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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. 7 . It is all about creativity and innovation. It is long-term in nature. It is a holistic and integrated approach.STRATEGIC MANAGEMENT . It provides broad guidelines. It is irreversible. It involves substantial resource outlay.FEATURES It forms the core activity of the top management. It requires full commitment of the top management.
It is about a definite formula. It brings instant success. It attempts to minimize risk. It involves nitty-gritty's. It is rocket science. It is fool-proof in nature. It about mere data and facts. It a bundle of techniques or even tricks. It is about forecasting.STRATEGIC MANAGEMENT – MYTHS It involves short-cuts. 8 . It involves only the top management.
To leverage size. . To generate large resource pool. again and again ……. rather than reactive. To innovate. To be insulated against environmental threats. 9 To develop core–competencies.STRATEGIC MANAGEMENT IMPERATIVES To be continuously alert. To gain expertise in technologies. scale and scope. To be future oriented. To be proactive. To assimilate change faster. To tap markets across boundaries.
but by virtue of their courage. In the ancient days battles were fought over land.strategies. whose origin can be traced to some of the greatest battles fought in the ancient days. but with a lot a rigour and robustness. In the ancient days battles were won not by virtue of size of the army or armory. today's battles are fought over markets. Even in today’s markets. battles fought on the market front are won by companies by virtue of their obsession & strategies. 10 .STRATEGY . In contrast.ORIGIN The word strategy has its origin from the Greek word strategia meaning Military Commander. It is an old wine in a new bottle. and more importantly . obsession.
Allied Forces Vs Germany (WW-II) – Strategy: Forging alliances. US attack of Morocco to capture Germany – Strategy: Pin-hole strategy – Wal-Mart challenging Sears by entering small towns. – Yahoo and Microsoft challenging Google. – Toyota’s entry in the US.SOME PARALLELS Japan’s attack on Pearl Harbour – Strategy: Attack where it hurts the most. 11 . – Reliance’s entry into telecom. challenging GM and Ford. Napoleon’s attack on Russia – Strategy: Waiting for the right time.
1910). a radical change in the business environment brings about discontinuity. The first major discontinuity in the history of global business environment was the . A paradigm is a dominant belief about how the business and its environment operates. – Mass Production Organization Size – Complicated Processes – Complex Structures Evolving of an emerging paradigm – survival of the fittest (Fayol & Taylor. The things happening around the firm when totally disconnected from the past leads to a paradigm shift. 12 .Industrial Revolution.EVOLUTION OF MANAGEMENT As Peter Drucker refers to it.
Survival of the most adaptable becomes a new management paradigm (Ansoff. 1960). – Global market place. – Homogeneous to heterogeneous products. The question of outperforming the benchmark became the new buzzword.EVOLUTION OF STRATEGIC MANAGEMENT The second major discontinuity in the history of global economic environment – World War II.e. 13 . – Affluence of the new customer (i. From uniform performance. push to pull). performance across firms became differentiated. Efficiency and effectiveness are no longer sufficient. – Changes in the technology fore-front.
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 .
– Biases and prejudices has a very little role to play in strategic choices pursued by managers. 15 . – The choice of strategy is primarily concerned with external ones rather than internal ones. – The choice of product-market mix is based on conscious evaluation of risk – return factors. Ansoff (1960) – Strategy can be segregated into certain mutually exclusive and inter-related components aimed at managing the growth of an organization. – It is primarily the top management’s prerogative.APPROACHES TO STRATEGY Analytical Approach – Igor H. Learning always begin on a clean sheet of paper.
how it will compete.APPROACHES TO STRATEGY Design Approach – Alfred Chandler (1970) – Structure follows strategy. The organization initially decides which industry to enter. who will be the top managers. – Organization structure will precede and cause changes in strategy. everything else follows. 16 . – Management control systems has a dominating role in influencing firm performance. Successful organizations align authority and responsibility of various departments in way to reach overall objectives. Once the control systems are in place. – The top managers then decide on the type of organization structure & systems to be in place.
competitors. – A firms performance is inversely related with the bargaining power of environmental forces to which it is exposed. new entrant. substitutes. 17 . – An organization is seldom in a position to influence the larger business environment. – The organization will outperform the industry where environmental forces are weak and vice-versa. Porter (1980) – Choose a consumer segment and position your product accordingly. – The environmental forces comprises of – supplier.APPROACHES TO STRATEGY Positioning Approach – Michael E. customer.
– Organizations can significantly alter the way an industry functions. K.APPROACHES TO STRATEGY Core Competence – C. 18 . – Core competencies are a set of skills that are unique and can be leveraged. but exploiting the resource differences among them. Prahalad (1990) – The key to superior performance is not doing the same as other organizations. They are complex resources and undermines a firms competitive advantage. – It enables a firm to deliver unimaginable value ahead of time. locating in most attractive industries and pursuing the same strategy.
STRATEGIC MANAGEMENT PROCESS Strategic Intent Strategic Planning Strategic Gap – Environmental Scanning – Internal Appraisal of the Firm Strategy Formulation – Corporate Strategy – Business Strategy Strategic Choices – Functional Strategy Strategy Implementation Strategy Performance Strategy Evaluation & Control 19 .
TOP MANAGEMENT PERSPECTIVE 20 .
It is the cornerstone of an organizations strategic architecture reflecting its desired future state or its aspirations. It’s a philosophy that distinguishes it from its competitors. A substantial gap between its resources and aspirations. It implies a significant stretch. It provides a sense of direction and destiny. A gap that consciously manages between stagnation and atrophy. A strategic intent is a statement of purpose of existence. you cannot reach there. 21 .STRATEGIC INTENT If you cannot see the future. It involves an obsession to be the best or outperform the best.
HIERARCHY Integrativ e m Do an in Visio n Mission Dominant Objective s Goal s Plans Lo g ic Single Specifi c Man y 22 t .STRATEGIC INTENT .
when radical changes in the internal and external environment (i. Dominant logic changes. 23 . 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. strategic variety) is apparent.e.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. To put it more simply.
but achievable aspirations. – It stands for the unchanging core values of the company.VISION It is a dream (not a forecast) about what the company wants to become in the foreseeable future. It ensures that the company does not wander off into unrelated zones or fall into an activity trap. 24 . – It represents the company’s audacious. beyond just making money. It provides an unity of purpose amidst diversity of personal goals. It enables the top management to remain focused. It is a combination of three basic elements – – An organizations fundamental reason for existence.
Sharing – The company across all hierarchies should have faith in it. Reachable – It should be within a reasonable target in the known future. 25 . not an utopian dream. and memorizable. In Reliance when a new project becomes operational top managers hand over charge to the SBU heads and move on to a new project. Empathy – It should reflect the company’s beliefs to which it is sensitive. clear. Brevity – It should be short.CHARACTERISTICS Reliance – Where growth is a way of life.VISION . Clarity – Vividly descriptive image of what the company wants to be known for in the future.
VISION . It makes strategic alignment easier. It gives a shared platform. 26 . It gives the impression of a forward-looking organisation. To prevent the fall in a activity trap. It facilitates development of skills & capabilities. It gives enlightment. It provides a holistic picture. It fosters risk taking and experimentation.ADVANTAGES To stay focused on the right track. It lends integrity and genuineness.
its reason for existence. 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. 27 . It enables the firm to define its business landscape and identify its competitive forces. Although the purpose may change over time. It serves as a road map to reach the vision. A broad mission statement helps in fending competitors.MISSION Mission defines the space that a business wants to create for itself in a competitive terrain.
28 . We offer comfort. We offer solutions. though some may seem unrelated in nature. – We do not offer steel. …………………. Some other examples – We do not offer shoes. We offer security. We offer strength. – We do not offer insurance. All the businesses of the company are strongly integrated with their main business.MISSION – SOME IDEAS Reliance – We are in the business of integration. – We do not offer software's. …………………. …………………. ………………….
– It adds legitimacy and motivation.GOALS & OBJECTIVES Reliance – We want to become a Rs.100K crore company by the year 2005. – It prevents deviation. – It provides a benchmark for evaluation. – It is based on Management by Objectives (MBO). 29 . – It helps identifying key success factors. It is an end result (quantifiable) something a firm aims and tries to reach in a time bound frame. – It keeps the mid management pre-occupied. – It lends direction – time frame in the medium term. It provides a quantitative feel to an abstract proposition.
It is specific to a particular business. – Leverage economies of size and scale. – Compress project times. 30 . It is the process of garnering necessary inputs. and gaining access to desired markets to achieve the desired goals and objectives. – Use price-elasticity to break market barriers.PLANS Reliance – Desire to invest 25K crore in telecom business by circa 2010. coordinating appropriate technologies. – Acquire a market share of indomitable position. The details of the plan Reliance Telecom adopted were – Backward integrate process technologies.
This tendency to restore continuity is known as inertia (resistance to change). strategies lose touch with the emerging realities. Historical studies have shown that most organizations tend to continue with their existing strategies. radical change may lead to disequilibrium. equilibrium is maintained. When changes in the environment is incremental. It often leads to an organizational crisis.STRATEGIC DRIFT Due to top management commitment. However. In such a context. This state of affairs is known as strategic drift. 31 . past strategies tend to have a bearing on future strategies.
STRATEGIC DRIFT FRAMEWORK Environmental Change Degree of change Strategic Change Radical Change Incremental Change State of Flux Continuity Stage of Transformation Strategic Drift Stage of Atrophy Time 32 .
– Creating obligations of reciprocity. – Hiding vulnerability. Organizational politics involves intentional acts of influence to enhance or protect the self-interest of individuals or groups over organizational goals.ORGANIZATIONAL POLITICS Strategic drift often leads to organizational politics. Some instances of organizational politics – Formation of powerful groups or coteries. 33 . – Creating a favourable image. – Distorting information to gain mileage. – Developing a platform of support. – Using covert tactics to pursue self interests.
Usually there is wide gap between the two when organizational politics is evident. – The environment context has changed. – Influential stake-holders back out. A realized strategy is what the top management actually translates into practice. – Persons responsible for strategy conceptualization and implementation are34 divergent. Other causes – – The plans are unworkable and utopian.INTENDED & REALISED STRATEGIES An intended strategy is an expression of interest of a desired strategic direction. .
LOGICAL INCREMENTALISM According to the incrementalism approach (contrary to integrated approach) practitioners simply do not arrive at goals and announce them in crafted and well defined packages. 35 . Strategy formulation and implementation are linked together in a continuous improvement cycle. this is not to be treated as “muddling”. However. but the master scheme of the rational comprehensive scheme is not apparent. Learning is an integral part of logical incrementalism. They simply unfold the particulars of the sub-system in stages. but as a defensible response to the complexities of a large organization that mitigate against publicizing goals.
36 . The broader objective should serve the overall interest of the organization. Macro Broadcasting – The broad idea is floated without details to invite pros and cons leading to finer refinements. Adaptation – As implementation progresses. Agent of Change – Formal ratification of a change plan through MBO.IMPLEMENTING INCREMENTALISM General Concern – A vaguely felt awareness of an issue or opportunity. Leveraging Crisis – A sudden crisis or an opportunity should be used as a trigger to facilitate acceptance and implementation of change.
Tampering with surface level factors often leads to atrophy.STRATEGIC TRANSFORMATION Strategic transformation (a complete overhauling of the strategic architecture) becomes inevitable whenever a strategic drift takes place. As it brings 37 with it a different dominant logic. Dominant logic’s are very rigid and sticky and prone to inertia. It creates blinders. . Dominant logic’s are the cornerstones of change when strategic transformation is apparent. Strategic transformation becomes smooth through a change in top leadership.
LEARNING ORGANIZATION A learning organization is capable of continual regeneration from knowledge. A learning organization must continuously focus on unlearning as well. experience. It helps prevent a strategic drift from occurring at the first place. – Experimentation – Fosters a culture of risk taking. 38 . Factors that fosters a learning organization – Pluralistic – An environment where different and even conflicting ideas are welcome. – Informal Networks – Emerging of new ideas. – Constructive Bargaining – Agree to disagree. and skills that fosters experimentation and questioning and challenge around a shared purpose. – Organisational Slack – Enough free space.
ENVIRONMENTAL CONDITIONS Dynamic Scenario Planning Learning Organization Static Forecasting Decentralization Simple Complex 39 .
ANALYZING BUSINESS ENVIRONMENT 40 .
It requires a quantum leap (i. It is based on the assumption of incremental change. Competitive advantage provides the surest way to fulfill the strategic gap. It is based on the assumption of radical change. Strategic gap basically points towards a vacuum of where the organisation wants to be and where it is. It points to a position of superiority with relation to competition. Strategic planning is a function of discounting the future. 41 . It is pro-active in nature. gap analysis).PLANNING & STRATEGIC PLANNING Formal planning is a function of extrapolating the past. It is reactive in nature.e.
not guided by any boundaries. A manager has to continuously scan the environment to ensure alignment of the strategies with the radically changing environment. The world is flat. 42 . Environmental scanning is very important component of strategic planning. and influences that affect an organizations way of doing things. resources and ideas move unhindered. events. Environmental factors can be external as well as internal to the organization.ENVIRONMENTAL SCANNING The environment is defined as the aggregate of conditions. It is exploratory in nature. The segments of the environment a top manager scans selectively depends upon his dominant logics.
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. for which a holistic picture is required. 43 . which may be different from the past impact. Understanding the composite effect is critical.PESTEL PESTEL attempts to provide a broad framework on how the broader environmental forces affects an organization and influences the way it practices strategy. but also to analyze the complex linkages across them. It is important not only to identify the structural drivers of change.
Currency Stability. Savings & Investment. Economic – GDP.PESTEL FRAMEWORK Political – Government Stability. Fiscal Deficit. Licensing & Quotas. Monsoon & Food Grains Reserves. FDI Inflows. Economic Model. Social Values. Inflation & Interest Rates. Capital Market & Forex Reserves. Infra-Structural Investments. Social – Population Diversity. Government Attitude. 44 . Language Barriers. Religious Sentiments. Central – State Co-alignment. Economic Cycles. Subsidies & Protection. Literacy Levels. Income & Age Distribution.
Research & Development. Carbon Credits. Direct & Indirect Taxes. Employment Laws.PESTEL FRAMEWORK Technological – Innovation. Technological Convergence. Product Safety & Health Hazards. Non-Fossil & Alternative Fuels. Patents. Waste Disposal & Emissions. Pollution Control Laws. Legal – Monopolies Legislation. Patent Laws. 45 . Consumer Protection Laws. Extended Producer Responsibility. ERP. Environmental – Global Warming & CSR. Obsolescence Rate. Environmentally Preferable Purchasing. Product Design.
MRTP Liberalization. Economic Reforms – Fiscal & Monetary Reforms. Curtailment of PSU’s. PSU Disinvestments. Structural Adjustments – Phasing out subsidies. Abolition of import licenses.VRS. Exit Policy. Encouraging exports. Rupee convertibility. Dismantling price controls. Banking Sector Reforms. New Trade Policy (NTP) – Lowering import tariffs. 46 . Capital Market Reforms.ECONOMIC LIBERALISATION New Industrial Policy (NIP) – Liberalizing industrial licensing. Encouraging FDI. FERA Liberalization.
DISCONTINUITY Destabilization due to entrepreneurial freedom – Cocoon of protection disappears – Diversification spree – Existing notions of size shaken – Industry structures change radically – Economic Darwinism . Mergers & Acquisitions 47 .Survival of the fittest MNC Onslaught – Enhancing stakes – Power Equation – Joint Ventures – Technological Alliances – Take-over threat.
DISCONTINUITY Hyper Competition – MNC’s . Consumerism Challenges on the technology front – Competencies become technology based – Investment in R&D become inescapable 48 .Globalization – Cheap Imports & Dumping – Push to Pull Marketing Buyers exacting demands – Shortage to surplus – Price competition – Life-style changes – Stress on quality.
DISCONTINUITY Compulsion to find export markets – Identifying competitive advantage – Technological gap – Global presence – Depreciating currency – Exports Corporate vulnerability – It is no longer business as usual – Capital inadequacy – Lack of product clout and brand power – One product syndrome – Loss of monopoly 49 .
PORTER Threat of New Entrants Bargainin g power of Suppliers Competition from Existing Players Bargainin gBargainin power g of power of Suppliers Customer s Threat of Substitutes 50 .FIVE FORCES MODEL .
The model should not be used as a snapshot in time. It is even wiser to apply the same at the product – market level. profit potential) per se. It depicts the attractiveness of an industry (i.FIVE FORCES MODEL ASSUMPTIONS The model is to be used at the SBU level and not at the industry level. but also used to understand how they can be countered and overcome.e. incremental or otherwise. 51 . the forces are subject to changes. It should not only be used to understand the forces. The five forces have strong cross-linkages.
Threat of Customers – Buyer concentration and volumes. Presence of substitutes or unorganized sector.PORTERS FIVE FORCES ANALYSIS Threat to Entry – Economies of size and scale. High switching costs. Low customer switching costs. Government policy. Resource profile & fear of retaliation. Learning curve advantages. Capital requirements. Low margins & stagnancy. Scope for backward integration. Unimportance of product quality. Product differentiation through proprietary technology or brand power. Undifferentiated product. 52 . Industry stagnation. Access to distribution channels. Low relative importance of the segment.
Product perishability. Unorganised sector. 53 . Low level of differentiation. Jockeying for position – Fragmented market. Produced by industries earning high profits. Piracy and counterfeits. Lack of substitute inputs. Scope for forward integration. Low relative importance of the segment.PORTERS FIVE FORCES ANALYSIS Threat of Suppliers – Supplier monopoly. Industry stagnancy. High customer switching costs. High exit barriers. Intermittent overcapacity. Differentiated inputs. Diversity of players. Threat of Substitutes – Improvement in price -performance trade-off. Buyer’s propensity to substitute.
Inertia – Excessive commitment to past strategies prevents firms from tapping emerging opportunities. Resource Profile – It highlights the capabilities (generic) or competencies (business specific) of the firm. dominant or related diversified or unrelated diversified businesses (Infosys. Business Scope – The intention whether the firm wants to be in a single. 54 . Reliance). Cohesiveness – Degree of bonding existing across affiliated firms.FIRM ENVIRONMENT Size and Scale of Operations – It is a very important component of competitiveness in today's global context (Bharti – MTN. Tata).
it can price its products more competitively. and with lower prices it can increase its sales volume. Matured firms will always be positioned advantageously on the ECurve than new entrants. Experience curve has strong linkages with performance. which further reduces costs. With lower costs. 55 . experience teaches better and more effective way of doing things. The E-Curve thus enables organisations to build entry barriers. an E-Curve can prove to be futile during discontinuity.EXPERIENCE CURVE The cost of performing an activity declines on per-unit basis as a firm becomes more efficient. However. leverage it as a competitive advantage.
EXPERIENCE CURVE Cost per unit of output Decreases at an increasing rate Point of inflexion Decreases at a constant rate Decreases at a decreasing rate Production / Volume 56 .
EXPERIENCE CURVE .TRADITIONAL VIEW Efficiency = Lower Costs 2 3 1 Experience = Efficiency Lower Costs = Higher Sales Entry Barrier = Better Performance 4 6 5 Higher Sales = Lower Costs Lower Costs = Entry Barrier 57 .
STRATEGIC VIEW Inertia = Limited Growth Experience = Inertia 2 3 1 Limited Growth = Diversification Strategic Failure = Poor Performance 6 5 4 Diversification = New Experience New Experience ≠ Old Experience 58 .EXPERIENCE CURVE .
Suppliers. Customers. 59 Analysts. Business Intelligence – Bankers. Acronym for Strengths – Weaknesses – Opportunities – Threats. It is one of the earliest models in environmental scanning. Case Studies – Structured Questionnaires. Interviews. Press Clippings & Interviews.SWOT The framework was originally conceptualized by Kenneth Andrews in 1970. A SWOT audit involves – Company Records – Annual Reports. It helps an organisation to capitalize on the opportunities by maximizing its strengths and neutralizing the threats minimizing the weaknesses. Websites.VULNERABILITY ANALYSIS . Observation. Competitors. .
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 .
Tata. Aditya Birla. Infosys. Honda. Large resource pool – Eg. Volkswagen. Good credit rating – Eg. Excellent penetration – Eg. Reliance. Biocon. Engineering Skills – Eg. Infosys. Dr. Toyota. High quality products – Eg.SOURCES OF STRENGTH Strong brand identity – Eg. Ranbaxy. Reliance. Motivated employees & cordial industrial relations – Eg. ITC. 61 . Economies of scale – Eg. Siemens. SBI. Sony. Strong R&D base – Eg. HUL. Strong after sales & service network – Eg. Tata Steel. Reddy’s. Caterpillar.
Excessive diversification – Eg.Raymond. Excess manpower – Eg. Strategic myopia – Eg. Inefficient top management – Eg. Organizational Politics – Eg. Lacking experimentation culture – Eg. Modi Group. Inertia – Eg. Hindustan Motors. Nirma. K. Group . B. Single product syndrome – Eg. Bijoligrill. K. Lack of product / brand clout – Eg. J. Ballarpur Inds. Procter & Gamble.SOURCES OF WEAKNESSES Outdated technology – Eg. Tatas. CESC. Narrow business scope – Eg. CMC (Tata Group) 62 . SAIL.
Fertilizer. Sugar. Exit Policy – Eg. Abolishing MRTP – Eg. Middle-class buying power. ECB’s. GDR’s. Free pricing – Eg. VRS. Collaborations & Joint Ventures – Bharti & WalMart. Life style changes – Eg. Capital market reforms – Eg. Abolishing CCI. Market driven Interest rates – Eg. Market driven Pricing – Eg. Retailing. Globalization – Eg. 63 . Telecom. Growing population – Eg. Maruti. Fertilizers. Insurance. Sugar.Tata Motors. Banking.SOURCES OF OPPORTUNITIES Delicensing of Industries – Eg.
11/9. Group disintegration – Eg. Land acquisition . Tata Steel. Onida. Import relaxation – Eg. Economic recession – Eg. Natural disaster – Eg. (2008). Lack of Corporate Governance – Eg. Foreign Direct Investment (FDI) – Eg. Tsunami. Dumping from China. Hostile take-over – Eg. Terrorist attacks – Eg. Satyam. 26/11. (1985–1990). 64 . Singur SEZ.Social activism – Eg. Nationalisation – Eg.SOURCES OF THREATS Political instability – Eg. Reliance. Bajoria – Bombay Dyeing. Earth Quake.
e. Strategic responses (including adaptation) to opportunities and threats is critical for survival and success. 65 . scenario analysis). Forecasting – Predict the future (i. Stages in ETOP analysis – List the aspects of the environment that has a bearing on the organization. Holistic view – Prepare a complete overall picture.ETOP Acronym for Environment – Threat – Opportunity – Profile. It represents a summary picture of the external environmental factors and their likely impact on the organization. Delphi's technique. time series. Assess the extent of impact of the factors.
Relative attractiveness of the market. High investment intensity acts as a drag. selectively. Some key findings on major performance drivers that explains 75% deviations in performance – Product quality and relative market share. . 66 Vertical integration is a powerful strategy.PROFIT IMPACT OF MARKET STRATEGY PIMS is a database model developed by GE and later extended by HBS to examine the impact of a wide range of strategy variables on business performance. It is also a form of assessing vulnerability through longitudinal analysis. An organization can draw upon the experience of its peers in similar situations.
Managers should be particularly cautious while referring to such data during times of discontinuity as it makes past patterns futile. – Contexts may vary over time.LIMITATIONS The analysis is based on historical data and it does not take care of future challenges.PIMS . Authenticity of data is of prime importance – Contexts drawn across one organization may not be applicable to another. – Contexts may vary across countries. therefore 67 validity may be a question. . As every organization is unique in its own way. when radical changes in the economy takes place.
It involves a three-stage process – Identify KSF – What does it take to be successful in a business? Drawing KSF – What should be the organizations response to the same? Benchmarking KSF – How do we evaluate organization success on this factor? 68 .KEY SUCCESS FACTORS (KSF) KSF relates to identification and putting concentrated effort on a particular activity or process which forms the very basis of competitive advantage. It enables the top management to draw focus. KSF helps organizations spot early opportunities and convert them into value adding business propositions.
IDENTIFYING ALTERNATIVE STRATEGIES 69 .
A corporate strategy identifies and fixes the strategic gap it proposes to fill. It reflects the customer needs it intends to satisfy.CORPORATE . national. It determines the locus a firm encounters with internal and external environment. 70 . It provides broad direction to the groups vision and mission. It indicates the quality of growth an organization is looking for. global) of a firm and deals with choices of allocating resources across them. dominant.GRAND STRATEGY It is concerned with the overall business scope (single. related. 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. 72 . The reasons for stability strategy – – Lack of attractive opportunities. does not relate to do-nothing (Eg. (Eg. The scale and scope of present operations remains almost intact. Even during adverse times firms need to adopt a strategy to sustain current performance levels. Citibank). Hindustan Motors). – To stop for a while and assess past records. – Why disturb the existing equilibrium set up? – Limited resource position.STABILITY It involves maintaining status-quo or growing in a slow and selective manner. erosion of capabilities. Stability however.
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.
convert competitors customers. Ujjala. Nirma. (Eg. – The company carries a risk of product obsolescence. Market penetration can be achieved by – increasing sales to current customers. – Helps firms which are not comfortable with unfamiliar terrain. – Elongated product life-cycle. 74 . Britannia). – Suitable for industries where scope for technological breakthrough is limited.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. direct non-users to users. within a well defined market segment.
Du Pont – Nylon: parachutes. – Creativity and innovation – thinking out of the box. – Immense customer reach & flexible advertising. tyres. – Stretches product life cycles. socks & stockings. (Eg. fabrics.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. carpets. upholstery.…… or Teflon: aircraft technologies to cutlery to paints or Raytheon Corp – Microwaves: radars to kitchen appliances). – Moves across geographical boundaries. – Unconventional and flexible distribution channels. 75 .
serviceability. aesthetics. conformance. durability. Microsoft: DOS to Windows) or a substantial improved version (incremental) of an existing product to repeatedly enter the same market (Eg. Refills) 76 . reliability. perception. – Leverage on customer and brand loyalty. features. – Leveraging through – innovation. – Deliverable through – redesigning or reengineering. Close Up: Fluoride – Gel toothpaste or VIP . – Areas of product improvement – performance. – Substitutes that serve the same needs (Eg.PRODUCT DEVELOPMENT It is a strategy where a firm tries to achieve growth through a radical new product (Eg.Strolleys).
– Permits: quotas. dominance).DIVERSIFICATION It marks the entry of a firm into newer markets with new products. the new business is distinct from the existing business in terms of – inputs – technologies – markets. From the traditional point of view. 77 . licenses (i. – Internal capital market. – Risk reduction. thereby creating a new business. Why do firms diversify in the Indian context? – Shift the growth trajectory or opportunistic.e. industrial embassies). – Conglomerate or market power (i.e. From the modern point of view they are strategically dissimilar. – High transaction costs and institutional gaps.
while the coffee business would register a return of 30%. Let us assume that there are two businesses constituting the entire market – coffee and icecream.HOW DIVERSIFICATION REDUCES RISK? Consider a hypothetical planet. either of which is equally likely to prevail. ice-cream business would register a return of 10%. cold wave dominates the planet. What would be your ideal diversification strategy through optimization? 78 . 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 10%. the ice-cream business would register a return of 30%. If the hot 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 . Maruti – Sona Steering). Dr. Reddy’s). Usually the firm concentrates on its core activities. and out-sources the noncore activities (Eg.Where one firm has full ownership and control over all the stages of a value-chain in the manufacturing of a product (Eg. Reliance). 85 . Ranbaxy. Tapered integration .A firm gets most of its requirements from one or more outside suppliers that is under its partial control through value chain partnerships (Eg.A firm produces part of its own requirements and buys the rest from outside suppliers with a variable degree of ownership and control.QUASI & TAPERED INTEGRATION Full Integration .
A CASE OF TAPERED INTEGRATION Partial Ownershi p Transmission Engine Design Electricals Steering 86 Seats & Carpets Windscreen Ordinary Components Zero Ownership Very Critical Component s Full Ownership Critical Component s .
synergies pulling in opposite directions). Drawbacks of unrelated diversification – – Cost of failure (i. and are also strategically dissimilar.CONGLOMERATE DIVERSIFICATION It relates to entry of firms into businesses which are distinct in terms of – inputs – technologies – markets. lack of strategic intent. myopia).e.e. – Cost of ignorance (i. 87 . – Cost of neglect (i. – Cost of dysynergy (i. lack of knowledge of competitive forces). core business).e.e. Firms usually engage in conglomerate diversification when emerging opportunities are very attractive and offers potential growth opportunities.
CONGLOMERATE DIVERSIFICATION Paper & Packaging Edible Oils Tobacco Hotels Food & Confectionary 88 .
reactive) and survival is at stake and the firm does not have resources to fend off competitive forces. Tatas sale of Goodlass Nerolac. In strategy there is no scope for sentimentality with divestment. 89 . ACC) in full to an independent entity. (Eg. It is may also be a pro-active strategy. L&TCement Division to Aditya Birla Group) technically known as divestiture or a product (Eg. Tata Press). It taken into account when performance is disappointing (i. It may also involve a SBU (Eg. Tata Pharma. where a company simply exits because the business no longer contribute to or fit its dominant logic.e. Glaxo’s “Glucon-D” to Heinz).DIVESTMENT Divestment is a defensive strategy involving the sale of entire stake (Eg.
the Companies Act. Sale of Diamond Beverages to Coca-Cola for US $ 40 million). involving 608 pence per share). Leveraged Buy-Out (LBO) – Here the company’s shareholders are bought out through a negotiated deal using borrowed funds.3 billion. (Eg. (Eg.ROUTES Outright Sale – Popularly known as the asset route. However. Tatas buy-out of Corus for US $ 11. 1956 does not permit this mode. where the equity is allotted amongst the existing shareholders on a pro-rata basis. where 100% of the assets (including intangibles) are valued and paid for. Hive-Off – A hive off is the creation of a new entity followed by transfer of assets. 90 .DIVESTMENT .
91 . developing facilities right from the scratch) or through brown-field projects (i. mergers and acquisition. and divestment strategies applied simultaneously or sequentially for a portfolio of businesses. growth. because every business has its own unique external and internal environment. It is usually pursued by a business group with diverse interests across multiple industries. There can be no ideal strategy for every business.COMBINATION STRATEGY It is a mixture of stability.e.e. joint ventures). A combination strategy can be implemented through green-field projects (i.
STRATEGY CHOICE & PORTFOLIO ANALYSIS 92 .
Dominant logic enables top managers to selectively scan the environment and make trade-offs.STRATEGIC CHOICE A strategic choice seeks to determine the alternative courses of action available before top managers to achieve its strategic intent. What then is the magical number? 93 . It attempts to answer the following questions – How effective has the existing strategy been? How effective will that strategy be in the future? What will be the effectiveness of alternative strategies? It is impossible for a manager to assess all the alternatives. In most cases the trade-off is between resources and opportunities.
managers need to ask the right questions.SELECTIVITY IS THE KEY The role of a top manager is not to solve a problem. will help the firm achieve its intent. To identify the right problems. The key task before a top manager is to identify the right problems. nor is to a define a problem for others to solve. For an optimal choice the following four issues need to be resolved – Is the strategy clearly identifiable? Is it consistent with the resources of the firm? Will it be able to exploit the opportunities in full? Is it in tune with the values and beliefs of the firm? 94 . They must choose problems which will lead to the right kind of opportunities. if addressed.
Proximity to the corridors of power (i. embassies). Resource sharing. High degree of centralized control (GEO.e.DEFINITION A business group is known by various names in various countries – guanxique in China. keiretsus in Japan. Their roots can be traced to a single family or clan and share broad similarities. 95 Succession planning is critical to continuity. BRC). formal and informal ties. Their origins can be traced back to market imperfections existing in an economy (MRTP Laws.BUSINESS GROUP . business houses in India. . chaebols in Korea. Licenses & Quotas. Managing Agency).
RESOURCE SHARING ACROSS FIRMS Parent Company Firm 1 Firm 5 Firm 3 Firm 2 Firm 4 96 .
STRATEGIC CHOICE – MACRO TIMING Recession (Stability) Prosperity (Diversificatio n) Depression (Divestmen t) Recovery (Intensification ) 97 .
Divestment Duration (Yrs) Inception Intensification 98 .STRATEGIC CHOICE – MICRO TIMING ReEngineering Growth (%) Maturity Stability Growth Diversification Decline .
Power and resources often goes hand in hand. 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. Why? Businesses are not about liquid assets. sometimes impossible. Investing in emerging businesses may not actually be so simple as it appears to be. therefore. Relatedness across resources are difficult to realize. there are high costs associated with entry and exit. Rules of the game are different. 99 . next only to choice of business.
BCG GROWTH MODEL Relative Market Share (%) Industry Growth (%) Low High High Low Stars Question Mark ? Cash Cow Dogs 100 .
BUSINESS ANALYSIS – TATA GROUP Question Marks – They have potentials in the long term. Tata Steel). Tata-AIG). provided the company is able to build up on its market-share (i. which remains a big? These businesses are net users of resources. TCS. provided the industry growth rate continues and the company is able to maintain its growth (i. diversification). but to larger extent than a question mark. 101 .e.e. product development). Tata Telecom. Trent. market penetration. market development. and their risk profile is high (Eg. Stars – They achievers in the near term. These businesses are also net users of resources (Eg.
Tata Pharma. Given that the growth potential in the business is low. Dogs – They are a drag on the group. cash cows may also need to invest provided the industry takes an upswing (Eg. However.e.BUSINESS ANALYSIS – TATA GROUP Cash Cow – These are matured businesses. Tata Tea. Groups prefer to dispose off such businesses (i. stability). Nelco.e. Tata Chemicals). and they lack on competencies to take on competition and are basically cash traps (Eg. Tata Motors. divest) as achieving a dominant position in these businesses is a difficult task. harvest. Indian Hotels. Tata Press). and the company dominates the industry ahead of competition (i. they are generators of resources. 102 .
niche – Rolex. Data may be prohibitive. Armani). Cash cows may actually need substantial investments to retain their market position (Eg.LIMITATIONS It does not address the concerns of a business which is in the average category (usually the majority). Certain businesses in the low market share category may be the result of a conscious strategy (i.e. The model does not provide specific solutions within a particular category. Cartier.BCG . The terminologies used are somewhat prohibitive. 103 . factors are limited. HUL). Mercedes Benz. neither in high or low.
GE .MATRIX Distinctive Capabilities Strong High Medium Weak Stability Industry Attractiveness Diversify (++) Intensify (+) Med Intensify(+) Stability Harvest (-) Low Stability Harvest (-) Divest (.-) 104 .
LITTLE Inception Dominant Strong Favourable Tenable Weak Growth Maturity Decline Improve Selective Niche Abandon Industry Life-Cycle Divest Harvest 105 Competitive Position Invest Consolidate Hold .ARTHUR’ D.
SHELL – DIRECTIONAL POLICY MATRIX Business Sector Prospects Attractive Average Unattractive Generate Cash Phased Withdrawal Distinctive Capabilities Strong Market Leadership Try Harder Double Or Quit Growth Average Custodial Weak Phased Expand Withdrawal Divest 106 .
Divest – Selling a part or the entire business at one go. BCG – Boston Consulting Group.TERMINOLOGIES Harvest – It entails minimizing investments while trying to maximize short-run profits and cash flow with the intention to exit the business in the near future. Portfolio – An organization is perceived as a portfolio of businesses. SBU – A business unit which is strategically different from another and also shares a different SIC code. 107 . Disinvestment involves selling in phases. Gap Analysis – It emphasizes what a firm wants to achieve.
BUSINESS STRATEGY & COMPETITION 108 .
building market-share. The principal focus is on meeting competition.e. and earning super-normal profits (i.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. Such resources or activities should be distinctive and sustainable over time. Competitive advantage is the back-bone of strategy. 109 . The strength of a firm in a particular business usually stems from its competitive advantage.
preventing new entry and/or competition (Hax & Wilde). involving harmonizing and integrating multiple streams of technologies. Blue Ocean – Consciously moving away from overcrowded industries to uncharted territories and making competition irrelevant (Kim & Mauborgne). Resource Based View – Obsession with competence building. 110 .BUSINESS STRATEGY FRAMEWORKS How to be distinctive and yet sustainable – Differentiation – Understanding of the dynamics of competition. developing competitive advantage (Porter). leveraging (Prahalad). identifying critical success factors. Delta Lock In – Two dominant players co-opt to selfreinforce and create or escalate an entry barrier.
PORTERS – COST LEADERSHIP Cost Leadership – It is a strategy that focuses on making a firm more competitive by producing its products more cheaply than its competitors. Reliance) or may pass it to customers to increase market-share (Eg. proprietary technology. Compress project duration through crashing. T-Series). preferential access to raw materials. Ayur. backward integration. Steep experience curve effects. Sources of cost advantage are varied and depends on the structure of the industry – Economies of size. Nirma. The firm may retain the benefits of cost advantage by enjoying higher margins (Eg. Locational or early entry advantage. 111 .
Feeling the pulse of the customer. Intel. 112 . Successful product differentiation is often followed by premium pricing. Focus on brand loyalty. Sony. avoiding brand dilution. and sufficient slack. undeterred attention to quality.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). Means of product differentiation are peculiar to each industry. It selects one or more attributes that buyers perceive as important. (Eg. innovation and out of the box thinking. Culture of experimentation. Creativity.
though it may not possess an overall competitive advantage. coupled with fear of structural erosion. The target segment must have unusual needs or the delivery system catering to this segment must be unique. 113 . A focuser seeks to achieve a competitive advantage in its target segment. Maybach. Mont-Blanc. Cartier. They are poorly served by mainstream players. Armani).PORTERS NICHE OR FOCUS Focus / Niche – It is a variant strategy of cost leadership or product differentiation targeting a specific market or buyer sub-segment with the exclusion of others (Eg. Rolex. Sub optimization alone may not be a source of superior performance.
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 .
jugaad or frugal engineering).e.HYBRID STRATEGY A hybrid strategy is the simultaneous pursuit of cost leadership and differentiation. and usually outperforms a stand alone generic strategy. 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. 115 . in a hyper competitive context the two strategies need not be mutually exclusive. Reducing cost does not always involve a sacrifice in differentiation. Tata Nano). Though cost leadership and differentiation are inconsistent.
unless such a player is capable of discovering a profitable segment. leading to what is called – straddling. It tries to compete through every means.STUCK IN THE MIDDLE A firm that engages in a hybrid strategy and fails to achieve a competitive advantage because it was ill conceived will be . The positioning therefore gets – blurred. It will have a competitive disadvantage vis-à-vis a clearly positioned generic player. 116 . It is usually the result of a firm not willing to make trade offs.stuck in the middle. Industry maturity will usually widen the gap. but achieves none.
3D imaging. Consumer behaviour pattern unstable and evolving. 117 . changing customer needs. technological innovations. There is a lot of scope to define the rules of competition. ending in a differential cost economics. It is characterized by – High level of technological uncertainty.EMERGING INDUSTRY Emerging Industry – An evolving industry characterized by . Market segmentation not well defined. leading to a blurred productivity frontier and steep learning curve. coupled with low penetration levels. Speech recognition software's. Nano technology.) Excessive turbulence in the dynamics of the environment. (Eg. First-time buyers. Artificial intelligence). Eg.radical environmental changes.
Retail and telecom. Eg. leading to clear fragmentation. Eg. IT. Air Conditioning. 118 . because of lack of economies of size and scale. Government regulations in the form Eg. MRTP may also cause fragmentation. High exit barriers because of huge investment in CAPEX. Diverse customer needs. It is characterized by – Low entry barriers. Eg.GROWTH / FRAGMENTED INDUSTRY Growth Industry – An industry characterized by high growth potential in the long run and where no firm has a significant market share (an edge over another). Scope for players to change the rules of the game. Paints. Consumer durables.
well defined consumer behavioral patterns and imperfect competition leading to near monopoly. early entry and location advantages. distribution networks. established industry dynamics. Limited scope for innovation . collaboration and co-option. 119 .technological maturity. Strong entry barriers. technological maturity. Firms are rule takers in the segment as productivity frontier is well defined.MATURED INDUSTRY Matured Industry – An industry characterized by saturation in growth rates. Cartel among existing players through collusion. because of economies of size and learning curve effects.
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). 120 . Firms facing a declining phase are characterized by inertia and slow to react to environmental changes. backed by corporate espionage. and costly price wars. Typewriters. with little or no signs of recovery. Exit barriers are extremely high because of limited prospective buyers. scooters. Learning abilities have been stunted and firms adverse to investment in R&D and make fresh investments. (Eg. Nature of competition extremely high.
increasing scope. focus more on product differentiation or even a hybrid one. recreate new markets. branding and promotion. Matured Industry – Sophisticated cost analysis.COMPETITIVE STRATEGIES Emerging Industry – Set benchmarks. strike alliances. Fragmented Industry – Identify. Locate a defendable position. or else exit the segment. strictly product differentiation and not standardization. aggressive building of distribution networks. mergers and acquisition. premium pricing. process innovation. regenerate. Declining Industry – Redesign. move beyond boundaries. 121 . strictly cost differentiation. reengineer. assess and overcome fragmentation.
They are a standard in nature. patents. brands. 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. 122 . positions based on resources which are unique and inimitable are far more sustainable even in the long term. and complex learning experiences in integrating and harmonizing technologies (distinctive capabilities) that play an important role in delivering competitive advantage through “causal ambiguity”. However. Intangible – These refer to goodwill.RESOURCE BASED VIEW Differentiation based on cost or products saturates and ceases to exist beyond the medium term.
e. There is a high degree of internal and external causal ambiguity involved in it. they are woven around technologies. Hence. Typically.CAPABILITIES & COPMPETENCIES These include a complex combinations of tangible and intangible resources that organizations use to convert inputs to outputs. can be leveraged across businesses) or specific to a particular business. differentiation based on capabilities can be sustained even in the long run. Capabilities can be generic (i. Therefore firms should concentrate on developing complex resources that forms the very basis of differentiation. They play a very critical role in shaping competitive advantage. 123 . but not necessarily.
COMPETITIVE ADVANTAGE 124 .
A portfolio of competitive advantage comprises strategic advantage profile (SAP). 125 . Strategy drives competitive advantage. It results in a distinct differentiation advantage or a cost advantage or hybrid as well.e. and results in well springs of new business development. not absolute) to competition.COMPETITIVE ADVANTAGE A competitive advantage is a position of superiority relative (i. It enlarges the scope of an organization. Success of a strategy critically depends on SAP. competitive advantage subsequently becomes the back bone for a competitive strategy.
Identification of SAP is critical for and stretching and leveraging of resources. Most successful organizations around the world have a well balanced SAP.STRATEGIC ADVANTAGE PROFILE (SAP) Organizations have to systematically and continuously conduct exercises to identify its SAP. In today's world of discontinuity. SAP changes from time to time. In most cases SAP is hidden and dormant. Internal strategic fit between its strategy and dominant logics is essential for the top management to stretch and leverage SAP. 126 .
A VC is often compared with a relay team. Today SCM is integrated with greening the environment as CSR practices. Inventory Mgt to Logistics Mgt to Supply Chain Mgt (SCM).VALUE CHAIN ANALYSIS A value-chain segregates a firm into strategically relevant activities to understand its composite behaviour. Substantial cost reductions also follow. faster product launches. 127 . each of the players need to be efficient backed by sufficient coordination at the contact points (i. Competitive advantage arises not from an individual activity but a stream of inter-related activities. and enhanced customer tracking – higher market share. kaizen or internal customer). VC pay-offs: better product availability.e.
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 .
STRATEGIC FIT – THE PORTER WAY The sustainability of the value chain depends on the degree of fit between the activities. – Third order fit refers to optimization of effort. 129 . – First order fit refers to simple consistency between each activity and the overall strategy. A learning organization helps create strategic fit. Operational effectiveness is not strategy. – Second order fit occurs when activities are reinforcing amongst them. Fit is important because discrete activities result in negative synergy and can also be easily copied by competitors. A high fit involving a complex chain of activities drives both competitive advantage and its sustainability.
– Cannot be easily imitated or substituted. – Can be sustained even in the long run. but not necessarily. It should satisfy the following conditions – Contributes significantly to customer benefits. . Core competence has a high degree of external and 130 internal causal ambiguity embedded in it. A core competence usually has its roots in technology.CORE COMPETENCE A core competence represents the collective learning's of an organization around diverse streams of technologies. – Can be leveraged across businesses. These skills results in distinctive activities and processes. It forms the very basis of competitive advantage.
A competitive advantage may or may not lead to superior performance. Majority of the firms have competitive advantage. A competitive advantage is sustainable in the shortmedium term. a core competence always implies a competitive advantage. a core competence is sustainable even in the long-term. only global leaders possess a core competence. a core competence has its roots in a set of skills. a core competence usually does. 131 .CORE COMPETENCE A competitive advantage does not necessarily imply a core competence. A competitive advantage manifests from a function.
In a game (similar to a business) one players win is always another's loss. In fact there are no. 132 . A game is a contest involving two or more players. each of whom wants to win. the stringent assumptions of game theory and difficulty in ascertaining of pay-offs makes game theory application difficult in business. However. Here the magnitude of gain offsets the magnitude of loss equally. illustrations depicting a win-win situation. This is known as a zero-sum game.GAME THEORY The game theory was developed in 1944 by Oscar Morgenstern. Subsequent work on game theory by John Nash led him to win the Nobel prize in 1994.
Firm Y’s Strategy Use Radio Use Radio +2 +6 Use Newspaper +7 -4 133 Firm X’s Strategy Use Newspaper Firm X’s Pay-Off Matrix . An unbiased game is one where both the players have equal chances of winning.BIASED AND UNBIASED GAME A game is said to be biased when one of the players have a disproportionate chance of winning.
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.
iteration) rather than through collusion (E.TYPES OF GAMES Simultaneous Games – This is a situation where the players have an option to choose to cooperate or not through collusion. Repeated Games – In this situation the players interact repeatedly with each other sub-optimizing the outcome possibilities. Yahoo Vs Microsoft). 135 . However. It represents the classical “prisoner’s dilemma”.g. there is likely to be temptation by any of the players to try to steal the advantage over the other by breaking the rules of the game (Eg.e. Coke Vs Pepsi). This is usually through learning by “experience or observation” (i. collaboration or cooption.
– Making pricing more transparent. It results in a shift in the productivity frontier. – Building incentives for customer loyalty. . 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.
DELTA MODEL & LOCK-IN
Its a systematic approach where-in two or more industry majors, who by default has achieved a proprietary position (Microsoft – Software / IBM – Computers) which are not necessarily best-products in the industry, co-opt to create a lock-in. A lock-in implies that other players has to conform or relate to that standard in order to prosper. Becoming the industry standard requires – strong brand, causal ambiguity, and close relationship with other companies offering complimentary services. Lock-in is self reinforcing and escalating (i.e. accelerating effect).
THE THREE STRATEGIC POSITIONS
System Economics Market Dominance Complementary Share
Enabled through effective use of technology
Total Customer Solutions
Customer Economics Cooperation Customer Share
Product Economics Rivalry Product Share 138
Bill Gates is the richest man in the world not necessarily because he has developed the world’s best software's or excels at customer satisfaction; but he has got an army of people working for him who are not on his payroll – all the application software providers who are writing programs based on “Windows” compatible operating platform. Once you create the lock-in it is sustainable because of the “network effects”; which creates the proverbial “virtuous cycle” – customers want to buy the computer with largest set of applications and software developers want to write programs for the computers with the largest installed base.
The proponents (Hax & Wilde) believe that every organization has the ability to create and sustain a “lock-in” positioning (though in varying degree). This “system lock-in” is referred to as “delta” – delta being the Greek letter that stands for transformation and change amongst the players. The lock-in once created becomes very difficult for a firm to penetrate, and becomes a distinct entry barrier. The model is based on the belief that it compliments Porter’s differentiation model and RBV framework instead of contradicting them. In a lock-in strategy the performance outcomes are dependent on the success of another.
It relates to translating strategy formulations into practice. Performance realization of a strategy depends on the implementation effort. Successful implementation also depends on the appropriateness of the strategy. Since strategy implementation is a time bound process, alignment (i.e. strategic fit) is a key variable during times of radical change. Some of the other levers of successful strategy implementation are – Transformational leadership and motivating power. Resource allocation; its stretching and leveraging. Compatible organization structure & control systems. Inertia & resistance to change.
– Resource commitment from top management. internal strategic fit (strategy – dominant logic) is critical to strategy implementation. – Development of capabilities & competencies.IMPORTANCE OF STRATEGIC FIT Strategic fit has a central role to play in strategic management. While external strategic fit (strategy – environment) is relevant for strategy formulation. 143 . – Unlearning & learning of new skill sets. A high strategic fit (co alignment) is useful because it enables – – Appropriate and timely response. – Changing the rules of the game. – Better strategic and operational control.
In such a situation.FORMULATION Vs IMPLEMENTATION Traditionally. at the cost of sacrificing a lesser degree of control. formulation & implementation can occur simultaneously. effective strategies are better crafted when there is a subtle overlapping between the two (i. while control is very effective.e. learning levels are very high. learning levels are very low. Some of the key strategic learning's exists at the contact point between the organization and its customer. In such a situation. strategy formulation and implementation has been perceived to be distinct & independent. According to Mintzberg. In fact. 144 . emergent strategy vis-à-vis intended & realized).
145 . Install a system of shared beliefs and values. He should be an agent of change. companies depend more on transformational leaders than transactional leaders. In contrast. A transactional leader is usually confined to allocating tasks & responsibilities and extracting performance. transformational leaders go one step beyond – Design a well crafted and designed strategic intent of the organization. bring about transparency. Pragmatism is the ability to make things happen. shift from compliance to commitment.ROLE OF TOP MANAGEMENT To bring about change and to implement strategies successfully.
labour. machines) referred to as threshold resources (i. minimum requirement). skills) also includes complex resources like capabilities and competencies. The various methods of resource allocation includes Historical Budget – The budgets framed by HQ for a particular SBU keeping in mind past trends. brands.RESOURCE ALLOCATION Resources allocation includes tangible resources (Eg. land. Performance Budget – SBU managers need to justify the distinctive resources in terms of the opportunity it is pursuing yields the highest possible pay-offs. Intangible resources (Eg. patents.e. 146 . Zero Based Budget – In this case the budget of a SBU has to be worked out right from the scratch.
Due to causal ambiguity (complexity). Moreover. 147 . Distinctive capabilities are complex set of skills woven around technologies. Mobiles). Distinctive capabilities helps in stretching and leveraging resources thereby overcoming two major constraints involved in strategy implementation – times & costs. convergence of multiple streams of technologies at the product – market level is becoming increasingly evident (Eg. these capabilities are sustainable even in the medium to long term. Flat Screen Displays.CAPABILITIES & COMPETENCIES Technology and business are slowly becoming in – separable. though not necessarily in the case of emerging markets.
148 . An appropriate organization structure & adequate control systems are essential to implement strategies and achieve stated goals. A single product or a dominant business firm usually employs a functional structure. The level of centralization and decentralization is decisive. A firm in several related businesses usually employs a divisional structure. processes become people independent. Once the structure is in place.STRATEGY & STRUCTURE It is a framework within which individual efforts are coordinated to bring synergy. A firm in several unrelated businesses usually employs a SBU structure.
disbanded subsequently. Virtual Structure – A boundary less or hollow organization. Inputs . SBU Structure – Businesses segregated in terms of strategic dissimilarities (Eg. processes.TYPES OF STRUCTURES Functional Structure – Activities grouped together by a common function (Eg. Divisional Structure – Units grouped together in terms of products. with team members having dual line of control. Marketing. 149 . based on skills and competencies. Finance). Project / Matrix Structure – A formal but temporary framework initiated for the completion of a particular project/crisis. Output). Team Structure – An informal group formed for a crisis.Technology. or geographical locations.
Technology – With more and more convergence of technologies in business. as span is broader. leading to a tall structure. facing challenges & crises. Environment & People – Economic and political conditions have a major bearing on structure coupled with the attitude and aspirations of the people in the organization. It includes the desire for independence.FACTORS INFLUENCING STRUCTURE Size – As an organizations size increases there is more specialization and differentiation leading to the top management moving away from operational issues and control. 150 . structures are becoming flatter and more simpler. assuming responsibility.
co0ntinuity).INERTIA When a firm has been operating in a certain fashion for a long time. Changes in top management and unlearning helps overcome inertia. Common sources of 151 inertia – complacency with past successes. Inertia is a characteristic of a firm that endures status quo (i. Top managers resist change. Inertia acts as an impediment in strategy implementation. Most firms undergo periods of strategic continuity rather than strategic discontinuity.e. there is a tendency to continue along the same lines. irrespective whether it is from worse to good or good to worse. .
certain authors propose misfit as a source of superior 152 performance. strategies need to be evaluated on an ongoing basis to prevent deviations of fit. firms should move beyond financial performance to strategic performance as organization systems are becoming complex. . Deviation of fit is detrimental to performance and may lead to strategic failure.STRATEGY EVALUATION Strategy evaluation centers around assessment of strategic fit. Since the internal and external environment is in a state of continuous flux. To prevent deviation of fit. However.
It attempts to answer the following questions – Is the strategic intent appropriate to the changing context? Are the organizations capabilities still holding good. . detecting changes in the external and internal environment and taking corrective action wherever necessary. competitive advantages becoming disadvantages? Has the company acquired any new competency? Has the company been able to overcome the 153 environmental threats.STRATEGY CONTROL It is concerned with trafficking a strategy as it is being implemented.
Premise Control – Checking the validity of the assumptions on which a strategy was based.STRATEGY CONTROL IMPLEMENTATION It involves steering the company towards its original growth trajectory & stated goals. checking every premise is costly as well as difficult. However. It is open-ended as well as . Implementation Control – It aims at assessing whether key activities are proceeding as per schedule. Special Alert Control – It intends to uncover unanticipated information having critical impact 154 on strategies. It involves assessing – strategic thrusts and milestones.
“If you cannot . Strategy not linked to resource allocation & capabilities – Lacking commitment of top management. difficult to translate into practice. Strategy intent not linked with goals and objectives – Lack of coordination at lower levels leading to negative synergy. low strategic fit due to consultants intervention. 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.
On top of that. to be sure of successful implementation of a strategy. Today it is considered one of the most powerful tools for strategy implementation determining success or failure. the relative importance of each factor may vary over time and context. Large or small. so if one fails to pay proper attention to one of them. this may effect all others as well.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. important or not they're all interdependent. 156 . Together these factors determine the way in which a corporation operates.
157 . They had been investigating how Japanese industry had been so successful. The 7-S model was born at a meeting of these four authors in 1982. and was taken up as a basic tool by the global management consultancy company McKinsey. At around the same time in the US Tom Peters and Robert Waterman were exploring what made a company excellent. It appeared also in "In Search of Excellence" by Peters and Waterman. Since then it is known as their 7-S model and is extensively used by corporations worldwide to implement their strategies.BACKGROUND & ORIGIN The 7-S Framework was first mentioned in "The Art Of Japanese Management" by Richard Pascale and Anthony Athos in 1981.
to reach identified & stated goals.THE 7’S Shared Values – It represents what the organization stands for and what the top management believes in. Staff – Human inter-relationships. Strategy – Trade-offs for the allocation of a firms scarce resources. Systems – The procedures. processes and routines that characterize how work should be done. formal & informal . Style – The way in which the top management influences the functioning of an organization. over time. Skills – An organizations capabilities and competencies. Structure – The way in which the organization's units relate to each other in terms of their commonalities. 158 .
STRATEGIC FIT Strategy Structure Shared Values Systems Skills Staff Style 1st Order Fit 2nd Order Fit 3rd Order Fit 159 .
In contrast.A CRITIC OF THE 7S MODEL While the hard S’s (strategy. their Japanese counterparts focus more on the soft S’s for their early success and sustainability. structure. 160 . Consider the 4P’s of marketing or 3R’s of SCM. systems) are comparatively easy to identify and influence. A choice of an alphabet often limits the scope and skews the interpretation of a model. Ineffective in case of a virtual company. the soft S’s (skill. shared values) are very malleable and comparatively more difficult to identify & influence. While the American co’s focuses on the hard S’s. style. because most often they are culturally embedded and often neglected. staff.
Low Take Overs 161 .STRATEGY IMPLEMENTATION ROUTES Strategic Fit .High Organic Growth Strategic Alliance Joint Venture Mergers & Acquisition Strategic Fit .
concessions are available for green-field projects. subsidized power). Govt. green-field projects. the entire value chain. tax holidays. technologies. i. It has complete control over inputs.e. 162 Risk of cost and time overruns. The entire infra-structural facilities are set up afresh having its own gestation and break-even. Long gestation leads to delayed market entry. SEZ’s. (Eg. and markets. .ORGANIC GROWTH Here a firm builds up its facilities right from the scratch and continues to do so without any external participation.e. soft loans. i. (Eg. Reliance Industries).
. It has limited intervention power and usually lacks holistic commitment from the alliance partner. 163 It is a form of competitive collaboration.STRATEGIC ALLIANCE It involves a pro-active collaboration between two or more firms on a particular domain or function for mutual gain. Alliances are usually short-lived and disbanded once the purpose is achieved. Alliances are usually in the areas of technologies or markets (Eg. Tata Motors & Fiat). It touches upon a limited aspects of a firms value chain. There is no funding or equity participation from the alliance partner & both the firms continue to operate independently.
Hero . Degree and extent of management control must be clearly 164 laid down.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. A comprehensive MOU is essential. Selecting the right partner is critical for success. . It is a win-win situation for both the companies. Tata – AIG. Dominant logic of both the companies should be complimentary. leaving minimum scope of overlapping.Honda). (Eg.
Integration of assets and other financial resources. with the individual firms ceasing to exist any more (Eg. Coca Cola – Thums Up). Acquisition is an outright purchase of a firm assets by another independent entity (Eg.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. ITC Tribeni Tissues. Brooke Bond & Lipton). Economies in scale leading to lowering of costs. Revival of a sick-unit through better management practices is a major motive behind an acquisition 165 strategy.
Larger geo-graphical diversity. often the new firm is “left alone”. Make a public offer of not less than . Most countries have stringent laws that prevents hostile take over. Tata Steel . Integration of organization structure & cultures is difficult. Instant access to capacities and markets. Consolidation in a fragmented industry. Inform SEBI / Stock Exchange after 5% stake is 166 acquired.TAKE OVERS It refers to the acquisition of significant management control by buying out majority stake in a firm through due diligence or hostility (Eg.Corus).
MANAGEMENT TOOLS IN STRATEGY 167 .
Radical change is superseding incremental change. Change provides enormous opportunities. it is also a source of potential threat.WHY MANAGEMENT TOOLS? Change is becoming pertinent in the business environment. 168 . or better still create next practices Reengineering – Redesigning work processes right from the scratch. TQM – Doing the right thing the first time. Companies therefore need to ensure competitive advantages doesn’t become competitive disadvantages. every time. Some tools to ensure that – Benchmarking – Adopt certain best practices. The past is ceasing to be an indication of the future. Balanced Scorecard – Tracking strategy 3600.
A best practice is defined as an activity performed by a company in a particular domain or function which distinguishes it from others and making them world-class. These exemplary practices involves the stakeholders of the company and helps achieve its strategic intent. Best practices centers around looking at a different way to satisfy various stakeholders. Benchmarking involves the identification, understanding and adapting of certain best practices and implementing them to enhance performance. Firms are moving towards next practices as best practices make firms look more and more homogeneous.
SOME BEST PRACTICES
Dell: Customized configuration of computers. Caterpillar: 48 hours delivery anywhere in the world. Citi Bank : Priority banking services. Maruti: Certified “true value” pre-owned cars. Microsoft: ESOP to employees. Infosys: Customized work-stations. TCS: Referencing potential new recruits. ITC: Shareholders factory visit. AmEx: Outsourcing data warehousing mining. MARG: Set-top box to study viewing patterns. Honda: CEO’s visit to dealers.
TYPES OF BENCHMARKING
Functional – Used by companies to improve a particular management activity. Eg. Motorola learnt delivery scheduling from Domino’s. Process – Improving specific key processes and operations from experiences in similar businesses. Eg. Ford adopting assembly lay-out plan of Toyota. Competitive – It involves assessing the sources of competitive advantage and imitating them. Eg. Samsung leveraging miniaturization skills of Sony. Strategic – It involves assessing business models and replicating them in a different market. Eg. Reliance replicating AT&T business model.
HOW TO BENCHMARK?
Phase 1: Planning – What to benchmark? Whom to benchmark? – Identify key performance indicators & Data source. Phase 2: Analysis – Assessment of performance gaps. – Predict future performance levels. Phase 3: Integration – Communicate findings and gain acceptance. – Establish functional goals and its implementation. Phase 4: Action – Implement and monitor progress. – Measure results against stakeholder wants and needs. – Recalibrate or outperform benchmarks.
WHOM TO BENCHMARK?
Selecting the benchmarking partner is critical to solving the problem. Firms should generally avoid selecting the industry leader, because it may not always adopt the best practices for every process or activity. Benchmarking partners may also be from different industries. Types – – Internal – It involves benchmarking against its own branches, divisions, SBU’s. Proximity to data and cooperation is taken care of automatically. – External – It involves benchmarking against firms that succeeded on account of their best practices. It may also involve benchmarking against world-class firms. Friction may arise due to presence in competing industries.
BENCHMARKING - ADVANTAGES
Finding better ways of meeting stakeholder needs. Organizational learning comes from internal as well as external sources. Establishing goals based on formal assessment of external conditions. Defining effective measure of indicators, facilitate comparison, adopt from other organizations. Ensuring a continuous learning organization. Reducing competitive disadvantage. Organizational turnaround, especially effective in case of a wide strategic drift when differentiation strategies fail to work. 174
It does not shifts the growth 175 trajectory of the industry as a whole. the more similar they end up looking. Benchmarking is useful for bringing about operational efficiency.e.BENCHMARKING . While strategy is all about differentiation and not looking alike. but it cannot be used as a strategic decision making tool. Benchmarking merely reorients profits in the hands of few to profits in the hands in the hands of many (i. clustering). Strategy is more of creating best practices rather than copying them. It can at best complement it.LIMITATIONS More and more companies benchmark. .
Re-engineering involves complete reconstruction and overhauling of job descriptions from the scratch (i. DOS to Windows).e. clean sheet). for achieving performance improvement (E. Windows 95 to 97).g. The task demands a total change in organisational 176 culture and mindset.g. process mapping) and eliminating or improving them (E. Re-engineering attempts to radically change an organizational products or process by challenging the basic assumptions surrounding it.e. .RE-ENGINEERING Redesigning leads to identification of superfluous activities or product features (i.
than people driven Innovative Vs Traditional Customer centric Vs Organisational centric 177 .REENGINEERING – KEY TENETS Ambition Focus Attitude Enabler Performance Large scale improvement by questioning basic assumptions about how work is done Micro Vs Macro Business Processes Vs Organisational Processes Starting right from the scratch Not historical More IT driven.
etc) and supports the organization for the present. processes. resource allocation and prepares the organization for the future through a reorientation of the entire strategic architecture. 178 . Strategic – It looks into the process of strategic planning. Business – It looks into markets.REENGINEERING . .e. It can be of the following types – Functional – It looks into the flow of operations (i. customers and suppliers and protects the organization from the future (i.LEVELS Reengineering can be successfully leveraged at all levels of an organization with varying degree of results. products. BPR).e. structures.
Cheaper versions of Intel chips and mother-boards manufactured in Taiwan. – Early entry advantages. protection can be had in the following ways – – Patenting. reverse engineering is a top-bottom approach. learning curve advantage. – High cost and time acts as a deterrent. – Causal Ambiguity. 179 . It generally acts as a threat to innovation. While traditional manufacturing is a bottom-up approach. However. with an intention to copy it (Eg.REVERSE ENGINEERING It is a process by which a product is dismantled and analyzed in order to understand how the product was designed and manufactured. Indonesia).
STAGES IN REVERSE ENGINEERING Awareness – Recognizing whether the product is found to be worth the time. Inaccurate assessment at this stage may lead to a failure of the entire project. 180 .e. nano-technology). Implementation – Developing of a prototype. Actualization – Obtaining and dismantling of the product to assess how it functions. machine tools to convert ideas into a marketable product (i. Usually in such cases segmentation and pricing is different from the original innovator. cost and effort necessary for the purpose of reverse engineering. Introduction – Launching the product in the market. designing facilities.
– Aesthetics – Appeal in design. – Features – Anti-lock braking systems. – Durability – 1980 manufactured cars still on road. – Serviceability – Large no. It has eight dimensions (Eg. Car) – – Performance – Mileage of 14 kms to a litre of fuel. 181 . More and more companies are moving towards meeting implied rather than stated needs. of service stations. – Perception – Customer notions. – Conformance – Emission standards .WHAT IS QUALITY? It involves the totality of a product or service in meeting certain stated or implied needs. – Reliability – Consistency in mileage.Euro IV. Air bags.
fix it in nature. which ensures good market standing. It had little impact on improving overall productivity. touching upon a limited aspect of a value chain.TOTAL QUALITY MANAGEMENT Objective – Management of quality ensures conformance to certain pre-set standards. . TQM is a way of creating an organization culture committed to the continuous improvement of work processes – Deming. zero defects. Management of quality was traditionally inspect it . It is deeply embedded as an aspect of 182 organisational life & culture.
fully involved in decision-making and fairly rewarded for results. provided with all relevant information and best possible tools. not a final destination. Empowerment – It takes place when employees are properly trained. the first time – From reactively fixing error in products to proactively preventing errors from occurring at the first place (Juran). Looking at quality as an endless journey. 183 . Be customer centric – Generate the concept of internal customer (Ishikawa). Kaizen – Make continuous improvement a way of life.TQM – KEY TENETS Do it right.
Quality Circles – It a small group of shop-floor employees who meet periodically to take decisions regarding operational problems and crises. 6-Sigma). It is based on the principles of MBO (i. 184 . 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. of units meet preset standards (Eg. equal participation). saving precious top management time.e. enabling the firm to concentrate on core activities essential to customer satisfaction.TQM .STRATEGIES Outsourcing – It is the process of self-contracting services and operations which are routine and mundane.
Source: Fortune Magazine Why CEO’s fail? 185 .... – In the majority of failures – we estimate 70% – the real problem isn’t (bad strategy) . – Less than 10% of strategies effectively formulated are effectively executed...... – Efficiency and effectiveness is passé. it’s bad execution..... strategy implementation has never been more important.BALANCED SCORE CARD Some interesting comments .
BSC . Most managers tend to rely on traditional measures of performance having its origin in finance as they are well tried and tested. rather than effects. 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. Organizations need to move from financial to strategic performance. These measures worked well when organizational systems were simple and unidirectional and more importantly the environment was static. 186 . Focus more on causes.CONCEPTUALISATION A company’s performance depends on how it measures performance.
and distinguish strategic problems from operational ones. It has four dimensions – – How do customers see us? – What must we excel at? – Can we continue to improve and create value? – How do we look to shareholders? Firms more often have problems. The most critical element of a BSC is to measure these four dimensions. 187 . because they have too many.BSC – KAPLAN & NORTON (1992) A BSC helps a manager to track and communicate the different elements of company’s strategy.
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. ageing schedule) % of key customer transactions Ranking of key customer accounts No.e.
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.
LEARNING PERSPECTIVE GOALS Technology Manufacturing Focus Timing MEASURES No. of product innovations 190 . of new patents registered Time to develop next generation products Average and spread in operating cycle % of products that equal 2/3 sales No.
Return on Investment Market Capitalization / PE ratio 191 .FINANCIAL PERSPECTIVE GOALS Survival Success Prosper Divestment MEASURES Cash flows Growth in Sales and Profits EPS.
STRATEGY MAPPING 192 .
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 .
what they don’t know. 194 performance will automatically follow. The BSC brings together the different elements of a company’s strategy at a glance.ADVANTAGES Most often top managers face information overload. Seek excellence. It helps translating strategy into practice (i. Focus on cause not effects.e. Shift from control to strategy (i. sharing of vision). . As a result.BSC . Modern managers should be poised to ask the right questions. they don’t know . doing right things instead of doing things right).e.
EFFICIENCY Vs EFFECTIVENESS Ineffective Effective Inefficient Goes out of Business quickly Survives Efficient Dies Slowly Thrives 195 .
but also sustains it. Porter 196 .Michael E. .EFFECTIVENESS + STRATEGY A company which is effective as well as strategic. not only thrives.
CORPORATE RESTRUCTURING 197 .
Strategic variety may be caused by changes in the as external well as internal environment. Restructuring involves consciously driving significant changes in the way an organizations thinks and looks (Eg.. To adapt to the changing environment.. Tata Group). firms use restructuring strategies.” 198 . Radical change brings about strategic variety. to survival of the most adaptable. Strategic variety brings paradigm shift.CORPORATE RESTRUCTURING The only thing constant in today's business environment is change. As Peter Drucker pointed out.... from survival of the fittest .. “every organization must be prepared to abandon everything it does.
Structural Changes – Conventional hierarchical structures should be disbanded in favour of more 199 flexible ones (i. Internal customers should also not be neglected. Walkman. Fax.e. ATM. and dividing the core businesses into SBU’s (i. downsizing or rightsizing). .RESTRUCTURING – BASIC TENETS Customer Focus – Restructuring ideally begins and ends with the customer. Company’s should go beyond just asking what he expects. they should strive to provide unimaginable value ahead of its time (Eg. Core Business – Company’s should introspect – What business are we in? Business evolved out of opportunism or myopia should be divested. downscoping). etc). Instead.e.
.) Reliance dismantled their industrial embassies .. Ratan Tata now drives the point the group means business. 200 .. Restructuring also requires cultural reorientation... the Tatas were considered a benevolent and charitable organization.. It is created and institutionalized by the top management. During the times of JRD. started focusing on their capabilities. Kumar Birla today is more dependent on professionals.....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 .
” 201 . Honda’s ad says. they tend to move away from the customer. Communicating to the media about organization efforts to deliver quality products. “ … one reason our customers are satisfied is that we aren’t. Publicizing welfare projects to demonstrate CSR. Restructuring provides a platform to close this gap. Getting feedback & addressing customer complaints. Use the reach of networking technologies. Carry out PR campaigns.MOVING CLOSER TO THE CUSTOMER As companies evolve. Organizing customer and supplier meets.
horizontal. Hive Off – It involves siphoning of assets under control. Further. Tata – Corus) or hostile (Eg. spin-off and equity carve. It may include brands as well. or conglo-merate. including its intangibles – Mergers – It may be vertical. It can have two forms. Further spin-off can be classified as split-off and split-up.ASSET RESTRUCTURING Asset Restructuring – The asset composition of a firm undergoes a major change. where the difference in valuation is settled off through cash or equity (Eg. it may be smooth (Eg. 202 . Asset Swaps – It entails divesting and acquisition simultaneously by two companies. Mittal – Arcelor) and can take various forms. Glaxo – Heinz).
the entire parent company loses its identity after being split into a number of subsidiaries.HIVE OFF Spin-Off – A spin off is the creation of a new entity. – Split-Off – In a split-off. 203 . the existing shareholders receive equity in the subsidiary in exchange for the stocks of the parent company. in which the equity is allotted amongst the existing shareholders on a pro-rata basis (Eg. – Split-Up – In a split-up. Equity Carve – It involves selling a minority stake to a third party while retaining control (Eg. Tata Industries selling 20% stake to Jardine Matheson). Most of these practices are not in consonance with Indian laws. Reliance Ent).
In 1995. In 2005. L&T sold its cements division to Aditya Birla group. 204 . repay long-term debts. Selling out in phases is called disinvestment (IPCL). Generic motives include – – Raise working capital. but retained its engineering division. for a specified market or in general with full management control.DIVESTITURE It involves the sale of a brand or a division of a company to a third party. Parle sold its Thums Up brand to Coke for $40 million apprehending fierce competition. A complete sell-out is known as divestment (TOMCO). – Poor performance. strategic misfit.
Conversion – Replacing debt with equity or vice-versa or costlier with cheaper debt or cross currency debt. Share Buyback – It is a process of cancellation of shares out of free reserves to the extent of 25% of paid-up capital (Eg. 205 . Wipro).The internal & external liability composition undergoes a major change – LBO – Acquiring control over a substantially larger company through borrowed funds (Eg. It provides greater leverage as well as management control. involving 608 pence per share).CAPITAL RESTRUCTURING Capital Restructuring .3 billion. Tatas take-over of Corus for US $11.
1860 cr .Rs. 950 cr Merind . 256 cr ACC – Rs.Rs. 150 cr VSNL – Rs. 120 cr Tata AIG – Rs. 230 cr Diversifications Tata Motors – Rs. 42 cr Voltas .BUSINESS RESTRUCTURING – TATAS Divestments Lakme – Rs. 250 cr Tata Tetley – Rs. 1700 cr Trent – Rs. 1170 cr Goodlass Nerolac – Rs. 99 cr Tata Power – Rs. 1890 cr CMC – Rs. 1439 cr 206 Tata Timken – Rs 120 cr Tata Telecom – Rs.
It can be carried out in the following ways – Downsizing – It is a systematic one-time reduction in the no. Turnaround is the primary motive. usually as a result external turbulence. Downscoping – It involves reducing the business and/or geographical scope of a firm (Aditya Birla group). of operating units. of a firm’s employees and sometimes in the no.ORGANIZATIONAL RESTRUCTURING Organizational structure and systems calls for a change when strategic variety is apparent. keeping the composition of business intact (Jet Airways). Rightsizing – It is phasing of excess and redundant employees resulted out of faulty internal planning (SAIL). Survival is the primary motive. 207 .
e. the more difficult it becomes to uproot the paradigm (i. Dominant logic becomes deep-rooted in organizational contexts depending on the period it is in place (tenure of the CEO). as strategies are based on such beliefs and biases. The longer the period. 208 .e. thumb rules) of the top management. The dominant logic represents the perceptions and biases (i. Strategy change is unviable without a preceding change in its dominant logics.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. inertia).
In most organizations. 209 . Companies achieve real agility only when people at every level rise above the ordinary to face the challenges – revitalization or transformation. the factor that stifled change & performance was – culture.e. Successful transformation requires – incorporating employees fully into the process – leading from a different place so as to maintain employee involvement – instill mental disciplines that will enable employees to behave differently. 20% of the people carry out 80% of the changes).FORCES AGAINST STRATEGIC CHANGE The problem with strategic change is that the whole burden typically rests on few people (i.
SUCCESSFUL TRANSFORMATION Build an intricate understanding of the business model at all levels of the organization. never take no for an answer. The best way is to alter the institutional point of view. Promote inventive accountability. 210 . Questioning every basic action of the organization. Encourage uncompromising straight talk. Harness setbacks. it is not about winning but about learning. Understand and deliver the quid pro quo. process ownership. Create relentless discomfort with the status quo. Manage from the future.
It involves diagnosing a change situation – systems & structures. 211 . by identifying forces for and against change. also known as cultural-web.FORCE-FIELD ANALYSIS A force-field analysis provides an initial overview of change problems that needs to tackled. Identify and implement facilitators of cultural change. that can be both enablers and blockages to change and restructuring. It involves identifying – Aspects of current culture which needs to be reinforced. Aspects of current culture which needs to be overcome. Culture and style of management are two main impediments in force-field analysis.
Term Loss of human capital Lower performance Higher performance Capital .RESTRUCTURING .OUTCOMES Alternatives Organizational Short .Term Reduced labour costs Reduced debt costs Emphasis on strategic control Business High debt costs Higher risk 212 Long .
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. While the first strategy produces results instantaneously. 213 . hence go in for downsizing.NUMERATOR & DENOMINATOR MGT Most firms across emerging markets undergo strategic discontinuity and as a result are forced to restructure their businesses. reverse engineering and regenerating. the second one is a more viable strategy and sustainable option in the long run. focuses on reengineering.
TURNAROUND MANAGEMENT 214 .
and that the thirty-two of the country’s largest business groups in 1969 are no longer among the top fifty today. – Only seven of the first fifty Indian business groups in 1947 were even in business by the turn of this century.. .. 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 . still exist as on 2005. January 1997).. 215 (Govindarajan and Trimble.
216 . systems. Stage Theory). skills. ends the threat with a combination of strategies. While content focuses on endogenous and exogenous variables. Both content (what) and process (how) are equally important for a successful turnaround. A category of underlying principles and concepts. and achieves sustainable performance recovery. As a sequence of events describing how things change and why they change (i. and capabilities.TURN AROUND MANAGEMENT A turnaround is said to occur when a firm perseveres through an existence threatening performance decline. process focuses on – A logic to explain a causal relationship between intervening variables.e.
Rising input costs. Low stakeholder confidence. Uncompetitive products or services. leading to lack of acceptability from distributors and customers. Substantial shifts in consumer preferences. unavailability or radical lowering of substitute costs or technological obsolescence. suppliers and bankers. especially in key positions. Some indicators Continuous cash flow crises as a result of dwindling market-share and profits.TURNAROUND INDICATORS Most firms atrophy simply because they fail to diagnose the indicators that acts as threat to organizational existence. 217 . Low employee morale leading to high employee attrition at all levels.
consider extension. based on elasticity. they adopt surface level measures (disprin popping) which most often fail. Extending work hours. Recalibrate prices. Common approaches adopted Change in key positions. Product redesigning or reengineering. Hence. liquidating dead assets. “all is not well”.TURNAROUND ILLUSION The first step to a successful turnaround is the basic acceptance of the fact that …. focus on power brands. prune work-force.. 218 . be more customer centric. Revamp product portfolio. which most top managers fail to appreciate. Emphasis on advertising and market penetration.
TURNAROUND STAGE THEORY Stage 1 Decline Stage 2 Stage 3 Stage 4 Outcome Response Transition Performance Equilibrium Line Success Failure Indeterminate Nadir Time 219 .
R-Extinction – It suggests that organization factors. Identification of the stimulus leads to the arrest of the downfall.DECLINE Decline is the first stage in the turnaround process. primarily dwindling resources and capabilities are responsible for decline. 220 . It has its origin in “resource led stretch” and subscribes to the view that a firm has substantial power to override the context. It has its origin in “environment led fit” that subscribes to the view that a firm has little control over external factors. 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.
diversification. If the decline stems from structural shifts. 221 . asset reduction.RESPONSE INITIATION Turnaround responses are typically categorized as operating or strategic. the response should be operational. If the underlying cause is internal efficiency. Strategic responses focus on changing or adjusting the business the firm is engaged in through long term moves such as – integration. new market initiatives. The response must match the cause of the decline. Operating responses typically focuses on the way the firm conducts business and involves tactics geared towards – cost cutting and process redesigning (BPR). the response should be strategic.
which may be unavailable to a focused firm. 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.RESPONSE DICHOTOMY The response initiation is somewhat dichotomous and cannot be universally applicable. 222 . Contour – It is easier to reverse decline in the earlier stages through operational measures. Similarly new market initiatives is feasible only for multi-product firms. Untangling this question brings into focus three events – Domain – Many of the strategic cures have limited applicability for an affiliated firm.
However. confidence building measures. Sustenance is the key factor in this stage. Empirical studies show that average time is 7. participative management (i.e. However. role model. transparency. substantial amount of time usually passes before results begin to show (i.7 years with a range of (4-16) years. Effective levers of transition. many a times early signs of recovery fades out. lead – lag). The top management has a key role to play through empowerment. Support from all the stake holders through resource commitment. 223 .e. consensus).TRANSITION Transition usually reflects the first signs of recovery.
Regaining lost market share and distributor confidence.OUTCOME Outcome is said to be successful when a firm breaches the equilibrium performance level. Commanding a premium in the market. Share price indications and media coverage. 224 . Cut off points must be unequivocal. Failure is an indication that initial momentum was not sustainable characterized by irreversibility. it should adopt a holistic approach. Supplier and banker confidence. Revival of key customers and new product launches. Instead of focusing on financial parameters alone.
COOPERATIVE STRATEGIES & ALLIANCES 225 .
226 . supply-chain partnership. Any cooperative strategy maybe between firms within the same country or cross border as well. or joint venture. It can assume any of the following forms – franchising. and globalization . licensing. In the cooperative strategy continuum as firms move up the value order. consortia. More and more companies worldwide are moving away from competition to co-option to leverage their resources and enhance bargaining power. strategic alliance. the commitment and the involvement between the firms increases manifold. technology.COOPERATIVE STRATEGIES Cooperative strategies are a logical and timely response to changes in business dynamics.
Branding is critical to franchising. owners of the brand Tanishq allows its franchisees to sell its jewellery products. It is an effective strategy to penetrate markets in a shortest possible time at a minimum cost. Switz Foods. 227 . owners of the brand Monginis allows its franchisees to sell its confectionary 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. Titan Inds.
as in Tata Indica. 228 . Become a systems integrator (CKD). refine processes and adopt necessary technologies (SKD).LICENSING Licensing – It is a contractual agreement between two legally independent firms whereby the licensor grants the right to the licensee to manufacture the licensor’s product and do business under its brand-name in a given location for a specified period of time for a consideration. HM manufacturing GM range of cars in India with a buy-back arrangement is a perfect example of CBU. Different levels of licensing Manufacturing without embracing any technology (CBU). Develop a product through its crude stage.
Tata. Cross Holdings – A maze of equity holdings through centralised control to ensure earnings stability & threshold resources for critical mass (Eg. Airbus – Boeing). Hyundai).CONSORTIA Consortia – They are defined as large inter-locking relationships & cross holdings between businesses in a similar industry. Coke – Pepsi). 229 . enabling them to increase prices (Eg. leverage upon size to preempt competition by escalating entry barriers (Eg. It can be of the following types – Multipartner – Intends to share an underlying technology or asset. Collusion – Few firms in a matured industry collude to reduce industry output below the equilibrium level.
Tata Motors – IDEA). Continuous sharing of knowledge is critical to the success of a supply chain partnership. . It usually provides a platform to sort out differences between conceptualization and implementation to suit local market needs. otherwise it 230 becomes routine outsourcing.SUPPLY CHAIN PARTNERSHIP It is a pro-active & collaborative arrangement between supplier and customer aimed at achieving better control over the value chain (Eg. Companies in different industries with different but complimentary skills. link their capabilities to create value for end users.
Reliance – Du Pont). design next generation products. Generic motives involved are . instead of hurrying into a relationship. preempt competition. effective R&D management. Tata Motors – Fiat. Despite their popularity (50-60)% of the alliances fail to accomplish their stated objectives. enter newer markets. Firm’s should undertake a long courtship with potential partners. 231 . to gain knowledge and to obtain access to new markets (Eg. enhance credibility.learning organization.STRATEGIC ALLIANCE It is an short to medium term understanding between two or more firms to share knowledge and risk. Partner selection is one of the critical success factors.
Complementary Equals – Two firms mutually promoting each others complimentary products (Eg. Airbus – Boeing). Bajaj – Castrol). Whirlpool – Tide. Maruti). Coke – Pepsi). Backward – An alliance (quasi or tapered) with a supplier of critical components seeking commitment (Eg.STRATEGIC ALLIANCE . Alliances of the Weak – An alliance is entered into to preempt competition (Eg. 232 . Bootstrap – An alliance between a weak and a strong company with an intention to acquire it.TYPES Collusion – Tacit top management understanding to neutralize price wars (Eg.
Firms from developed markets seek access to markets and firms from emerging markets seeking access to technology. 233 . Differences in level of economic development can produce differences in alliances motives.PARTNER SELECTION CRITERIA It is likely that partners will not have complete consent on alliance objectives because the institutional context in which the alliance embedded varies from country to country. – Japan Vs US). Too much stress on financials & structure be avoided. Cultural orientation has been found to have a profound effect on top management’s strategic orientation (Eg.
Managerial capabilities.PARTNER CHARACTERISTICS Complimentarity of Capabilities – The degree to which partners resources can be used in conjunction. 234 . Intangible Assets – Move beyond the financials of the firm. including ability to provide quality products and services. Partner’s ability to acquire fresh skills. Willingness to share knowledge and skills. Dominant Logic’s – Similarity in beliefs & biases. Unique Resources – Abilities or skills which cannot be easily duplicated. Experience related to previous alliances.
the value chain. degree of compatibility. Getting Engaged – It should incorporate a specific joint activity. Learning to collaborate – strategic. vows to include commitment to expand the relationship. understanding the chemistry. Setting up the housekeeping. operational & cultural integration. 235 . instead of focusing controlling the relationship. partners should nurture it. Changing within. incorporating clear signs of continuing independence for all partners.MANAGING ALLIANCES Alliances are more than just a deal. Selection & Courtship – It involves self analyzing. differences not anticipated earlier.
There are substantial linkages in the value-chain. whilst the partners continue to operate independently.e. It lasts till the vision is reached. synergy) rather than mere exchange (i.JOINT VENTURE A joint venture is a long term association between two equal partners to create an independent firm (SPV) by complementing their resources and capabilities to explore newer businesses or markets for achieving a shared vision. combining parts).e. Conceptually. . separation is very 236 bitter. a joint venture is a selection among modes by which two or more firms can transact. It aims at creating new value (i.
though more profitable alternative to other choices. 237 . The market fails as sellers are unwilling to reveal their technology and buyers are unwilling to purchase in the absence of inspection. in addition to a high degree of asset specificity. Organizational Learning – It is a means through which a firm learns or seeks to retain their capabilities.JOINT VENTURE – GENERIC MOTIVES Transaction Cost – The situational characteristics best suited for a JV are high performance uncertainty. It may also be linked to deterring entry or eroding competitors position. Strategic Behaviour – Firms may override transaction costs.
Essar – Hutch (Vodafone). Maruti – Suzuki. – Eg. TVS – Suzuki (4-Stroke Engines) Fill gaps in existing product lines. Daimler – Chrysler (Premium Cars) 238 . Renault – Nissan (Minivans – Cars). – Eg. – Eg. Yamaha – Escorts. – Eg. – Eg. Endorsement from government authorities.OTHER MOTIVES Entry into newer markets. Define future industry standards. Sharing of resources. – Eg. Eli Lily – Ranbaxy. Learning new technologies.
Modi – Telstra What after exit (parenting disadvantage)? – Eg. LML – Piaggio Differences in size and resource base. technology) drain. – Eg. PAL – Fiat If the cost of continuing exceeds the exit costs? – Eg.e. Century . – Eg. Risk of over dependence. Risk of brain (i.RISKS INVOLVED Incompatibility – Differences in cultural background. – Maruti – Suzuki. – Godrej – Procter & Gamble.Enka. Tata – Aditya Birla in Idea Cellular 239 .
Equality – Lack of dominance. Objectives – Shared vision. Inertia – Differences in age and evolution patterns. Agreement – Clarity on operational control. Focus – Avoid strategic myopia. respect. Partner – Avoid duplication of skills and capabilities. 240 . Flexibility – Sufficient space to breathe and adjust. Incompatibility – Performance expectations. Culture – Reconcile gaps. Costs – Other modes of transaction becomes cheaper. time sharing.PRE-REQUISITES FOR SUCCESS Commitment – Mutual trust.
MERGERS & ACQUISITION 241 .
reverses are also taking place through LBO) with a view to acquire conglomerate power and induce synergy (Eg. SEBI Takeover Code. HLL – Tomco).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. The larger objective is to leverage on size. 242 . however. Ranbaxy . 2002). 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. An acquisition is the purchase of a firm by a firm (of larger size.Daichi) and hostile if it is without the consent of the management (Eg. Brooke Bond – Lipton). Mittal Arcelor).
Preferential – A preferential allottee ending up acquiring 5% stake also comes under its purview. Hike – An acquirer who has already picked up a 5% has to make a mandatory disclosure for every additional 1% stake that it acquires.SEBI TAKEOVER CODE. . Acquirer – Someone (individual or firm) who picks up an atleast 5% stake without mandatory disclosure having an intention to wrest management control (i. Control – A special resolution of 75% of the share 243 holders approving the change of guard. 2002 Promoter – A person who has a clear control of atleast 51% of the voting rights of the company and confidence of all the major stakeholders. creeping acquisition).e.
asset stripping). and/or does not enjoy the confidence of the different stake holders. Grasim – L&T Cement. whichever is higher as an exit route (Eg. SEBI – In case of a hostile take over. 244 . the SEBI can intervene and block share transfers if: the acquirer has ulterior motives (i. credentials or track record is at stake.SEBI TAKEOVER CODE. Disclosure – All acquirers have to inform the respective stock exchanges where it is listed and SEBI upon acquiring the basic limit and upon every incremental limit thereon. Gujarat Ambuja – ACC).e. 2002 Pricing – Acquirers will have to offer minority shareholders (at least 20%) the past 26 weeks or past 2 weeks average price.
Horizontal – It involves integration of two highly related businesses (Eg. Vertical – It involves complimentarily (partially related) in terms of supply of inputs or marketing activities (Eg. Conglomerate – It involves integration of two distinctly unrelated businesses.Kelvinator). usually opportunistic (Eg.TYPES OF MERGERS A business is an activity that involves procuring of desired inputs to transform it to an output by using appropriate technologies and thereby creating value for its stake holders in the process. Godrej. The type of merger is depends on the degree of relatedness (strategic) between the two businesses. Reliance). 245 . Electrolux . ITC).
Acquiring assets or capabilities (Eg.MERGERS & ACQUISITION . scale and scope. Coinsurance effect – Higher debt raising capability. Ranbaxy – Crosslands). Asset Stripping – Shaw Wallace). Tata Steel – Corus). Reduction in risk. ITC Bhadrachalam). Access to newer segments (Eg.MOTIVES Increased market / conglomerate power.e. Reduced gestation (i. Global image (Eg. Overcoming entry barriers (Eg. 246 . Mittal – Arcelor). Tax benefits (Eg. Economies of size. ICICI –ITC Classic). quick access). Ulterior motives – (Eg. Avoiding risk of new product development.
MERGERS & ACQUISITIONS PITFALLS Cultural differences (Eg. Top management overtly focused on due diligence exercise and negotiations. their initial offer was around 420 pence/share. Overvaluation is often as a result of an ego drive and substantially affects future returns. while the ultimate acquisition was made at 607 pence/share). Tata – Corus). Overvaluation of buying firms (Eg. Managing over-diversification. Inability to achieve synergy. 247 . neglecting core business. Merging of organisational structures. Managing size. When Tata Steel started negotiations with Corus.
Tata Steel – Corus). Brooke Bond – Lipton). Maturity – A larger firm acquires a smaller firm with an objective to achieve economies of scale and experience curve effects (Eg. Kingfisher – Air Deccan). Decline – Horizontal mergers are undertaken to ensure survival.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. 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. Growth – This stage may witness parallel merger of two firms of similar size. 248 .
Strong differences may stifle plans and its execution. Blanket promotions across entities and confidence building exercises needs to be practiced. Left alone syndrome. A common shared vision. An acquisition just for the sake of it or reputation yields very little value in the long term.INTERNATIONAL M&A . active top management intervention in phases. Immediate attempts to super impose structure and culture may cause bottle necks. A concern of respect and trust for the business of the acquired company. 249 .FRAMEWORK Positive contribution to the acquired company.
Shift attention from business portfolio to people and processes. Determine business strategy. Integrating work processes. Redefine responsibilities and authority.INTEGRATION . Decide upon management control systems. They can carry the message to the various stake holders. It will enable focus on customers and key people. promptly. 250 Do not ignore the “people factor”. . Decide on the new hierarchy.BLUEPRINT Take the media into confidence.
VALUATION The process of valuation is central to M&A.M&A .e. over valuation can become a curse. While under valuation may be a significant opportunity. The process takes (6-12) months. – Synergy – Potential value gain from combining operations (i. 251 . Financial motives – Undervaluation relative to true value. operational & financial). Valuation decisions are arrived through a due diligence process when the prospective acquirer gets access to the books of accounts of acquiring company. – Unstated reasons – Personal self interest and hubris. – Market for corporate control.
– Vertical Synergy – Gains come from controlling the supplychain and savings in transaction costs. Sources of operational synergy – Horizontal Synergy – Gains come from economies of scale which reduces costs. 252 .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). or from increased market power which increases sales and margins. Synergy can be negative as well. – Conglomerate Synergy – Gains come when one firm complements the resources or capabilities of another (Eg. when the “fit” between the two entities is very poor.
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. and without paying take-over premiums. Synergy comes from projects which would not have been undertaken if the two firms stayed apart (Eg. Hotmail). 253 .VALUING FINANCIAL SYNERGY Diversification – Reduce variability in earnings by diversifying into unrelated industries. but availed after being merged with a profitable firm (Eg. shareholders can accomplish the same at a much lesser cost. However. ITC – Bhadrachalam Paper).
254 . hence better performance. It relates to the concept of diversification. – Default risk comes down and credit rating improves. 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. This will induce higher debt capacity. higher leverage.VALUING FINANCIAL SYNERGY Co-Insurance Effect – If the cash flows of the two firms are less than perfectly correlated. as risky debt is spread across the new firm's operations. – Coupon rates may also be negotiated at lower rates. the cash flow the merged firm will be less variable than the individual firms.
– – Value of Control = Value of firm after restructuring Value of firm before restructuring. 255 . The value of wrestling control is inversely proportional to the perceived quality of that management. Assessment of perceived quality is critical. The value of control can be substantial for firms that are operating well below optimal value. since a restructuring can lead to significant increase in value.VALUING CORPORATE CONTROL Premium of M&A are often justified to control the management of the firm. While value of corporate control is negligible for firms that are operating close to their optimal value.
LEVERAGE BUYOUT (LBO) The basic difference between a take-over and a LBO is the high inherent leverage (i. It is a very costly and risky proposition. sometimes in combination with the assets of the acquiring company. debt component) at the time of buyout and rapid changes in capital structure over time. The assets of the acquired company are used as collateral for the borrowed capital. LBO facilitates a relatively smaller firm to bid for a comparatively larger firm in the bid for management control.e. 256 . Confidence of investment bankers and the international financial community is essential.
However. the advantages of going public includes . 257 . on-going valuation. The increased benefit showed in the following way – reduced costs and increased revenue. A research study showed that 30% of the publicly listed firms reported above average returns after going private. liquidity. off-late many publicly traded firms have gone private keeping in mind the following – – The fear of LBO.TO GO PUBLIC OR NOT? However. – Increased information needs.access to financial markets. – The need to satisfy analysts and shareholders. – Separation of ownership from management.
– Cost of debt coming down (i. 258 .e. – Managers cannot be trusted to invest free cash flows wisely. – It is a temporary phenomenon. – Cash trapped company unable to utilize opportunities. – Debts repaid off from increased value after successful restructuring and wresting management control. which disappears once assets are liquidated and significant portion of debt is paid off. co-insurance effect).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).
259 .EFFECT OF HIGH LEVERAGE Increases the riskiness of dividend flows to shareholders by increasing the interest cost to debt holders. Any discounting has to reflect these changing cost of capital. – Increase equity valuation. Lack of sufficient cash flows to repay costly debts resulting in a possible debt trap. As the firm liquidates / pledges assets and pays off debt. leverage is expected to decrease over time. initial rise in leverage is anticipated. Therefore. A LBO has to pass two tests to be viable – – Restructuring to pay-off increased debt.
REVERSE MERGER Reverse Merger – The acquisition of a public company. – Automatic listing in major exchanges. small in size but having a promising business. time-barred. – Prevents dilution of equity.e. shell company) by a private company. allowing the private company to bypass the usually lengthy and complex process of going public. 260 . Objectives – – Traditional route of filing prospectus and undergoing an IPO is costly. or costly. – Tax shelter. which has discontinued its operations (i. – Facilitates better valuation and forthcoming offerings.
Most target firms are taken over within (6090) days. During bearish periods excess returns were 19%. Excess returns also vary across time periods. However.EFFECT OF TAKE-OVER ANNOUNCEMENT The shareholders of target firms are the clear winners. Initial anomaly in stock prices usually normalizes over a period of time (6-12) months. takeover failures have only initial negative effects on stock prices. – Takeover announcements reported 30% excess returns. and 35% during bullish periods. – Merger announcements reported 20% excess returns. 261 .
1983. 1983. 1988 . – However. – However. 262 Jarrel. and Netter. Brickley. Bradley. and Kim. over time.EFFECT OF TAKE-OVER ANNOUNCEMENT The effect of take-over announcement on bidder firm’s stock prices are not clear cut. – Most studies reported insignificant excess returns around take-over offers or merger announcements. as stock markets become more and more perfect such anomalies would reduce Source: Jensen and Ruback. Desai. in the event of take-over failure negative returns to the extent of 5% on bidder firm stock prices is reflected.
DEFENSIVE STRATEGIES Golden Parachute – An employment contract that compensates top managers for loss of jobs as a result of change in management control. 263 . Poison Put – Premature retirement of bonds at attractive rates to pour surplus cash and make target investment unattractive. Poison Pill – An offer to existing shareholders to buy shares at a substantial discount to increase their voting rights (Eg. so that nothing is left for the raider to strip off. Asset Stripping – The targeted company hives off its key assets to another subsidiary. Rights).
thus thwarting the raider company’s attention. East India Hotels – Reliance Industries – ITC).DEFENSIVE STRATEGIES White Knight – It is the placing of stocks to a cash rich investor and bargaining for protection in return. Shapoorji Pallonji). But often the White Knight turns a betrayer himself (Eg. Green Mail – The targeted company buys large blocks from holders either through premium or through pressure tactics (Eg. Gray Knight – The target company takes the help of friendly company to buy the shares of the raiding company. Pac Man – The target company makes a counter bid to take over the raider company. 264 .
COMPETING FOR THE FUTURE 265 .
Nokia overpowering Motorola. British Air overpowering Pan Am. Honda overpowering Volkswagen. What went wrong???? What were they doing with the present? What were they pre-occupied with? 266 . were spending 99% of their precious time dealing with present. Most companies were too preoccupied with the present than the future? 99% of the companies overpowered. Compaq overpowering IBM. Wal-Mart overpowering Sears. Hitachi overpowering Westinghouse. Honda overpowering GM. The reverse was true for the companies overpowering.GETTING OFF THE TREADMILL Canon overpowering Xerox.
downsizing). 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. falling market share). decluttering. Thus efficiency was grievously hurt.THE PAST OF COMPETITION Beyond Restructuring – When a competitiveness become inescapable problem (stagnant growth. Not knowing when to stop. These denominator based managers stuck to their restructuring strategies (like building pyramids) and didn't know what to do next? Thus they became history? (like the pharaohs) 267 . declining margins.
but not of the future. A poll in circa 2000 revealed that 80% of the U. ensuring only survival of the present. top managers believed that quality will be a source of competitive advantage of the future. 268 . However. incrementalism or nominal innovation has almost reached a plateau.THE PRESENT OF COMPETITION Beyond Reengineering – Numerator based managers (innovation) at least offers some hope.S. On the contrary only 20% of Japanese managers believed that quality will be a source of competitive advantage of the future. but forging ahead in competition. The future is not about catching up with competition.
Creating the future requires industry foresight. Transform the industry. reinvent its industry. It is based on deep insights into trends in technology. as important as these may be. not just the organization. better. they are not enough to get a company to the future. aspirations and resources. Companies need to fundamentally reconcieve itself. demographics and lifestyles.THE FUTURE OF COMPETITION Regenerating – Leaner. Create a potential gap. not the other way. faster. don’t predict. It involves Dream about the company’s future. Empower from bottom to top. 269 . and regenerate its strategies (breaking its – managerial frames).
ABOUT THE DREAM Which customers will you be serving? What will the potential customer look like? Who will be your future competitors? What will be the basis of your competitive advantage? Where would your margins come from? What will be your future competencies? Which end product markets would you cater? 270 .
by converging technologies complex. hence do not fall sick in the first place. they do not need to restructure. Therefore.e.ABOUT THE TRANSFORMATION The future does not belong to those who take the industry for granted. Change in at least one fundamental way the rules of engagement in an industry. It is about deliberately creating a strategic misfit. blue oceans). Successful companies have a complete grip over the industry. It drives a hunger and a passion to transform. 271 . Redraw the boundaries between industries. Create entirely new industries (i.
Such a process is called institutionalization (from people centric to organisational centric). 272 .ABOUT THE EMPOWERMENT Bring about a revolution (a paradigm shift) in the organization. the revolution must start at the bottom and spread in all directions of the organization. Most successful revolutions (Gandhi to Mandela) rose from the dispossessed. Transformational leaders merely lead the way. The middle management plays a strong moderating role. A revolution that is thrust upon from the top seldom sustains. More importantly.
without taking undue risk. Companies need to strategize (think ahead of times). Toshiba – LCD. What does it take to get to the future first? Understanding how competition for the future is different. An ability to energize the company. Apply the 40 – 30 – 20 principle. A process for finding and gaining insight into tomorrows opportunities (Eg. It requires a lot of common sense and a little bit of out of the box thinking. Get to the future first. South West Airlines – LCC. Apple – iphone).THE FUTURE OF STRATEGY A company must get to the future not only first but also for less. 273 .
but hundreds. As there is no one future. What distinguishes a leader from a laggard. 274 . We are in the midst of a 3600 vacuum. each point in space represents a unique business opportunity. the farther it will be away from competition. greatness from mediocrity. is the ability to imagine in a different way what the future could be.HOW DOES THE FUTURE LOOK LIKE? There is no rule which says that for every leader there will be a follower. The farther one can see in this endless space. Companies of the future will be not based so much on the strength of their resources. as on their aspirations.
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.
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. Leverage – They are the gateways to future markets. Inimitable & Insubstitutable – A high degree causal ambiguity between these skills yield sustainable competitive advantage. It is characterized by the following – Unique – It provides unimaginable customer value ahead of its times. It represents the collective learning's of an organization centering around diverse streams of technologies. It cannot be matched even by its closest competitors. 278 .
Most companies around the world do not possess one. it gets more refined and valuable through use. Core competencies are the roots of the organization. A core competency cannot be outsourced. Canon – imaging. Although a core competence may lose value over time. Honda – engines. Toyota – lean manufacturing. Wal-Mart – logistics. 279 .MORE ABOUT CORE COMPETENCE Sony – miniaturization. Nike – designing. SKF – antifriction and precision. Coca Cola – brand. Intel – nano-electronics. leaders have one. Toshiba – flat screen displays. it is deeply embedded in the heart of the organization. at the most three to four.
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 .
Chile) provide a different context (i.EMERGING MARKETS Emerging markets (India. Korea. China. 1997). 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. and high transaction costs.e. Diversified groups in operating in emerging markets therefore benefit from unrelated diversification. strategies suited for the developed markets may not be appropriate for emerging markets. Therefore. institutional gaps. 288 .
Experience Strategic Fit Diversity Palich. Concentric. Entropy).PERFORMANCE (I) Diversity attempts to measure the degree and extent of diversification (Herfindahl. Optimum level of diversification Performance Diversity is initially positively related with performance. Synergy. et al. (2000) 289 . Size & Scale. subsequently negatively related across developed markets.DIVERSITY .
brand building Risk diversification. conglomerate power Threshold level of diversification Performance Diversity (Khanna & Palepu. 2001) 290 . Huge initial investment. subsequently positively related across emerging markets.DIVERSITY .PERFORMANCE (II) Diversity is initially negatively related with performance.
Characteristics – It should have a spread of affiliates or subsidiaries. It should have a spread of manufacturing facilities. It should think globally. 291 . It should have a spread of assets. act locally (Eg. It should have a spread of interest groups / stake holders.INTERNATIONAL IDENTITY MNC’s consciously engage in FDI in different parts of the globe to forge resource diversity as a distinct competitive advantage. HSBC). revenues and profits.
low risk profile in developed markets and vice versa for emerging markets). low power distance in developed markets and vice versa for emerging markets). 292 . high feminity index in developed markets and vice versa for emerging markets).GLOBAL BUSINESS ENVIRONMENT Power Distance – It reflects the disparities in income and intellectual development (Eg.It reflects the relative role of team building (Eg. Risk Profile – It reflects the risk attitude of the top management (Eg.It reflects the disparities in women in workforce (Eg. low group scale in developed markets and vice versa for emerging markets). Feminity Index . Group Scale .
Country Risk – It reflects the political and economic risk (Eg. high cultural adaptability in developed markets and vice versa for emerging markets).GLOBAL BUSINESS ENVIRONMENT Cultural Adaptability – It reflects the adaptive ability to a changing environment . FOREX reserves. customs. attitude. dress sense. political stability. interest rates. time value. judiciary) of doing business in a particular country (Eg.culture. inflation. credit rating. 293 . code of conduct. low country risk in developed markets and vice versa for emerging markets). way of life. flexibility (Eg. currency. terrorism (9/11). corruption.
in most emerging markets meetings are delayed and lasts unusually long. High levels of ethnocentrism usually has a negative effect on business. Language Barriers – Developed country managers expect foreign partners to communicate in their languages. 294 . in most emerging markets use of an interpreter may be a standard protocol.GLOBAL BUSINESS ENVIRONMENT Time Sensitiveness – Developed country managers regard time as precious. and vice-versa. time-zones. Other factors – local celebrations. Ethnocentrism – Developed country managers tend to regard their own culture as superior. however.
BRIC). It focused largely on TRIPS (patents. ASEAN. trademarks). 295 . In 1995 (Uruguay Round) GATT was renamed to WTO. copyrights. 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 also initiated provisions on anti-dumping.GATT GATT was a bi-lateral treaty initiated between US and some member countries in 1947 to promote free trade. The 2001 (Doha Round) focused on power blocks (NAFTA. The 1999 (Seattle Round) saw a lot of protest amidst bringing agriculture under the purview of TRIPS.
However with current recession in the US 2002 onwards.Pound). three countries joined in 2002 increasing it to fifteen members as of 2008. 296 .e.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. Sterling . Euro). The Euro was significantly devalued against the Dollar till 2002. The notable exception was Great Britain which still continues with its local currency (i. primarily the OPEC countries. the Dollar still remains the most preferred currency globally.e. However.
but it may have spill-over effects.SINGLE Vs MULTIPLE CURRENCY Transaction Costs – Though the initial cost of introduction of a single currency is very complicated and costly. a multiple currency is preferable where the business cycles of member nations are different. Transparency – A single currency is transparent and competitive. However. it helps avoiding transaction costs associated with a multiple currency. Rate Uncertainty – A single currency eliminates the risk of competitive devaluations. 297 . Trade Block – It will strengthen the EU identity which would not have been possible otherwise.
– FDI (transfer of tangible resources) is slow but steady for the purpose of economic growth. It is short-medium term with comparatively low levels of commitment.e.e. hot money). 298 . Neo classical economists believe that foreign investment may in fact be a win-win game.FII Vs FDI INVESTMENT Classical economists believed that foreign investment (in any form) is basically a zero sum game (i. – FII (transfer of intangible resources) is fast but may have strong repercussions (i. the gain of one country is loss of another). It is long term with high levels of commitment.
Pricing – It depends on the competitive structure (PLC – Kellogg's). usage (talk time). customer awareness (microwaves). technology (microchip). Distribution – It depends on the market characteristics (fragmented – concentrated).culture (food habits). promotion (surrogate advertising). .INTERNATION MARKETING Product – The various attributes of a product may receive different degrees of emphasis depending on differences in . buying patterns (spread). lifestyle (petroleum 299 outlets – departmental stores). economic (middle class buying power).
INTERNATION FINANCE Currency Risk – Many Indian IT companies (Rs) having business in US (Dollar) are asking for quotes in (Euro) or are shifting bases out of US to avoid risk of devaluation of Dollar. Leverage – The leverage may vary across countries depending upon money and capital market conditions (Eg.India) may be different from that another trading country (US – GAAP or IRS). Cost Structure – Companies in India need to investment in fixed costs due to poor infra-structure 300 compared to developed markets. equity is cheap in India). Accounting Norms – The accounting norms of one country (AS . debt is cheap in US. .
INTERNATIONAL HR An uniform HR policy is idealistic to enable parity in performance appraisal. in most cases it is not desirable nor practiced. Training – It is a pre-requisite for international business to reduce language. and cultural barriers (language) vis-à-vis emerging markets. shortened life cycles). social security. technology (convergence. skills are more important that cultural fit and vice-versa. however. Recruitment – In local recruitment. double taxation. labour laws. 301 . Compensation – Differential pay packages exists because of differences in purchasing power.
SCM – Use of ERP to network the extended enterprise 302 across the globe. Technology – The cost to be evaluated in terms of latest technology (Euro VI) vis-à-vis effective cost of appropriate technology (Euro II).INTERNATIONAL OPERATIONS Location Incentives – FDI in emerging markets should explore options for SEZ’s to explore benefits (tax holidays. reduce power costs) vis-à-vis infrastructural bottlenecks. . Bosch spark plugs are used by car manufacturers worldwide). Outsourcing – A company having a core competence may be the source of global outsourcing (Eg.
CONTEMPORARY TOPICS 303 .
it has destructive effects as well. While innovation typically adds value for organizations. Innovation is all about staying ahead of competition. Innovation is the most preferred strategy today to maintain competitive advantage in the present turbulent business environment.INNOVATION An invention is the first occurrence of an idea for a new product or process. innovation is the first attempt to carry it out in practice. 304 . but has inherent risks involved as well. Innovations typically paves the way for more secured and improved lifestyle for consumers in general.
While product innovations are typically customer driven. Process innovation usually follows product innovation.TYPES OF INNOVATION A key challenge is maintaining a balance between process and product innovations. Strategic innovation has the potential to change the rules of the game. process innovations are organizational driven. However. Tangible impact of product innovation on performance is significantly higher than process innovation. process innovation is necessary to sustain the competitive advantage of product innovation. 305 .
Medical Surgery (Lasik). Processors (Pentium). Drug Development (Bio Chemicals).BUSINESS MODEL It is a simplified description and representation of a complex real world. Innovations are the back-bone of successful business models . a paradigm shift). It leads to a shift in the price – performance envelope. 306 . putting an idea into practice). Disruptive business models brings in a new frame of reference (i.e. Telecom (CDMA Technology). Data Storage (Pen Drives).e. about how an organization makes money (i.
The cost structure resulting from the business model. The proposed relationships established with clients. The key activities / processes necessary for execution. 307 .NINE BUILDING BLOCKS Value proposition offered to the market. The channels to reach out to the clients. The key partners involved in the activities. The segment(s) of clients to be addressed. The revenue streams generated by the activities. The key resources and capabilities required.
BUSINESS MODEL FRAMEWORK 308 .
It is just one piece of the puzzle. 309 . Investment Banking. Real Estate) companies need to untangle and understand the intricacies of their business model.REVENUE MODEL Positioning is just not sufficient. The revenue model described here are the means to generate revenues. innovative companies to carve out unique business models to fend off competition. It involves – Product Visualization – Product Prototype – Product Test – Capacity – Pricing – Distribution. With the rapid erosion of certain industries (IT.
Promote the culture of experimentation. Allow the workforce idiosyncrasies for their errors. 310 .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. Allow the management sufficient slack to be future oriented. Promote the grape-vine. Provide reasonable incentives (not necessarily monetary). A favourable intellectual property (IP) climate.
The most preferred strategy of internal protection includes imbibing “causal ambiguity” in the production process to make reverse engineering difficult. In most emerging markets where the IP climate is not so favorable. however that possibility is slowly atrophying. companies are increasingly relying on internal protection to sustain innovation effects.HOW TO PROTECT INNOVATION? Without adequate protection (external or otherwise) the effects of innovation does not translate to performance. Collusion with the judiciary is also another distinct possibility in emerging markets. 311 311 .
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.
shareholders can diversify their portfolio at a much lesser risk and cost. According to the agency theory top managers and shareholders interests are usually conflicting in nature and tend to pull in opposite directions. 313 . From the strategic point of view managers tend to diversify into unrelated businesses as it provides higher returns hence a more favourable appraisal. However. also known as the principal-agent problem or agency dilemma. not present in portfolio diversifications. This exposes the shareholders to additional risks and higher costs.AGENCY THEORY The root of Corporate Governance goes back to the Agency Theory.
After the Enron downfall. various laws were enacted to ensure proper usage of these funds. SEBI Report – 2005. . 2002 to restore public confidence in corporate governance. the US government passed the Sarbanes – Oxley Act. 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.ORIGIN & CONTEXT Since the early 20th century since a large part of public funds were held by publicly traded firms in the US.
GOVERNANCE PRINCIPLES Rights and equitable treatment of shareholders: Help shareholders exercise their rights by effectively communicating information in transparent ways that is understandable and accessible and encouraging shareholders to participate in general meetings. The key roles of chairperson and CEO should not be held by the same person and their offices be clearly separated. Interests of other stakeholders: Recognize the legal and other obligations of all legitimate stakeholders. Role and responsibilities of the board: It deals with issues about an appropriate mix of executive and nonexecutive directors. including the society at large. 315 .
assessment and mitigation of risks and retirement by rotation over a fixed period of time. They should also implement systems to independently verify and safeguard the integrity of the company's financial reporting.. 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.
with its legal authority to hire. Balance of power: The simplest balance of power is very common. Regular board meetings allow potential problems to be identified. Remuneration: Performance-based remuneration is designed to relate some proportion of salary to individual performance. discussed and resolved. 317 . fire and compensate top management. However. safeguards invested capital. a person benefitting from a decision should abstain from it. they should provide no mechanism or scope for opportunistic behaviour.GOVERNANCE STRATEGIES Monitoring by the board of directors: The board of directors.
They defined a well-governed company as one that had mostly out-side directors. Egypt and Russia) to around 40% for Canadian & European companies. 318 . The size of the premium varied by market. and was responsive to investors' requests for information on governance issues. McKinsey found that 80% of the respondents would pay a premium for wellgoverned companies.GOVERNANCE & PERFORMANCE In its “Global Investor Opinion Survey” of over 200 institutional investors in 2002. undertook formal evaluation of its directors. who had no management ties. from 10% for companies where the regulatory backdrop was least certain (those in Morocco.
However. corporate philanthropy should be a part of every corporate mission. today economic institutions are considered as a major drivers of improvement in quality of life in general and therefore needs to include multiple stakeholders.SHAREHODER – STAKE HOLDER THEORY Till the early part of the 20th the basic objective of modern organizations was to provide goods and services for public consumption for profit maximisation. Over a period of time. 319 . the short-term view of profit maximisation gave way to a more broader and mediumterm view wealth maximisation of the shareholders. The basic premise is that firms cannot exist in vacuum. Therefore.
economic and social responsibilities cannot be mutually exclusive. the debate on CRS still continues whether firms should detract its focus from its business? 320 . Therefore. CSR can be defined as. “an enterprises decisions and actions being taken for reasons at least partially beyond its immediate economic interests”. However. in fact a large part of it is significantly overlapping. giving a very important message that one cannot exist without the other. Therefore.CORPORATE SOCIAL RESPONSIBILITY As Peter Drucker rightly pointed out that. “a healthy business cannot exist in a sick and impoverished society”.
MRTP). Fear of government interference: Excessive quench for profits may lead to build up of adverse public opinion compelling the government to intervene (Eg. The role of media: The media and various consumer organizations have come up in protecting consumer rights and exposing mal-practices.GROWING CONCERN FOR CSR Awareness due to education: With growing literacy. Public image: Entrepreneurs are increasingly relying on public image as a source of competitive advantage and a higher financial discounting. 321 . people are becoming increasingly aware of their right to a decent and healthy life.
322 . Literacy & Training Programs – (Eg.CSR STRATEGIES Green Supply Chain Management: It includes environmentally preferable purchasing. Tata Steel – Life Line Express). eco efficiency. designing eco-friendly products.Paper packaging. and extended producer responsibility (Eg. Health & Hygiene – Attending the health hazards due to wastes and by-products to employees and society in proximity (Eg. Refrigerators – CFC. Cement . Aditya Birla Research Centre – LBS). Education. Exide – Product take back).
In turn companies by serving these markets. across the world's billions of poor people having immense untapped buying power. K. Prahalad notes that future markets exist collectively. 323 .BOTTOM OF THE PYRAMID With the market across most developed markets including the US getting saturated. C. They represent an enormous opportunity for companies who learn how to serve them. Strategic innovations leading to disruptive business models can show the way out. they're helping millions of the world's poorest people to escape poverty.
BLUE OCEAN STRATEGY 324 .
MARKETSPACE .TWO WORLDS 325 .
They have fought for profits. battled over market-share. where most industries are saturated. profitable growth. .WHAT IS RED OCEAN? Companies have long engaged in head-to-head competition in search of sustained. and struggled for differentiation (cost or product). Yet in today’s overcrowded industries. one companies gain is always at the 326 cost of another companies loss. In today’s red oceans. competing head on results in nothing but a bloody red ocean of rivals fighting over a shrinking profit pool.
It is only the frames of the . It helps in creating powerful leaps in value for both the firm and its buyers. Such strategic moves are possible through the pursuit of product differentiation and low cost simultaneously. Blue Ocean’s have existed in the past. it will exist 327 in the future as well. rendering rivals obsolete and unleashing new demand.WHAT IS BLUE OCEAN? Tomorrow’s leading companies will succeed not by battling in red oceans. but by creating blue oceans of uncontested market space ripe for growth .
RED OCEAN Vs BLUE OCEAN Compete in existing markets Compete in uncontested markets Beat the competition Exploit existing demand Make the competition irrelevant Create and capture demand Make the value-cost trade off Break the value-cost trade off Demand is the limiting factor Supply is the limiting factor 328 .
information imperfections atrophy instantly.BLUE OCEAN STRATEGY IMPERATIVES Prospects in most established market spaces – red oceans – are shrinking steadily. of European nations. Technological advances have substantially 329 improved industrial productivity. . Demand across developed markets reaching a plateau. As trade barriers between nations & regions fall. Niche markets & monopoly havens are continuing to disappear. Population shrinkage across a no.
Incumbents often create blue oceans within the ambit of their core business. History indicates that blue oceans exist in three basic industries – automobiles (how people get to work) – computers (what people use at work) – entertainment (what people do after work). managerial moves are.CONCEPTUAL UNDERPINNINGS Blue oceans have existed in the past and will exist in the future as well. Company & industry are the wrong units of 330 strategic analysis. the underlying technology was often already in existence. They are not necessarily about technology. .
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 .BLUE OCEAN .
IMPLEMENTATION SEQUENCE Buyer Utility (1) Is there exceptional buyer utility in your business idea? Price (2) Is your price easily accessible to the mass of buyers? Blue Ocean Strategy Adoption (4) What are the adoption hurdles in actualizing your business idea? Are you addressing them up front? Cost (3) Can you attain your cost target to profit at your strategic price? 332 .
. Southwest Airlines: Pioneering the concept of LCC. Sony Play Station: Redefining machine-human interface in entertainment and targeting an altogether new user base. 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.
According to this view managers need not be constrained to act within the confines of their industry. companies & managers are largely at the mercy of economic forces. All they need to do is change their managerial frames. 334 . According to this view.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. greater than themselves. Off late emerging views in strategy having its origin in (Organization Theory) led to a paradigm shift to what is called the – reconstructionist view.
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