Choose a consumer segment and position your product accordingly.
18 .APPROACHES TO STRATEGY Core Competence – C. but exploiting the resource differences among them. – It enables a firm to deliver unimaginable value ahead of time. They are complex resources and undermines a firms competitive advantage. – Core competencies are a set of skills that are unique and can be leveraged. locating in most attractive industries and pursuing the same strategy. – Organizations can significantly alter the way an industry functions. K. Prahalad (1990) – The key to superior performance is not doing the same as other organizations.
STRATEGIC MANAGEMENT PROCESS Strategic Intent Strategic Planning Strategic Gap – Environmental Scanning – Internal Appraisal of the Firm Strategy Formulation – Corporate Strategy – Business Strategy Strategic Choices – Functional Strategy Strategy Implementation Strategy Performance Strategy Evaluation & Control 19 .
TOP MANAGEMENT PERSPECTIVE 20 .
21 . you cannot reach there. 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. It involves an obsession to be the best or outperform the best. It’s a philosophy that distinguishes it from its competitors. A gap that consciously manages between stagnation and atrophy. It implies a significant stretch. A substantial gap between its resources and aspirations.STRATEGIC INTENT If you cannot see the future. It provides a sense of direction and destiny.
STRATEGIC INTENT .HIERARCHY Integrativ e m Do an in Visio n Mission Dominant Objective s Goal s Plans Lo g ic Single Specifi c Man y 22 t .
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. To put it more simply. strategic variety) is apparent.DOMINANT LOGIC A dominant logic can be defined as the way in which the top management team conceptualizes its various businesses and make critical resource allocation decisions. It is core to the strategic intent of the firm. 23 . Dominant logic changes.e. when radical changes in the internal and external environment (i.
– It represents the company’s audacious. It enables the top management to remain focused. It is a combination of three basic elements – – An organizations fundamental reason for existence. – It stands for the unchanging core values of the company. It provides an unity of purpose amidst diversity of personal goals. 24 . but achievable aspirations.VISION It is a dream (not a forecast) about what the company wants to become in the foreseeable future. beyond just making money. It ensures that the company does not wander off into unrelated zones or fall into an activity trap.
In Reliance when a new project becomes operational top managers hand over charge to the SBU heads and move on to a new project. Reachable – It should be within a reasonable target in the known future. Empathy – It should reflect the company’s beliefs to which it is sensitive. Clarity – Vividly descriptive image of what the company wants to be known for in the future.CHARACTERISTICS Reliance – Where growth is a way of life. clear. not an utopian dream.VISION . 25 . Brevity – It should be short. Sharing – The company across all hierarchies should have faith in it. and memorizable.
To prevent the fall in a activity trap. It lends integrity and genuineness. 26 .VISION . It gives a shared platform. It gives enlightment. It makes strategic alignment easier. It provides a holistic picture. It gives the impression of a forward-looking organisation.ADVANTAGES To stay focused on the right track. It facilitates development of skills & capabilities. It fosters risk taking and experimentation.
its reason for existence. Although the purpose may change over time. 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.MISSION Mission defines the space that a business wants to create for itself in a competitive terrain. 27 . It serves as a road map to reach the vision. It enables the firm to define its business landscape and identify its competitive forces. A broad mission statement helps in fending competitors.
28 . All the businesses of the company are strongly integrated with their main business. We offer solutions.MISSION – SOME IDEAS Reliance – We are in the business of integration. We offer comfort. though some may seem unrelated in nature. – We do not offer insurance. …………………. – We do not offer steel. – We do not offer software's. …………………. …………………. We offer security. We offer strength. …………………. Some other examples – We do not offer shoes.
It is an end result (quantifiable) something a firm aims and tries to reach in a time bound frame. 29 . – It adds legitimacy and motivation. – It lends direction – time frame in the medium term. – 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. – It is based on Management by Objectives (MBO). – It prevents deviation.100K crore company by the year 2005. – It provides a benchmark for evaluation. – It helps identifying key success factors.
– Leverage economies of size and scale. It is specific to a particular business. – Acquire a market share of indomitable position. coordinating appropriate technologies.PLANS Reliance – Desire to invest 25K crore in telecom business by circa 2010. and gaining access to desired markets to achieve the desired goals and objectives. – Use price-elasticity to break market barriers. The details of the plan Reliance Telecom adopted were – Backward integrate process technologies. – Compress project times. 30 . It is the process of garnering necessary inputs.
strategies lose touch with the emerging realities. past strategies tend to have a bearing on future strategies. In such a context. When changes in the environment is incremental.STRATEGIC DRIFT Due to top management commitment. However. It often leads to an organizational crisis. 31 . radical change may lead to disequilibrium. Historical studies have shown that most organizations tend to continue with their existing strategies. equilibrium is maintained. This tendency to restore continuity is known as inertia (resistance to change). This state of affairs is known as strategic drift.
STRATEGIC DRIFT FRAMEWORK Environmental Change Degree of change Strategic Change Radical Change Incremental Change State of Flux Continuity Stage of Transformation Strategic Drift Stage of Atrophy Time 32 .
Organizational politics involves intentional acts of influence to enhance or protect the self-interest of individuals or groups over organizational goals. – Distorting information to gain mileage. – Developing a platform of support. – Using covert tactics to pursue self interests. 33 . Some instances of organizational politics – Formation of powerful groups or coteries. – Creating a favourable image. – Creating obligations of reciprocity. – Hiding vulnerability.ORGANIZATIONAL POLITICS Strategic drift often leads to organizational politics.
INTENDED & REALISED STRATEGIES An intended strategy is an expression of interest of a desired strategic direction. . – Persons responsible for strategy conceptualization and implementation are34 divergent. A realized strategy is what the top management actually translates into practice. – The environment context has changed. Usually there is wide gap between the two when organizational politics is evident. – Influential stake-holders back out. Other causes – – The plans are unworkable and utopian.
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. 35 . this is not to be treated as “muddling”. Learning is an integral part of logical incrementalism. but as a defensible response to the complexities of a large organization that mitigate against publicizing goals. but the master scheme of the rational comprehensive scheme is not apparent. They simply unfold the particulars of the sub-system in stages. However.
The broader objective should serve the overall interest of the organization.IMPLEMENTING INCREMENTALISM General Concern – A vaguely felt awareness of an issue or opportunity. 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. 36 . Adaptation – As implementation progresses. Macro Broadcasting – The broad idea is floated without details to invite pros and cons leading to finer refinements.
Dominant logic’s are the cornerstones of change when strategic transformation is apparent. Strategic transformation becomes smooth through a change in top leadership.STRATEGIC TRANSFORMATION Strategic transformation (a complete overhauling of the strategic architecture) becomes inevitable whenever a strategic drift takes place. Tampering with surface level factors often leads to atrophy. It creates blinders. . As it brings 37 with it a different dominant logic. Dominant logic’s are very rigid and sticky and prone to inertia.
– Constructive Bargaining – Agree to disagree. – Informal Networks – Emerging of new ideas. It helps prevent a strategic drift from occurring at the first place. – Experimentation – Fosters a culture of risk taking. Factors that fosters a learning organization – Pluralistic – An environment where different and even conflicting ideas are welcome.LEARNING ORGANIZATION A learning organization is capable of continual regeneration from knowledge. experience. – Organisational Slack – Enough free space. A learning organization must continuously focus on unlearning as well. 38 . and skills that fosters experimentation and questioning and challenge around a shared purpose.
ENVIRONMENTAL CONDITIONS Dynamic Scenario Planning Learning Organization Static Forecasting Decentralization Simple Complex 39 .
ANALYZING BUSINESS ENVIRONMENT 40 .
e. It points to a position of superiority with relation to competition. It is based on the assumption of incremental change.PLANNING & STRATEGIC PLANNING Formal planning is a function of extrapolating the past. Strategic gap basically points towards a vacuum of where the organisation wants to be and where it is. It is reactive in nature. 41 . It requires a quantum leap (i. It is based on the assumption of radical change. Strategic planning is a function of discounting the future. Competitive advantage provides the surest way to fulfill the strategic gap. gap analysis). It is pro-active in nature.
The world is flat. 42 . resources and ideas move unhindered. Environmental factors can be external as well as internal to the organization.ENVIRONMENTAL SCANNING The environment is defined as the aggregate of conditions. not guided by any boundaries. and influences that affect an organizations way of doing things. It is exploratory in nature. Environmental scanning is very important component of strategic planning. events. The segments of the environment a top manager scans selectively depends upon his dominant logics. A manager has to continuously scan the environment to ensure alignment of the strategies with the radically changing environment.
Understanding the composite effect is critical. It is important not only to identify the structural drivers of change. which may be different from the past impact. for which a holistic picture is required. 43 .PESTEL PESTEL attempts to provide a broad framework on how the broader environmental forces affects an organization and influences the way it practices strategy. It is not intended to be used as an exhaustive list. It is particularly important that PESTEL be used to look at the future impact of environmental factors. but also to analyze the complex linkages across them.
PESTEL FRAMEWORK Political – Government Stability. Savings & Investment. Licensing & Quotas. Literacy Levels. Infra-Structural Investments. Language Barriers. Subsidies & Protection. Capital Market & Forex Reserves. Social Values. Social – Population Diversity. Central – State Co-alignment. Economic Cycles. Income & Age Distribution. Religious Sentiments. Inflation & Interest Rates. Currency Stability. Monsoon & Food Grains Reserves. Government Attitude. Economic Model. Economic – GDP. FDI Inflows. 44 . Fiscal Deficit.
Pollution Control Laws. Consumer Protection Laws. Legal – Monopolies Legislation.PESTEL FRAMEWORK Technological – Innovation. Research & Development. Obsolescence Rate. Product Design. Employment Laws. Direct & Indirect Taxes. Carbon Credits. Patents. Waste Disposal & Emissions. Environmental – Global Warming & CSR. Extended Producer Responsibility. Environmentally Preferable Purchasing. ERP. Product Safety & Health Hazards. Technological Convergence. Patent Laws. Non-Fossil & Alternative Fuels. 45 .
Dismantling price controls. Capital Market Reforms. Economic Reforms – Fiscal & Monetary Reforms. New Trade Policy (NTP) – Lowering import tariffs. Curtailment of PSU’s. Rupee convertibility. PSU Disinvestments. Banking Sector Reforms. Exit Policy.ECONOMIC LIBERALISATION New Industrial Policy (NIP) – Liberalizing industrial licensing. MRTP Liberalization. Abolition of import licenses. Structural Adjustments – Phasing out subsidies. FERA Liberalization.VRS. 46 . Encouraging FDI. Encouraging exports.
DISCONTINUITY Destabilization due to entrepreneurial freedom – Cocoon of protection disappears – Diversification spree – Existing notions of size shaken – Industry structures change radically – Economic Darwinism . Mergers & Acquisitions 47 .Survival of the fittest MNC Onslaught – Enhancing stakes – Power Equation – Joint Ventures – Technological Alliances – Take-over threat.
DISCONTINUITY Hyper Competition – MNC’s .Globalization – Cheap Imports & Dumping – Push to Pull Marketing Buyers exacting demands – Shortage to surplus – Price competition – Life-style changes – Stress on quality. Consumerism Challenges on the technology front – Competencies become technology based – Investment in R&D become inescapable 48 .
DISCONTINUITY Compulsion to find export markets – Identifying competitive advantage – Technological gap – Global presence – Depreciating currency – Exports Corporate vulnerability – It is no longer business as usual – Capital inadequacy – Lack of product clout and brand power – One product syndrome – Loss of monopoly 49 .
FIVE FORCES MODEL .PORTER Threat of New Entrants Bargainin g power of Suppliers Competition from Existing Players Bargainin gBargainin power g of power of Suppliers Customer s Threat of Substitutes 50 .
the forces are subject to changes.FIVE FORCES MODEL ASSUMPTIONS The model is to be used at the SBU level and not at the industry level.e. It should not only be used to understand the forces. The model should not be used as a snapshot in time. profit potential) per se. 51 . incremental or otherwise. 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. but also used to understand how they can be countered and overcome.
52 . Learning curve advantages. Resource profile & fear of retaliation. Industry stagnation. Product differentiation through proprietary technology or brand power. Undifferentiated product. Capital requirements. High switching costs. Government policy. Scope for backward integration. Low margins & stagnancy.PORTERS FIVE FORCES ANALYSIS Threat to Entry – Economies of size and scale. Low relative importance of the segment. Presence of substitutes or unorganized sector. Access to distribution channels. Unimportance of product quality. Threat of Customers – Buyer concentration and volumes. Low customer switching costs.
High exit barriers. Piracy and counterfeits. Low relative importance of the segment. Lack of substitute inputs. Product perishability. Low level of differentiation. Buyer’s propensity to substitute. Unorganised sector.PORTERS FIVE FORCES ANALYSIS Threat of Suppliers – Supplier monopoly. Industry stagnancy. 53 . Jockeying for position – Fragmented market. Produced by industries earning high profits. Diversity of players. High customer switching costs. Intermittent overcapacity. Threat of Substitutes – Improvement in price -performance trade-off. Scope for forward integration. Differentiated inputs.
Resource Profile – It highlights the capabilities (generic) or competencies (business specific) of the firm. dominant or related diversified or unrelated diversified businesses (Infosys.FIRM ENVIRONMENT Size and Scale of Operations – It is a very important component of competitiveness in today's global context (Bharti – MTN. Tata). Business Scope – The intention whether the firm wants to be in a single. Reliance). 54 . Cohesiveness – Degree of bonding existing across affiliated firms. Inertia – Excessive commitment to past strategies prevents firms from tapping emerging opportunities.
which further reduces costs. However. 55 . an E-Curve can prove to be futile during discontinuity. and with lower prices it can increase its sales volume.EXPERIENCE CURVE The cost of performing an activity declines on per-unit basis as a firm becomes more efficient. With lower costs. experience teaches better and more effective way of doing things. The E-Curve thus enables organisations to build entry barriers. Experience curve has strong linkages with performance. Matured firms will always be positioned advantageously on the ECurve than new entrants. it can price its products more competitively. leverage it as a competitive advantage.
EXPERIENCE CURVE Cost per unit of output Decreases at an increasing rate Point of inflexion Decreases at a constant rate Decreases at a decreasing rate Production / Volume 56 .
TRADITIONAL VIEW Efficiency = Lower Costs 2 3 1 Experience = Efficiency Lower Costs = Higher Sales Entry Barrier = Better Performance 4 6 5 Higher Sales = Lower Costs Lower Costs = Entry Barrier 57 .EXPERIENCE CURVE .
EXPERIENCE CURVE .STRATEGIC VIEW Inertia = Limited Growth Experience = Inertia 2 3 1 Limited Growth = Diversification Strategic Failure = Poor Performance 6 5 4 Diversification = New Experience New Experience ≠ Old Experience 58 .
Case Studies – Structured Questionnaires. Websites. Observation. Press Clippings & Interviews. Acronym for Strengths – Weaknesses – Opportunities – Threats. Interviews. 59 Analysts. It is one of the earliest models in environmental scanning. Competitors.VULNERABILITY ANALYSIS . A SWOT audit involves – Company Records – Annual Reports.SWOT The framework was originally conceptualized by Kenneth Andrews in 1970. . Suppliers. Customers. It helps an organisation to capitalize on the opportunities by maximizing its strengths and neutralizing the threats minimizing the weaknesses. Business Intelligence – Bankers.
SWOT ANALYSIS .FRAMEWORK Opportunities Nullify weaknesses which prevents you from exploiting opportunities Leverage strengths to make use of opportunities Weaknesses Minimize weaknesses which prevents you from countering threats Strengths Threats Utilise strengths to counter threats (?) 60 .
Good credit rating – Eg. Honda. Reliance. Biocon. Infosys. Tata. Economies of scale – Eg. Siemens. Infosys. High quality products – Eg. 61 . Large resource pool – Eg. Engineering Skills – Eg. Strong after sales & service network – Eg. Ranbaxy. Strong R&D base – Eg. Excellent penetration – Eg. Toyota. Sony. Caterpillar. HUL. Reddy’s. Aditya Birla. Tata Steel. Motivated employees & cordial industrial relations – Eg. Reliance. ITC. Volkswagen.SOURCES OF STRENGTH Strong brand identity – Eg. Dr. SBI.
Inertia – Eg. Strategic myopia – Eg. Lacking experimentation culture – Eg. Single product syndrome – Eg. K. Narrow business scope – Eg. K. Modi Group. Hindustan Motors. Ballarpur Inds.SOURCES OF WEAKNESSES Outdated technology – Eg. Tatas. Lack of product / brand clout – Eg. Procter & Gamble. Group . Inefficient top management – Eg. Excess manpower – Eg. J. SAIL. Nirma. CMC (Tata Group) 62 . Excessive diversification – Eg. Organizational Politics – Eg. CESC. B. Bijoligrill.Raymond.
Fertilizer. Fertilizers. ECB’s. 63 . Capital market reforms – Eg. Life style changes – Eg. Abolishing CCI. VRS. Insurance. Exit Policy – Eg. Globalization – Eg.SOURCES OF OPPORTUNITIES Delicensing of Industries – Eg. Abolishing MRTP – Eg. Telecom. Retailing. Market driven Interest rates – Eg. Market driven Pricing – Eg. Collaborations & Joint Ventures – Bharti & WalMart. Sugar.Tata Motors. Free pricing – Eg. Growing population – Eg. Middle-class buying power. Banking. Sugar. GDR’s. Maruti.
Economic recession – Eg. Reliance. Group disintegration – Eg.Social activism – Eg. Bajoria – Bombay Dyeing. Terrorist attacks – Eg. Onida. Singur SEZ. Satyam. Foreign Direct Investment (FDI) – Eg. 11/9. Hostile take-over – Eg. Earth Quake. Nationalisation – Eg. Lack of Corporate Governance – Eg. Import relaxation – Eg. Tata Steel. Tsunami. Natural disaster – Eg. Land acquisition . Dumping from China. (1985–1990).SOURCES OF THREATS Political instability – Eg. (2008). 64 . 26/11.
Delphi's technique. time series. scenario analysis). Strategic responses (including adaptation) to opportunities and threats is critical for survival and success.ETOP Acronym for Environment – Threat – Opportunity – Profile. 65 . Forecasting – Predict the future (i.e. Holistic view – Prepare a complete overall picture. Assess the extent of impact of the factors. Stages in ETOP analysis – List the aspects of the environment that has a bearing on the organization. It represents a summary picture of the external environmental factors and their likely impact on the organization.
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. An organization can draw upon the experience of its peers in similar situations. High investment intensity acts as a drag. selectively. It is also a form of assessing vulnerability through longitudinal analysis. . Relative attractiveness of the market. Some key findings on major performance drivers that explains 75% deviations in performance – Product quality and relative market share.
– Contexts may vary across countries. . Authenticity of data is of prime importance – Contexts drawn across one organization may not be applicable to another.PIMS . when radical changes in the economy takes place. As every organization is unique in its own way. therefore 67 validity may be a question. – Contexts may vary over time. Managers should be particularly cautious while referring to such data during times of discontinuity as it makes past patterns futile.LIMITATIONS The analysis is based on historical data and it does not take care of future challenges.
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 enables the top management to draw focus. It involves a three-stage process – Identify KSF – What does it take to be successful in a business? Drawing KSF – What should be the organizations response to the same? Benchmarking KSF – How do we evaluate organization success on this factor? 68 . KSF helps organizations spot early opportunities and convert them into value adding business propositions.
IDENTIFYING ALTERNATIVE STRATEGIES 69 .
It determines the locus a firm encounters with internal and external environment. It reflects the customer needs it intends to satisfy. A corporate strategy identifies and fixes the strategic gap it proposes to fill. related. national.CORPORATE .GRAND STRATEGY It is concerned with the overall business scope (single. It indicates the quality of growth an organization is looking for. 70 . dominant. It provides broad direction to the groups vision and mission. global) of a firm and deals with choices of allocating resources across them. unrelated) and geographical scope (local.
CORPORATE STRATEGY MATRIX Corporate Strategy Stability Stability Growth Growth Combination Diversification Divestment Intensification Market Penetration Related Vertical Market Development Product Development Unrelated Horizontal 71 .
– The firm may not be willing to take additional risk associated with new projects. The reasons for stability strategy – – Lack of attractive opportunities. The scale and scope of present operations remains almost intact. Citibank). – Why disturb the existing equilibrium set up? – Limited resource position. (Eg. Even during adverse times firms need to adopt a strategy to sustain current performance levels. 72 . Hindustan Motors). erosion of capabilities. Stability however.STABILITY It involves maintaining status-quo or growing in a slow and selective manner. does not relate to do-nothing (Eg. – To stop for a while and assess past records.
73 .GROWTH .ANSOFF’S MODEL New Product Existing Product Existing Market Market Penetration (+) Product Development (++) New Market Market Development (++) Diversificatio n (+++) Note: (+) indicates degree of growth and risk involved.
Market penetration can be achieved by – increasing sales to current customers.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. 74 . (Eg. – Elongated product life-cycle. Ujjala. direct non-users to users. Nirma. convert competitors customers. – Helps firms which are not comfortable with unfamiliar terrain. within a well defined market segment. – Suitable for industries where scope for technological breakthrough is limited. Britannia). – The company carries a risk of product obsolescence.
fabrics. carpets. – Immense customer reach & flexible advertising. (Eg. Du Pont – Nylon: parachutes. – Unconventional and flexible distribution channels.MARKET DEVELOPMENT It is a strategy where a firm tries to achieve growth by finding new uses of existing products or its close variants and tap a new potential customer base altogether. – Creativity and innovation – thinking out of the box. upholstery. tyres. – Stretches product life cycles. – Moves across geographical boundaries. 75 .…… or Teflon: aircraft technologies to cutlery to paints or Raytheon Corp – Microwaves: radars to kitchen appliances). socks & stockings.
– Deliverable through – redesigning or reengineering. aesthetics. – Areas of product improvement – performance. conformance. Microsoft: DOS to Windows) or a substantial improved version (incremental) of an existing product to repeatedly enter the same market (Eg.PRODUCT DEVELOPMENT It is a strategy where a firm tries to achieve growth through a radical new product (Eg. features. perception. Refills) 76 . – Leveraging through – innovation. reliability. – Leverage on customer and brand loyalty. serviceability.Strolleys). Close Up: Fluoride – Gel toothpaste or VIP . durability. – Substitutes that serve the same needs (Eg.
dominance).e.DIVERSIFICATION It marks the entry of a firm into newer markets with new products. licenses (i. From the traditional point of view. – Conglomerate or market power (i. – Internal capital market. Why do firms diversify in the Indian context? – Shift the growth trajectory or opportunistic. the new business is distinct from the existing business in terms of – inputs – technologies – markets.e. 77 . industrial embassies). From the modern point of view they are strategically dissimilar. thereby creating a new business. – Risk reduction. – High transaction costs and institutional gaps. – Permits: quotas.
either of which is equally likely to prevail. while the coffee business would register a return of 10%. in which a given year is either under hot or cold wave. If on the other hand. while the coffee business would register a return of 30%. ice-cream business would register a return of 10%.HOW DIVERSIFICATION REDUCES RISK? Consider a hypothetical planet. If the hot wave dominates the planet. What would be your ideal diversification strategy through optimization? 78 . Let us assume that there are two businesses constituting the entire market – coffee and icecream. the ice-cream business would register a return of 30%. cold wave dominates the planet.
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-integration . Usually the firm concentrates on its core activities. Dr. 85 . Tapered integration .Where one firm has full ownership and control over all the stages of a value-chain in the manufacturing of a product (Eg. Reliance).QUASI & TAPERED INTEGRATION Full Integration . Ranbaxy.A firm gets most of its requirements from one or more outside suppliers that is under its partial control through value chain partnerships (Eg. Reddy’s). 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. 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 .
87 .e. lack of strategic intent. and are also strategically dissimilar. lack of knowledge of competitive forces). core business). – Cost of neglect (i. Drawbacks of unrelated diversification – – Cost of failure (i. synergies pulling in opposite directions).e.CONGLOMERATE DIVERSIFICATION It relates to entry of firms into businesses which are distinct in terms of – inputs – technologies – markets. – Cost of dysynergy (i.e.e. – Cost of ignorance (i. Firms usually engage in conglomerate diversification when emerging opportunities are very attractive and offers potential growth opportunities. myopia).
CONGLOMERATE DIVERSIFICATION Paper & Packaging Edible Oils Tobacco Hotels Food & Confectionary 88 .
It may also involve a SBU (Eg. ACC) in full to an independent entity. Glaxo’s “Glucon-D” to Heinz). Tata Press). L&TCement Division to Aditya Birla Group) technically known as divestiture or a product (Eg. Tatas sale of Goodlass Nerolac. 89 . In strategy there is no scope for sentimentality with divestment. It is may also be a pro-active strategy. Tata Pharma. It taken into account when performance is disappointing (i. (Eg.e.DIVESTMENT Divestment is a defensive strategy involving the sale of entire stake (Eg. reactive) and survival is at stake and the firm does not have resources to fend off competitive forces. where a company simply exits because the business no longer contribute to or fit its dominant logic.
90 . where 100% of the assets (including intangibles) are valued and paid for. (Eg.3 billion. 1956 does not permit this mode.DIVESTMENT . However.ROUTES Outright Sale – Popularly known as the asset route. Leveraged Buy-Out (LBO) – Here the company’s shareholders are bought out through a negotiated deal using borrowed funds. (Eg. involving 608 pence per share). where the equity is allotted amongst the existing shareholders on a pro-rata basis. Sale of Diamond Beverages to Coca-Cola for US $ 40 million). Hive-Off – A hive off is the creation of a new entity followed by transfer of assets. Tatas buy-out of Corus for US $ 11. the Companies Act.
e. mergers and acquisition. It is usually pursued by a business group with diverse interests across multiple industries. because every business has its own unique external and internal environment. joint ventures). There can be no ideal strategy for every business.e. developing facilities right from the scratch) or through brown-field projects (i. and divestment strategies applied simultaneously or sequentially for a portfolio of businesses. growth. 91 .COMBINATION STRATEGY It is a mixture of stability. A combination strategy can be implemented through green-field projects (i.
STRATEGY CHOICE & PORTFOLIO ANALYSIS 92 .
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. What then is the magical number? 93 .STRATEGIC CHOICE A strategic choice seeks to determine the alternative courses of action available before top managers to achieve its strategic intent.
if addressed. nor is to a define a problem for others to solve. 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? 94 . managers need to ask the right questions.SELECTIVITY IS THE KEY The role of a top manager is not to solve a problem. To identify the right problems. They must choose problems which will lead to the right kind of opportunities. will help the firm achieve its intent.
Managing Agency). Resource sharing. BRC). embassies). business houses in India. Their origins can be traced back to market imperfections existing in an economy (MRTP Laws. High degree of centralized control (GEO. Licenses & Quotas.DEFINITION A business group is known by various names in various countries – guanxique in China. 95 Succession planning is critical to continuity.e. Their roots can be traced to a single family or clan and share broad similarities. .BUSINESS GROUP . Proximity to the corridors of power (i. formal and informal ties. keiretsus in Japan. chaebols in Korea.
RESOURCE SHARING ACROSS FIRMS Parent Company Firm 1 Firm 5 Firm 3 Firm 2 Firm 4 96 .
STRATEGIC CHOICE – MACRO TIMING Recession (Stability) Prosperity (Diversificatio n) Depression (Divestmen t) Recovery (Intensification ) 97 .
Divestment Duration (Yrs) Inception Intensification 98 .STRATEGIC CHOICE – MICRO TIMING ReEngineering Growth (%) Maturity Stability Growth Diversification Decline .
Relatedness across resources are difficult to realize. therefore. sometimes impossible. next only to choice of business. Why? Businesses are not about liquid assets. Power and resources often goes hand in hand. Investing in emerging businesses may not actually be so simple as it appears to be. Redeployment of resources upsets the established power bases of a group.PORTFOLIO ANALYSIS Resource allocation across a portfolio of businesses is an important strategic choice. Rules of the game are different. 99 . there are high costs associated with entry and exit.
BCG GROWTH MODEL Relative Market Share (%) Industry Growth (%) Low High High Low Stars Question Mark ? Cash Cow Dogs 100 .
market penetration. Tata Telecom. product development). These businesses are also net users of resources (Eg. 101 . provided the company is able to build up on its market-share (i. and their risk profile is high (Eg.BUSINESS ANALYSIS – TATA GROUP Question Marks – They have potentials in the long term. but to larger extent than a question mark. Trent. which remains a big? These businesses are net users of resources. diversification). TCS. Tata-AIG). Tata Steel). provided the industry growth rate continues and the company is able to maintain its growth (i. Stars – They achievers in the near term.e.e. market development.
e. Tata Tea. Tata Motors. Tata Chemicals). divest) as achieving a dominant position in these businesses is a difficult task. Given that the growth potential in the business is low. However. cash cows may also need to invest provided the industry takes an upswing (Eg.BUSINESS ANALYSIS – TATA GROUP Cash Cow – These are matured businesses. Dogs – They are a drag on the group. they are generators of resources. Groups prefer to dispose off such businesses (i. harvest. Tata Pharma.e. Tata Press). 102 . and they lack on competencies to take on competition and are basically cash traps (Eg. Indian Hotels. and the company dominates the industry ahead of competition (i. stability). Nelco.
The terminologies used are somewhat prohibitive. Cash cows may actually need substantial investments to retain their market position (Eg. Mercedes Benz. HUL).BCG . The model does not provide specific solutions within a particular category.e. Data may be prohibitive. Cartier. factors are limited. neither in high or low.LIMITATIONS It does not address the concerns of a business which is in the average category (usually the majority). 103 . Armani). Certain businesses in the low market share category may be the result of a conscious strategy (i. niche – Rolex.
MATRIX Distinctive Capabilities Strong High Medium Weak Stability Industry Attractiveness Diversify (++) Intensify (+) Med Intensify(+) Stability Harvest (-) Low Stability Harvest (-) Divest (.GE .-) 104 .
ARTHUR’ D. LITTLE Inception Dominant Strong Favourable Tenable Weak Growth Maturity Decline Improve Selective Niche Abandon Industry Life-Cycle Divest Harvest 105 Competitive Position Invest Consolidate Hold .
SHELL – DIRECTIONAL POLICY MATRIX Business Sector Prospects Attractive Average Unattractive Generate Cash Phased Withdrawal Distinctive Capabilities Strong Market Leadership Try Harder Double Or Quit Growth Average Custodial Weak Phased Expand Withdrawal Divest 106 .
SBU – A business unit which is strategically different from another and also shares a different SIC code. Disinvestment involves selling in phases. Gap Analysis – It emphasizes what a firm wants to achieve.TERMINOLOGIES Harvest – It entails minimizing investments while trying to maximize short-run profits and cash flow with the intention to exit the business in the near future. 107 . Divest – Selling a part or the entire business at one go. Portfolio – An organization is perceived as a portfolio of businesses. BCG – Boston Consulting Group.
BUSINESS STRATEGY & COMPETITION 108 .
The principal focus is on meeting competition. Such resources or activities should be distinctive and sustainable over time. building market-share. and earning super-normal profits (i.e. The strength of a firm in a particular business usually stems from its competitive advantage. Competitive advantage is the back-bone of strategy.COMPETITIVE STRATEGY A competitive strategy deals with how a firm competes in a particular business or product-market segment. rent). Competitive advantage refers to a firms resources or activities in which it is way ahead of competition. 109 .
developing competitive advantage (Porter). Delta Lock In – Two dominant players co-opt to selfreinforce and create or escalate an entry barrier. 110 .BUSINESS STRATEGY FRAMEWORKS How to be distinctive and yet sustainable – Differentiation – Understanding of the dynamics of competition. preventing new entry and/or competition (Hax & Wilde). identifying critical success factors. Resource Based View – Obsession with competence building. Blue Ocean – Consciously moving away from overcrowded industries to uncharted territories and making competition irrelevant (Kim & Mauborgne). leveraging (Prahalad). involving harmonizing and integrating multiple streams of technologies.
Nirma. backward integration. Reliance) or may pass it to customers to increase market-share (Eg. Ayur. preferential access to raw materials.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. 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. 111 . Steep experience curve effects. Locational or early entry advantage. T-Series). proprietary technology. Compress project duration through crashing.
Feeling the pulse of the customer. Focus on brand loyalty. Means of product differentiation are peculiar to each industry.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. Rayban). avoiding brand dilution. It selects one or more attributes that buyers perceive as important. (Eg. Successful product differentiation is often followed by premium pricing. Creativity. undeterred attention to quality. innovation and out of the box thinking. Culture of experimentation. 112 . Intel. Sony. and sufficient slack.
Sub optimization alone may not be a source of superior performance.PORTERS NICHE OR FOCUS Focus / Niche – It is a variant strategy of cost leadership or product differentiation targeting a specific market or buyer sub-segment with the exclusion of others (Eg. Cartier. A focuser seeks to achieve a competitive advantage in its target segment. Rolex. Maybach. 113 . The target segment must have unusual needs or the delivery system catering to this segment must be unique. though it may not possess an overall competitive advantage. coupled with fear of structural erosion. Armani). Mont-Blanc. They are poorly served by mainstream players.
COMPETITIVE POSITIONS Competitive Advantage Cost Differentiation Product Differentiation Competitive Scope Broad Cost Leadership (Toyota) Product Differentiation (General Motors) Narrow Cost Focus (Hyundai) Differentiation Focus (Mercedes) 114 .
Reducing cost does not always involve a sacrifice in differentiation.HYBRID STRATEGY A hybrid strategy is the simultaneous pursuit of cost leadership and differentiation. 115 .e. jugaad or frugal engineering). in a hyper competitive context the two strategies need not be mutually exclusive. Firms focusing on a hybrid strategy typically aim at shifting the productivity frontier and recreating a new product-market segment altogether (Eg. similarly differentiation may not always lead to rising costs (i. Tata Nano). and usually outperforms a stand alone generic strategy. Though cost leadership and differentiation are inconsistent.
but achieves none. 116 .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 . leading to what is called – straddling. It will have a competitive disadvantage vis-à-vis a clearly positioned generic player. unless such a player is capable of discovering a profitable segment. The positioning therefore gets – blurred.stuck in the middle. Industry maturity will usually widen the gap. It tries to compete through every means. It is usually the result of a firm not willing to make trade offs.
It is characterized by – High level of technological uncertainty.EMERGING INDUSTRY Emerging Industry – An evolving industry characterized by .radical environmental changes. Consumer behaviour pattern unstable and evolving. Eg. Artificial intelligence). First-time buyers.) Excessive turbulence in the dynamics of the environment. 117 . coupled with low penetration levels. Speech recognition software's. changing customer needs. There is a lot of scope to define the rules of competition. technological innovations. (Eg. 3D imaging. leading to a blurred productivity frontier and steep learning curve. Market segmentation not well defined. ending in a differential cost economics. Nano technology.
Eg. Retail and telecom. leading to clear fragmentation. Diverse customer needs. Consumer durables. Scope for players to change the rules of the game. because of lack of economies of size and scale. MRTP may also cause fragmentation. IT. Eg. Paints.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). High exit barriers because of huge investment in CAPEX. Eg. It is characterized by – Low entry barriers. 118 . Air Conditioning. Government regulations in the form Eg.
technological maturity. Strong entry barriers. Firms are rule takers in the segment as productivity frontier is well defined. well defined consumer behavioral patterns and imperfect competition leading to near monopoly.technological maturity. because of economies of size and learning curve effects. distribution networks.MATURED INDUSTRY Matured Industry – An industry characterized by saturation in growth rates. 119 . Limited scope for innovation . established industry dynamics. early entry and location advantages. Cartel among existing players through collusion. collaboration and co-option.
and costly price wars. (Eg. backed by corporate espionage. 120 . Nature of competition extremely high.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). Firms facing a declining phase are characterized by inertia and slow to react to environmental changes. Exit barriers are extremely high because of limited prospective buyers. scooters. Typewriters. with little or no signs of recovery. Learning abilities have been stunted and firms adverse to investment in R&D and make fresh investments.
Locate a defendable position. aggressive building of distribution networks. Declining Industry – Redesign. reengineer. assess and overcome fragmentation. regenerate. branding and promotion. Matured Industry – Sophisticated cost analysis. 121 . Fragmented Industry – Identify. focus more on product differentiation or even a hybrid one. strike alliances. move beyond boundaries. mergers and acquisition. strictly cost differentiation. premium pricing.COMPETITIVE STRATEGIES Emerging Industry – Set benchmarks. recreate new markets. strictly product differentiation and not standardization. process innovation. or else exit the segment. increasing scope.
patents. hence very rarely confer competitive advantage as can be easily acquired or replicated. A firms resources can be classified into – Tangible – These refer to real assets. 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. 122 . Intangible – These refer to goodwill. positions based on resources which are unique and inimitable are far more sustainable even in the long term.
they are woven around technologies. They play a very critical role in shaping competitive advantage. Capabilities can be generic (i. Typically. Hence. differentiation based on capabilities can be sustained even in the long run. There is a high degree of internal and external causal ambiguity involved in it.e. can be leveraged across businesses) or specific to a particular business. Therefore firms should concentrate on developing complex resources that forms the very basis of differentiation.CAPABILITIES & COPMPETENCIES These include a complex combinations of tangible and intangible resources that organizations use to convert inputs to outputs. but not necessarily. 123 .
COMPETITIVE ADVANTAGE 124 .
e. 125 . It enlarges the scope of an organization. competitive advantage subsequently becomes the back bone for a competitive strategy. and results in well springs of new business development. not absolute) to competition. It results in a distinct differentiation advantage or a cost advantage or hybrid as well. Strategy drives competitive advantage.COMPETITIVE ADVANTAGE A competitive advantage is a position of superiority relative (i. Success of a strategy critically depends on SAP. A portfolio of competitive advantage comprises strategic advantage profile (SAP).
In today's world of discontinuity. 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.STRATEGIC ADVANTAGE PROFILE (SAP) Organizations have to systematically and continuously conduct exercises to identify its SAP. Identification of SAP is critical for and stretching and leveraging of resources. In most cases SAP is hidden and dormant. 126 .
each of the players need to be efficient backed by sufficient coordination at the contact points (i. Inventory Mgt to Logistics Mgt to Supply Chain Mgt (SCM). kaizen or internal customer). Substantial cost reductions also follow. VC pay-offs: better product availability. Today SCM is integrated with greening the environment as CSR practices. A VC is often compared with a relay team. 127 . Competitive advantage arises not from an individual activity but a stream of inter-related activities.e. faster product launches. and enhanced customer tracking – higher market share.VALUE CHAIN ANALYSIS A value-chain segregates a firm into strategically relevant activities to understand its composite behaviour.
THE VALUE CHAIN Support Infrastructure n gi ar M Human Resource Management Technology Development Procurement Out Logistics Mktg & Sales In Logistics Operations Primary Service M ar gi n 128 .
– First order fit refers to simple consistency between each activity and the overall strategy. A learning organization helps create strategic fit. Fit is important because discrete activities result in negative synergy and can also be easily copied by competitors.STRATEGIC FIT – THE PORTER WAY The sustainability of the value chain depends on the degree of fit between the activities. 129 . – Second order fit occurs when activities are reinforcing amongst them. – Third order fit refers to optimization of effort. Operational effectiveness is not strategy. A high fit involving a complex chain of activities drives both competitive advantage and its sustainability.
It should satisfy the following conditions – Contributes significantly to customer benefits. A core competence usually has its roots in technology. Core competence has a high degree of external and 130 internal causal ambiguity embedded in it. . – Can be leveraged across businesses. These skills results in distinctive activities and processes. – Cannot be easily imitated or substituted. 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. – Can be sustained even in the long run. but not necessarily.
A competitive advantage is sustainable in the shortmedium term.CORE COMPETENCE A competitive advantage does not necessarily imply a core competence. only global leaders possess a core competence. A competitive advantage may or may not lead to superior performance. A competitive advantage manifests from a function. 131 . a core competence is sustainable even in the long-term. a core competence has its roots in a set of skills. Majority of the firms have competitive advantage. a core competence usually does. a core competence always implies a competitive advantage.
In fact there are no. However. the stringent assumptions of game theory and difficulty in ascertaining of pay-offs makes game theory application difficult in business. Here the magnitude of gain offsets the magnitude of loss equally. This is known as a zero-sum game.GAME THEORY The game theory was developed in 1944 by Oscar Morgenstern. illustrations depicting a win-win situation. each of whom wants to win. A game is a contest involving two or more players. 132 . In a game (similar to a business) one players win is always another's loss. Subsequent work on game theory by John Nash led him to win the Nobel prize in 1994.
An unbiased game is one where both the players have equal chances of winning. Firm Y’s Strategy Use Radio Use Radio +2 +6 Use Newspaper +7 -4 133 Firm X’s Strategy Use Newspaper Firm X’s Pay-Off Matrix .BIASED AND UNBIASED GAME A game is said to be biased when one of the players have a disproportionate chance of winning.
PURE STRATEGY GAME The strategy each player follows will always be the same regardless of the other players strategy. Firm Y’s Strategy Use Radio +3 +1 Use Newspaper +7 -2 134 Firm X’s Strategy Saddle Point Use Radio Use Newspaper Firm X’s Pay-Off Matrix . A saddle point is a situation where both the players are facing pure strategies.
e. iteration) rather than through collusion (E. This is usually through learning by “experience or observation” (i. Yahoo Vs Microsoft). 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).TYPES OF GAMES Simultaneous Games – This is a situation where the players have an option to choose to cooperate or not through collusion. 135 . However. there is likely to be temptation by any of the players to try to steal the advantage over the other by breaking the rules of the game (Eg.g. collaboration or cooption.
It results in a shift in the productivity frontier. Game theory relies on the principle of rationality. In a market dominated by price-based differentiation one may attempt to change the rules of the game by/when – – Bases of differentiation dependent on clear identification of what customer wants or value. but 136 players do not always behave rationally.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. . – Making pricing more transparent. – Building incentives for customer loyalty.
DELTA MODEL & LOCK-IN
Its a systematic approach where-in two or more industry majors, who by default has achieved a proprietary position (Microsoft – Software / IBM – Computers) which are not necessarily best-products in the industry, co-opt to create a lock-in. A lock-in implies that other players has to conform or relate to that standard in order to prosper. Becoming the industry standard requires – strong brand, causal ambiguity, and close relationship with other companies offering complimentary services. Lock-in is self reinforcing and escalating (i.e. accelerating effect).
THE THREE STRATEGIC POSITIONS
System Economics Market Dominance Complementary Share
Enabled through effective use of technology
Total Customer Solutions
Customer Economics Cooperation Customer Share
Product Economics Rivalry Product Share 138
Bill Gates is the richest man in the world not necessarily because he has developed the world’s best software's or excels at customer satisfaction; but he has got an army of people working for him who are not on his payroll – all the application software providers who are writing programs based on “Windows” compatible operating platform. Once you create the lock-in it is sustainable because of the “network effects”; which creates the proverbial “virtuous cycle” – customers want to buy the computer with largest set of applications and software developers want to write programs for the computers with the largest installed base.
The proponents (Hax & Wilde) believe that every organization has the ability to create and sustain a “lock-in” positioning (though in varying degree). This “system lock-in” is referred to as “delta” – delta being the Greek letter that stands for transformation and change amongst the players. The lock-in once created becomes very difficult for a firm to penetrate, and becomes a distinct entry barrier. The model is based on the belief that it compliments Porter’s differentiation model and RBV framework instead of contradicting them. In a lock-in strategy the performance outcomes are dependent on the success of another.
It relates to translating strategy formulations into practice. Performance realization of a strategy depends on the implementation effort. Successful implementation also depends on the appropriateness of the strategy. Since strategy implementation is a time bound process, alignment (i.e. strategic fit) is a key variable during times of radical change. Some of the other levers of successful strategy implementation are – Transformational leadership and motivating power. Resource allocation; its stretching and leveraging. Compatible organization structure & control systems. Inertia & resistance to change.
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. 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. 143 . – Resource commitment from top management. – Development of capabilities & competencies. – Changing the rules of the game. – Better strategic and operational control. – Unlearning & learning of new skill sets.
In such a situation. emergent strategy vis-à-vis intended & realized). learning levels are very low. Some of the key strategic learning's exists at the contact point between the organization and its customer. formulation & implementation can occur simultaneously. In such a situation. In fact. at the cost of sacrificing a lesser degree of control. strategy formulation and implementation has been perceived to be distinct & independent. According to Mintzberg. learning levels are very high.FORMULATION Vs IMPLEMENTATION Traditionally. 144 . while control is very effective. effective strategies are better crafted when there is a subtle overlapping between the two (i.e.
companies depend more on transformational leaders than transactional leaders.ROLE OF TOP MANAGEMENT To bring about change and to implement strategies successfully. 145 . He should be an agent of change. Install a system of shared beliefs and values. Pragmatism is the ability to make things happen. bring about transparency. A transactional leader is usually confined to allocating tasks & responsibilities and extracting performance. In contrast. shift from compliance to commitment. transformational leaders go one step beyond – Design a well crafted and designed strategic intent of the organization.
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. The various methods of resource allocation includes Historical Budget – The budgets framed by HQ for a particular SBU keeping in mind past trends. 146 . skills) also includes complex resources like capabilities and competencies. patents. Intangible resources (Eg.RESOURCE ALLOCATION Resources allocation includes tangible resources (Eg. brands. labour.e. machines) referred to as threshold resources (i. Zero Based Budget – In this case the budget of a SBU has to be worked out right from the scratch. land.
CAPABILITIES & COMPETENCIES Technology and business are slowly becoming in – separable. Due to causal ambiguity (complexity). Distinctive capabilities are complex set of skills woven around technologies. 147 . Moreover. Distinctive capabilities helps in stretching and leveraging resources thereby overcoming two major constraints involved in strategy implementation – times & costs. though not necessarily in the case of emerging markets. these capabilities are sustainable even in the medium to long term. Mobiles). convergence of multiple streams of technologies at the product – market level is becoming increasingly evident (Eg. Flat Screen Displays.
The level of centralization and decentralization is decisive.STRATEGY & STRUCTURE It is a framework within which individual efforts are coordinated to bring synergy. A single product or a dominant business firm usually employs a functional structure. Once the structure is in place. 148 . An appropriate organization structure & adequate control systems are essential to implement strategies and achieve stated goals. A firm in several related businesses usually employs a divisional structure. A firm in several unrelated businesses usually employs a SBU structure. processes become people independent.
Divisional Structure – Units grouped together in terms of products. 149 . Finance).Technology. with team members having dual line of control. Project / Matrix Structure – A formal but temporary framework initiated for the completion of a particular project/crisis. or geographical locations. Inputs .TYPES OF STRUCTURES Functional Structure – Activities grouped together by a common function (Eg. Virtual Structure – A boundary less or hollow organization. Team Structure – An informal group formed for a crisis. processes. SBU Structure – Businesses segregated in terms of strategic dissimilarities (Eg. Output). Marketing. based on skills and competencies. disbanded subsequently.
Environment & People – Economic and political conditions have a major bearing on structure coupled with the attitude and aspirations of the people in the organization. leading to a tall structure. assuming responsibility. It includes the desire for independence. structures are becoming flatter and more simpler. 150 . as span is broader.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. facing challenges & crises. Technology – With more and more convergence of technologies in business.
Common sources of 151 inertia – complacency with past successes.INERTIA When a firm has been operating in a certain fashion for a long time. Changes in top management and unlearning helps overcome inertia. Inertia acts as an impediment in strategy implementation. co0ntinuity). there is a tendency to continue along the same lines. .e. Most firms undergo periods of strategic continuity rather than strategic discontinuity. Top managers resist change. irrespective whether it is from worse to good or good to worse. Inertia is a characteristic of a firm that endures status quo (i.
Since the internal and external environment is in a state of continuous flux. strategies need to be evaluated on an ongoing basis to prevent deviations of fit. certain authors propose misfit as a source of superior 152 performance. . Deviation of fit is detrimental to performance and may lead to strategic failure. firms should move beyond financial performance to strategic performance as organization systems are becoming complex. To prevent deviation of fit. However.STRATEGY EVALUATION Strategy evaluation centers around assessment of strategic fit.
.STRATEGY CONTROL It is concerned with trafficking a strategy as it is being implemented. It attempts to answer the following questions – Is the strategic intent appropriate to the changing context? Are the organizations capabilities still holding good. competitive advantages becoming disadvantages? Has the company acquired any new competency? Has the company been able to overcome the 153 environmental threats. detecting changes in the external and internal environment and taking corrective action wherever necessary.
However. Implementation Control – It aims at assessing whether key activities are proceeding as per schedule. It is open-ended as well as . It involves assessing – strategic thrusts and milestones. Premise Control – Checking the validity of the assumptions on which a strategy was based. Special Alert Control – It intends to uncover unanticipated information having critical impact 154 on strategies.STRATEGY CONTROL IMPLEMENTATION It involves steering the company towards its original growth trajectory & stated goals. checking every premise is costly as well as difficult.
difficult to translate into practice. low strategic fit due to consultants intervention. “If you cannot . 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. Performance measures are defective – What to evaluate against? How to measure the 155 construct? As a saying goes.BARRIERS TO STRATEGY EXECUTION Vision and strategy not actionable – Utopian ideas.
Today it is considered one of the most powerful tools for strategy implementation determining success or failure. 156 . 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. Managers should take into account all seven of these factors. so if one fails to pay proper attention to one of them. Large or small. this may effect all others as well. important or not they're all interdependent. the relative importance of each factor may vary over time and context. Together these factors determine the way in which a corporation operates. to be sure of successful implementation of a strategy.
It appeared also in "In Search of Excellence" by Peters and Waterman. They had been investigating how Japanese industry had been so successful. 157 . At around the same time in the US Tom Peters and Robert Waterman were exploring what made a company excellent. and was taken up as a basic tool by the global management consultancy company McKinsey.BACKGROUND & ORIGIN The 7-S Framework was first mentioned in "The Art Of Japanese Management" by Richard Pascale and Anthony Athos in 1981. Since then it is known as their 7-S model and is extensively used by corporations worldwide to implement their strategies. The 7-S model was born at a meeting of these four authors in 1982.
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. Structure – The way in which the organization's units relate to each other in terms of their commonalities. 158 . processes and routines that characterize how work should be done. formal & informal . Systems – The procedures. Skills – An organizations capabilities and competencies. over time. to reach identified & stated goals. Staff – Human inter-relationships. Style – The way in which the top management influences the functioning of an organization.
STRATEGIC FIT Strategy Structure Shared Values Systems Skills Staff Style 1st Order Fit 2nd Order Fit 3rd Order Fit 159 .
In contrast. Consider the 4P’s of marketing or 3R’s of SCM. Ineffective in case of a virtual company. While the American co’s focuses on the hard S’s.A CRITIC OF THE 7S MODEL While the hard S’s (strategy. style. systems) are comparatively easy to identify and influence. shared values) are very malleable and comparatively more difficult to identify & influence. because most often they are culturally embedded and often neglected. A choice of an alphabet often limits the scope and skews the interpretation of a model. structure. 160 . their Japanese counterparts focus more on the soft S’s for their early success and sustainability. staff. the soft S’s (skill.
STRATEGY IMPLEMENTATION ROUTES Strategic Fit .High Organic Growth Strategic Alliance Joint Venture Mergers & Acquisition Strategic Fit .Low Take Overs 161 .
(Eg. concessions are available for green-field projects. subsidized power). It has complete control over inputs. Govt. 162 Risk of cost and time overruns. i.e. . technologies. Long gestation leads to delayed market entry.ORGANIC GROWTH Here a firm builds up its facilities right from the scratch and continues to do so without any external participation. i. (Eg. the entire value chain. soft loans. SEZ’s. green-field projects.e. Reliance Industries). tax holidays. The entire infra-structural facilities are set up afresh having its own gestation and break-even. and markets.
Alliances are usually short-lived and disbanded once the purpose is achieved. Alliances are usually in the areas of technologies or markets (Eg. 163 It is a form of competitive collaboration. It has limited intervention power and usually lacks holistic commitment from the alliance partner. Tata Motors & Fiat).STRATEGIC ALLIANCE It involves a pro-active collaboration between two or more firms on a particular domain or function for mutual gain. . There is no funding or equity participation from the alliance partner & both the firms continue to operate independently. It touches upon a limited aspects of a firms value chain.
JOINT VENTURES A joint venture involves an equivalent equity participation between two firms usually of similar strategic intent and comparable size to enter a particular market through a newly formed entity. (Eg. Tata – AIG. Degree and extent of management control must be clearly 164 laid down. Selecting the right partner is critical for success. A comprehensive MOU is essential. It is a win-win situation for both the companies. leaving minimum scope of overlapping. Hero . Dominant logic of both the companies should be complimentary. .Honda).
Integration of assets and other financial resources. Revival of a sick-unit through better management practices is a major motive behind an acquisition 165 strategy. with the individual firms ceasing to exist any more (Eg. Economies in scale leading to lowering of costs. Acquisition is an outright purchase of a firm assets by another independent entity (Eg. ITC Tribeni Tissues.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. Brooke Bond & Lipton). Coca Cola – Thums Up).
Consolidation in a fragmented industry. Make a public offer of not less than . Inform SEBI / Stock Exchange after 5% stake is 166 acquired. often the new firm is “left alone”.Corus). Instant access to capacities and markets. Tata Steel . Larger geo-graphical diversity. Integration of organization structure & cultures is difficult.TAKE OVERS It refers to the acquisition of significant management control by buying out majority stake in a firm through due diligence or hostility (Eg. Most countries have stringent laws that prevents hostile take over.
MANAGEMENT TOOLS IN STRATEGY 167 .
Balanced Scorecard – Tracking strategy 3600. 168 . every time. TQM – Doing the right thing the first time. Some tools to ensure that – Benchmarking – Adopt certain best practices. Change provides enormous opportunities. Radical change is superseding incremental change. it is also a source of potential threat.WHY MANAGEMENT TOOLS? Change is becoming pertinent in the business environment. 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.
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
While strategy is all about differentiation and not looking alike. . clustering). It does not shifts the growth 175 trajectory of the industry as a whole. It can at best complement it. Benchmarking is useful for bringing about operational efficiency. Benchmarking merely reorients profits in the hands of few to profits in the hands in the hands of many (i.LIMITATIONS More and more companies benchmark. the more similar they end up looking.e.BENCHMARKING . Strategy is more of creating best practices rather than copying them. but it cannot be used as a strategic decision making tool.
Re-engineering attempts to radically change an organizational products or process by challenging the basic assumptions surrounding it.e. The task demands a total change in organisational 176 culture and mindset. DOS to Windows). for achieving performance improvement (E. Windows 95 to 97).RE-ENGINEERING Redesigning leads to identification of superfluous activities or product features (i.g.g. process mapping) and eliminating or improving them (E. Re-engineering involves complete reconstruction and overhauling of job descriptions from the scratch (i. . clean sheet).e.
REENGINEERING – KEY TENETS Ambition Focus Attitude Enabler Performance Large scale improvement by questioning basic assumptions about how work is done Micro Vs Macro Business Processes Vs Organisational Processes Starting right from the scratch Not historical More IT driven. than people driven Innovative Vs Traditional Customer centric Vs Organisational centric 177 .
customers and suppliers and protects the organization from the future (i. structures. resource allocation and prepares the organization for the future through a reorientation of the entire strategic architecture. BPR). It can be of the following types – Functional – It looks into the flow of operations (i.REENGINEERING . processes. Strategic – It looks into the process of strategic planning.LEVELS Reengineering can be successfully leveraged at all levels of an organization with varying degree of results. products. Business – It looks into markets. 178 . .e.e. etc) and supports the organization for the present.
While traditional manufacturing is a bottom-up approach. However. with an intention to copy it (Eg. – High cost and time acts as a deterrent. – Early entry advantages.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. Indonesia). It generally acts as a threat to innovation. reverse engineering is a top-bottom approach. 179 . – Causal Ambiguity. protection can be had in the following ways – – Patenting. Cheaper versions of Intel chips and mother-boards manufactured in Taiwan.
STAGES IN REVERSE ENGINEERING Awareness – Recognizing whether the product is found to be worth the time. Introduction – Launching the product in the market. cost and effort necessary for the purpose of reverse engineering. Inaccurate assessment at this stage may lead to a failure of the entire project. designing facilities. Actualization – Obtaining and dismantling of the product to assess how it functions. Implementation – Developing of a prototype. 180 . machine tools to convert ideas into a marketable product (i. nano-technology).e. Usually in such cases segmentation and pricing is different from the original innovator.
– Reliability – Consistency in mileage. – Conformance – Emission standards . – Durability – 1980 manufactured cars still on road. of service stations. More and more companies are moving towards meeting implied rather than stated needs. Car) – – Performance – Mileage of 14 kms to a litre of fuel. – Serviceability – Large no. 181 .WHAT IS QUALITY? It involves the totality of a product or service in meeting certain stated or implied needs. – Aesthetics – Appeal in design. It has eight dimensions (Eg. – Features – Anti-lock braking systems. – Perception – Customer notions. Air bags.Euro IV.
TOTAL QUALITY MANAGEMENT Objective – Management of quality ensures conformance to certain pre-set standards.fix it in nature. It is deeply embedded as an aspect of 182 organisational life & culture. It had little impact on improving overall productivity. TQM is a way of creating an organization culture committed to the continuous improvement of work processes – Deming. zero defects. . touching upon a limited aspect of a value chain. which ensures good market standing. Management of quality was traditionally inspect it .
not a final destination. provided with all relevant information and best possible tools.TQM – KEY TENETS Do it right. Be customer centric – Generate the concept of internal customer (Ishikawa). Empowerment – It takes place when employees are properly trained. Looking at quality as an endless journey. Kaizen – Make continuous improvement a way of life. the first time – From reactively fixing error in products to proactively preventing errors from occurring at the first place (Juran). fully involved in decision-making and fairly rewarded for results. 183 .
Quality Circles – It a small group of shop-floor employees who meet periodically to take decisions regarding operational problems and crises. It is based on the principles of MBO (i. equal participation). enabling the firm to concentrate on core activities essential to customer satisfaction.STRATEGIES Outsourcing – It is the process of self-contracting services and operations which are routine and mundane.TQM .e. 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. 6-Sigma). of units meet preset standards (Eg. saving precious top management time. 184 .
.... – Less than 10% of strategies effectively formulated are effectively executed.... – In the majority of failures – we estimate 70% – the real problem isn’t (bad strategy) .BALANCED SCORE CARD Some interesting comments . – Efficiency and effectiveness is passé. strategy implementation has never been more important... Source: Fortune Magazine Why CEO’s fail? 185 ... it’s bad execution..
Organizations need to move from financial to strategic performance. rather than effects. 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 . 186 . Focus more on causes. Most managers tend to rely on traditional measures of performance having its origin in finance as they are well tried and tested.CONCEPTUALISATION A company’s performance depends on how it measures performance. These measures worked well when organizational systems were simple and unidirectional and more importantly the environment was static.
It has four dimensions – – How do customers see us? – What must we excel at? – Can we continue to improve and create value? – How do we look to shareholders? Firms more often have problems. The most critical element of a BSC is to measure these four dimensions.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. 187 . and distinguish strategic problems from operational ones.
e. ageing schedule) % of key customer transactions Ranking of key customer accounts No. of visits or calls made % of NPA’s 188 .CUSTOMER PERSPECTIVE GOALS Products Supply Preference Relationship MEASURES Relative market share (%) % of sales from new Vs proprietary products Timely deliveries and service Customer credit analysis (i.
BUSINESS PERSPECTIVE GOALS Skills Excellence Exposure Introduction MEASURES New capabilities and competencies Implementation & gestation period Bank and supplier credit limits & PLR Unit Costs / Conversion Ratio / Defect Ratio No. of new product launches Vs competition Product pricing Vs competition 189 . of times covered in media No.
of 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 190 .LEARNING PERSPECTIVE GOALS Technology Manufacturing Focus Timing MEASURES No.
FINANCIAL PERSPECTIVE GOALS Survival Success Prosper Divestment MEASURES Cash flows Growth in Sales and Profits EPS. Return on Investment Market Capitalization / PE ratio 191 .
STRATEGY MAPPING 192 .
BSC .IMPLEMENTATION 2 Translate strategy into operational terms 1 Mobilize change through effective leadership 5 STRATEGY Make strategy a continual process 3 Align the organization to the strategy 4 Make strategy everyone’s job 193 .
. they don’t know .what they don’t know. As a result. Shift from control to strategy (i.e. sharing of vision).BSC . doing right things instead of doing things right). Modern managers should be poised to ask the right questions.e. 194 performance will automatically follow.ADVANTAGES Most often top managers face information overload. It helps translating strategy into practice (i. Seek excellence. The BSC brings together the different elements of a company’s strategy at a glance. Focus on cause not effects.
EFFICIENCY Vs EFFECTIVENESS Ineffective Effective Inefficient Goes out of Business quickly Survives Efficient Dies Slowly Thrives 195 .
EFFECTIVENESS + STRATEGY A company which is effective as well as strategic. not only thrives. but also sustains it.Michael E. . Porter 196 .
CORPORATE RESTRUCTURING 197 .
Radical change brings about strategic variety.CORPORATE RESTRUCTURING The only thing constant in today's business environment is change... Strategic variety may be caused by changes in the as external well as internal environment. As Peter Drucker pointed out. from survival of the fittest . firms use restructuring strategies. “every organization must be prepared to abandon everything it does.. Tata Group). To adapt to the changing environment.. to survival of the most adaptable.” 198 . Restructuring involves consciously driving significant changes in the way an organizations thinks and looks (Eg. Strategic variety brings paradigm shift...
they should strive to provide unimaginable value ahead of its time (Eg. Structural Changes – Conventional hierarchical structures should be disbanded in favour of more 199 flexible ones (i. downsizing or rightsizing). . etc).RESTRUCTURING – BASIC TENETS Customer Focus – Restructuring ideally begins and ends with the customer. Internal customers should also not be neglected. Company’s should go beyond just asking what he expects.e. Fax.e. Instead. Walkman. and dividing the core businesses into SBU’s (i. downscoping). Core Business – Company’s should introspect – What business are we in? Business evolved out of opportunism or myopia should be divested. ATM.
Kumar Birla today is more dependent on professionals. the Tatas were considered a benevolent and charitable organization...RESTRUCTURING – BASIC TENETS Cultural Changes – A culture represents the values and beliefs of the people about the organization.....) The Aditya Birla group typically relied on the “marwari” community for key management positions ...) Reliance dismantled their industrial embassies . Ratan Tata now drives the point the group means business. During the times of JRD. 200 .. Restructuring also requires cultural reorientation.. started focusing on their capabilities... . It is created and institutionalized by the top management.
“ … one reason our customers are satisfied is that we aren’t. Communicating to the media about organization efforts to deliver quality products.MOVING CLOSER TO THE CUSTOMER As companies evolve. Restructuring provides a platform to close this gap. Organizing customer and supplier meets. Honda’s ad says.” 201 . Carry out PR campaigns. Getting feedback & addressing customer complaints. Publicizing welfare projects to demonstrate CSR. Use the reach of networking technologies. they tend to move away from the customer.
ASSET RESTRUCTURING Asset Restructuring – The asset composition of a firm undergoes a major change. or conglo-merate. horizontal. Further. it may be smooth (Eg. including its intangibles – Mergers – It may be vertical. Glaxo – Heinz). Mittal – Arcelor) and can take various forms. spin-off and equity carve. Asset Swaps – It entails divesting and acquisition simultaneously by two companies. Tata – Corus) or hostile (Eg. Hive Off – It involves siphoning of assets under control. It can have two forms. where the difference in valuation is settled off through cash or equity (Eg. It may include brands as well. 202 . Further spin-off can be classified as split-off and split-up.
in which the equity is allotted amongst the existing shareholders on a pro-rata basis (Eg. Tata Industries selling 20% stake to Jardine Matheson). Equity Carve – It involves selling a minority stake to a third party while retaining control (Eg. Reliance Ent). 203 .HIVE OFF Spin-Off – A spin off is the creation of a new entity. the existing shareholders receive equity in the subsidiary in exchange for the stocks of the parent company. Most of these practices are not in consonance with Indian laws. – Split-Off – In a split-off. – Split-Up – In a split-up. the entire parent company loses its identity after being split into a number of subsidiaries.
Parle sold its Thums Up brand to Coke for $40 million apprehending fierce competition. L&T sold its cements division to Aditya Birla group. Generic motives include – – Raise working capital. but retained its engineering division. 204 .DIVESTITURE It involves the sale of a brand or a division of a company to a third party. In 2005. A complete sell-out is known as divestment (TOMCO). – Poor performance. In 1995. Selling out in phases is called disinvestment (IPCL). for a specified market or in general with full management control. strategic misfit. repay long-term debts.
involving 608 pence per share). Share Buyback – It is a process of cancellation of shares out of free reserves to the extent of 25% of paid-up capital (Eg. Wipro). Conversion – Replacing debt with equity or vice-versa or costlier with cheaper debt or cross currency debt.3 billion.The internal & external liability composition undergoes a major change – LBO – Acquiring control over a substantially larger company through borrowed funds (Eg. Tatas take-over of Corus for US $11.CAPITAL RESTRUCTURING Capital Restructuring . It provides greater leverage as well as management control. 205 .
150 cr VSNL – Rs.Rs. 230 cr Diversifications Tata Motors – Rs. 1170 cr Goodlass Nerolac – Rs. 250 cr Tata Tetley – Rs. 42 cr Voltas . 950 cr Merind .Rs. 256 cr ACC – Rs. 99 cr Tata Power – Rs. 1439 cr 206 Tata Timken – Rs 120 cr Tata Telecom – Rs. 1890 cr CMC – Rs. 1860 cr .BUSINESS RESTRUCTURING – TATAS Divestments Lakme – Rs. 1700 cr Trent – Rs. 120 cr Tata AIG – Rs.
Turnaround is the primary motive. usually as a result external turbulence. of operating units. Survival is the primary motive.ORGANIZATIONAL RESTRUCTURING Organizational structure and systems calls for a change when strategic variety is apparent. Downscoping – It involves reducing the business and/or geographical scope of a firm (Aditya Birla group). Rightsizing – It is phasing of excess and redundant employees resulted out of faulty internal planning (SAIL). keeping the composition of business intact (Jet Airways). It can be carried out in the following ways – Downsizing – It is a systematic one-time reduction in the no. of a firm’s employees and sometimes in the no. 207 .
e. 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.e. inertia).STRATEGIC CHANGE One of the most difficult components of organization restructuring is the mindset of the top management represented through its dominant logic and its shared values reflected in cultural orientation. Dominant logic becomes deep-rooted in organizational contexts depending on the period it is in place (tenure of the CEO). The longer the period. Strategy change is unviable without a preceding change in its dominant logics. as strategies are based on such beliefs and biases. 208 .
FORCES AGAINST STRATEGIC CHANGE The problem with strategic change is that the whole burden typically rests on few people (i. 209 .e. the factor that stifled change & performance was – culture. 20% of the people carry out 80% of the changes). In most organizations. Companies achieve real agility only when people at every level rise above the ordinary to face the challenges – revitalization or transformation. Successful transformation requires – incorporating employees fully into the process – leading from a different place so as to maintain employee involvement – instill mental disciplines that will enable employees to behave differently.
Questioning every basic action of the organization.SUCCESSFUL TRANSFORMATION Build an intricate understanding of the business model at all levels of the organization. The best way is to alter the institutional point of view. Encourage uncompromising straight talk. it is not about winning but about learning. never take no for an answer. process ownership. Create relentless discomfort with the status quo. Harness setbacks. Manage from the future. Promote inventive accountability. Understand and deliver the quid pro quo. 210 .
FORCE-FIELD ANALYSIS A force-field analysis provides an initial overview of change problems that needs to tackled. It involves diagnosing a change situation – systems & structures. Identify and implement facilitators of cultural change. that can be both enablers and blockages to change and restructuring. 211 . It involves identifying – Aspects of current culture which needs to be reinforced. also known as cultural-web. Aspects of current culture which needs to be overcome. by identifying forces for and against change. Culture and style of management are two main impediments in force-field analysis.
Term Loss of human capital Lower performance Higher performance Capital .Term Reduced labour costs Reduced debt costs Emphasis on strategic control Business High debt costs Higher risk 212 Long .RESTRUCTURING .OUTCOMES Alternatives Organizational Short .
While the first strategy produces results instantaneously. focuses on reengineering. reverse engineering and regenerating. 213 . the second one is a more viable strategy and sustainable option in the long run. In order to put back the company on the right track they are resort to – Denominator – It assumes that turnover cannot be increased. Numerator – It assumes that turnover is not a barrier or constraint. down-scoping or asset stripping.NUMERATOR & DENOMINATOR MGT Most firms across emerging markets undergo strategic discontinuity and as a result are forced to restructure their businesses. hence go in for downsizing.
TURNAROUND MANAGEMENT 214 .
. still exist as on 2005... 215 (Govindarajan and Trimble... – Only seven of the first fifty Indian business groups in 1947 were even in business by the turn of this century. and that the thirty-two of the country’s largest business groups in 1969 are no longer among the top fifty today... Source: Why do firms atrophy? (Business Today. – Less than 10% of the Fortune 500 companies as first published in 1955.WHY TURN AROUND MANAGEMENT? Some interesting insights . January 1997).
216 . While content focuses on endogenous and exogenous variables. and achieves sustainable performance recovery. A category of underlying principles and concepts. process focuses on – A logic to explain a causal relationship between intervening variables.e. As a sequence of events describing how things change and why they change (i. Both content (what) and process (how) are equally important for a successful turnaround.TURN AROUND MANAGEMENT A turnaround is said to occur when a firm perseveres through an existence threatening performance decline. Stage Theory). skills. ends the threat with a combination of strategies. systems. and capabilities.
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. Low employee morale leading to high employee attrition at all levels. Rising input costs. unavailability or radical lowering of substitute costs or technological obsolescence. especially in key positions. 217 . Substantial shifts in consumer preferences. Some indicators Continuous cash flow crises as a result of dwindling market-share and profits. leading to lack of acceptability from distributors and customers. Uncompetitive products or services.
based on elasticity.. which most top managers fail to appreciate. Hence. be more customer centric. prune work-force. Extending work hours. liquidating dead assets. they adopt surface level measures (disprin popping) which most often fail. Product redesigning or reengineering. Common approaches adopted Change in key positions. 218 .TURNAROUND ILLUSION The first step to a successful turnaround is the basic acceptance of the fact that …. Revamp product portfolio. Emphasis on advertising and market penetration. Recalibrate prices. focus on power brands. consider extension. “all is not well”.
TURNAROUND STAGE THEORY Stage 1 Decline Stage 2 Stage 3 Stage 4 Outcome Response Transition Performance Equilibrium Line Success Failure Indeterminate Nadir Time 219 .
DECLINE Decline is the first stage in the turnaround process. Identification of the stimulus leads to the arrest of the downfall. It involves the identification of the theoretical perspectives that explains performance decline – K-Extinction – It suggests that macro economic and industry wide factors are responsible for decline. It has its origin in “environment led fit” that subscribes to the view that a firm has little control over external factors. 220 . It has its origin in “resource led stretch” and subscribes to the view that a firm has substantial power to override the context. R-Extinction – It suggests that organization factors. primarily dwindling resources and capabilities are responsible for decline.
asset reduction. new market initiatives. the response should be operational. If the decline stems from structural shifts. diversification. the response should be strategic. The response must match the cause of the decline. If the underlying cause is internal efficiency. 221 . Operating responses typically focuses on the way the firm conducts business and involves tactics geared towards – cost cutting and process redesigning (BPR). Strategic responses focus on changing or adjusting the business the firm is engaged in through long term moves such as – integration.RESPONSE INITIATION Turnaround responses are typically categorized as operating or strategic.
Untangling this question brings into focus three events – Domain – Many of the strategic cures have limited applicability for an affiliated firm. Contour – It is easier to reverse decline in the earlier stages through operational measures. Scope – A diversified conglomerate may acquire a distressed business to turn it around and gain valuable synergies. when decline deepens shifts in strategic position becomes essential. Similarly new market initiatives is feasible only for multi-product firms. 222 . which may be unavailable to a focused firm.RESPONSE DICHOTOMY The response initiation is somewhat dichotomous and cannot be universally applicable.
e. consensus). However. transparency. role model. confidence building measures. Effective levers of transition.e. substantial amount of time usually passes before results begin to show (i. Support from all the stake holders through resource commitment. However. Sustenance is the key factor in this stage. Empirical studies show that average time is 7. lead – lag). many a times early signs of recovery fades out.TRANSITION Transition usually reflects the first signs of recovery. participative management (i. 223 . The top management has a key role to play through empowerment.7 years with a range of (4-16) years.
Share price indications and media coverage. Failure is an indication that initial momentum was not sustainable characterized by irreversibility. 224 . Regaining lost market share and distributor confidence.OUTCOME Outcome is said to be successful when a firm breaches the equilibrium performance level. Supplier and banker confidence. Commanding a premium in the market. it should adopt a holistic approach. Cut off points must be unequivocal. Instead of focusing on financial parameters alone. Revival of key customers and new product launches.
COOPERATIVE STRATEGIES & ALLIANCES 225 .
or joint venture. 226 . consortia. supply-chain partnership. the commitment and the involvement between the firms increases manifold. 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. technology.COOPERATIVE STRATEGIES Cooperative strategies are a logical and timely response to changes in business dynamics. and globalization . Any cooperative strategy maybe between firms within the same country or cross border as well. licensing. strategic alliance.
Switz Foods. owners of the brand Monginis allows its franchisees to sell its confectionary products. It is an effective strategy to penetrate markets in a shortest possible time at a minimum cost. Branding is critical to franchising. 227 . Titan Inds. owners of the brand Tanishq allows its franchisees to sell its jewellery products.FRANCHISING Franchising – It is a contractual agreement between two legally independent firms whereby the franchiser grants the right to the franchisee to sell the franchisor’s product or service or do business under its brand-name in a given location for a specified period of time for a consideration.
228 . HM manufacturing GM range of cars in India with a buy-back arrangement is a perfect example of CBU. refine processes and adopt necessary technologies (SKD). Different levels of licensing Manufacturing without embracing any technology (CBU). Develop a product through its crude stage. as in Tata Indica. Become a systems integrator (CKD).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.
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. Cross Holdings – A maze of equity holdings through centralised control to ensure earnings stability & threshold resources for critical mass (Eg. Airbus – Boeing). 229 . It can be of the following types – Multipartner – Intends to share an underlying technology or asset. Tata. Hyundai). leverage upon size to preempt competition by escalating entry barriers (Eg. Coke – Pepsi). enabling them to increase prices (Eg.
SUPPLY CHAIN PARTNERSHIP It is a pro-active & collaborative arrangement between supplier and customer aimed at achieving better control over the value chain (Eg. link their capabilities to create value for end users. It usually provides a platform to sort out differences between conceptualization and implementation to suit local market needs. Tata Motors – IDEA). Continuous sharing of knowledge is critical to the success of a supply chain partnership. otherwise it 230 becomes routine outsourcing. Companies in different industries with different but complimentary skills. .
Generic motives involved are . to gain knowledge and to obtain access to new markets (Eg.learning organization. Firm’s should undertake a long courtship with potential partners.STRATEGIC ALLIANCE It is an short to medium term understanding between two or more firms to share knowledge and risk. enhance credibility. effective R&D management. Despite their popularity (50-60)% of the alliances fail to accomplish their stated objectives. 231 . Reliance – Du Pont). Partner selection is one of the critical success factors. Tata Motors – Fiat. preempt competition. enter newer markets. instead of hurrying into a relationship. design next generation products.
TYPES Collusion – Tacit top management understanding to neutralize price wars (Eg. Maruti). 232 . Alliances of the Weak – An alliance is entered into to preempt competition (Eg. Complementary Equals – Two firms mutually promoting each others complimentary products (Eg. Bajaj – Castrol). Airbus – Boeing). Whirlpool – Tide. Coke – Pepsi). Bootstrap – An alliance between a weak and a strong company with an intention to acquire it.STRATEGIC ALLIANCE . Backward – An alliance (quasi or tapered) with a supplier of critical components seeking commitment (Eg.
– Japan Vs US).PARTNER SELECTION CRITERIA It is likely that partners will not have complete consent on alliance objectives because the institutional context in which the alliance embedded varies from country to country. 233 . Too much stress on financials & structure be avoided. Differences in level of economic development can produce differences in alliances motives. Cultural orientation has been found to have a profound effect on top management’s strategic orientation (Eg. Firms from developed markets seek access to markets and firms from emerging markets seeking access to technology.
including ability to provide quality products and services.PARTNER CHARACTERISTICS Complimentarity of Capabilities – The degree to which partners resources can be used in conjunction. Partner’s ability to acquire fresh skills. Managerial capabilities. Intangible Assets – Move beyond the financials of the firm. Willingness to share knowledge and skills. Experience related to previous alliances. Unique Resources – Abilities or skills which cannot be easily duplicated. 234 . Dominant Logic’s – Similarity in beliefs & biases.
Changing within.MANAGING ALLIANCES Alliances are more than just a deal. the value chain. partners should nurture it. understanding the chemistry. operational & cultural integration. 235 . differences not anticipated earlier. vows to include commitment to expand the relationship. degree of compatibility. Selection & Courtship – It involves self analyzing. Setting up the housekeeping. instead of focusing controlling the relationship. incorporating clear signs of continuing independence for all partners. Getting Engaged – It should incorporate a specific joint activity. Learning to collaborate – strategic.
a joint venture is a selection among modes by which two or more firms can transact. It aims at creating new value (i. combining parts). Conceptually. whilst the partners continue to operate independently. There are substantial linkages in the value-chain. synergy) rather than mere exchange (i. It lasts till the vision is reached. .e.e. separation is very 236 bitter.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.
JOINT VENTURE – GENERIC MOTIVES Transaction Cost – The situational characteristics best suited for a JV are high performance uncertainty. Organizational Learning – It is a means through which a firm learns or seeks to retain their capabilities. It may also be linked to deterring entry or eroding competitors position. 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. 237 .
Maruti – Suzuki. Renault – Nissan (Minivans – Cars). – Eg. Define future industry standards. – Eg. Sharing of resources. – Eg. Learning new technologies. Eli Lily – Ranbaxy. TVS – Suzuki (4-Stroke Engines) Fill gaps in existing product lines. Endorsement from government authorities. Essar – Hutch (Vodafone).OTHER MOTIVES Entry into newer markets. Yamaha – Escorts. – Eg. – Eg. – Eg. Daimler – Chrysler (Premium Cars) 238 .
Tata – Aditya Birla in Idea Cellular 239 . PAL – Fiat If the cost of continuing exceeds the exit costs? – Eg.Enka. – Eg.e. Century . Modi – Telstra What after exit (parenting disadvantage)? – Eg. technology) drain. – Godrej – Procter & Gamble.RISKS INVOLVED Incompatibility – Differences in cultural background. – Maruti – Suzuki. LML – Piaggio Differences in size and resource base. – Eg. Risk of over dependence. Risk of brain (i.
Culture – Reconcile gaps. Costs – Other modes of transaction becomes cheaper.PRE-REQUISITES FOR SUCCESS Commitment – Mutual trust. 240 . Focus – Avoid strategic myopia. Equality – Lack of dominance. respect. Partner – Avoid duplication of skills and capabilities. time sharing. Incompatibility – Performance expectations. Objectives – Shared vision. Agreement – Clarity on operational control. Flexibility – Sufficient space to breathe and adjust. Inertia – Differences in age and evolution patterns.
MERGERS & ACQUISITION 241 .
Daichi) and hostile if it is without the consent of the management (Eg. reverses are also taking place through LBO) with a view to acquire conglomerate power and induce synergy (Eg. 2002). Ranbaxy . SEBI Takeover Code. Brooke Bond – Lipton). The larger objective is to leverage on size. An acquisition is the purchase of a firm by a firm (of larger size. 242 .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. Mittal Arcelor). however. HLL – Tomco). Most countries have stringent laws that prevents hostile takeovers (Eg. 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.e. 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. Hike – An acquirer who has already picked up a 5% has to make a mandatory disclosure for every additional 1% stake that it acquires.SEBI TAKEOVER CODE. . creeping acquisition). Preferential – A preferential allottee ending up acquiring 5% stake also comes under its purview.
asset stripping). Gujarat Ambuja – ACC). credentials or track record is at stake.e. SEBI – In case of a hostile take over. the SEBI can intervene and block share transfers if: the acquirer has ulterior motives (i. Grasim – L&T Cement. 2002 Pricing – Acquirers will have to offer minority shareholders (at least 20%) the past 26 weeks or past 2 weeks average price.SEBI TAKEOVER CODE. and/or does not enjoy the confidence of the different stake holders. 244 . Disclosure – All acquirers have to inform the respective stock exchanges where it is listed and SEBI upon acquiring the basic limit and upon every incremental limit thereon. whichever is higher as an exit route (Eg.
Conglomerate – It involves integration of two distinctly unrelated businesses. 245 . Horizontal – It involves integration of two highly related businesses (Eg. usually opportunistic (Eg. ITC). Vertical – It involves complimentarily (partially related) in terms of supply of inputs or marketing activities (Eg. Reliance).Kelvinator). Electrolux . Godrej.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.
MERGERS & ACQUISITION . ITC Bhadrachalam). quick access). Acquiring assets or capabilities (Eg. ICICI –ITC Classic). Asset Stripping – Shaw Wallace). Access to newer segments (Eg. Global image (Eg. Overcoming entry barriers (Eg.MOTIVES Increased market / conglomerate power. scale and scope. Reduction in risk. Tax benefits (Eg.e. Economies of size. Reduced gestation (i. Ranbaxy – Crosslands). 246 . Tata Steel – Corus). Coinsurance effect – Higher debt raising capability. Avoiding risk of new product development. Ulterior motives – (Eg. Mittal – Arcelor).
Top management overtly focused on due diligence exercise and negotiations. while the ultimate acquisition was made at 607 pence/share). Merging of organisational structures. Tata – Corus). When Tata Steel started negotiations with Corus. neglecting core business. their initial offer was around 420 pence/share.MERGERS & ACQUISITIONS PITFALLS Cultural differences (Eg. Managing size. Inability to achieve synergy. Managing over-diversification. Overvaluation of buying firms (Eg. Overvaluation is often as a result of an ego drive and substantially affects future returns. 247 .
Brooke Bond – Lipton). Growth – This stage may witness parallel merger of two firms of similar size.MERGER TYPE & PLC Introduction – A larger firm may acquire a newly formed entity with an objective to preempt new competition or acquire its license (Eg. Tata Steel – Corus). vertical to save transactions costs. with an objective to reinforce its growth trajectory or to take on the might of a comparatively larger player (Eg. Kingfisher – Air Deccan). 248 . Maturity – A larger firm acquires a smaller firm with an objective to achieve economies of scale and experience curve effects (Eg. Decline – Horizontal mergers are undertaken to ensure survival.
FRAMEWORK Positive contribution to the acquired company. A common shared vision. Blanket promotions across entities and confidence building exercises needs to be practiced. Left alone syndrome. Strong differences may stifle plans and its execution. An acquisition just for the sake of it or reputation yields very little value in the long term. A concern of respect and trust for the business of the acquired company. active top management intervention in phases.INTERNATIONAL M&A . Immediate attempts to super impose structure and culture may cause bottle necks. 249 .
250 Do not ignore the “people factor”. . Determine business strategy.INTEGRATION . Shift attention from business portfolio to people and processes. Decide on the new hierarchy. promptly. Redefine responsibilities and authority.BLUEPRINT Take the media into confidence. Decide upon management control systems. They can carry the message to the various stake holders. Integrating work processes. It will enable focus on customers and key people.
While under valuation may be a significant opportunity. – Synergy – Potential value gain from combining operations (i.VALUATION The process of valuation is central to M&A. over valuation can become a curse. operational & financial). Financial motives – Undervaluation relative to true value.M&A . The process takes (6-12) months. – Market for corporate control. Valuation decisions are arrived through a due diligence process when the prospective acquirer gets access to the books of accounts of acquiring company. 251 .e. – Unstated reasons – Personal self interest and hubris.
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). Synergy can be negative as well. Sources of operational synergy – Horizontal Synergy – Gains come from economies of scale which reduces costs. or from increased market power which increases sales and margins. – Conglomerate Synergy – Gains come when one firm complements the resources or capabilities of another (Eg. – Vertical Synergy – Gains come from controlling the supplychain and savings in transaction costs. when the “fit” between the two entities is very poor. 252 .
and without paying take-over premiums. shareholders can accomplish the same at a much lesser cost. However.VALUING FINANCIAL SYNERGY Diversification – Reduce variability in earnings by diversifying into unrelated industries. ITC – Bhadrachalam Paper). Synergy comes from projects which would not have been undertaken if the two firms stayed apart (Eg. 253 . Hotmail). Cash Slack – It reduces asymmetry between cash starved firms with deserving projects and cash cows with no investment opportunities. Tax Benefits – Tax benefits may accrue from tax entitlements and depreciation benefits unutilized by a loss making firm. but availed after being merged with a profitable firm (Eg.
as risky debt is spread across the new firm's operations. It relates to the concept of diversification.VALUING FINANCIAL SYNERGY Co-Insurance Effect – If the cash flows of the two firms are less than perfectly correlated. 254 . The likelihood of default decreases when two firms' assets and liabilities are combined through a M&A compared to the likelihood of default in the individual companies. – Default risk comes down and credit rating improves. This will induce higher debt capacity. hence better performance. – Coupon rates may also be negotiated at lower rates. the cash flow the merged firm will be less variable than the individual firms. higher leverage.
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. 255 . 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 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.
e. It is a very costly and risky proposition. sometimes in combination with the assets of the acquiring company. 256 . debt component) at the time of buyout and rapid changes in capital structure over time.LEVERAGE BUYOUT (LBO) The basic difference between a take-over and a LBO is the high inherent leverage (i. LBO facilitates a relatively smaller firm to bid for a comparatively larger firm in the bid for management control. The assets of the acquired company are used as collateral for the borrowed capital. Confidence of investment bankers and the international financial community is essential.
– The need to satisfy analysts and shareholders.TO GO PUBLIC OR NOT? However. on-going valuation. – Increased information needs. the advantages of going public includes . However. The increased benefit showed in the following way – reduced costs and increased revenue. – Separation of ownership from management. 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. 257 . liquidity.access to financial markets.
e. – Cash trapped company unable to utilize opportunities. – It is a temporary phenomenon. co-insurance effect). – Cost of debt coming down (i. which disappears once assets are liquidated and significant portion of debt is paid off. – Managers cannot be trusted to invest free cash flows wisely. 258 . – Debts repaid off from increased value after successful restructuring and wresting management control.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).
Any discounting has to reflect these changing cost of capital. leverage is expected to decrease over time. Therefore. initial rise in leverage is anticipated. 259 .EFFECT OF HIGH LEVERAGE Increases the riskiness of dividend flows to shareholders by increasing the interest cost to debt holders. – Increase equity valuation. As the firm liquidates / pledges assets and pays off debt. Lack of sufficient cash flows to repay costly debts resulting in a possible debt trap. A LBO has to pass two tests to be viable – – Restructuring to pay-off increased debt.
– Facilitates better valuation and forthcoming offerings.e. – Prevents dilution of equity. which has discontinued its operations (i. shell company) by a private company. or costly. – Tax shelter. – Automatic listing in major exchanges. 260 . time-barred. Objectives – – Traditional route of filing prospectus and undergoing an IPO is costly. small in size but having a promising business.REVERSE MERGER Reverse Merger – The acquisition of a public company. allowing the private company to bypass the usually lengthy and complex process of going public.
However. – Takeover announcements reported 30% excess returns. – Merger announcements reported 20% excess returns.EFFECT OF TAKE-OVER ANNOUNCEMENT The shareholders of target firms are the clear winners. Most target firms are taken over within (6090) days. Initial anomaly in stock prices usually normalizes over a period of time (6-12) months. takeover failures have only initial negative effects on stock prices. and 35% during bullish periods. During bearish periods excess returns were 19%. 261 . Excess returns also vary across time periods.
and Netter. – Most studies reported insignificant excess returns around take-over offers or merger announcements. 1983. 1983. and Kim. 262 Jarrel. over time. Bradley. in the event of take-over failure negative returns to the extent of 5% on bidder firm stock prices is reflected. – However.EFFECT OF TAKE-OVER ANNOUNCEMENT The effect of take-over announcement on bidder firm’s stock prices are not clear cut. Desai. 1988 . – However. Brickley. as stock markets become more and more perfect such anomalies would reduce Source: Jensen and Ruback.
Poison Put – Premature retirement of bonds at attractive rates to pour surplus cash and make target investment unattractive. so that nothing is left for the raider to strip off. 263 . Asset Stripping – The targeted company hives off its key assets to another subsidiary. Rights).DEFENSIVE STRATEGIES Golden Parachute – An employment contract that compensates top managers for loss of jobs as a result of change in management control. Poison Pill – An offer to existing shareholders to buy shares at a substantial discount to increase their voting rights (Eg.
Green Mail – The targeted company buys large blocks from holders either through premium or through pressure tactics (Eg. East India Hotels – Reliance Industries – ITC).DEFENSIVE STRATEGIES White Knight – It is the placing of stocks to a cash rich investor and bargaining for protection in return. Shapoorji Pallonji). Pac Man – The target company makes a counter bid to take over the raider company. thus thwarting the raider company’s attention. But often the White Knight turns a betrayer himself (Eg. 264 . Gray Knight – The target company takes the help of friendly company to buy the shares of the raiding company.
COMPETING FOR THE FUTURE 265 .
The reverse was true for the companies overpowering. Honda overpowering Volkswagen. Wal-Mart overpowering Sears.GETTING OFF THE TREADMILL Canon overpowering Xerox. Most companies were too preoccupied with the present than the future? 99% of the companies overpowered. were spending 99% of their precious time dealing with present. Nokia overpowering Motorola. Hitachi overpowering Westinghouse. Honda overpowering GM. Compaq overpowering IBM. British Air overpowering Pan Am. What went wrong???? What were they doing with the present? What were they pre-occupied with? 266 .
These denominator based managers stuck to their restructuring strategies (like building pyramids) and didn't know what to do next? Thus they became history? (like the pharaohs) 267 . declining margins. Thus efficiency was grievously hurt. most often they ended up cutting corporate muscle as well and became anorexic. CEO’s brutally pick up the knife and ruthlessly carve away layers of corporate flab (delayering.THE PAST OF COMPETITION Beyond Restructuring – When a competitiveness become inescapable problem (stagnant growth. decluttering. downsizing). Not knowing when to stop. falling market share).
The future is not about catching up with competition. incrementalism or nominal innovation has almost reached a plateau. but not of the future. A poll in circa 2000 revealed that 80% of the U. However. but forging ahead in competition.S. top managers believed that quality will be a source of competitive advantage of the future. ensuring only survival of the present. 268 .THE PRESENT OF COMPETITION Beyond Reengineering – Numerator based managers (innovation) at least offers some hope. On the contrary only 20% of Japanese managers believed that quality will be a source of competitive advantage of the future.
as important as these may be. Create a potential gap. Empower from bottom to top. Companies need to fundamentally reconcieve itself. not the other way. It involves Dream about the company’s future. demographics and lifestyles. It is based on deep insights into trends in technology. better. and regenerate its strategies (breaking its – managerial frames). don’t predict. reinvent its industry. they are not enough to get a company to the future. faster. Transform the industry. 269 . aspirations and resources.THE FUTURE OF COMPETITION Regenerating – Leaner. not just the organization. Creating the future requires industry foresight.
ABOUT THE DREAM Which customers will you be serving? What will the potential customer look like? Who will be your future competitors? What will be the basis of your competitive advantage? Where would your margins come from? What will be your future competencies? Which end product markets would you cater? 270 .
Create entirely new industries (i. It is about deliberately creating a strategic misfit. Redraw the boundaries between industries. blue oceans). Successful companies have a complete grip over the industry. hence do not fall sick in the first place. Change in at least one fundamental way the rules of engagement in an industry.e. It drives a hunger and a passion to transform. by converging technologies complex. 271 . they do not need to restructure. Therefore.ABOUT THE TRANSFORMATION The future does not belong to those who take the industry for granted.
Such a process is called institutionalization (from people centric to organisational centric). 272 . Transformational leaders merely lead the way. Most successful revolutions (Gandhi to Mandela) rose from the dispossessed. The middle management plays a strong moderating role. the revolution must start at the bottom and spread in all directions of the organization.ABOUT THE EMPOWERMENT Bring about a revolution (a paradigm shift) in the organization. A revolution that is thrust upon from the top seldom sustains. More importantly.
without taking undue risk. A process for finding and gaining insight into tomorrows opportunities (Eg. South West Airlines – LCC. An ability to energize the company. Toshiba – LCD. It requires a lot of common sense and a little bit of out of the box thinking. Apple – iphone). What does it take to get to the future first? Understanding how competition for the future is different.THE FUTURE OF STRATEGY A company must get to the future not only first but also for less. Get to the future first. Apply the 40 – 30 – 20 principle. 273 . Companies need to strategize (think ahead of times).
HOW DOES THE FUTURE LOOK LIKE? There is no rule which says that for every leader there will be a follower. 274 . We are in the midst of a 3600 vacuum. as on their aspirations. What distinguishes a leader from a laggard. the farther it will be away from competition. is the ability to imagine in a different way what the future could be. greatness from mediocrity. As there is no one future. but hundreds. Companies of the future will be not based so much on the strength of their resources. each point in space represents a unique business opportunity. The farther one can see in this endless space.
THE EMERGING STRATEGY PARADIGM Not Only Reengineering Processes But Also Regenerating Strategy The Competitive Challenge Organizational Transformation Industry Transformation Competing for Market Share Competing for Opportunity Share Finding the Future Strategy as Learning Strategy as Positioning Strategy as Engineering Strategy as Unlearning Strategy as Dream Strategy as Architecture 275 .
THE EMERGING STRATEGY PARADIGM Not Only But Also Mobilising for the Future Strategic Fit Resource Allocation Strategic Misfit Resource Stretch & Leverage Getting to the Future First Existing Industry Structure Product Leadership Single Entity Product Hits & Timing Future Industry Structure Competency Leadership Dominant Coalitions / Co-option Market Learning & Preemption 276 .
Degree of Learning Unlearning Curve P2: Unlearning in previous period does not necessarily ensure learning in the current period. Learning Curve t1 t2 t3 Time t4 t5 277 .LEARNING TO FORGET P1: The degree of learning in current period is directly proportional to the degree of unlearning in the previous period.
It is characterized by the following – Unique – It provides unimaginable customer value ahead of its times. It cannot be matched even by its closest competitors. Leverage – They are the gateways to future markets. It represents the collective learning's of an organization centering around diverse streams of technologies. 278 .CORE COMPETENCE A core competence relates to a bundle of skills (not an asset or a business) that revolves around activities or processes and critically underpins a firm’s competitive advantage. Inimitable & Insubstitutable – A high degree causal ambiguity between these skills yield sustainable competitive advantage.
Canon – imaging. it is deeply embedded in the heart of the organization. Intel – nano-electronics. Honda – engines. A core competency cannot be outsourced.MORE ABOUT CORE COMPETENCE Sony – miniaturization. Coca Cola – brand. SKF – antifriction and precision. at the most three to four. Although a core competence may lose value over time. Most companies around the world do not possess one. Nike – designing. Core competencies are the roots of the organization. Toshiba – flat screen displays. Toyota – lean manufacturing. 279 . it gets more refined and valuable through use. leaders have one. Wal-Mart – logistics.
ROOTS OF COMPETITIVENESS End Products 1 2 3 4 5 6 7 8 9 10 Core Businesses Core Business 1 Core Business 2 Core Business 3 Core Business 4 Core Product 2 Core Products Core Competencies Core Product 1 Competence 1 Competence 2 Competence 3 Competence 4 280 .
RESOURCE STRETCH & LEVERAGE
Initial resource position is a very poor indicator of future performance. It leads to atrophy and stagnation. Successful companies consciously create a potential gap between aspirations and resources. Resource crunch is a common factor among firms that faces a wealthy rival, and outperforms them. Leveraging what a company already has, rather than allocating it is a more creative response to scarcity. – By concentrating existing resources. – By accumulating existing resources. – By complementing existing resources. – By conserving existing resources. – By recovering existing resources.
Concentrating – It involves effectively directing portfolio of resources on key strategic goals in which individual efforts converge over time. It is a balance between individual mediocrity and collective brilliance. It is achieved through – Converging – Redirecting multiple diverging (i.e. fragmented) short term goals into one long term goal. It is then resources can be stretched over time. Focusing – Making trade-offs and preventing dilution of resources at a particular point of time. Targeting – Focusing on the right innovations that are likely to have the biggest impact on customer value.
Accumulating – Using existing reservoir of resources to build new resources. Each and every individual is a rich & potential source of learning, discover better ways of doing things. It is achieved through Mining – Extracting learning experiences from existing body of each additional experience (i.e. success or failure). It is an attitude that can be acquired, but never learnt. It leads to a substantial jump in the experience curve. Borrowing – Utilizing resources outside the firm through licensing, alliances, joint ventures. A firms absorptive capacity is as important as its inventive capacity.
Complementing – Using resources of one type with another that aligns smoothly to create higher order value. In a way it produces an accelerating effect on each individual resource. It is achieved through – Blending – Interweaving discrete capabilities to create world class technologies (GM – Honda) through integration and imagination. Different functional skills can also be blended to create a world class end products (Yamaha – Keyboard). Balancing – An ability to exploit excellence in one area is never imperiled by mediocrity in another (GE acquiring the CT scanning rights from EMI because of its inadequate market reach).
Conserving – Sustaining competencies over time through frequent usage. Resources are never abandoned; they are always preserved for future use. Recycling – Increasing the velocity of use of a competencies over time. As a result core competencies can be leveraged across an array of products (Sony - Betamax). It includes brand extensions as well. Co-Opting – Enticing resources of potential competitors to exercise influence in an industry (Fujitsu – IBM). Shielding – It involves identifying competitors blind spots and then attacking without having the fear of retaliation.
Recovering - It is the process of reducing the elapsed time between investing in resources and the recovery of those resources in the form of revenues via the market. Speeding – Prior to the 1980’s Detroit’s majors took an average of 8 years to develop an entirely new model; the Japanese reduced it to less than 4.5 years, with major new variants in 2 years. This envisaged Japanese players in giving customers more opportunities to switch allegiance and loyalty (Toyota). Protecting – It uses competitors strength to one’s own advantage, by deflecting it, rather than absorbing it as practiced in Judo.
INTERNATIONAL BUSINESS ENVIRONMENT 287 .
institutional gaps. Diversified groups in operating in emerging markets therefore benefit from unrelated diversification. Therefore. China.e. Chile) provide a different context (i. strategies suited for the developed markets may not be appropriate for emerging markets. Korea.EMERGING MARKETS Emerging markets (India. 288 . and high transaction costs. Therefore focused strategies based on core competence may not be suitable for emerging markets (Khanna & Palepu. high levels of market imperfection). Emerging markets are characterised by infrastructural bottlenecks. 1997).
Entropy). Optimum level of diversification Performance Diversity is initially positively related with performance.DIVERSITY . Concentric. (2000) 289 . Synergy. et al. Experience Strategic Fit Diversity Palich. Size & Scale. subsequently negatively related across developed markets.PERFORMANCE (I) Diversity attempts to measure the degree and extent of diversification (Herfindahl.
2001) 290 .DIVERSITY . Huge initial investment. subsequently positively related across emerging markets.PERFORMANCE (II) Diversity is initially negatively related with performance. conglomerate power Threshold level of diversification Performance Diversity (Khanna & Palepu. brand building Risk diversification.
Characteristics – It should have a spread of affiliates or subsidiaries. It should have a spread of manufacturing facilities. It should have a spread of interest groups / stake holders. revenues and profits. It should have a spread of assets. It should think globally. act locally (Eg. 291 .INTERNATIONAL IDENTITY MNC’s consciously engage in FDI in different parts of the globe to forge resource diversity as a distinct competitive advantage. HSBC).
292 . low risk profile in developed markets and vice versa for emerging markets).It reflects the disparities in women in workforce (Eg. Risk Profile – It reflects the risk attitude of the top management (Eg. Group Scale .GLOBAL BUSINESS ENVIRONMENT Power Distance – It reflects the disparities in income and intellectual development (Eg. high feminity index in developed markets and vice versa for emerging markets). low group scale in developed markets and vice versa for emerging markets). Feminity Index .It reflects the relative role of team building (Eg. low power distance in developed markets and vice versa for emerging markets).
credit rating. terrorism (9/11). 293 . flexibility (Eg. way of life. interest rates. Country Risk – It reflects the political and economic risk (Eg. dress sense. FOREX reserves. attitude. time value. judiciary) of doing business in a particular country (Eg. political stability. low country risk in developed markets and vice versa for emerging markets). code of conduct. inflation. customs. currency. high cultural adaptability in developed markets and vice versa for emerging markets). corruption.GLOBAL BUSINESS ENVIRONMENT Cultural Adaptability – It reflects the adaptive ability to a changing environment .culture.
however. in most emerging markets use of an interpreter may be a standard protocol. Language Barriers – Developed country managers expect foreign partners to communicate in their languages. and vice-versa. 294 . Other factors – local celebrations.GLOBAL BUSINESS ENVIRONMENT Time Sensitiveness – Developed country managers regard time as precious. time-zones. in most emerging markets meetings are delayed and lasts unusually long. High levels of ethnocentrism usually has a negative effect on business. Ethnocentrism – Developed country managers tend to regard their own culture as superior.
It also highlighted the nexus between US & WTO. It a multi-lateral treaty with 143 (as on 2002) member countries to reduce tariff and non-tariff (quota) barriers. It focused largely on TRIPS (patents. trademarks). 295 . copyrights.GATT GATT was a bi-lateral treaty initiated between US and some member countries in 1947 to promote free trade. In 1995 (Uruguay Round) GATT was renamed to WTO. ASEAN. The 1999 (Seattle Round) saw a lot of protest amidst bringing agriculture under the purview of TRIPS. BRIC). It also initiated provisions on anti-dumping. The 2001 (Doha Round) focused on power blocks (NAFTA.
The notable exception was Great Britain which still continues with its local currency (i. 296 .e. Sterling . However. However with current recession in the US 2002 onwards.e. primarily the OPEC countries. the Dollar still remains the most preferred currency globally. The Euro was significantly devalued against the Dollar till 2002. Euro).Pound).EURO – SINGLE CURRENCY In 1999 twelve member countries in Europe joined hands to move over to a single currency (i. the Euro slowly started outperforming the Dollar. three countries joined in 2002 increasing it to fifteen members as of 2008.
Trade Block – It will strengthen the EU identity which would not have been possible otherwise. a multiple currency is preferable where the business cycles of member nations are different. it helps avoiding transaction costs associated with a multiple currency. However.SINGLE Vs MULTIPLE CURRENCY Transaction Costs – Though the initial cost of introduction of a single currency is very complicated and costly. 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. 297 .
– FII (transfer of intangible resources) is fast but may have strong repercussions (i.FII Vs FDI INVESTMENT Classical economists believed that foreign investment (in any form) is basically a zero sum game (i. – FDI (transfer of tangible resources) is slow but steady for the purpose of economic growth. hot money). Neo classical economists believe that foreign investment may in fact be a win-win game. It is short-medium term with comparatively low levels of commitment.e. It is long term with high levels of commitment. the gain of one country is loss of another).e. 298 .
lifestyle (petroleum 299 outlets – departmental stores). . Distribution – It depends on the market characteristics (fragmented – concentrated). usage (talk time).culture (food habits). economic (middle class buying power). Pricing – It depends on the competitive structure (PLC – Kellogg's).INTERNATION MARKETING Product – The various attributes of a product may receive different degrees of emphasis depending on differences in . buying patterns (spread). promotion (surrogate advertising). customer awareness (microwaves). technology (microchip).
Accounting Norms – The accounting norms of one country (AS . equity is cheap in India). debt is cheap in US. Cost Structure – Companies in India need to investment in fixed costs due to poor infra-structure 300 compared to developed markets. Leverage – The leverage may vary across countries depending upon money and capital market conditions (Eg.India) may be different from that another trading country (US – GAAP or IRS). .INTERNATION FINANCE Currency Risk – Many Indian IT companies (Rs) having business in US (Dollar) are asking for quotes in (Euro) or are shifting bases out of US to avoid risk of devaluation of Dollar.
Recruitment – In local recruitment. skills are more important that cultural fit and vice-versa. however. 301 . shortened life cycles).INTERNATIONAL HR An uniform HR policy is idealistic to enable parity in performance appraisal. and cultural barriers (language) vis-à-vis emerging markets. in most cases it is not desirable nor practiced. technology (convergence. Training – It is a pre-requisite for international business to reduce language. double taxation. labour laws. Compensation – Differential pay packages exists because of differences in purchasing power. social security.
.INTERNATIONAL OPERATIONS Location Incentives – FDI in emerging markets should explore options for SEZ’s to explore benefits (tax holidays. SCM – Use of ERP to network the extended enterprise 302 across the globe. Bosch spark plugs are used by car manufacturers worldwide). Technology – The cost to be evaluated in terms of latest technology (Euro VI) vis-à-vis effective cost of appropriate technology (Euro II). Outsourcing – A company having a core competence may be the source of global outsourcing (Eg. reduce power costs) vis-à-vis infrastructural bottlenecks.
CONTEMPORARY TOPICS 303 .
it has destructive effects as well. Innovations typically paves the way for more secured and improved lifestyle for consumers in general. Innovation is the most preferred strategy today to maintain competitive advantage in the present turbulent business environment. innovation is the first attempt to carry it out in practice. While innovation typically adds value for organizations. but has inherent risks involved as well. Innovation is all about staying ahead of competition. 304 .INNOVATION An invention is the first occurrence of an idea for a new product or process.
TYPES OF INNOVATION A key challenge is maintaining a balance between process and product innovations. 305 . Tangible impact of product innovation on performance is significantly higher than process innovation. Strategic innovation has the potential to change the rules of the game. However. Process innovation usually follows product innovation. process innovations are organizational driven. While product innovations are typically customer driven. process innovation is necessary to sustain the competitive advantage of product innovation.
Disruptive business models brings in a new frame of reference (i. 306 . a paradigm shift). Medical Surgery (Lasik). Data Storage (Pen Drives). Innovations are the back-bone of successful business models . about how an organization makes money (i. Telecom (CDMA Technology).BUSINESS MODEL It is a simplified description and representation of a complex real world.e.e. Drug Development (Bio Chemicals). putting an idea into practice). Processors (Pentium). It leads to a shift in the price – performance envelope.
The key activities / processes necessary for execution. 307 . The segment(s) of clients to be addressed. The key partners involved in the activities. The key resources and capabilities required. The channels to reach out to the clients. The cost structure resulting from the business model. The proposed relationships established with clients.NINE BUILDING BLOCKS Value proposition offered to the market. The revenue streams generated by the activities.
BUSINESS MODEL FRAMEWORK 308 .
Investment Banking. innovative companies to carve out unique business models to fend off competition. 309 . The revenue model described here are the means to generate revenues. It involves – Product Visualization – Product Prototype – Product Test – Capacity – Pricing – Distribution. Real Estate) companies need to untangle and understand the intricacies of their business model. It is just one piece of the puzzle.REVENUE MODEL Positioning is just not sufficient. With the rapid erosion of certain industries (IT.
Promote the culture of experimentation. Promote the grape-vine.HOW TO MAKE INNOVATIVE CO’S Innovative company’s are a matter of culture and aspirations rather than tangible resources. Have a lean and a flat organization structure. Provide reasonable incentives (not necessarily monetary). 310 . Allow the management sufficient slack to be future oriented. A favourable intellectual property (IP) climate. Allow the workforce idiosyncrasies for their errors.
The most preferred strategy of internal protection includes imbibing “causal ambiguity” in the production process to make reverse engineering difficult. 311 311 . however that possibility is slowly atrophying. companies are increasingly relying on internal protection to sustain innovation effects. Collusion with the judiciary is also another distinct possibility in emerging markets.HOW TO PROTECT INNOVATION? Without adequate protection (external or otherwise) the effects of innovation does not translate to performance. In most emerging markets where the IP climate is not so favorable.
312 312 .CORPORATE GOVERNANCE The basic theme of corporate governance is to ensure that professional managers are identified and made accountable in terms of clear business processes or activities and held responsible through adequate mechanisms & control systems for channelizing their decisions for the benefit of stakeholders at large. 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.
AGENCY THEORY The root of Corporate Governance goes back to the Agency Theory. According to the agency theory top managers and shareholders interests are usually conflicting in nature and tend to pull in opposite directions. This exposes the shareholders to additional risks and higher costs. However. also known as the principal-agent problem or agency dilemma. shareholders can diversify their portfolio at a much lesser risk and cost. 313 . From the strategic point of view managers tend to diversify into unrelated businesses as it provides higher returns hence a more favourable appraisal. not present in portfolio diversifications.
2002 to restore public confidence in corporate governance. the US government passed the Sarbanes – Oxley Act. After the Enron downfall. . various laws were enacted to ensure proper usage of these funds. defines corporate governance (headed by Kumar Mangalam Birla) as the acceptance by management of the inalienable rights of shareholders as the true owners of the corporation and of their own role as trustees on behalf of the 314 shareholders. SEBI Report – 2005.ORIGIN & CONTEXT Since the early 20th century since a large part of public funds were held by publicly traded firms in the US.
The key roles of chairperson and CEO should not be held by the same person and their offices be clearly separated. Interests of other stakeholders: Recognize the legal and other obligations of all legitimate stakeholders.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. including the society at large. 315 . Role and responsibilities of the board: It deals with issues about an appropriate mix of executive and nonexecutive directors.
They should also implement systems to independently verify and safeguard the integrity of the company's financial reporting. Independence of the entity's auditors: Identification.GOVERNANCE PRINCIPLES Integrity and ethical behaviour: Organizations should develop a code of conduct for their top management that promotes ethical and responsible decision making. 316 316 . 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..
Balance of power: The simplest balance of power is very common. with its legal authority to hire. However. a person benefitting from a decision should abstain from it. they should provide no mechanism or scope for opportunistic behaviour. Regular board meetings allow potential problems to be identified. fire and compensate top management. 317 . Remuneration: Performance-based remuneration is designed to relate some proportion of salary to individual performance. discussed and resolved.GOVERNANCE STRATEGIES Monitoring by the board of directors: The board of directors. safeguards invested capital.
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. 318 . McKinsey found that 80% of the respondents would pay a premium for wellgoverned companies. The size of the premium varied by market.GOVERNANCE & PERFORMANCE In its “Global Investor Opinion Survey” of over 200 institutional investors in 2002. undertook formal evaluation of its directors. and was responsive to investors' requests for information on governance issues. who had no management ties. Egypt and Russia) to around 40% for Canadian & European companies.
319 . Over a period of time. corporate philanthropy should be a part of every corporate mission. Therefore. the short-term view of profit maximisation gave way to a more broader and mediumterm view wealth maximisation of the shareholders. However.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. The basic premise is that firms cannot exist in vacuum. 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 debate on CRS still continues whether firms should detract its focus from its business? 320 . “an enterprises decisions and actions being taken for reasons at least partially beyond its immediate economic interests”. in fact a large part of it is significantly overlapping. Therefore. CSR can be defined as.CORPORATE SOCIAL RESPONSIBILITY As Peter Drucker rightly pointed out that. giving a very important message that one cannot exist without the other. However. economic and social responsibilities cannot be mutually exclusive. “a healthy business cannot exist in a sick and impoverished society”.
Fear of government interference: Excessive quench for profits may lead to build up of adverse public opinion compelling the government to intervene (Eg.GROWING CONCERN FOR CSR Awareness due to education: With growing literacy. MRTP). 321 . The role of media: The media and various consumer organizations have come up in protecting consumer rights and exposing mal-practices. Public image: Entrepreneurs are increasingly relying on public image as a source of competitive advantage and a higher financial discounting. people are becoming increasingly aware of their right to a decent and healthy life.
Aditya Birla Research Centre – LBS). eco efficiency. 322 . Tata Steel – Life Line Express). Cement .CSR STRATEGIES Green Supply Chain Management: It includes environmentally preferable purchasing. designing eco-friendly products. Education.Paper packaging. Exide – Product take back). Refrigerators – CFC. Literacy & Training Programs – (Eg. Health & Hygiene – Attending the health hazards due to wastes and by-products to employees and society in proximity (Eg. and extended producer responsibility (Eg.
BOTTOM OF THE PYRAMID With the market across most developed markets including the US getting saturated. Prahalad notes that future markets exist collectively. 323 . they're helping millions of the world's poorest people to escape poverty. Strategic innovations leading to disruptive business models can show the way out. C. In turn companies by serving these markets. K. They represent an enormous opportunity for companies who learn how to serve them. across the world's billions of poor people having immense untapped buying power.
BLUE OCEAN STRATEGY 324 .
TWO WORLDS 325 .MARKETSPACE .
profitable growth. In today’s red oceans. where most industries are saturated. competing head on results in nothing but a bloody red ocean of rivals fighting over a shrinking profit pool. and struggled for differentiation (cost or product). one companies gain is always at the 326 cost of another companies loss. . They have fought for profits.WHAT IS RED OCEAN? Companies have long engaged in head-to-head competition in search of sustained. Yet in today’s overcrowded industries. battled over market-share.
WHAT IS BLUE OCEAN? Tomorrow’s leading companies will succeed not by battling in red oceans. It helps in creating powerful leaps in value for both the firm and its buyers. it will exist 327 in the future as well. Such strategic moves are possible through the pursuit of product differentiation and low cost simultaneously. rendering rivals obsolete and unleashing new demand. but by creating blue oceans of uncontested market space ripe for growth . Blue Ocean’s have existed in the past. It is only the frames of the .
RED OCEAN Vs BLUE OCEAN Compete in existing markets Compete in uncontested markets Beat the competition Exploit existing demand Make the competition irrelevant Create and capture demand Make the value-cost trade off Break the value-cost trade off Demand is the limiting factor Supply is the limiting factor 328 .
. Niche markets & monopoly havens are continuing to disappear. of European nations.BLUE OCEAN STRATEGY IMPERATIVES Prospects in most established market spaces – red oceans – are shrinking steadily. information imperfections atrophy instantly. Demand across developed markets reaching a plateau. As trade barriers between nations & regions fall. Technological advances have substantially 329 improved industrial productivity. Population shrinkage across a no.
. Incumbents often create blue oceans within the ambit of their core business. They are not necessarily about technology.CONCEPTUAL UNDERPINNINGS Blue oceans have existed in the past and will exist in the future as well. managerial moves are. Company & industry are the wrong units of 330 strategic analysis. the underlying technology was often already in existence. History indicates that blue oceans exist in three basic industries – automobiles (how people get to work) – computers (what people use at work) – entertainment (what people do after work).
BLUE OCEAN .IMPLEMENTATION Reduce Which factors to be reduced below the industry standard Eliminate Which of the industry factors that the industry takes for granted should be eliminated Create VI Which factors should be created that the industry has not offered Raise Which of the factors should be raised above the industry’s standard 331 .
IMPLEMENTATION SEQUENCE Buyer Utility (1) Is there exceptional buyer utility in your business idea? Price (2) Is your price easily accessible to the mass of buyers? Blue Ocean Strategy Adoption (4) What are the adoption hurdles in actualizing your business idea? Are you addressing them up front? Cost (3) Can you attain your cost target to profit at your strategic price? 332 .
Citibank – Automated teller machines & credit 333 cards. .SOME GLARING EXAMPLES In the last century authors Kim and Mauborgne have documented the creation of more than 150 blue ocean creations across 30 industries – Virgin Atlantic: Fractional jet ownership or travel to space. Southwest Airlines: Pioneering the concept of LCC. Sony Play Station: Redefining machine-human interface in entertainment and targeting an altogether new user base.
All they need to do is change their managerial frames. Off late emerging views in strategy having its origin in (Organization Theory) led to a paradigm shift to what is called the – reconstructionist view. companies & managers are largely at the mercy of economic forces. According to this view managers need not be constrained to act within the confines of their industry. According to this view. greater than themselves.WHAT THEN IS THE HANDICAP? Most of the traditional views in strategy having its origin in (Economic Theory) led to what is called the – structuralist paradigm. 334 .
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