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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
7 . It is long-term in nature. It requires full commitment of the top management. It is a holistic and integrated approach. It is irreversible. It involves substantial resource outlay.FEATURES It forms the core activity of the top management. It is all about creativity and innovation. It is about adaptation and response to the same.STRATEGIC MANAGEMENT . It provides broad guidelines.
It about mere data and facts. It attempts to minimize risk. It is about a definite formula. It is about forecasting. It involves nitty-gritty's. It is fool-proof in nature. 8 . It involves only the top management. It brings instant success.STRATEGIC MANAGEMENT – MYTHS It involves short-cuts. It a bundle of techniques or even tricks. It is rocket science.
To leverage size. again and again ……. To be insulated against environmental threats. To innovate. To tap markets across boundaries. . To gain expertise in technologies. To generate large resource pool. scale and scope. To be future oriented. To assimilate change faster. rather than reactive. To be proactive.STRATEGIC MANAGEMENT IMPERATIVES To be continuously alert. 9 To develop core–competencies.
In the ancient days battles were fought over land. but with a lot a rigour and robustness. It is an old wine in a new bottle.strategies. obsession. In contrast.STRATEGY . Even in today’s markets. whose origin can be traced to some of the greatest battles fought in the ancient days. but by virtue of their courage. 10 . In the ancient days battles were won not by virtue of size of the army or armory. today's battles are fought over markets.ORIGIN The word strategy has its origin from the Greek word strategia meaning Military Commander. battles fought on the market front are won by companies by virtue of their obsession & strategies. and more importantly .
SOME PARALLELS Japan’s attack on Pearl Harbour – Strategy: Attack where it hurts the most. – Reliance’s entry into telecom. challenging GM and Ford. – Yahoo and Microsoft challenging Google. 11 . 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. Napoleon’s attack on Russia – Strategy: Waiting for the right time. – Toyota’s entry in the US.
a radical change in the business environment brings about discontinuity. A paradigm is a dominant belief about how the business and its environment operates. The first major discontinuity in the history of global business environment was the .EVOLUTION OF MANAGEMENT As Peter Drucker refers to it.Industrial Revolution. 1910). 12 . – 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.
EVOLUTION OF STRATEGIC MANAGEMENT The second major discontinuity in the history of global economic environment – World War II. push to pull). – Changes in the technology fore-front. – Global market place. From uniform performance. – Homogeneous to heterogeneous products. 13 . 1960). – Affluence of the new customer (i. Efficiency and effectiveness are no longer sufficient. Survival of the most adaptable becomes a new management paradigm (Ansoff. The question of outperforming the benchmark became the new buzzword.e. performance across firms became differentiated.
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 .
– The choice of strategy is primarily concerned with external ones rather than internal ones.APPROACHES TO STRATEGY Analytical Approach – Igor H. – Biases and prejudices has a very little role to play in strategic choices pursued by managers. – The choice of product-market mix is based on conscious evaluation of risk – return factors. Ansoff (1960) – Strategy can be segregated into certain mutually exclusive and inter-related components aimed at managing the growth of an organization. Learning always begin on a clean sheet of paper. 15 . – It is primarily the top management’s prerogative.
– The top managers then decide on the type of organization structure & systems to be in place. Successful organizations align authority and responsibility of various departments in way to reach overall objectives. who will be the top managers. how it will compete. Once the control systems are in place. 16 . – Organization structure will precede and cause changes in strategy.APPROACHES TO STRATEGY Design Approach – Alfred Chandler (1970) – Structure follows strategy. The organization initially decides which industry to enter. – Management control systems has a dominating role in influencing firm performance. everything else follows.
new entrant. 17 . customer. Porter (1980) – Choose a consumer segment and position your product accordingly.APPROACHES TO STRATEGY Positioning Approach – Michael E. – The environmental forces comprises of – supplier. – An organization is seldom in a position to influence the larger business environment. – A firms performance is inversely related with the bargaining power of environmental forces to which it is exposed. competitors. substitutes. – The organization will outperform the industry where environmental forces are weak and vice-versa.
– Organizations can significantly alter the way an industry functions. but exploiting the resource differences among them. – Core competencies are a set of skills that are unique and can be leveraged. 18 .APPROACHES TO STRATEGY Core Competence – C. locating in most attractive industries and pursuing the same strategy. K. They are complex resources and undermines a firms competitive advantage. – It enables a firm to deliver unimaginable value ahead of time. Prahalad (1990) – The key to superior performance is not doing the same as other organizations.
STRATEGIC MANAGEMENT PROCESS Strategic Intent Strategic Planning Strategic Gap – Environmental Scanning – Internal Appraisal of the Firm Strategy Formulation – Corporate Strategy – Business Strategy Strategic Choices – Functional Strategy Strategy Implementation Strategy Performance Strategy Evaluation & Control 19 .
TOP MANAGEMENT PERSPECTIVE 20 .
21 . It involves an obsession to be the best or outperform the best.STRATEGIC INTENT If you cannot see the future. It’s a philosophy that distinguishes it from its competitors. A substantial gap between its resources and aspirations. A gap that consciously manages between stagnation and atrophy. It implies a significant stretch. It provides a sense of direction and destiny. It is the cornerstone of an organizations strategic architecture reflecting its desired future state or its aspirations. you cannot reach there. A strategic intent is a statement of purpose of existence.
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 .
strategic variety) is apparent. It is core to the strategic intent of the firm.e. To put it more simply. 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.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. when radical changes in the internal and external environment (i. Dominant logic changes.
but achievable aspirations. It is a combination of three basic elements – – An organizations fundamental reason for existence.VISION It is a dream (not a forecast) about what the company wants to become in the foreseeable future. It enables the top management to remain focused. – It stands for the unchanging core values of the company. It ensures that the company does not wander off into unrelated zones or fall into an activity trap. beyond just making money. 24 . – It represents the company’s audacious. It provides an unity of purpose amidst diversity of personal goals.
VISION . Clarity – Vividly descriptive image of what the company wants to be known for in the future. Empathy – It should reflect the company’s beliefs to which it is sensitive. Brevity – It should be short. Reachable – It should be within a reasonable target in the known future. Sharing – The company across all hierarchies should have faith in it. 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. not an utopian dream. 25 . clear.CHARACTERISTICS Reliance – Where growth is a way of life.
It gives a shared platform. It provides a holistic picture. It gives enlightment. To prevent the fall in a activity trap. 26 . It facilitates development of skills & capabilities.ADVANTAGES To stay focused on the right track.VISION . It gives the impression of a forward-looking organisation. It makes strategic alignment easier. It fosters risk taking and experimentation. It lends integrity and genuineness.
MISSION Mission defines the space that a business wants to create for itself in a competitive terrain. It enables the firm to define its business landscape and identify its competitive forces. its reason for existence. It serves as a road map to reach the vision. Although the purpose may change over time. A broad mission statement helps in fending competitors. It is intuitive for managers to conceive their business in terms of the customer needs they are serving – What business are we in? – Which customer needs are we serving? It should be broad based and relevant to all stake-holders. 27 .
MISSION – SOME IDEAS Reliance – We are in the business of integration. We offer strength. though some may seem unrelated in nature. …………………. …………………. 28 . – We do not offer software's. We offer security. – We do not offer steel. …………………. Some other examples – We do not offer shoes. We offer solutions. – We do not offer insurance. We offer comfort. …………………. All the businesses of the company are strongly integrated with their main business.
– It adds legitimacy and motivation. – It lends direction – time frame in the medium term. – It keeps the mid management pre-occupied.GOALS & OBJECTIVES Reliance – We want to become a Rs. – It provides a benchmark for evaluation. It provides a quantitative feel to an abstract proposition. It is an end result (quantifiable) something a firm aims and tries to reach in a time bound frame.100K crore company by the year 2005. – It is based on Management by Objectives (MBO). – It helps identifying key success factors. – It prevents deviation. 29 .
– Acquire a market share of indomitable position. – Leverage economies of size and scale. It is specific to a particular business. The details of the plan Reliance Telecom adopted were – Backward integrate process technologies. coordinating appropriate technologies. and gaining access to desired markets to achieve the desired goals and objectives.PLANS Reliance – Desire to invest 25K crore in telecom business by circa 2010. It is the process of garnering necessary inputs. – Compress project times. – Use price-elasticity to break market barriers. 30 .
31 . When changes in the environment is incremental. strategies lose touch with the emerging realities. This state of affairs is known as strategic drift. past strategies tend to have a bearing on future strategies. It often leads to an organizational crisis. equilibrium is maintained. Historical studies have shown that most organizations tend to continue with their existing strategies. In such a context. radical change may lead to disequilibrium. This tendency to restore continuity is known as inertia (resistance to change).STRATEGIC DRIFT Due to top management commitment. However.
STRATEGIC DRIFT FRAMEWORK Environmental Change Degree of change Strategic Change Radical Change Incremental Change State of Flux Continuity Stage of Transformation Strategic Drift Stage of Atrophy Time 32 .
Organizational politics involves intentional acts of influence to enhance or protect the self-interest of individuals or groups over organizational goals. – Developing a platform of support.ORGANIZATIONAL POLITICS Strategic drift often leads to organizational politics. – Distorting information to gain mileage. – Hiding vulnerability. – Using covert tactics to pursue self interests. – Creating obligations of reciprocity. – Creating a favourable image. Some instances of organizational politics – Formation of powerful groups or coteries. 33 .
– The environment context has changed. Usually there is wide gap between the two when organizational politics is evident. Other causes – – The plans are unworkable and utopian. . – Influential stake-holders back out. – Persons responsible for strategy conceptualization and implementation are34 divergent.INTENDED & REALISED STRATEGIES An intended strategy is an expression of interest of a desired strategic direction. A realized strategy is what the top management actually translates into practice.
Learning is an integral part of logical incrementalism.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. this is not to be treated as “muddling”. 35 . but the master scheme of the rational comprehensive scheme is not apparent. but as a defensible response to the complexities of a large organization that mitigate against publicizing goals. They simply unfold the particulars of the sub-system in stages. However. Strategy formulation and implementation are linked together in a continuous improvement cycle.
Adaptation – As implementation progresses. Agent of Change – Formal ratification of a change plan through MBO. Leveraging Crisis – A sudden crisis or an opportunity should be used as a trigger to facilitate acceptance and implementation of change. The broader objective should serve the overall interest of the organization. 36 .IMPLEMENTING INCREMENTALISM General Concern – A vaguely felt awareness of an issue or opportunity. Macro Broadcasting – The broad idea is floated without details to invite pros and cons leading to finer refinements.
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. Dominant logic’s are very rigid and sticky and prone to inertia. As it brings 37 with it a different dominant logic. It creates blinders. Dominant logic’s are the cornerstones of change when strategic transformation is apparent. . Strategic transformation becomes smooth through a change in top leadership.
A learning organization must continuously focus on unlearning as well. – Constructive Bargaining – Agree to disagree. – Informal Networks – Emerging of new ideas. 38 . – Experimentation – Fosters a culture of risk taking. – Organisational Slack – Enough free space. and skills that fosters experimentation and questioning and challenge around a shared purpose. experience. Factors that fosters a learning organization – Pluralistic – An environment where different and even conflicting ideas are welcome.LEARNING ORGANIZATION A learning organization is capable of continual regeneration from knowledge. It helps prevent a strategic drift from occurring at the first place.
ENVIRONMENTAL CONDITIONS Dynamic Scenario Planning Learning Organization Static Forecasting Decentralization Simple Complex 39 .
ANALYZING BUSINESS ENVIRONMENT 40 .
It is pro-active in nature. It is reactive in nature.e. It points to a position of superiority with relation to competition. 41 . gap analysis). 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.PLANNING & STRATEGIC PLANNING Formal planning is a function of extrapolating the past. Competitive advantage provides the surest way to fulfill the strategic gap. It is based on the assumption of incremental change. Strategic planning is a function of discounting the future. It requires a quantum leap (i.
Environmental factors can be external as well as internal to the organization. events.ENVIRONMENTAL SCANNING The environment is defined as the aggregate of conditions. Environmental scanning is very important component of strategic planning. The world is flat. not guided by any boundaries. and influences that affect an organizations way of doing things. A manager has to continuously scan the environment to ensure alignment of the strategies with the radically changing environment. It is exploratory in nature. The segments of the environment a top manager scans selectively depends upon his dominant logics. resources and ideas move unhindered. 42 .
but also to analyze the complex linkages across them.PESTEL PESTEL attempts to provide a broad framework on how the broader environmental forces affects an organization and influences the way it practices strategy. It is important not only to identify the structural drivers of change. It is particularly important that PESTEL be used to look at the future impact of environmental factors. Understanding the composite effect is critical. which may be different from the past impact. It is not intended to be used as an exhaustive list. for which a holistic picture is required. 43 .
Religious Sentiments. FDI Inflows. Income & Age Distribution. Social – Population Diversity. Economic – GDP. 44 . Literacy Levels. Currency Stability. Licensing & Quotas. Infra-Structural Investments. Central – State Co-alignment. Savings & Investment. Subsidies & Protection. Government Attitude. Inflation & Interest Rates. Economic Model. Social Values.PESTEL FRAMEWORK Political – Government Stability. Capital Market & Forex Reserves. Economic Cycles. Language Barriers. Monsoon & Food Grains Reserves. Fiscal Deficit.
Carbon Credits. Product Safety & Health Hazards.PESTEL FRAMEWORK Technological – Innovation. Direct & Indirect Taxes. Environmentally Preferable Purchasing. Patent Laws. Patents. Obsolescence Rate. Technological Convergence. Legal – Monopolies Legislation. Research & Development. Non-Fossil & Alternative Fuels. Environmental – Global Warming & CSR. Pollution Control Laws. Employment Laws. Product Design. Waste Disposal & Emissions. Extended Producer Responsibility. ERP. 45 . Consumer Protection Laws.
Encouraging FDI.VRS. MRTP Liberalization. New Trade Policy (NTP) – Lowering import tariffs. Exit Policy. FERA Liberalization. Economic Reforms – Fiscal & Monetary Reforms. Encouraging exports. Capital Market Reforms. Abolition of import licenses. Banking Sector Reforms. Curtailment of PSU’s. Rupee convertibility.ECONOMIC LIBERALISATION New Industrial Policy (NIP) – Liberalizing industrial licensing. 46 . PSU Disinvestments. Structural Adjustments – Phasing out subsidies. Dismantling price controls.
Survival of the fittest MNC Onslaught – Enhancing stakes – Power Equation – Joint Ventures – Technological Alliances – Take-over threat.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 .
Globalization – Cheap Imports & Dumping – Push to Pull Marketing Buyers exacting demands – Shortage to surplus – Price competition – Life-style changes – Stress on quality.DISCONTINUITY Hyper Competition – MNC’s . Consumerism Challenges on the technology front – Competencies become technology based – Investment in R&D become inescapable 48 .
DISCONTINUITY Compulsion to find export markets – Identifying competitive advantage – Technological gap – Global presence – Depreciating currency – Exports Corporate vulnerability – It is no longer business as usual – Capital inadequacy – Lack of product clout and brand power – One product syndrome – Loss of monopoly 49 .
FIVE FORCES MODEL .PORTER Threat of New Entrants Bargainin g power of Suppliers Competition from Existing Players Bargainin gBargainin power g of power of Suppliers Customer s Threat of Substitutes 50 .
but also used to understand how they can be countered and overcome. It should not only be used to understand the forces.e. profit potential) per se. The model should not be used as a snapshot in time. 51 . It is even wiser to apply the same at the product – market level. It depicts the attractiveness of an industry (i. incremental or otherwise. the forces are subject to changes. The five forces have strong cross-linkages.FIVE FORCES MODEL ASSUMPTIONS The model is to be used at the SBU level and not at the industry level.
Scope for backward integration. Government policy. Low customer switching costs. Access to distribution channels. Capital requirements. Unimportance of product quality. Presence of substitutes or unorganized sector. Industry stagnation. Learning curve advantages. 52 . Product differentiation through proprietary technology or brand power. Low margins & stagnancy.PORTERS FIVE FORCES ANALYSIS Threat to Entry – Economies of size and scale. Undifferentiated product. Low relative importance of the segment. Resource profile & fear of retaliation. Threat of Customers – Buyer concentration and volumes. High switching costs.
Scope for forward integration. Lack of substitute inputs. High customer switching costs. Jockeying for position – Fragmented market. 53 . Intermittent overcapacity.PORTERS FIVE FORCES ANALYSIS Threat of Suppliers – Supplier monopoly. Differentiated inputs. Buyer’s propensity to substitute. Industry stagnancy. Threat of Substitutes – Improvement in price -performance trade-off. Piracy and counterfeits. Low level of differentiation. Diversity of players. Produced by industries earning high profits. Low relative importance of the segment. Product perishability. Unorganised sector. High exit barriers.
dominant or related diversified or unrelated diversified businesses (Infosys. Business Scope – The intention whether the firm wants to be in a single. 54 .FIRM ENVIRONMENT Size and Scale of Operations – It is a very important component of competitiveness in today's global context (Bharti – MTN. Tata). Inertia – Excessive commitment to past strategies prevents firms from tapping emerging opportunities. Cohesiveness – Degree of bonding existing across affiliated firms. Reliance). Resource Profile – It highlights the capabilities (generic) or competencies (business specific) of the firm.
However. With lower costs. experience teaches better and more effective way of doing things. The E-Curve thus enables organisations to build entry barriers. 55 . an E-Curve can prove to be futile during discontinuity. it can price its products more competitively.EXPERIENCE CURVE The cost of performing an activity declines on per-unit basis as a firm becomes more efficient. and with lower prices it can increase its sales volume. leverage it as a competitive advantage. Matured firms will always be positioned advantageously on the ECurve than new entrants. which further reduces costs. Experience curve has strong linkages with performance.
EXPERIENCE CURVE Cost per unit of output Decreases at an increasing rate Point of inflexion Decreases at a constant rate Decreases at a decreasing rate Production / Volume 56 .
TRADITIONAL VIEW Efficiency = Lower Costs 2 3 1 Experience = Efficiency Lower Costs = Higher Sales Entry Barrier = Better Performance 4 6 5 Higher Sales = Lower Costs Lower Costs = Entry Barrier 57 .EXPERIENCE CURVE .
EXPERIENCE CURVE .STRATEGIC VIEW Inertia = Limited Growth Experience = Inertia 2 3 1 Limited Growth = Diversification Strategic Failure = Poor Performance 6 5 4 Diversification = New Experience New Experience ≠ Old Experience 58 .
. Suppliers. It is one of the earliest models in environmental scanning. Websites. Case Studies – Structured Questionnaires. Competitors. Observation. Business Intelligence – Bankers.SWOT The framework was originally conceptualized by Kenneth Andrews in 1970. Acronym for Strengths – Weaknesses – Opportunities – Threats. 59 Analysts. It helps an organisation to capitalize on the opportunities by maximizing its strengths and neutralizing the threats minimizing the weaknesses. A SWOT audit involves – Company Records – Annual Reports. Customers. Press Clippings & Interviews.VULNERABILITY ANALYSIS . Interviews.
FRAMEWORK Opportunities Nullify weaknesses which prevents you from exploiting opportunities Leverage strengths to make use of opportunities Weaknesses Minimize weaknesses which prevents you from countering threats Strengths Threats Utilise strengths to counter threats (?) 60 .SWOT ANALYSIS .
Good credit rating – Eg. Infosys. ITC. Aditya Birla. Tata. Ranbaxy. Tata Steel. Caterpillar. Motivated employees & cordial industrial relations – Eg. Reliance. Toyota. Siemens. Strong R&D base – Eg. Economies of scale – Eg. Sony. Large resource pool – Eg. Biocon. Strong after sales & service network – Eg. SBI. Dr. 61 . Reliance. HUL. Honda. Reddy’s. Infosys.SOURCES OF STRENGTH Strong brand identity – Eg. Engineering Skills – Eg. Volkswagen. Excellent penetration – Eg. High quality products – Eg.
Excess manpower – Eg. Bijoligrill. Lack of product / brand clout – Eg.Raymond. K. Ballarpur Inds. Nirma. SAIL. Organizational Politics – Eg. J. CMC (Tata Group) 62 . K. Hindustan Motors. Narrow business scope – Eg. CESC.SOURCES OF WEAKNESSES Outdated technology – Eg. Single product syndrome – Eg. Tatas. B. Excessive diversification – Eg. Strategic myopia – Eg. Procter & Gamble. Group . Inefficient top management – Eg. Modi Group. Lacking experimentation culture – Eg. Inertia – Eg.
SOURCES OF OPPORTUNITIES Delicensing of Industries – Eg. Telecom. Growing population – Eg. VRS. Market driven Pricing – Eg. Abolishing MRTP – Eg. Exit Policy – Eg. Sugar. Fertilizer. Fertilizers. Sugar. Life style changes – Eg. Insurance. Banking. Free pricing – Eg. Maruti. GDR’s.Tata Motors. Retailing. 63 . Globalization – Eg. Abolishing CCI. Capital market reforms – Eg. Middle-class buying power. ECB’s. Collaborations & Joint Ventures – Bharti & WalMart. Market driven Interest rates – Eg.
Natural disaster – Eg. Group disintegration – Eg. Foreign Direct Investment (FDI) – Eg. Bajoria – Bombay Dyeing. (1985–1990). Singur SEZ. Land acquisition . Reliance.Social activism – Eg. 26/11. Tsunami. 11/9. Satyam. Dumping from China. Lack of Corporate Governance – Eg. Economic recession – Eg. 64 . Terrorist attacks – Eg. Hostile take-over – Eg.SOURCES OF THREATS Political instability – Eg. Onida. Import relaxation – Eg. Earth Quake. Nationalisation – Eg. Tata Steel. (2008).
Stages in ETOP analysis – List the aspects of the environment that has a bearing on the organization. 65 .e. Assess the extent of impact of the factors. scenario analysis). time series. Strategic responses (including adaptation) to opportunities and threats is critical for survival and success.ETOP Acronym for Environment – Threat – Opportunity – Profile. Delphi's technique. It represents a summary picture of the external environmental factors and their likely impact on the organization. Forecasting – Predict the future (i. Holistic view – Prepare a complete overall picture.
66 Vertical integration is a powerful strategy. An organization can draw upon the experience of its peers in similar situations. It is also a form of assessing vulnerability through longitudinal analysis. Some key findings on major performance drivers that explains 75% deviations in performance – Product quality and relative market share. High investment intensity acts as a drag.PROFIT IMPACT OF MARKET STRATEGY PIMS is a database model developed by GE and later extended by HBS to examine the impact of a wide range of strategy variables on business performance. selectively. Relative attractiveness of the market. .
PIMS . when radical changes in the economy takes place. Managers should be particularly cautious while referring to such data during times of discontinuity as it makes past patterns futile. Authenticity of data is of prime importance – Contexts drawn across one organization may not be applicable to another. As every organization is unique in its own way. – Contexts may vary over time.LIMITATIONS The analysis is based on historical data and it does not take care of future challenges. therefore 67 validity may be a question. . – Contexts may vary across countries.
It enables the top management to draw focus. It involves a three-stage process – Identify KSF – What does it take to be successful in a business? Drawing KSF – What should be the organizations response to the same? Benchmarking KSF – How do we evaluate organization success on this factor? 68 . KSF helps organizations spot early opportunities and convert them into value adding business propositions.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.
IDENTIFYING ALTERNATIVE STRATEGIES 69 .
It indicates the quality of growth an organization is looking for.CORPORATE . related. national. 70 .GRAND STRATEGY It is concerned with the overall business scope (single. global) of a firm and deals with choices of allocating resources across them. It determines the locus a firm encounters with internal and external environment. unrelated) and geographical scope (local. dominant. It provides broad direction to the groups vision and mission. It reflects the customer needs it intends to satisfy. A corporate strategy identifies and fixes the strategic gap it proposes to fill.
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 scale and scope of present operations remains almost intact. The reasons for stability strategy – – Lack of attractive opportunities. does not relate to do-nothing (Eg. Stability however. – To stop for a while and assess past records. – Why disturb the existing equilibrium set up? – Limited resource position. Hindustan Motors). Even during adverse times firms need to adopt a strategy to sustain current performance levels. 72 . – The firm may not be willing to take additional risk associated with new projects.STABILITY It involves maintaining status-quo or growing in a slow and selective manner. (Eg. erosion of capabilities. Citibank).
GROWTH . 73 .ANSOFF’S MODEL New Product Existing Product Existing Market Market Penetration (+) Product Development (++) New Market Market Development (++) Diversificatio n (+++) Note: (+) indicates degree of growth and risk involved.
– Suitable for industries where scope for technological breakthrough is limited. within a well defined market segment. Ujjala. – Helps firms which are not comfortable with unfamiliar terrain. convert competitors customers. Nirma. direct non-users to users. – The company carries a risk of product obsolescence. 74 . Market penetration can be achieved by – increasing sales to current customers. – Elongated product life-cycle. (Eg.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. Britannia).
socks & stockings. carpets. (Eg. – Unconventional and flexible distribution channels. – Immense customer reach & flexible advertising. fabrics. – Stretches product life cycles. tyres. 75 . upholstery.MARKET DEVELOPMENT It is a strategy where a firm tries to achieve growth by finding new uses of existing products or its close variants and tap a new potential customer base altogether. – Moves across geographical boundaries.…… or Teflon: aircraft technologies to cutlery to paints or Raytheon Corp – Microwaves: radars to kitchen appliances). – Creativity and innovation – thinking out of the box. Du Pont – Nylon: parachutes.
PRODUCT DEVELOPMENT It is a strategy where a firm tries to achieve growth through a radical new product (Eg. Microsoft: DOS to Windows) or a substantial improved version (incremental) of an existing product to repeatedly enter the same market (Eg. – Leverage on customer and brand loyalty. durability. reliability. perception. conformance. features. aesthetics.Strolleys). – Deliverable through – redesigning or reengineering. – Areas of product improvement – performance. – Leveraging through – innovation. Refills) 76 . Close Up: Fluoride – Gel toothpaste or VIP . serviceability. – Substitutes that serve the same needs (Eg.
– Conglomerate or market power (i. 77 . industrial embassies). – Internal capital market. dominance). licenses (i. – Permits: quotas. thereby creating a new business. From the modern point of view they are strategically dissimilar. – High transaction costs and institutional gaps.e. From the traditional point of view. – Risk reduction.e. the new business is distinct from the existing business in terms of – inputs – technologies – markets. Why do firms diversify in the Indian context? – Shift the growth trajectory or opportunistic.DIVERSIFICATION It marks the entry of a firm into newer markets with new products.
in which a given year is either under hot or cold wave. ice-cream business would register a return of 10%.HOW DIVERSIFICATION REDUCES RISK? Consider a hypothetical planet. either of which is equally likely to prevail. What would be your ideal diversification strategy through optimization? 78 . while the coffee business would register a return of 30%. If the hot wave dominates the planet. the ice-cream business would register a return of 30%. while the coffee business would register a return of 10%. If on the other hand. Let us assume that there are two businesses constituting the entire market – coffee and icecream. cold wave dominates the planet.
If we diversified in either of the two businesses, our expected return will be 20%, with a possible risk of 10%. If, we split our investment between the two businesses in equal proportion, half of our investment will earn a return of 30%, while the other half would earn 10%, so our expected return would still be 20%. But in the second instance there is no possibility of deviation of returns (i.e. risk). Diversification results in 20% expected return with zero risk, whereas investing in individual businesses was yielding an expected return of 20% with a risk factor of 10%. The pivotal point is that the two businesses are negatively correlated. 79
It takes place when a company increases the breadth of a firms business or geographical scope by getting into product – market segments which compliments its existing businesses (Eg. Reliance). Alternatively, existing business may recreate new businesses, which are distinct, but supplements its existing business (Eg. Bajaj – scooters to motorcycles, Dove – soaps to shampoo). – It results in increased market power. – Leveraging existing capabilities. – Resources can be shared for mutual benefit. – Reduces economic risk (i.e. business cycles). – Enables brand or product line extension.
It increases the depth of its business scope either in a backward business process or in a forward one. Backward integration occurs when the company starts manufacturing its inputs or catalysts. In forward integration a firm moves into marketing of its products and services. Advantages of backward integration – – Cost competitiveness – entry barrier. – Better operational control – timely supplies, quality control, coordination – JIT, savings in indirect taxes. Disadvantages of backward integration – – It may spark of a chain reaction - contagion effect. – Long gestation & break even - investment in CAPEX.
Oil & Gas exploration Naptha-cracking Acetic Acid Paraxylene (PX)
Purified tetra-pthalic acid
Polyester Filament Polyester Staple Fibre (PSF) Yarn (PFY) Textiles 83
DIVERSIFICATION SUCCESS ?
While diversifying into new businesses, the scope of relatedness or unrelatedness should not be judged from the traditional static view, but from the modern dynamic view which incorporates strategic factors like capabilities and dominant logic. Countermanding reasons – Potential to reap economies of scope across SBU’s that can share the same strategic asset. Potential to use an existing capability to help improve the quality of a strategic asset in another business. Potential to use an existing capability to create a new strategic asset in another business. Potential to expand the existing pool of capabilities. Dominant logic ensures timely & appropriate response.
Usually the firm concentrates on its core activities.Where one firm has full ownership and control over all the stages of a value-chain in the manufacturing of a product (Eg. Reddy’s). 85 .A firm gets most of its requirements from one or more outside suppliers that is under its partial control through value chain partnerships (Eg.QUASI & TAPERED INTEGRATION Full Integration . Quasi-integration .A firm produces part of its own requirements and buys the rest from outside suppliers with a variable degree of ownership and control. Maruti – Sona Steering). Reliance). Tapered integration . and out-sources the noncore activities (Eg. Ranbaxy. Dr.
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 .
and are also strategically dissimilar. – Cost of neglect (i. synergies pulling in opposite directions). Firms usually engage in conglomerate diversification when emerging opportunities are very attractive and offers potential growth opportunities. myopia). core business). – Cost of ignorance (i.e.e. 87 .e.e. Drawbacks of unrelated diversification – – Cost of failure (i. lack of strategic intent.CONGLOMERATE DIVERSIFICATION It relates to entry of firms into businesses which are distinct in terms of – inputs – technologies – markets. lack of knowledge of competitive forces). – Cost of dysynergy (i.
CONGLOMERATE DIVERSIFICATION Paper & Packaging Edible Oils Tobacco Hotels Food & Confectionary 88 .
DIVESTMENT Divestment is a defensive strategy involving the sale of entire stake (Eg. In strategy there is no scope for sentimentality with divestment. L&TCement Division to Aditya Birla Group) technically known as divestiture or a product (Eg. It is may also be a pro-active strategy. It may also involve a SBU (Eg. (Eg.e. Tata Pharma. reactive) and survival is at stake and the firm does not have resources to fend off competitive forces. where a company simply exits because the business no longer contribute to or fit its dominant logic. Tatas sale of Goodlass Nerolac. Glaxo’s “Glucon-D” to Heinz). Tata Press). ACC) in full to an independent entity. It taken into account when performance is disappointing (i. 89 .
Tatas buy-out of Corus for US $ 11. where 100% of the assets (including intangibles) are valued and paid for. the Companies Act. (Eg.ROUTES Outright Sale – Popularly known as the asset route. Sale of Diamond Beverages to Coca-Cola for US $ 40 million). (Eg. involving 608 pence per share). 1956 does not permit this mode. Hive-Off – A hive off is the creation of a new entity followed by transfer of assets.DIVESTMENT .3 billion. where the equity is allotted amongst the existing shareholders on a pro-rata basis. However. Leveraged Buy-Out (LBO) – Here the company’s shareholders are bought out through a negotiated deal using borrowed funds. 90 .
e. because every business has its own unique external and internal environment.COMBINATION STRATEGY It is a mixture of stability. It is usually pursued by a business group with diverse interests across multiple industries. joint ventures). and divestment strategies applied simultaneously or sequentially for a portfolio of businesses. mergers and acquisition. There can be no ideal strategy for every business.e. 91 . developing facilities right from the scratch) or through brown-field projects (i. growth. 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. What then is the magical number? 93 .STRATEGIC CHOICE A strategic choice seeks to determine the alternative courses of action available before top managers to achieve its strategic intent. 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.
To identify the right problems. will help the firm achieve its intent.SELECTIVITY IS THE KEY The role of a top manager is not to solve a problem. nor is to a define a problem for others to solve. They must choose problems which will lead to the right kind of opportunities. if addressed. For an optimal choice the following four issues need to be resolved – Is the strategy clearly identifiable? Is it consistent with the resources of the firm? Will it be able to exploit the opportunities in full? Is it in tune with the values and beliefs of the firm? 94 . The key task before a top manager is to identify the right problems. managers need to ask the right questions.
Licenses & Quotas. keiretsus in Japan. Their origins can be traced back to market imperfections existing in an economy (MRTP Laws.BUSINESS GROUP . Their roots can be traced to a single family or clan and share broad similarities.DEFINITION A business group is known by various names in various countries – guanxique in China. . Managing Agency). embassies). business houses in India. formal and informal ties. chaebols in Korea. 95 Succession planning is critical to continuity. BRC). Proximity to the corridors of power (i.e. Resource sharing. High degree of centralized control (GEO.
RESOURCE SHARING ACROSS FIRMS Parent Company Firm 1 Firm 5 Firm 3 Firm 2 Firm 4 96 .
STRATEGIC CHOICE – MACRO TIMING Recession (Stability) Prosperity (Diversificatio n) Depression (Divestmen t) Recovery (Intensification ) 97 .
STRATEGIC CHOICE – MICRO TIMING ReEngineering Growth (%) Maturity Stability Growth Diversification Decline .Divestment Duration (Yrs) Inception Intensification 98 .
therefore. 99 . Investing in emerging businesses may not actually be so simple as it appears to be. next only to choice of business.PORTFOLIO ANALYSIS Resource allocation across a portfolio of businesses is an important strategic choice. Power and resources often goes hand in hand. sometimes impossible. Rules of the game are different. Redeployment of resources upsets the established power bases of a group. Relatedness across resources are difficult to realize. there are high costs associated with entry and exit. Why? Businesses are not about liquid assets.
BCG GROWTH MODEL Relative Market Share (%) Industry Growth (%) Low High High Low Stars Question Mark ? Cash Cow Dogs 100 .
Stars – They achievers in the near term. provided the company is able to build up on its market-share (i. 101 . Tata Telecom.e. market development. diversification). market penetration. provided the industry growth rate continues and the company is able to maintain its growth (i. Trent. and their risk profile is high (Eg.BUSINESS ANALYSIS – TATA GROUP Question Marks – They have potentials in the long term. These businesses are also net users of resources (Eg. which remains a big? These businesses are net users of resources. Tata-AIG). TCS. product development). but to larger extent than a question mark. Tata Steel).e.
e. Groups prefer to dispose off such businesses (i. Indian Hotels. cash cows may also need to invest provided the industry takes an upswing (Eg. Given that the growth potential in the business is low. Tata Press). However. harvest. divest) as achieving a dominant position in these businesses is a difficult task. Tata Chemicals). stability). Tata Motors. and the company dominates the industry ahead of competition (i. Nelco. 102 . they are generators of resources. Tata Tea.BUSINESS ANALYSIS – TATA GROUP Cash Cow – These are matured businesses. Dogs – They are a drag on the group. Tata Pharma. and they lack on competencies to take on competition and are basically cash traps (Eg.e.
BCG . Cash cows may actually need substantial investments to retain their market position (Eg. factors are limited. Cartier.LIMITATIONS It does not address the concerns of a business which is in the average category (usually the majority). Data may be prohibitive. Certain businesses in the low market share category may be the result of a conscious strategy (i. 103 . HUL). Armani). Mercedes Benz. niche – Rolex. The terminologies used are somewhat prohibitive.e. neither in high or low. The model does not provide specific solutions within a particular category.
-) 104 .GE .MATRIX Distinctive Capabilities Strong High Medium Weak Stability Industry Attractiveness Diversify (++) Intensify (+) Med Intensify(+) Stability Harvest (-) Low Stability Harvest (-) Divest (.
ARTHUR’ D. LITTLE Inception Dominant Strong Favourable Tenable Weak Growth Maturity Decline Improve Selective Niche Abandon Industry Life-Cycle Divest Harvest 105 Competitive Position Invest Consolidate Hold .
SHELL – DIRECTIONAL POLICY MATRIX Business Sector Prospects Attractive Average Unattractive Generate Cash Phased Withdrawal Distinctive Capabilities Strong Market Leadership Try Harder Double Or Quit Growth Average Custodial Weak Phased Expand Withdrawal Divest 106 .
107 .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. Gap Analysis – It emphasizes what a firm wants to achieve. Divest – Selling a part or the entire business at one go. BCG – Boston Consulting Group. Portfolio – An organization is perceived as a portfolio of businesses. Disinvestment involves selling in phases. SBU – A business unit which is strategically different from another and also shares a different SIC code.
BUSINESS STRATEGY & COMPETITION 108 .
rent). The principal focus is on meeting competition. and earning super-normal profits (i. Competitive advantage refers to a firms resources or activities in which it is way ahead of competition.COMPETITIVE STRATEGY A competitive strategy deals with how a firm competes in a particular business or product-market segment. Competitive advantage is the back-bone of strategy. The strength of a firm in a particular business usually stems from its competitive advantage. Such resources or activities should be distinctive and sustainable over time. building market-share. 109 .e.
110 . Delta Lock In – Two dominant players co-opt to selfreinforce and create or escalate an entry barrier. identifying critical success factors. Blue Ocean – Consciously moving away from overcrowded industries to uncharted territories and making competition irrelevant (Kim & Mauborgne). developing competitive advantage (Porter). Resource Based View – Obsession with competence building. preventing new entry and/or competition (Hax & Wilde). leveraging (Prahalad).BUSINESS STRATEGY FRAMEWORKS How to be distinctive and yet sustainable – Differentiation – Understanding of the dynamics of competition. involving harmonizing and integrating multiple streams of technologies.
T-Series). Nirma. Steep experience curve effects. backward integration.PORTERS – COST LEADERSHIP Cost Leadership – It is a strategy that focuses on making a firm more competitive by producing its products more cheaply than its competitors. preferential access to raw materials. Compress project duration through crashing. 111 . Ayur. The firm may retain the benefits of cost advantage by enjoying higher margins (Eg. Sources of cost advantage are varied and depends on the structure of the industry – Economies of size. Reliance) or may pass it to customers to increase market-share (Eg. proprietary technology. Locational or early entry advantage.
(Eg. Sony.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. Successful product differentiation is often followed by premium pricing. Feeling the pulse of the customer. Rayban). Means of product differentiation are peculiar to each industry. Intel. Creativity. avoiding brand dilution. 112 . Culture of experimentation. innovation and out of the box thinking. undeterred attention to quality. and sufficient slack. Focus on brand loyalty. It selects one or more attributes that buyers perceive as important.
A focuser seeks to achieve a competitive advantage in its target segment. They are poorly served by mainstream players. Rolex. Sub optimization alone may not be a source of superior performance. Armani). coupled with fear of structural erosion. Mont-Blanc. The target segment must have unusual needs or the delivery system catering to this segment must be unique.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. Maybach. though it may not possess an overall competitive advantage. Cartier. 113 .
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 .
115 . in a hyper competitive context the two strategies need not be mutually exclusive.e. and usually outperforms a stand alone generic strategy. Tata Nano). similarly differentiation may not always lead to rising costs (i. Firms focusing on a hybrid strategy typically aim at shifting the productivity frontier and recreating a new product-market segment altogether (Eg.HYBRID STRATEGY A hybrid strategy is the simultaneous pursuit of cost leadership and differentiation. Though cost leadership and differentiation are inconsistent. Reducing cost does not always involve a sacrifice in differentiation. jugaad or frugal engineering).
leading to what is called – straddling. unless such a player is capable of discovering a profitable segment. The positioning therefore gets – blurred. It is usually the result of a firm not willing to make trade offs. It tries to compete through every means. but achieves none. Industry maturity will usually widen the gap.stuck in the middle. It will have a competitive disadvantage vis-à-vis a clearly positioned generic player.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 . 116 .
Consumer behaviour pattern unstable and evolving. coupled with low penetration levels.EMERGING INDUSTRY Emerging Industry – An evolving industry characterized by .radical environmental changes. Market segmentation not well defined. (Eg. technological innovations.) Excessive turbulence in the dynamics of the environment. 117 . There is a lot of scope to define the rules of competition. It is characterized by – High level of technological uncertainty. leading to a blurred productivity frontier and steep learning curve. Nano technology. Eg. Artificial intelligence). ending in a differential cost economics. Speech recognition software's. 3D imaging. First-time buyers. changing customer needs.
Paints. Government regulations in the form Eg. MRTP may also cause fragmentation. IT. Scope for players to change the rules of the game. leading to clear fragmentation. Retail and telecom. Eg. High exit barriers because of huge investment in CAPEX. because of lack of economies of size and scale. Diverse customer needs.GROWTH / FRAGMENTED INDUSTRY Growth Industry – An industry characterized by high growth potential in the long run and where no firm has a significant market share (an edge over another). It is characterized by – Low entry barriers. Eg. Air Conditioning. Consumer durables. Eg. 118 .
well defined consumer behavioral patterns and imperfect competition leading to near monopoly. established industry dynamics. because of economies of size and learning curve effects. collaboration and co-option. 119 . Strong entry barriers. early entry and location advantages. Limited scope for innovation . distribution networks.technological maturity. technological maturity.MATURED INDUSTRY Matured Industry – An industry characterized by saturation in growth rates. Firms are rule takers in the segment as productivity frontier is well defined. Cartel among existing players through collusion.
Typewriters. backed by corporate espionage. dot-matrix printers). and costly price wars.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. Nature of competition extremely high. Learning abilities have been stunted and firms adverse to investment in R&D and make fresh investments. (Eg. scooters. Exit barriers are extremely high because of limited prospective buyers. 120 . with little or no signs of recovery. Firms facing a declining phase are characterized by inertia and slow to react to environmental changes.
process innovation. Fragmented Industry – Identify. focus more on product differentiation or even a hybrid one. 121 . regenerate.COMPETITIVE STRATEGIES Emerging Industry – Set benchmarks. premium pricing. assess and overcome fragmentation. branding and promotion. move beyond boundaries. or else exit the segment. strictly product differentiation and not standardization. mergers and acquisition. Locate a defendable position. increasing scope. Declining Industry – Redesign. recreate new markets. Matured Industry – Sophisticated cost analysis. aggressive building of distribution networks. reengineer. strictly cost differentiation. strike alliances.
hence very rarely confer competitive advantage as can be easily acquired or replicated.RESOURCE BASED VIEW Differentiation based on cost or products saturates and ceases to exist beyond the medium term. Intangible – These refer to goodwill. However. patents. They are a standard in nature. positions based on resources which are unique and inimitable are far more sustainable even in the long term. 122 . brands. A firms resources can be classified into – Tangible – These refer to real assets. and complex learning experiences in integrating and harmonizing technologies (distinctive capabilities) that play an important role in delivering competitive advantage through “causal ambiguity”.
Typically. differentiation based on capabilities can be sustained even in the long run. Hence. Therefore firms should concentrate on developing complex resources that forms the very basis of differentiation. can be leveraged across businesses) or specific to a particular business. they are woven around technologies. 123 . They play a very critical role in shaping competitive advantage.e. Capabilities can be generic (i. but not necessarily.CAPABILITIES & COPMPETENCIES These include a complex combinations of tangible and intangible resources that organizations use to convert inputs to outputs. There is a high degree of internal and external causal ambiguity involved in it.
COMPETITIVE ADVANTAGE 124 .
and results in well springs of new business development. 125 . It results in a distinct differentiation advantage or a cost advantage or hybrid as well. not absolute) to competition. Success of a strategy critically depends on SAP.COMPETITIVE ADVANTAGE A competitive advantage is a position of superiority relative (i. competitive advantage subsequently becomes the back bone for a competitive strategy. A portfolio of competitive advantage comprises strategic advantage profile (SAP).e. Strategy drives competitive advantage. It enlarges the scope of an organization.
Most successful organizations around the world have a well balanced SAP. 126 . In today's world of discontinuity. SAP changes from time to time.STRATEGIC ADVANTAGE PROFILE (SAP) Organizations have to systematically and continuously conduct exercises to identify its SAP. Internal strategic fit between its strategy and dominant logics is essential for the top management to stretch and leverage SAP. In most cases SAP is hidden and dormant. Identification of SAP is critical for and stretching and leveraging of resources.
e. 127 . and enhanced customer tracking – higher market share. Today SCM is integrated with greening the environment as CSR practices. VC pay-offs: better product availability. Substantial cost reductions also follow. each of the players need to be efficient backed by sufficient coordination at the contact points (i. faster product launches. A VC is often compared with a relay team. Competitive advantage arises not from an individual activity but a stream of inter-related activities.VALUE CHAIN ANALYSIS A value-chain segregates a firm into strategically relevant activities to understand its composite behaviour. kaizen or internal customer). Inventory Mgt to Logistics Mgt to Supply Chain Mgt (SCM).
THE VALUE CHAIN Support Infrastructure n gi ar M Human Resource Management Technology Development Procurement Out Logistics Mktg & Sales In Logistics Operations Primary Service M ar gi n 128 .
Operational effectiveness is not strategy. – Second order fit occurs when activities are reinforcing amongst them. A learning organization helps create strategic fit. Fit is important because discrete activities result in negative synergy and can also be easily copied by competitors. – First order fit refers to simple consistency between each activity and the overall strategy. A high fit involving a complex chain of activities drives both competitive advantage and its sustainability. – Third order fit refers to optimization of effort.STRATEGIC FIT – THE PORTER WAY The sustainability of the value chain depends on the degree of fit between the activities. 129 .
.CORE COMPETENCE A core competence represents the collective learning's of an organization around diverse streams of technologies. It should satisfy the following conditions – Contributes significantly to customer benefits. Core competence has a high degree of external and 130 internal causal ambiguity embedded in it. – Can be sustained even in the long run. but not necessarily. These skills results in distinctive activities and processes. – Cannot be easily imitated or substituted. A core competence usually has its roots in technology. It forms the very basis of competitive advantage. – Can be leveraged across businesses.
131 . A competitive advantage is sustainable in the shortmedium term. a core competence is sustainable even in the long-term.CORE COMPETENCE A competitive advantage does not necessarily imply a core competence. A competitive advantage manifests from a function. A competitive advantage may or may not lead to superior performance. a core competence usually does. a core competence always implies a competitive advantage. only global leaders possess a core competence. Majority of the firms have competitive advantage. a core competence has its roots in a set of skills.
In a game (similar to a business) one players win is always another's loss. However. illustrations depicting a win-win situation. In fact there are no. 132 . the stringent assumptions of game theory and difficulty in ascertaining of pay-offs makes game theory application difficult in business.GAME THEORY The game theory was developed in 1944 by Oscar Morgenstern. A game is a contest involving two or more players. This is known as a zero-sum game. Here the magnitude of gain offsets the magnitude of loss equally. each of whom wants to win. Subsequent work on game theory by John Nash led him to win the Nobel prize in 1994.
BIASED AND UNBIASED GAME A game is said to be biased when one of the players have a disproportionate chance of winning. An unbiased game is one where both the players have equal chances of winning. 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 .
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.PURE STRATEGY GAME The strategy each player follows will always be the same regardless of the other players strategy.
This is usually through learning by “experience or observation” (i. However. Repeated Games – In this situation the players interact repeatedly with each other sub-optimizing the outcome possibilities. 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. It represents the classical “prisoner’s dilemma”. collaboration or cooption.g. Yahoo Vs Microsoft).e. Coke Vs Pepsi).TYPES OF GAMES Simultaneous Games – This is a situation where the players have an option to choose to cooperate or not through collusion. 135 . iteration) rather than through collusion (E.
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. It results in a shift in the productivity frontier. In a market dominated by price-based differentiation one may attempt to change the rules of the game by/when – – Bases of differentiation dependent on clear identification of what customer wants or value. . but 136 players do not always behave rationally. – Building incentives for customer loyalty. Game theory relies on the principle of rationality. – Making pricing more transparent.
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.
internal strategic fit (strategy – dominant logic) is critical to strategy implementation. – Resource commitment from top management. While external strategic fit (strategy – environment) is relevant for strategy formulation. – Better strategic and operational control. A high strategic fit (co alignment) is useful because it enables – – Appropriate and timely response. – Unlearning & learning of new skill sets.IMPORTANCE OF STRATEGIC FIT Strategic fit has a central role to play in strategic management. – Changing the rules of the game. – Development of capabilities & competencies. 143 .
while control is very effective. strategy formulation and implementation has been perceived to be distinct & independent. at the cost of sacrificing a lesser degree of control. effective strategies are better crafted when there is a subtle overlapping between the two (i. According to Mintzberg. In fact. formulation & implementation can occur simultaneously. In such a situation.e.FORMULATION Vs IMPLEMENTATION Traditionally. 144 . learning levels are very low. In such a situation. learning levels are very high. Some of the key strategic learning's exists at the contact point between the organization and its customer. emergent strategy vis-à-vis intended & realized).
Install a system of shared beliefs and values. A transactional leader is usually confined to allocating tasks & responsibilities and extracting performance. bring about transparency. He should be an agent of change. In contrast. transformational leaders go one step beyond – Design a well crafted and designed strategic intent of the organization. 145 .ROLE OF TOP MANAGEMENT To bring about change and to implement strategies successfully. shift from compliance to commitment. Pragmatism is the ability to make things happen. companies depend more on transformational leaders than transactional leaders.
skills) also includes complex resources like capabilities and competencies. minimum requirement).e. machines) referred to as threshold resources (i. The various methods of resource allocation includes Historical Budget – The budgets framed by HQ for a particular SBU keeping in mind past trends. Performance Budget – SBU managers need to justify the distinctive resources in terms of the opportunity it is pursuing yields the highest possible pay-offs. 146 . land. Intangible resources (Eg. Zero Based Budget – In this case the budget of a SBU has to be worked out right from the scratch.RESOURCE ALLOCATION Resources allocation includes tangible resources (Eg. patents. brands. labour.
147 . Due to causal ambiguity (complexity). these capabilities are sustainable even in the medium to long term. Flat Screen Displays. convergence of multiple streams of technologies at the product – market level is becoming increasingly evident (Eg.CAPABILITIES & COMPETENCIES Technology and business are slowly becoming in – separable. though not necessarily in the case of emerging markets. Moreover. Mobiles). Distinctive capabilities helps in stretching and leveraging resources thereby overcoming two major constraints involved in strategy implementation – times & costs. Distinctive capabilities are complex set of skills woven around technologies.
148 . A firm in several unrelated businesses usually employs a SBU structure. A firm in several related businesses usually employs a divisional structure.STRATEGY & STRUCTURE It is a framework within which individual efforts are coordinated to bring synergy. Once the structure is in place. processes become people independent. A single product or a dominant business firm usually employs a functional structure. The level of centralization and decentralization is decisive. An appropriate organization structure & adequate control systems are essential to implement strategies and achieve stated goals.
SBU Structure – Businesses segregated in terms of strategic dissimilarities (Eg. Marketing. 149 . with team members having dual line of control. based on skills and competencies. Virtual Structure – A boundary less or hollow organization. Team Structure – An informal group formed for a crisis.Technology.TYPES OF STRUCTURES Functional Structure – Activities grouped together by a common function (Eg. Inputs . Finance). Output). processes. or geographical locations. disbanded subsequently. Project / Matrix Structure – A formal but temporary framework initiated for the completion of a particular project/crisis. Divisional Structure – Units grouped together in terms of products.
facing challenges & crises. Technology – With more and more convergence of technologies in business.FACTORS INFLUENCING STRUCTURE Size – As an organizations size increases there is more specialization and differentiation leading to the top management moving away from operational issues and control. assuming responsibility. It includes the desire for independence. as span is broader. Environment & People – Economic and political conditions have a major bearing on structure coupled with the attitude and aspirations of the people in the organization. leading to a tall structure. 150 . structures are becoming flatter and more simpler.
. Inertia is a characteristic of a firm that endures status quo (i. irrespective whether it is from worse to good or good to worse.INERTIA When a firm has been operating in a certain fashion for a long time. there is a tendency to continue along the same lines. Most firms undergo periods of strategic continuity rather than strategic discontinuity. Top managers resist change. co0ntinuity). Changes in top management and unlearning helps overcome inertia. Inertia acts as an impediment in strategy implementation.e. Common sources of 151 inertia – complacency with past successes.
To prevent deviation of fit.STRATEGY EVALUATION Strategy evaluation centers around assessment of strategic fit. . certain authors propose misfit as a source of superior 152 performance. However. firms should move beyond financial performance to strategic performance as organization systems are becoming complex. strategies need to be evaluated on an ongoing basis to prevent deviations of fit. Since the internal and external environment is in a state of continuous flux. Deviation of fit is detrimental to performance and may lead to strategic failure.
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. It attempts to answer the following questions – Is the strategic intent appropriate to the changing context? Are the organizations capabilities still holding good. .
checking every premise is costly as well as difficult. It involves assessing – strategic thrusts and milestones. However. Implementation Control – It aims at assessing whether key activities are proceeding as per schedule. It is open-ended as well as . Premise Control – Checking the validity of the assumptions on which a strategy was based. Special Alert Control – It intends to uncover unanticipated information having critical impact 154 on strategies.STRATEGY CONTROL IMPLEMENTATION It involves steering the company towards its original growth trajectory & stated goals.
Performance measures are defective – What to evaluate against? How to measure the 155 construct? As a saying goes. difficult to translate into practice. Strategy not linked to resource allocation & capabilities – Lacking commitment of top management. Strategy intent not linked with goals and objectives – Lack of coordination at lower levels leading to negative synergy.BARRIERS TO STRATEGY EXECUTION Vision and strategy not actionable – Utopian ideas. low strategic fit due to consultants intervention. “If you cannot .
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. the relative importance of each factor may vary over time and context. Managers should take into account all seven of these factors. this may effect all others as well. to be sure of successful implementation of a strategy. Together these factors determine the way in which a corporation operates. Large or small. On top of that. 156 . important or not they're all interdependent. Today it is considered one of the most powerful tools for strategy implementation determining success or failure. so if one fails to pay proper attention to one of them.
They had been investigating how Japanese industry had been so successful. and was taken up as a basic tool by the global management consultancy company McKinsey. 157 . The 7-S model was born at a meeting of these four authors in 1982. 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. At around the same time in the US Tom Peters and Robert Waterman were exploring what made a company excellent.BACKGROUND & ORIGIN The 7-S Framework was first mentioned in "The Art Of Japanese Management" by Richard Pascale and Anthony Athos in 1981.
158 . formal & informal . to reach identified & stated goals. Skills – An organizations capabilities and competencies. Style – The way in which the top management influences the functioning of an organization. Structure – The way in which the organization's units relate to each other in terms of their commonalities. Systems – The procedures. processes and routines that characterize how work should be done. over time. Staff – Human inter-relationships.THE 7’S Shared Values – It represents what the organization stands for and what the top management believes in. Strategy – Trade-offs for the allocation of a firms scarce resources.
STRATEGIC FIT Strategy Structure Shared Values Systems Skills Staff Style 1st Order Fit 2nd Order Fit 3rd Order Fit 159 .
style. Consider the 4P’s of marketing or 3R’s of SCM. because most often they are culturally embedded and often neglected. their Japanese counterparts focus more on the soft S’s for their early success and sustainability. systems) are comparatively easy to identify and influence.A CRITIC OF THE 7S MODEL While the hard S’s (strategy. 160 . While the American co’s focuses on the hard S’s. Ineffective in case of a virtual company. the soft S’s (skill. A choice of an alphabet often limits the scope and skews the interpretation of a model. In contrast. shared values) are very malleable and comparatively more difficult to identify & influence. staff. structure.
STRATEGY IMPLEMENTATION ROUTES Strategic Fit .High Organic Growth Strategic Alliance Joint Venture Mergers & Acquisition Strategic Fit .Low Take Overs 161 .
e. concessions are available for green-field projects. green-field projects.e. SEZ’s.ORGANIC GROWTH Here a firm builds up its facilities right from the scratch and continues to do so without any external participation. technologies. soft loans. Long gestation leads to delayed market entry. i. (Eg. 162 Risk of cost and time overruns. i. The entire infra-structural facilities are set up afresh having its own gestation and break-even. . It has complete control over inputs. subsidized power). Govt. the entire value chain. Reliance Industries). (Eg. and markets. tax holidays.
Alliances are usually in the areas of technologies or markets (Eg.STRATEGIC ALLIANCE It involves a pro-active collaboration between two or more firms on a particular domain or function for mutual gain. Alliances are usually short-lived and disbanded once the purpose is achieved. It touches upon a limited aspects of a firms value chain. 163 It is a form of competitive collaboration. Tata Motors & Fiat). There is no funding or equity participation from the alliance partner & both the firms continue to operate independently. It has limited intervention power and usually lacks holistic commitment from the alliance partner. .
Hero . Tata – AIG. Degree and extent of management control must be clearly 164 laid down. A comprehensive MOU is essential. leaving minimum scope of overlapping. Selecting the right partner is critical for success. It is a win-win situation for both the companies. (Eg.Honda). Dominant logic of both the companies should be complimentary. .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.
Acquisition is an outright purchase of a firm assets by another independent entity (Eg. with the individual firms ceasing to exist any more (Eg. Revival of a sick-unit through better management practices is a major motive behind an acquisition 165 strategy. Integrated distribution channel leads to better market penetration and overall synergy. Brooke Bond & Lipton). Economies in scale leading to lowering of costs. ITC Tribeni Tissues.MERGERS & ACQUISITION It refers to the fusion of two or more firms into a single entity. . Integration of assets and other financial resources. Coca Cola – Thums Up).
Most countries have stringent laws that prevents hostile take over. Make a public offer of not less than . Instant access to capacities and markets. 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. Consolidation in a fragmented industry.Corus). Integration of organization structure & cultures is difficult. Tata Steel . often the new firm is “left alone”. Larger geo-graphical diversity.
MANAGEMENT TOOLS IN STRATEGY 167 .
Change provides enormous opportunities. Companies therefore need to ensure competitive advantages doesn’t become competitive disadvantages. The past is ceasing to be an indication of the future. Some tools to ensure that – Benchmarking – Adopt certain best practices. or better still create next practices Reengineering – Redesigning work processes right from the scratch. every time. TQM – Doing the right thing the first time. 168 . Radical change is superseding incremental change. Balanced Scorecard – Tracking strategy 3600.WHY MANAGEMENT TOOLS? Change is becoming pertinent in the business environment. it is also a source of potential threat.
A best practice is defined as an activity performed by a company in a particular domain or function which distinguishes it from others and making them world-class. These exemplary practices involves the stakeholders of the company and helps achieve its strategic intent. Best practices centers around looking at a different way to satisfy various stakeholders. Benchmarking involves the identification, understanding and adapting of certain best practices and implementing them to enhance performance. Firms are moving towards next practices as best practices make firms look more and more homogeneous.
SOME BEST PRACTICES
Dell: Customized configuration of computers. Caterpillar: 48 hours delivery anywhere in the world. Citi Bank : Priority banking services. Maruti: Certified “true value” pre-owned cars. Microsoft: ESOP to employees. Infosys: Customized work-stations. TCS: Referencing potential new recruits. ITC: Shareholders factory visit. AmEx: Outsourcing data warehousing mining. MARG: Set-top box to study viewing patterns. Honda: CEO’s visit to dealers.
TYPES OF BENCHMARKING
Functional – Used by companies to improve a particular management activity. Eg. Motorola learnt delivery scheduling from Domino’s. Process – Improving specific key processes and operations from experiences in similar businesses. Eg. Ford adopting assembly lay-out plan of Toyota. Competitive – It involves assessing the sources of competitive advantage and imitating them. Eg. Samsung leveraging miniaturization skills of Sony. Strategic – It involves assessing business models and replicating them in a different market. Eg. Reliance replicating AT&T business model.
HOW TO BENCHMARK?
Phase 1: Planning – What to benchmark? Whom to benchmark? – Identify key performance indicators & Data source. Phase 2: Analysis – Assessment of performance gaps. – Predict future performance levels. Phase 3: Integration – Communicate findings and gain acceptance. – Establish functional goals and its implementation. Phase 4: Action – Implement and monitor progress. – Measure results against stakeholder wants and needs. – Recalibrate or outperform benchmarks.
WHOM TO BENCHMARK?
Selecting the benchmarking partner is critical to solving the problem. Firms should generally avoid selecting the industry leader, because it may not always adopt the best practices for every process or activity. Benchmarking partners may also be from different industries. Types – – Internal – It involves benchmarking against its own branches, divisions, SBU’s. Proximity to data and cooperation is taken care of automatically. – External – It involves benchmarking against firms that succeeded on account of their best practices. It may also involve benchmarking against world-class firms. Friction may arise due to presence in competing industries.
BENCHMARKING - ADVANTAGES
Finding better ways of meeting stakeholder needs. Organizational learning comes from internal as well as external sources. Establishing goals based on formal assessment of external conditions. Defining effective measure of indicators, facilitate comparison, adopt from other organizations. Ensuring a continuous learning organization. Reducing competitive disadvantage. Organizational turnaround, especially effective in case of a wide strategic drift when differentiation strategies fail to work. 174
Benchmarking is useful for bringing about operational efficiency.e.LIMITATIONS More and more companies benchmark. Strategy is more of creating best practices rather than copying them. It can at best complement it. 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. It does not shifts the growth 175 trajectory of the industry as a whole. While strategy is all about differentiation and not looking alike. .BENCHMARKING . clustering). the more similar they end up looking.
g. DOS to Windows). Windows 95 to 97). for achieving performance improvement (E.g.e. Re-engineering involves complete reconstruction and overhauling of job descriptions from the scratch (i. The task demands a total change in organisational 176 culture and mindset. process mapping) and eliminating or improving them (E. .e.RE-ENGINEERING Redesigning leads to identification of superfluous activities or product features (i. Re-engineering attempts to radically change an organizational products or process by challenging the basic assumptions surrounding it. clean sheet).
REENGINEERING – KEY TENETS Ambition Focus Attitude Enabler Performance Large scale improvement by questioning basic assumptions about how work is done Micro Vs Macro Business Processes Vs Organisational Processes Starting right from the scratch Not historical More IT driven. than people driven Innovative Vs Traditional Customer centric Vs Organisational centric 177 .
products. processes. Strategic – It looks into the process of strategic planning.LEVELS Reengineering can be successfully leveraged at all levels of an organization with varying degree of results.e.REENGINEERING . customers and suppliers and protects the organization from the future (i. . resource allocation and prepares the organization for the future through a reorientation of the entire strategic architecture. Business – It looks into markets. BPR). It can be of the following types – Functional – It looks into the flow of operations (i. etc) and supports the organization for the present. 178 .e. structures.
It generally acts as a threat to innovation. – Early entry advantages. reverse engineering is a top-bottom approach. learning curve advantage. While traditional manufacturing is a bottom-up approach.REVERSE ENGINEERING It is a process by which a product is dismantled and analyzed in order to understand how the product was designed and manufactured. However. – Causal Ambiguity. with an intention to copy it (Eg. Indonesia). Cheaper versions of Intel chips and mother-boards manufactured in Taiwan. – High cost and time acts as a deterrent. 179 . protection can be had in the following ways – – Patenting.
nano-technology). cost and effort necessary for the purpose of reverse engineering. designing facilities. Implementation – Developing of a prototype. machine tools to convert ideas into a marketable product (i.STAGES IN REVERSE ENGINEERING Awareness – Recognizing whether the product is found to be worth the time. Actualization – Obtaining and dismantling of the product to assess how it functions. 180 . Inaccurate assessment at this stage may lead to a failure of the entire project. Usually in such cases segmentation and pricing is different from the original innovator. Introduction – Launching the product in the market.e.
– Features – Anti-lock braking systems.Euro IV. – Aesthetics – Appeal in design. More and more companies are moving towards meeting implied rather than stated needs. 181 . – Reliability – Consistency in mileage. – Conformance – Emission standards . – Durability – 1980 manufactured cars still on road.WHAT IS QUALITY? It involves the totality of a product or service in meeting certain stated or implied needs. It has eight dimensions (Eg. Car) – – Performance – Mileage of 14 kms to a litre of fuel. Air bags. – Serviceability – Large no. of service stations. – Perception – Customer notions.
. zero defects. Management of quality was traditionally inspect it . It is deeply embedded as an aspect of 182 organisational life & culture. TQM is a way of creating an organization culture committed to the continuous improvement of work processes – Deming. which ensures good market standing.fix it in nature.TOTAL QUALITY MANAGEMENT Objective – Management of quality ensures conformance to certain pre-set standards. It had little impact on improving overall productivity. touching upon a limited aspect of a value chain.
not a final destination. Empowerment – It takes place when employees are properly trained. fully involved in decision-making and fairly rewarded for results. provided with all relevant information and best possible tools. 183 .TQM – KEY TENETS Do it right. Be customer centric – Generate the concept of internal customer (Ishikawa). the first time – From reactively fixing error in products to proactively preventing errors from occurring at the first place (Juran). Looking at quality as an endless journey. Kaizen – Make continuous improvement a way of life.
STRATEGIES Outsourcing – It is the process of self-contracting services and operations which are routine and mundane. enabling the firm to concentrate on core activities essential to customer satisfaction. It is based on the principles of MBO (i. equal participation).TQM . Quality Circles – It a small group of shop-floor employees who meet periodically to take decisions regarding operational problems and crises. 6-Sigma). saving precious top management time. 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. 184 . of units meet preset standards (Eg.e.
BALANCED SCORE CARD Some interesting comments ...... – Efficiency and effectiveness is passé. it’s bad execution.. strategy implementation has never been more important..... – 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... Source: Fortune Magazine Why CEO’s fail? 185 .
rather than effects.BSC .CONCEPTUALISATION A company’s performance depends on how it measures performance. Most managers tend to rely on traditional measures of performance having its origin in finance as they are well tried and tested. These measures worked well when organizational systems were simple and unidirectional and more importantly the environment was static. Organizations need to move from financial to strategic performance. 186 . 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. Focus more on causes.
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. 187 . and distinguish strategic problems from operational ones. because they have too many. The most critical element of a BSC is to measure these four dimensions.BSC – KAPLAN & NORTON (1992) A BSC helps a manager to track and communicate the different elements of company’s strategy.
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.e. ageing schedule) % of key customer transactions Ranking of key customer accounts No.
of new product launches Vs competition Product pricing Vs competition 189 .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 times covered in media No.
of product innovations 190 .LEARNING PERSPECTIVE GOALS Technology Manufacturing Focus Timing MEASURES No. of new patents registered Time to develop next generation products Average and spread in operating cycle % of products that equal 2/3 sales No.
FINANCIAL PERSPECTIVE GOALS Survival Success Prosper Divestment MEASURES Cash flows Growth in Sales and Profits EPS. Return on Investment Market Capitalization / PE ratio 191 .
STRATEGY MAPPING 192 .
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 .
doing right things instead of doing things right).what they don’t know. Shift from control to strategy (i.BSC . Modern managers should be poised to ask the right questions.e. sharing of vision). 194 performance will automatically follow. they don’t know . Focus on cause not effects.ADVANTAGES Most often top managers face information overload. As a result. The BSC brings together the different elements of a company’s strategy at a glance. It helps translating strategy into practice (i.e. . Seek excellence.
EFFICIENCY Vs EFFECTIVENESS Ineffective Effective Inefficient Goes out of Business quickly Survives Efficient Dies Slowly Thrives 195 .
not only thrives. Porter 196 .EFFECTIVENESS + STRATEGY A company which is effective as well as strategic. .Michael E. but also sustains it.
CORPORATE RESTRUCTURING 197 .
. To adapt to the changing environment. to survival of the most adaptable.. Strategic variety brings paradigm shift.. Tata Group)..” 198 . “every organization must be prepared to abandon everything it does.. firms use restructuring strategies. Strategic variety may be caused by changes in the as external well as internal environment.. from survival of the fittest . Restructuring involves consciously driving significant changes in the way an organizations thinks and looks (Eg. Radical change brings about strategic variety. As Peter Drucker pointed out.CORPORATE RESTRUCTURING The only thing constant in today's business environment is change.
. Fax.e. Instead. etc). they should strive to provide unimaginable value ahead of its time (Eg. Walkman.RESTRUCTURING – BASIC TENETS Customer Focus – Restructuring ideally begins and ends with the customer.e. Internal customers should also not be neglected. and dividing the core businesses into SBU’s (i. Structural Changes – Conventional hierarchical structures should be disbanded in favour of more 199 flexible ones (i. downscoping). downsizing or rightsizing). Company’s should go beyond just asking what he expects. Core Business – Company’s should introspect – What business are we in? Business evolved out of opportunism or myopia should be divested. ATM.
It is created and institutionalized by the top management.. During the times of JRD. . 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 ..... the Tatas were considered a benevolent and charitable organization. Ratan Tata now drives the point the group means business.. started focusing on their capabilities...) Reliance dismantled their industrial embassies . Restructuring also requires cultural reorientation.. 200 ...
Use the reach of networking technologies. “ … one reason our customers are satisfied is that we aren’t. Restructuring provides a platform to close this gap. Publicizing welfare projects to demonstrate CSR. Getting feedback & addressing customer complaints. Honda’s ad says. they tend to move away from the customer.” 201 . Carry out PR campaigns.MOVING CLOSER TO THE CUSTOMER As companies evolve. Communicating to the media about organization efforts to deliver quality products. Organizing customer and supplier meets.
or conglo-merate. Tata – Corus) or hostile (Eg. including its intangibles – Mergers – It may be vertical. Mittal – Arcelor) and can take various forms. Glaxo – Heinz). Further. It may include brands as well. where the difference in valuation is settled off through cash or equity (Eg. 202 . it may be smooth (Eg. It can have two forms. Hive Off – It involves siphoning of assets under control. horizontal. Further spin-off can be classified as split-off and split-up. spin-off and equity carve. Asset Swaps – It entails divesting and acquisition simultaneously by two companies.ASSET RESTRUCTURING Asset Restructuring – The asset composition of a firm undergoes a major change.
203 . Tata Industries selling 20% stake to Jardine Matheson). – Split-Up – In a split-up. Most of these practices are not in consonance with Indian laws. the existing shareholders receive equity in the subsidiary in exchange for the stocks of the parent company. Reliance Ent). – Split-Off – In a split-off. Equity Carve – It involves selling a minority stake to a third party while retaining control (Eg. 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. in which the equity is allotted amongst the existing shareholders on a pro-rata basis (Eg.
Selling out in phases is called disinvestment (IPCL). repay long-term debts. L&T sold its cements division to Aditya Birla group. but retained its engineering division. 204 . – Poor performance. Parle sold its Thums Up brand to Coke for $40 million apprehending fierce competition. strategic misfit. Generic motives include – – Raise working capital. A complete sell-out is known as divestment (TOMCO). In 1995. In 2005.DIVESTITURE It involves the sale of a brand or a division of a company to a third party. for a specified market or in general with full management control.
involving 608 pence per share). It provides greater leverage as well as management control. Conversion – Replacing debt with equity or vice-versa or costlier with cheaper debt or cross currency debt.CAPITAL RESTRUCTURING Capital Restructuring .3 billion.The internal & external liability composition undergoes a major change – LBO – Acquiring control over a substantially larger company through borrowed funds (Eg. 205 . Wipro). Share Buyback – It is a process of cancellation of shares out of free reserves to the extent of 25% of paid-up capital (Eg. Tatas take-over of Corus for US $11.
1439 cr 206 Tata Timken – Rs 120 cr Tata Telecom – Rs. 230 cr Diversifications Tata Motors – Rs.BUSINESS RESTRUCTURING – TATAS Divestments Lakme – Rs. 1170 cr Goodlass Nerolac – Rs. 42 cr Voltas . 120 cr Tata AIG – Rs. 1860 cr . 1890 cr CMC – Rs.Rs.Rs. 950 cr Merind . 99 cr Tata Power – Rs. 250 cr Tata Tetley – Rs. 256 cr ACC – Rs. 1700 cr Trent – Rs. 150 cr VSNL – Rs.
Downscoping – It involves reducing the business and/or geographical scope of a firm (Aditya Birla group). Survival is the primary motive. keeping the composition of business intact (Jet Airways). 207 . of operating units. usually as a result external turbulence. It can be carried out in the following ways – Downsizing – It is a systematic one-time reduction in the no. Rightsizing – It is phasing of excess and redundant employees resulted out of faulty internal planning (SAIL). of a firm’s employees and sometimes in the no. Turnaround is the primary motive.ORGANIZATIONAL RESTRUCTURING Organizational structure and systems calls for a change when strategic variety is apparent.
Dominant logic becomes deep-rooted in organizational contexts depending on the period it is in place (tenure of the CEO). Strategy change is unviable without a preceding change in its dominant logics. the more difficult it becomes to uproot the paradigm (i. The dominant logic represents the perceptions and biases (i. The longer the period.e. 208 .STRATEGIC CHANGE One of the most difficult components of organization restructuring is the mindset of the top management represented through its dominant logic and its shared values reflected in cultural orientation. thumb rules) of the top management.e. inertia). as strategies are based on such beliefs and biases.
the factor that stifled change & performance was – culture. 20% of the people carry out 80% of the changes). Companies achieve real agility only when people at every level rise above the ordinary to face the challenges – revitalization or transformation. 209 .e. In most organizations.FORCES AGAINST STRATEGIC CHANGE The problem with strategic change is that the whole burden typically rests on few people (i. Successful transformation requires – incorporating employees fully into the process – leading from a different place so as to maintain employee involvement – instill mental disciplines that will enable employees to behave differently.
Manage from the future.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. Create relentless discomfort with the status quo. Understand and deliver the quid pro quo. Questioning every basic action of the organization. it is not about winning but about learning. Harness setbacks. Encourage uncompromising straight talk. 210 . process ownership.
by identifying forces for and against change. Culture and style of management are two main impediments in force-field analysis. It involves identifying – Aspects of current culture which needs to be reinforced. that can be both enablers and blockages to change and restructuring. 211 . also known as cultural-web.FORCE-FIELD ANALYSIS A force-field analysis provides an initial overview of change problems that needs to tackled. It involves diagnosing a change situation – systems & structures. Identify and implement facilitators of cultural change. Aspects of current culture which needs to be overcome.
OUTCOMES Alternatives Organizational Short .Term Loss of human capital Lower performance Higher performance Capital .Term Reduced labour costs Reduced debt costs Emphasis on strategic control Business High debt costs Higher risk 212 Long .RESTRUCTURING .
213 . the second one is a more viable strategy and sustainable option in the long run. down-scoping or asset stripping. While the first strategy produces results instantaneously. reverse engineering and regenerating. 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. focuses on reengineering. In order to put back the company on the right track they are resort to – Denominator – It assumes that turnover cannot be increased. Numerator – It assumes that turnover is not a barrier or constraint.
TURNAROUND MANAGEMENT 214 .
WHY TURN AROUND MANAGEMENT? Some interesting insights .. January 1997).. still exist as on 2005.. . – Less than 10% of the Fortune 500 companies as first published in 1955. Source: Why do firms atrophy? (Business Today. and that the thirty-two of the country’s largest business groups in 1969 are no longer among the top fifty today.... 215 (Govindarajan and Trimble. – Only seven of the first fifty Indian business groups in 1947 were even in business by the turn of this century.
As a sequence of events describing how things change and why they change (i. systems. skills. and capabilities. process focuses on – A logic to explain a causal relationship between intervening variables. A category of underlying principles and concepts. Stage Theory). and achieves sustainable performance recovery.e. While content focuses on endogenous and exogenous variables.TURN AROUND MANAGEMENT A turnaround is said to occur when a firm perseveres through an existence threatening performance decline. Both content (what) and process (how) are equally important for a successful turnaround. ends the threat with a combination of strategies. 216 .
Some indicators Continuous cash flow crises as a result of dwindling market-share and profits. Low employee morale leading to high employee attrition at all levels. Substantial shifts in consumer preferences. 217 . leading to lack of acceptability from distributors and customers. Uncompetitive products or services. Low stakeholder confidence. unavailability or radical lowering of substitute costs or technological obsolescence. Rising input costs.TURNAROUND INDICATORS Most firms atrophy simply because they fail to diagnose the indicators that acts as threat to organizational existence. suppliers and bankers. especially in key positions.
focus on power brands. consider extension. be more customer centric. “all is not well”. Recalibrate prices. Extending work hours. prune work-force. Product redesigning or reengineering. based on elasticity.. Revamp product portfolio. 218 . they adopt surface level measures (disprin popping) which most often fail. Emphasis on advertising and market penetration. liquidating dead assets. Hence. Common approaches adopted Change in key positions. which most top managers fail to appreciate.TURNAROUND ILLUSION The first step to a successful turnaround is the basic acceptance of the fact that ….
TURNAROUND STAGE THEORY Stage 1 Decline Stage 2 Stage 3 Stage 4 Outcome Response Transition Performance Equilibrium Line Success Failure Indeterminate Nadir Time 219 .
It has its origin in “environment led fit” that subscribes to the view that a firm has little control over external factors. primarily dwindling resources and capabilities are responsible for decline.DECLINE Decline is the first stage in the turnaround process. 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 involves the identification of the theoretical perspectives that explains performance decline – K-Extinction – It suggests that macro economic and industry wide factors are responsible for decline. Identification of the stimulus leads to the arrest of the downfall. R-Extinction – It suggests that organization factors.
the response should be operational. Strategic responses focus on changing or adjusting the business the firm is engaged in through long term moves such as – integration. diversification. new market initiatives. Operating responses typically focuses on the way the firm conducts business and involves tactics geared towards – cost cutting and process redesigning (BPR). If the decline stems from structural shifts. The response must match the cause of the decline. the response should be strategic.RESPONSE INITIATION Turnaround responses are typically categorized as operating or strategic. If the underlying cause is internal efficiency. 221 . asset reduction.
Scope – A diversified conglomerate may acquire a distressed business to turn it around and gain valuable synergies. 222 . Similarly new market initiatives is feasible only for multi-product firms. when decline deepens shifts in strategic position becomes essential. Contour – It is easier to reverse decline in the earlier stages through operational measures.RESPONSE DICHOTOMY The response initiation is somewhat dichotomous and cannot be universally applicable. Untangling this question brings into focus three events – Domain – Many of the strategic cures have limited applicability for an affiliated firm. which may be unavailable to a focused firm.
TRANSITION Transition usually reflects the first signs of recovery. 223 . many a times early signs of recovery fades out.e. Sustenance is the key factor in this stage. The top management has a key role to play through empowerment.e. consensus). However. role model.7 years with a range of (4-16) years. substantial amount of time usually passes before results begin to show (i. lead – lag). confidence building measures. Effective levers of transition. Support from all the stake holders through resource commitment. participative management (i. transparency. However. Empirical studies show that average time is 7.
Cut off points must be unequivocal. Commanding a premium in the market. Regaining lost market share and distributor confidence. Instead of focusing on financial parameters alone. it should adopt a holistic approach. 224 . Supplier and banker confidence. Revival of key customers and new product launches.OUTCOME Outcome is said to be successful when a firm breaches the equilibrium performance level. Failure is an indication that initial momentum was not sustainable characterized by irreversibility. Share price indications and media coverage.
COOPERATIVE STRATEGIES & ALLIANCES 225 .
the commitment and the involvement between the firms increases manifold. supply-chain partnership. and globalization . technology. 226 . Any cooperative strategy maybe between firms within the same country or cross border as well. It can assume any of the following forms – franchising. strategic alliance. licensing.COOPERATIVE STRATEGIES Cooperative strategies are a logical and timely response to changes in business dynamics. In the cooperative strategy continuum as firms move up the value order. More and more companies worldwide are moving away from competition to co-option to leverage their resources and enhance bargaining power. or joint venture. consortia.
Switz Foods. owners of the brand Tanishq allows its franchisees to sell its jewellery products. Titan Inds. Branding is critical to franchising. owners of the brand Monginis allows its franchisees to sell its confectionary products. 227 .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. It is an effective strategy to penetrate markets in a shortest possible time at a minimum cost.
as in Tata Indica.LICENSING Licensing – It is a contractual agreement between two legally independent firms whereby the licensor grants the right to the licensee to manufacture the licensor’s product and do business under its brand-name in a given location for a specified period of time for a consideration. Become a systems integrator (CKD). Develop a product through its crude stage. refine processes and adopt necessary technologies (SKD). Different levels of licensing Manufacturing without embracing any technology (CBU). HM manufacturing GM range of cars in India with a buy-back arrangement is a perfect example of CBU. 228 .
It can be of the following types – Multipartner – Intends to share an underlying technology or asset.CONSORTIA Consortia – They are defined as large inter-locking relationships & cross holdings between businesses in a similar industry. enabling them to increase prices (Eg. Coke – Pepsi). Tata. leverage upon size to preempt competition by escalating entry barriers (Eg. Cross Holdings – A maze of equity holdings through centralised control to ensure earnings stability & threshold resources for critical mass (Eg. 229 . Airbus – Boeing). Collusion – Few firms in a matured industry collude to reduce industry output below the equilibrium level. Hyundai).
otherwise it 230 becomes routine outsourcing. It usually provides a platform to sort out differences between conceptualization and implementation to suit local market needs. Continuous sharing of knowledge is critical to the success of a supply chain partnership. link their capabilities to create value for end users.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. Tata Motors – IDEA).
Partner selection is one of the critical success factors. Generic motives involved are . enter newer markets.STRATEGIC ALLIANCE It is an short to medium term understanding between two or more firms to share knowledge and risk. Despite their popularity (50-60)% of the alliances fail to accomplish their stated objectives. effective R&D management. enhance credibility. Tata Motors – Fiat.learning organization. Firm’s should undertake a long courtship with potential partners. design next generation products. instead of hurrying into a relationship. Reliance – Du Pont). 231 . preempt competition. to gain knowledge and to obtain access to new markets (Eg.
TYPES Collusion – Tacit top management understanding to neutralize price wars (Eg. Bajaj – Castrol). Whirlpool – Tide. Airbus – Boeing). Backward – An alliance (quasi or tapered) with a supplier of critical components seeking commitment (Eg. Maruti).STRATEGIC ALLIANCE . Alliances of the Weak – An alliance is entered into to preempt competition (Eg. Coke – Pepsi). Complementary Equals – Two firms mutually promoting each others complimentary products (Eg. Bootstrap – An alliance between a weak and a strong company with an intention to acquire it. 232 .
233 . Too much stress on financials & structure be avoided. Differences in level of economic development can produce differences in alliances motives. Cultural orientation has been found to have a profound effect on top management’s strategic orientation (Eg.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). Firms from developed markets seek access to markets and firms from emerging markets seeking access to technology.
Intangible Assets – Move beyond the financials of the firm. Unique Resources – Abilities or skills which cannot be easily duplicated. Willingness to share knowledge and skills. Dominant Logic’s – Similarity in beliefs & biases. Partner’s ability to acquire fresh skills. including ability to provide quality products and services. Managerial capabilities. 234 . Experience related to previous alliances.PARTNER CHARACTERISTICS Complimentarity of Capabilities – The degree to which partners resources can be used in conjunction.
instead of focusing controlling the relationship. Selection & Courtship – It involves self analyzing. degree of compatibility. incorporating clear signs of continuing independence for all partners. 235 . partners should nurture it. Getting Engaged – It should incorporate a specific joint activity. Changing within. Setting up the housekeeping. understanding the chemistry. vows to include commitment to expand the relationship. the value chain. operational & cultural integration. differences not anticipated earlier.MANAGING ALLIANCES Alliances are more than just a deal. Learning to collaborate – strategic.
combining parts).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. It lasts till the vision is reached. synergy) rather than mere exchange (i. Conceptually. There are substantial linkages in the value-chain. separation is very 236 bitter. .e. a joint venture is a selection among modes by which two or more firms can transact. whilst the partners continue to operate independently.e. It aims at creating new value (i.
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. Organizational Learning – It is a means through which a firm learns or seeks to retain their capabilities. though more profitable alternative to other choices. 237 . Strategic Behaviour – Firms may override transaction costs. in addition to a high degree of asset specificity. The market fails as sellers are unwilling to reveal their technology and buyers are unwilling to purchase in the absence of inspection.
Eli Lily – Ranbaxy. Learning new technologies. – Eg. Define future industry standards.OTHER MOTIVES Entry into newer markets. Endorsement from government authorities. – Eg. – Eg. Daimler – Chrysler (Premium Cars) 238 . Sharing of resources. Yamaha – Escorts. – Eg. TVS – Suzuki (4-Stroke Engines) Fill gaps in existing product lines. – Eg. Essar – Hutch (Vodafone). Maruti – Suzuki. Renault – Nissan (Minivans – Cars). – Eg.
technology) drain. Risk of over dependence. Risk of brain (i. LML – Piaggio Differences in size and resource base. PAL – Fiat If the cost of continuing exceeds the exit costs? – Eg.e.RISKS INVOLVED Incompatibility – Differences in cultural background. – Eg. Century .Enka. – Maruti – Suzuki. – Eg. Modi – Telstra What after exit (parenting disadvantage)? – Eg. – Godrej – Procter & Gamble. Tata – Aditya Birla in Idea Cellular 239 .
Costs – Other modes of transaction becomes cheaper. Flexibility – Sufficient space to breathe and adjust. Equality – Lack of dominance. Partner – Avoid duplication of skills and capabilities. Inertia – Differences in age and evolution patterns. Objectives – Shared vision. respect. Incompatibility – Performance expectations. time sharing. 240 . Culture – Reconcile gaps.PRE-REQUISITES FOR SUCCESS Commitment – Mutual trust. Agreement – Clarity on operational control. Focus – Avoid strategic myopia.
MERGERS & ACQUISITION 241 .
Ranbaxy . HLL – Tomco). however. reverses are also taking place through LBO) with a view to acquire conglomerate power and induce synergy (Eg. 242 .Daichi) and hostile if it is without the consent of the management (Eg. Mittal Arcelor). 2002). An acquisition is said be smooth if it is with the consent of the management (Eg.MERGERS & ACQUISITION A merger is a mutually beneficial consent between two or more firms (usually of similar size) to form a newly evolved entity by absolving their individual entities to preempt competition (Eg. Brooke Bond – Lipton). An acquisition is the purchase of a firm by a firm (of larger size. SEBI Takeover Code. The larger objective is to leverage on size. Most countries have stringent laws that prevents hostile takeovers (Eg.
2002 Promoter – A person who has a clear control of atleast 51% of the voting rights of the company and confidence of all the major stakeholders.e. Preferential – A preferential allottee ending up acquiring 5% stake also comes under its purview. . Acquirer – Someone (individual or firm) who picks up an atleast 5% stake without mandatory disclosure having an intention to wrest management control (i.SEBI TAKEOVER CODE. creeping acquisition). Control – A special resolution of 75% of the share 243 holders approving the change of guard. Hike – An acquirer who has already picked up a 5% has to make a mandatory disclosure for every additional 1% stake that it acquires.
credentials or track record is at stake. 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. 244 . whichever is higher as an exit route (Eg.SEBI TAKEOVER CODE. and/or does not enjoy the confidence of the different stake holders. Gujarat Ambuja – ACC). SEBI – In case of a hostile take over. 2002 Pricing – Acquirers will have to offer minority shareholders (at least 20%) the past 26 weeks or past 2 weeks average price. asset stripping). Grasim – L&T Cement.e. the SEBI can intervene and block share transfers if: the acquirer has ulterior motives (i.
TYPES OF MERGERS A business is an activity that involves procuring of desired inputs to transform it to an output by using appropriate technologies and thereby creating value for its stake holders in the process. The type of merger is depends on the degree of relatedness (strategic) between the two businesses. Electrolux . Horizontal – It involves integration of two highly related businesses (Eg. ITC). 245 . usually opportunistic (Eg.Kelvinator). Vertical – It involves complimentarily (partially related) in terms of supply of inputs or marketing activities (Eg. Reliance). Godrej. Conglomerate – It involves integration of two distinctly unrelated businesses.
MOTIVES Increased market / conglomerate power. Mittal – Arcelor). Coinsurance effect – Higher debt raising capability. 246 .e. Reduction in risk. Economies of size. quick access). Global image (Eg. ITC Bhadrachalam). Asset Stripping – Shaw Wallace). ICICI –ITC Classic). Ulterior motives – (Eg. Reduced gestation (i. scale and scope. Access to newer segments (Eg. Ranbaxy – Crosslands). Tata Steel – Corus). Tax benefits (Eg. Acquiring assets or capabilities (Eg. Avoiding risk of new product development. Overcoming entry barriers (Eg.MERGERS & ACQUISITION .
while the ultimate acquisition was made at 607 pence/share). their initial offer was around 420 pence/share. Tata – Corus). When Tata Steel started negotiations with Corus.MERGERS & ACQUISITIONS PITFALLS Cultural differences (Eg. Managing over-diversification. 247 . Overvaluation of buying firms (Eg. neglecting core business. Overvaluation is often as a result of an ego drive and substantially affects future returns. Merging of organisational structures. Inability to achieve synergy. Top management overtly focused on due diligence exercise and negotiations. Managing size.
MERGER TYPE & PLC Introduction – A larger firm may acquire a newly formed entity with an objective to preempt new competition or acquire its license (Eg. Tata Steel – Corus). Kingfisher – Air Deccan). Growth – This stage may witness parallel merger of two firms of similar size. Brooke Bond – Lipton). with an objective to reinforce its growth trajectory or to take on the might of a comparatively larger player (Eg. 248 . Maturity – A larger firm acquires a smaller firm with an objective to achieve economies of scale and experience curve effects (Eg. Decline – Horizontal mergers are undertaken to ensure survival. vertical to save transactions costs.
FRAMEWORK Positive contribution to the acquired company.INTERNATIONAL M&A . A concern of respect and trust for the business of the acquired company. Left alone syndrome. Blanket promotions across entities and confidence building exercises needs to be practiced. Immediate attempts to super impose structure and culture may cause bottle necks. 249 . A common shared vision. Strong differences may stifle plans and its execution. An acquisition just for the sake of it or reputation yields very little value in the long term. active top management intervention in phases.
. Shift attention from business portfolio to people and processes. Decide upon management control systems.INTEGRATION . Determine business strategy. Integrating work processes. It will enable focus on customers and key people. Redefine responsibilities and authority.BLUEPRINT Take the media into confidence. They can carry the message to the various stake holders. 250 Do not ignore the “people factor”. Decide on the new hierarchy. promptly.
Financial motives – Undervaluation relative to true value. The process takes (6-12) months.VALUATION The process of valuation is central to M&A. – Market for corporate control. operational & financial). over valuation can become a curse. Valuation decisions are arrived through a due diligence process when the prospective acquirer gets access to the books of accounts of acquiring company. 251 . – Unstated reasons – Personal self interest and hubris.e.M&A . While under valuation may be a significant opportunity. – Synergy – Potential value gain from combining operations (i.
or from increased market power which increases sales and margins. when the “fit” between the two entities is very poor. – Conglomerate Synergy – Gains come when one firm complements the resources or capabilities of another (Eg. Innovative product – Good distribution network). 252 . – Vertical Synergy – Gains come from controlling the supplychain and savings in transaction costs.VALUING OPERATIONAL SYNERGY Synergy – It refers to the potential value gain where the whole is greater than the sum of the parts. Synergy can be negative as well. Sources of operational synergy – Horizontal Synergy – Gains come from economies of scale which reduces costs.
Synergy comes from projects which would not have been undertaken if the two firms stayed apart (Eg. Cash Slack – It reduces asymmetry between cash starved firms with deserving projects and cash cows with no investment opportunities. and without paying take-over premiums. 253 . Hotmail). However. shareholders can accomplish the same at a much lesser cost. but availed after being merged with a profitable firm (Eg.VALUING FINANCIAL SYNERGY Diversification – Reduce variability in earnings by diversifying into unrelated industries. ITC – Bhadrachalam Paper). Tax Benefits – Tax benefits may accrue from tax entitlements and depreciation benefits unutilized by a loss making firm.
the cash flow the merged firm will be less variable than the individual firms.VALUING FINANCIAL SYNERGY Co-Insurance Effect – If the cash flows of the two firms are less than perfectly correlated. higher leverage. 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. hence better performance. – Coupon rates may also be negotiated at lower rates. as risky debt is spread across the new firm's operations. – Default risk comes down and credit rating improves. It relates to the concept of diversification. 254 . This will induce higher debt capacity.
The value of wrestling control is inversely proportional to the perceived quality of that management.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. 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. 255 . Assessment of perceived quality is critical. – – Value of Control = Value of firm after restructuring Value of firm before restructuring.
Confidence of investment bankers and the international financial community is essential.LEVERAGE BUYOUT (LBO) The basic difference between a take-over and a LBO is the high inherent leverage (i. sometimes in combination with the assets of the acquiring company. The assets of the acquired company are used as collateral for the borrowed capital. 256 .e. LBO facilitates a relatively smaller firm to bid for a comparatively larger firm in the bid for management control. It is a very costly and risky proposition. debt component) at the time of buyout and rapid changes in capital structure over time.
– Separation of ownership from management. 257 . The increased benefit showed in the following way – reduced costs and increased revenue. – Increased information needs. liquidity. on-going valuation. However. the advantages of going public includes . off-late many publicly traded firms have gone private keeping in mind the following – – The fear of LBO.access to financial markets. – The need to satisfy analysts and shareholders.TO GO PUBLIC OR NOT? However. A research study showed that 30% of the publicly listed firms reported above average returns after going private.
– Managers cannot be trusted to invest free cash flows wisely. – Cash trapped company unable to utilize opportunities. – It is a temporary phenomenon. 258 . – Cost of debt coming down (i.e.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). co-insurance effect). – 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.
As the firm liquidates / pledges assets and pays off debt. 259 . Lack of sufficient cash flows to repay costly debts resulting in a possible debt trap. A LBO has to pass two tests to be viable – – Restructuring to pay-off increased debt.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. leverage is expected to decrease over time. Therefore. initial rise in leverage is anticipated. – Increase equity valuation.
– Automatic listing in major exchanges.REVERSE MERGER Reverse Merger – The acquisition of a public company. or costly. allowing the private company to bypass the usually lengthy and complex process of going public. time-barred. 260 . – Prevents dilution of equity. which has discontinued its operations (i. shell company) by a private company. – Tax shelter. – Facilitates better valuation and forthcoming offerings. small in size but having a promising business. Objectives – – Traditional route of filing prospectus and undergoing an IPO is costly.e.
takeover failures have only initial negative effects on stock prices. Initial anomaly in stock prices usually normalizes over a period of time (6-12) months. However. During bearish periods excess returns were 19%. and 35% during bullish periods.EFFECT OF TAKE-OVER ANNOUNCEMENT The shareholders of target firms are the clear winners. – Merger announcements reported 20% excess returns. Excess returns also vary across time periods. – Takeover announcements reported 30% excess returns. Most target firms are taken over within (6090) days. 261 .
over time. as stock markets become more and more perfect such anomalies would reduce Source: Jensen and Ruback. and Netter. in the event of take-over failure negative returns to the extent of 5% on bidder firm stock prices is reflected. – Most studies reported insignificant excess returns around take-over offers or merger announcements. Bradley. Brickley. 1988 . – However. and Kim. – However.EFFECT OF TAKE-OVER ANNOUNCEMENT The effect of take-over announcement on bidder firm’s stock prices are not clear cut. 1983. 1983. 262 Jarrel. Desai.
Rights). 263 . Poison Put – Premature retirement of bonds at attractive rates to pour surplus cash and make target investment unattractive.DEFENSIVE STRATEGIES Golden Parachute – An employment contract that compensates top managers for loss of jobs as a result of change in management control. Asset Stripping – The targeted company hives off its key assets to another subsidiary. Poison Pill – An offer to existing shareholders to buy shares at a substantial discount to increase their voting rights (Eg. so that nothing is left for the raider to strip off.
DEFENSIVE STRATEGIES White Knight – It is the placing of stocks to a cash rich investor and bargaining for protection in return. East India Hotels – Reliance Industries – ITC). Shapoorji Pallonji). 264 . Gray Knight – The target company takes the help of friendly company to buy the shares of the raiding company. thus thwarting the raider company’s attention. Pac Man – The target company makes a counter bid to take over the raider company. 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.
COMPETING FOR THE FUTURE 265 .
What went wrong???? What were they doing with the present? What were they pre-occupied with? 266 .GETTING OFF THE TREADMILL Canon overpowering Xerox. Compaq overpowering IBM. Honda overpowering Volkswagen. Most companies were too preoccupied with the present than the future? 99% of the companies overpowered. Honda overpowering GM. The reverse was true for the companies overpowering. were spending 99% of their precious time dealing with present. Hitachi overpowering Westinghouse. British Air overpowering Pan Am. Nokia overpowering Motorola. Wal-Mart overpowering Sears.
CEO’s brutally pick up the knife and ruthlessly carve away layers of corporate flab (delayering. downsizing). Thus efficiency was grievously hurt. decluttering. declining margins. falling market share). most often they ended up cutting corporate muscle as well and became anorexic.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 .
but forging ahead in competition. A poll in circa 2000 revealed that 80% of the U.THE PRESENT OF COMPETITION Beyond Reengineering – Numerator based managers (innovation) at least offers some hope. incrementalism or nominal innovation has almost reached a plateau. top managers believed that quality will be a source of competitive advantage of the future. The future is not about catching up with competition. but not of the future. On the contrary only 20% of Japanese managers believed that quality will be a source of competitive advantage of the future.S. 268 . ensuring only survival of the present. However.
and regenerate its strategies (breaking its – managerial frames). Creating the future requires industry foresight. It involves Dream about the company’s future. reinvent its industry. aspirations and resources. not just the organization. 269 . It is based on deep insights into trends in technology. Transform the industry. Companies need to fundamentally reconcieve itself. better. as important as these may be. not the other way. Empower from bottom to top. they are not enough to get a company to the future. Create a potential gap. faster.THE FUTURE OF COMPETITION Regenerating – Leaner. don’t predict. demographics and lifestyles.
ABOUT THE DREAM Which customers will you be serving? What will the potential customer look like? Who will be your future competitors? What will be the basis of your competitive advantage? Where would your margins come from? What will be your future competencies? Which end product markets would you cater? 270 .
Create entirely new industries (i. Redraw the boundaries between industries.ABOUT THE TRANSFORMATION The future does not belong to those who take the industry for granted. by converging technologies complex. blue oceans). Successful companies have a complete grip over the industry. 271 . Change in at least one fundamental way the rules of engagement in an industry. It drives a hunger and a passion to transform. It is about deliberately creating a strategic misfit. they do not need to restructure. hence do not fall sick in the first place.e. Therefore.
ABOUT THE EMPOWERMENT Bring about a revolution (a paradigm shift) in the organization. The middle management plays a strong moderating role. Such a process is called institutionalization (from people centric to organisational centric). Most successful revolutions (Gandhi to Mandela) rose from the dispossessed. More importantly. Transformational leaders merely lead the way. 272 . A revolution that is thrust upon from the top seldom sustains. the revolution must start at the bottom and spread in all directions of the organization.
without taking undue risk. South West Airlines – LCC. Companies need to strategize (think ahead of times). What does it take to get to the future first? Understanding how competition for the future is different. Get to the future first. A process for finding and gaining insight into tomorrows opportunities (Eg.THE FUTURE OF STRATEGY A company must get to the future not only first but also for less. Apple – iphone). It requires a lot of common sense and a little bit of out of the box thinking. Apply the 40 – 30 – 20 principle. 273 . Toshiba – LCD. An ability to energize the company.
the farther it will be away from competition. each point in space represents a unique business opportunity. As there is no one future. is the ability to imagine in a different way what the future could be. The farther one can see in this endless space. but hundreds. What distinguishes a leader from a laggard. as on their aspirations. greatness from mediocrity. We are in the midst of a 3600 vacuum. 274 .HOW DOES THE FUTURE LOOK LIKE? There is no rule which says that for every leader there will be a follower. Companies of the future will be not based so much on the strength of their resources.
THE EMERGING STRATEGY PARADIGM Not Only Reengineering Processes But Also Regenerating Strategy The Competitive Challenge Organizational Transformation Industry Transformation Competing for Market Share Competing for Opportunity Share Finding the Future Strategy as Learning Strategy as Positioning Strategy as Engineering Strategy as Unlearning Strategy as Dream Strategy as Architecture 275 .
THE EMERGING STRATEGY PARADIGM Not Only But Also Mobilising for the Future Strategic Fit Resource Allocation Strategic Misfit Resource Stretch & Leverage Getting to the Future First Existing Industry Structure Product Leadership Single Entity Product Hits & Timing Future Industry Structure Competency Leadership Dominant Coalitions / Co-option Market Learning & Preemption 276 .
LEARNING TO FORGET P1: The degree of learning in current period is directly proportional to the degree of unlearning in the previous period. Degree of Learning Unlearning Curve P2: Unlearning in previous period does not necessarily ensure learning in the current period. Learning Curve t1 t2 t3 Time t4 t5 277 .
278 .CORE COMPETENCE A core competence relates to a bundle of skills (not an asset or a business) that revolves around activities or processes and critically underpins a firm’s competitive advantage. 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. Leverage – They are the gateways to future markets. Inimitable & Insubstitutable – A high degree causal ambiguity between these skills yield sustainable competitive advantage. It cannot be matched even by its closest competitors.
Toyota – lean manufacturing. Most companies around the world do not possess one. leaders have one. Honda – engines. it gets more refined and valuable through use. Nike – designing.MORE ABOUT CORE COMPETENCE Sony – miniaturization. Canon – imaging. Core competencies are the roots of the organization. it is deeply embedded in the heart of the organization. at the most three to four. SKF – antifriction and precision. Intel – nano-electronics. Coca Cola – brand. Wal-Mart – logistics. 279 . A core competency cannot be outsourced. Although a core competence may lose value over time. Toshiba – flat screen displays.
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 .
Therefore focused strategies based on core competence may not be suitable for emerging markets (Khanna & Palepu. institutional gaps. Therefore. high levels of market imperfection). and high transaction costs. 288 . Diversified groups in operating in emerging markets therefore benefit from unrelated diversification.e. Korea. Emerging markets are characterised by infrastructural bottlenecks.EMERGING MARKETS Emerging markets (India. strategies suited for the developed markets may not be appropriate for emerging markets. China. 1997). Chile) provide a different context (i.
DIVERSITY . et al. Concentric. Optimum level of diversification Performance Diversity is initially positively related with performance. Size & Scale. (2000) 289 . Entropy). subsequently negatively related across developed markets.PERFORMANCE (I) Diversity attempts to measure the degree and extent of diversification (Herfindahl. Experience Strategic Fit Diversity Palich. Synergy.
PERFORMANCE (II) Diversity is initially negatively related with performance.DIVERSITY . brand building Risk diversification. subsequently positively related across emerging markets. 2001) 290 . Huge initial investment. conglomerate power Threshold level of diversification Performance Diversity (Khanna & Palepu.
It should have a spread of manufacturing facilities. It should have a spread of interest groups / stake holders. It should think globally. HSBC). Characteristics – It should have a spread of affiliates or subsidiaries. 291 . act locally (Eg. revenues and profits.INTERNATIONAL IDENTITY MNC’s consciously engage in FDI in different parts of the globe to forge resource diversity as a distinct competitive advantage. It should have a spread of assets.
Group Scale .It reflects the relative role of team building (Eg.GLOBAL BUSINESS ENVIRONMENT Power Distance – It reflects the disparities in income and intellectual development (Eg.It reflects the disparities in women in workforce (Eg. high feminity index in developed markets and vice versa for emerging markets). low power distance in developed markets and vice versa for emerging markets). Feminity Index . low risk profile in developed markets and vice versa for emerging markets). 292 . low group scale in developed markets and vice versa for emerging markets). Risk Profile – It reflects the risk attitude of the top management (Eg.
time value. terrorism (9/11). corruption. attitude.GLOBAL BUSINESS ENVIRONMENT Cultural Adaptability – It reflects the adaptive ability to a changing environment . interest rates. way of life. low country risk in developed markets and vice versa for emerging markets). flexibility (Eg. high cultural adaptability in developed markets and vice versa for emerging markets). judiciary) of doing business in a particular country (Eg. FOREX reserves. credit rating. Country Risk – It reflects the political and economic risk (Eg. customs. dress sense.culture. inflation. 293 . currency. code of conduct. political stability.
Other factors – local celebrations. and vice-versa. Language Barriers – Developed country managers expect foreign partners to communicate in their languages.GLOBAL BUSINESS ENVIRONMENT Time Sensitiveness – Developed country managers regard time as precious. however. in most emerging markets meetings are delayed and lasts unusually long. High levels of ethnocentrism usually has a negative effect on business. 294 . in most emerging markets use of an interpreter may be a standard protocol. Ethnocentrism – Developed country managers tend to regard their own culture as superior. time-zones.
GATT GATT was a bi-lateral treaty initiated between US and some member countries in 1947 to promote free trade. It also highlighted the nexus between US & WTO. The 1999 (Seattle Round) saw a lot of protest amidst bringing agriculture under the purview of TRIPS. The 2001 (Doha Round) focused on power blocks (NAFTA. ASEAN. BRIC). 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. 295 . In 1995 (Uruguay Round) GATT was renamed to WTO. copyrights. trademarks). It focused largely on TRIPS (patents.
e. the Euro slowly started outperforming the Dollar. Euro). 296 .Pound). three countries joined in 2002 increasing it to fifteen members as of 2008.EURO – SINGLE CURRENCY In 1999 twelve member countries in Europe joined hands to move over to a single currency (i.e. However. The Euro was significantly devalued against the Dollar till 2002. However with current recession in the US 2002 onwards. the Dollar still remains the most preferred currency globally. primarily the OPEC countries. The notable exception was Great Britain which still continues with its local currency (i. Sterling .
SINGLE Vs MULTIPLE CURRENCY Transaction Costs – Though the initial cost of introduction of a single currency is very complicated and costly. Rate Uncertainty – A single currency eliminates the risk of competitive devaluations. but it may have spill-over effects. However. it helps avoiding transaction costs associated with a multiple currency. 297 . a multiple currency is preferable where the business cycles of member nations are different. Trade Block – It will strengthen the EU identity which would not have been possible otherwise. Transparency – A single currency is transparent and competitive.
e.e. – FII (transfer of intangible resources) is fast but may have strong repercussions (i.FII Vs FDI INVESTMENT Classical economists believed that foreign investment (in any form) is basically a zero sum game (i. hot money). 298 . Neo classical economists believe that foreign investment may in fact be a win-win game. It is long term with high levels of commitment. It is short-medium term with comparatively low levels of commitment. – FDI (transfer of tangible resources) is slow but steady for the purpose of economic growth. the gain of one country is loss of another).
Pricing – It depends on the competitive structure (PLC – Kellogg's). economic (middle class buying power). Distribution – It depends on the market characteristics (fragmented – concentrated). usage (talk time). buying patterns (spread).culture (food habits). technology (microchip).INTERNATION MARKETING Product – The various attributes of a product may receive different degrees of emphasis depending on differences in . promotion (surrogate advertising). . customer awareness (microwaves). lifestyle (petroleum 299 outlets – departmental stores).
INTERNATION FINANCE Currency Risk – Many Indian IT companies (Rs) having business in US (Dollar) are asking for quotes in (Euro) or are shifting bases out of US to avoid risk of devaluation of Dollar.India) may be different from that another trading country (US – GAAP or IRS). Cost Structure – Companies in India need to investment in fixed costs due to poor infra-structure 300 compared to developed markets. Accounting Norms – The accounting norms of one country (AS . Leverage – The leverage may vary across countries depending upon money and capital market conditions (Eg. debt is cheap in US. . equity is cheap in India).
double taxation. social security. Training – It is a pre-requisite for international business to reduce language. 301 . skills are more important that cultural fit and vice-versa.INTERNATIONAL HR An uniform HR policy is idealistic to enable parity in performance appraisal. in most cases it is not desirable nor practiced. technology (convergence. and cultural barriers (language) vis-à-vis emerging markets. however. labour laws. shortened life cycles). Compensation – Differential pay packages exists because of differences in purchasing power. Recruitment – In local recruitment.
Outsourcing – A company having a core competence may be the source of global outsourcing (Eg.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. . Technology – The cost to be evaluated in terms of latest technology (Euro VI) vis-à-vis effective cost of appropriate technology (Euro II). SCM – Use of ERP to network the extended enterprise 302 across the globe. Bosch spark plugs are used by car manufacturers worldwide).
CONTEMPORARY TOPICS 303 .
Innovation is all about staying ahead of competition. but has inherent risks involved as well. 304 . it has destructive effects as well.INNOVATION An invention is the first occurrence of an idea for a new product or process. Innovations typically paves the way for more secured and improved lifestyle for consumers in general. innovation is the first attempt to carry it out in practice. While innovation typically adds value for organizations. Innovation is the most preferred strategy today to maintain competitive advantage in the present turbulent business environment.
Process innovation usually follows product innovation. Tangible impact of product innovation on performance is significantly higher than process innovation.TYPES OF INNOVATION A key challenge is maintaining a balance between process and product innovations. While product innovations are typically customer driven. However. 305 . process innovations are organizational driven. process innovation is necessary to sustain the competitive advantage of product innovation. Strategic innovation has the potential to change the rules of the game.
Medical Surgery (Lasik). Innovations are the back-bone of successful business models . a paradigm shift). about how an organization makes money (i. Telecom (CDMA Technology).BUSINESS MODEL It is a simplified description and representation of a complex real world. 306 . Disruptive business models brings in a new frame of reference (i.e. Data Storage (Pen Drives). putting an idea into practice). Processors (Pentium). Drug Development (Bio Chemicals). It leads to a shift in the price – performance envelope.e.
NINE BUILDING BLOCKS Value proposition offered to the market. The cost structure resulting from the business model. The key activities / processes necessary for execution. The key resources and capabilities required. The revenue streams generated by the activities. 307 . The key partners involved in the activities. The proposed relationships established with clients. The channels to reach out to the clients. The segment(s) of clients to be addressed.
BUSINESS MODEL FRAMEWORK 308 .
innovative companies to carve out unique business models to fend off competition. 309 . Investment Banking.REVENUE MODEL Positioning is just not sufficient. It is just one piece of the puzzle. With the rapid erosion of certain industries (IT. Real Estate) companies need to untangle and understand the intricacies of their business model. It involves – Product Visualization – Product Prototype – Product Test – Capacity – Pricing – Distribution. The revenue model described here are the means to generate revenues.
Provide reasonable incentives (not necessarily monetary). A favourable intellectual property (IP) climate. Have a lean and a flat organization structure. Allow the workforce idiosyncrasies for their errors. Allow the management sufficient slack to be future oriented.HOW TO MAKE INNOVATIVE CO’S Innovative company’s are a matter of culture and aspirations rather than tangible resources. Promote the culture of experimentation. 310 . Promote the grape-vine.
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.HOW TO PROTECT INNOVATION? Without adequate protection (external or otherwise) the effects of innovation does not translate to performance. 311 311 . companies are increasingly relying on internal protection to sustain innovation effects. Collusion with the judiciary is also another distinct possibility in emerging markets.
Corporate governance aims to reduce the principal-agent problem present in most professional managed organizations through appropriate forms of accountability and control mechanisms. In fact the principles of corporate governance implies that managers go beyond in satisfying the stated and unstated needs of the multiple stakeholders.CORPORATE GOVERNANCE The basic theme of corporate governance is to ensure that professional managers are identified and made accountable in terms of clear business processes or activities and held responsible through adequate mechanisms & control systems for channelizing their decisions for the benefit of stakeholders at large. 312 312 .
also known as the principal-agent problem or agency dilemma. However. 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.AGENCY THEORY The root of Corporate Governance goes back to the Agency Theory. not present in portfolio diversifications. shareholders can diversify their portfolio at a much lesser risk and cost. This exposes the shareholders to additional risks and higher costs.
the US government passed the Sarbanes – Oxley Act.ORIGIN & CONTEXT Since the early 20th century since a large part of public funds were held by publicly traded firms in the US. 2002 to restore public confidence in corporate governance. After the Enron downfall. defines corporate governance (headed by Kumar Mangalam Birla) as the acceptance by management of the inalienable rights of shareholders as the true owners of the corporation and of their own role as trustees on behalf of the 314 shareholders. SEBI Report – 2005. various laws were enacted to ensure proper usage of these funds. .
Interests of other stakeholders: Recognize the legal and other obligations of all legitimate stakeholders. including the society at large. The key roles of chairperson and CEO should not be held by the same person and their offices be clearly separated. Role and responsibilities of the board: It deals with issues about an appropriate mix of executive and nonexecutive directors.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. 315 .
They should also implement systems to independently verify and safeguard the integrity of the company's financial reporting. Disclosure and transparency: Disclosure of information should be timely and balanced to ensure that investors have clear access to data and facts. Independence of the entity's auditors: Identification. 316 316 .. assessment and mitigation of risks and retirement by rotation over a fixed period of time.GOVERNANCE PRINCIPLES Integrity and ethical behaviour: Organizations should develop a code of conduct for their top management that promotes ethical and responsible decision making.
discussed and resolved. safeguards invested capital. However. they should provide no mechanism or scope for opportunistic behaviour. Remuneration: Performance-based remuneration is designed to relate some proportion of salary to individual performance. fire and compensate top management. Regular board meetings allow potential problems to be identified. Balance of power: The simplest balance of power is very common.GOVERNANCE STRATEGIES Monitoring by the board of directors: The board of directors. with its legal authority to hire. 317 . a person benefitting from a decision should abstain from it.
who had no management ties. 318 .GOVERNANCE & PERFORMANCE In its “Global Investor Opinion Survey” of over 200 institutional investors in 2002. Egypt and Russia) to around 40% for Canadian & European companies. The size of the premium varied by market. They defined a well-governed company as one that had mostly out-side directors. from 10% for companies where the regulatory backdrop was least certain (those in Morocco. undertook formal evaluation of its directors. 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.
The basic premise is that firms cannot exist in vacuum. 319 . However. Over a period of time.SHAREHODER – STAKE HOLDER THEORY Till the early part of the 20th the basic objective of modern organizations was to provide goods and services for public consumption for profit maximisation. corporate philanthropy should be a part of every corporate mission. today economic institutions are considered as a major drivers of improvement in quality of life in general and therefore needs to include multiple stakeholders. Therefore. the short-term view of profit maximisation gave way to a more broader and mediumterm view wealth maximisation of the shareholders.
CSR can be defined as. Therefore. giving a very important message that one cannot exist without the other.CORPORATE SOCIAL RESPONSIBILITY As Peter Drucker rightly pointed out that. in fact a large part of it is significantly overlapping. “a healthy business cannot exist in a sick and impoverished society”. However. “an enterprises decisions and actions being taken for reasons at least partially beyond its immediate economic interests”. Therefore. the debate on CRS still continues whether firms should detract its focus from its business? 320 . economic and social responsibilities cannot be mutually exclusive.
Fear of government interference: Excessive quench for profits may lead to build up of adverse public opinion compelling the government to intervene (Eg. The role of media: The media and various consumer organizations have come up in protecting consumer rights and exposing mal-practices. Public image: Entrepreneurs are increasingly relying on public image as a source of competitive advantage and a higher financial discounting.GROWING CONCERN FOR CSR Awareness due to education: With growing literacy. 321 . people are becoming increasingly aware of their right to a decent and healthy life. MRTP).
Exide – Product take back). Cement . Aditya Birla Research Centre – LBS). Literacy & Training Programs – (Eg. Refrigerators – CFC. Tata Steel – Life Line Express). Health & Hygiene – Attending the health hazards due to wastes and by-products to employees and society in proximity (Eg.Paper packaging. designing eco-friendly products. 322 . eco efficiency. and extended producer responsibility (Eg.CSR STRATEGIES Green Supply Chain Management: It includes environmentally preferable purchasing. Education.
In turn companies by serving these markets. K. across the world's billions of poor people having immense untapped buying power. Strategic innovations leading to disruptive business models can show the way out. C.BOTTOM OF THE PYRAMID With the market across most developed markets including the US getting saturated. Prahalad notes that future markets exist collectively. 323 . They represent an enormous opportunity for companies who learn how to serve them. they're helping millions of the world's poorest people to escape poverty.
BLUE OCEAN STRATEGY 324 .
MARKETSPACE .TWO WORLDS 325 .
competing head on results in nothing but a bloody red ocean of rivals fighting over a shrinking profit pool. In today’s red oceans. battled over market-share. . one companies gain is always at the 326 cost of another companies loss. Yet in today’s overcrowded industries.WHAT IS RED OCEAN? Companies have long engaged in head-to-head competition in search of sustained. where most industries are saturated. They have fought for profits. and struggled for differentiation (cost or product). profitable growth.
WHAT IS BLUE OCEAN? Tomorrow’s leading companies will succeed not by battling in red oceans. Such strategic moves are possible through the pursuit of product differentiation and low cost simultaneously. rendering rivals obsolete and unleashing new demand. It is only the frames of the . but by creating blue oceans of uncontested market space ripe for growth . it will exist 327 in the future as well. It helps in creating powerful leaps in value for both the firm and its buyers. Blue Ocean’s have existed in the past.
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 .
As trade barriers between nations & regions fall. Population shrinkage across a no. Niche markets & monopoly havens are continuing to disappear. of European nations. Technological advances have substantially 329 improved industrial productivity. information imperfections atrophy instantly. Demand across developed markets reaching a plateau. .BLUE OCEAN STRATEGY IMPERATIVES Prospects in most established market spaces – red oceans – are shrinking steadily.
the underlying technology was often already in existence.CONCEPTUAL UNDERPINNINGS Blue oceans have existed in the past and will exist in the future as well. History indicates that blue oceans exist in three basic industries – automobiles (how people get to work) – computers (what people use at work) – entertainment (what people do after work). Incumbents often create blue oceans within the ambit of their core business. They are not necessarily about technology. . managerial moves are. Company & industry are the wrong units of 330 strategic analysis.
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.SOME GLARING EXAMPLES In the last century authors Kim and Mauborgne have documented the creation of more than 150 blue ocean creations across 30 industries – Virgin Atlantic: Fractional jet ownership or travel to space. Sony Play Station: Redefining machine-human interface in entertainment and targeting an altogether new user base. Citibank – Automated teller machines & credit 333 cards. .
greater than themselves.WHAT THEN IS THE HANDICAP? Most of the traditional views in strategy having its origin in (Economic Theory) led to what is called the – structuralist paradigm. 334 . According to this view managers need not be constrained to act within the confines of their industry. According to this view. companies & managers are largely at the mercy of economic forces. Off late emerging views in strategy having its origin in (Organization Theory) led to a paradigm shift to what is called the – reconstructionist view. All they need to do is change their managerial frames.
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