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Course Code: 611 & 612 Dr. Subir Sen – Faculty Member, IBS
E-Mail: firstname.lastname@example.org, 9830697368 1) Crafting & Executing Strategy – Thompson & Strickland. 2) Strategic Management – Pearce & Robinson. 3) Strategic Management – Fred. R. David. 4) Exploring Corporate Strategy – Johnson & Scholes. 5) Competitive Advantage – Michael E. Porter. 6) HBR – Articles & Case Studies.
STRATEGY - DEFINITION
Strategy is all about making trade-offs between what to do and more importantly what not to do; consciously choosing to differentiate. It reflects a congruence between external opportunities and internal capabilities. Types of strategies – Corporate Strategies – It is all about making choices across various businesses and allocating resources among them. Business Strategies – It is all about developing leveraging and sustaining competitive advantage. Functional Strategies – It is all about finding newer ways to perform existing processes, or 3 better still adopting new processes altogether.
STRATEGIC MANAGEMENT DEFINITION
Strategic management attempts to integrate the traditional management functions and align the organization as a whole with the broader environment to make resource allocations in a way to achieve the strategic intent of the organization. This alignment is called strategic fit. It serves as a road-map for the organization in its growth trajectory. It provides the direction – extent – pace – timing. It depends on the turbulence of the environment and the aggressiveness of the organization. It distinguishes the winners from the losers.
PILLARS OF STRATEGIC MANAGEMENT
Differentiation – Differentiation of key inputs and technologies helps a firm to consciously move away from homogeneous to heterogeneous markets enabling them to earn super-normal profits from normal profits. Integration – Whenever dealing with a complex task of managing a business (i.e. involving a no. of variables with cross linkages) it is in the interest of simplicity that the task be broken up in smaller components. However, for effective control, integration is essential. Alignment – Since differentiation is prone to replication, it is in the interest of the firm to differentiate continuously by aligning the resources with environmental opportunities.
STRATEGIC MANAGEMENT FRAMEWORK
Economic al Strategic Finance Fit Political Strategic Intent Fit Political Marketin g Manageme nt Social & Cultural
It is about adaptation and response to the same. It is irreversible. It requires full commitment of the top management. It is all about creativity and innovation. It provides broad guidelines.STRATEGIC MANAGEMENT . It involves substantial resource outlay. 7 . It is a holistic and integrated approach. It is long-term in nature.FEATURES It forms the core activity of the top management.
It brings instant success.STRATEGIC MANAGEMENT – MYTHS It involves short-cuts. 8 . It involves only the top management. It about mere data and facts. It is rocket science. It is about a definite formula. It involves nitty-gritty's. It is fool-proof in nature. It attempts to minimize risk. It a bundle of techniques or even tricks. It is about forecasting.
To innovate. rather than reactive. To assimilate change faster. scale and scope. again and again ……. To be proactive.STRATEGIC MANAGEMENT IMPERATIVES To be continuously alert. To gain expertise in technologies. To be insulated against environmental threats. To leverage size. To generate large resource pool. . To be future oriented. 9 To develop core–competencies. To tap markets across boundaries.
In the ancient days battles were fought over land. In the ancient days battles were won not by virtue of size of the army or armory. In contrast. whose origin can be traced to some of the greatest battles fought in the ancient days. Even in today’s markets. but with a lot a rigour and robustness. but by virtue of their courage. today's battles are fought over markets. It is an old wine in a new bottle.STRATEGY .strategies. 10 . battles fought on the market front are won by companies by virtue of their obsession & strategies. obsession.ORIGIN The word strategy has its origin from the Greek word strategia meaning Military Commander. and more importantly .
– Reliance’s entry into telecom. US attack of Morocco to capture Germany – Strategy: Pin-hole strategy – Wal-Mart challenging Sears by entering small towns. – Toyota’s entry in the US. – Yahoo and Microsoft challenging Google. challenging GM and Ford.SOME PARALLELS Japan’s attack on Pearl Harbour – Strategy: Attack where it hurts the most. 11 . Napoleon’s attack on Russia – Strategy: Waiting for the right time. Allied Forces Vs Germany (WW-II) – Strategy: Forging alliances.
12 . – Mass Production Organization Size – Complicated Processes – Complex Structures Evolving of an emerging paradigm – survival of the fittest (Fayol & Taylor.EVOLUTION OF MANAGEMENT As Peter Drucker refers to it.Industrial Revolution. A paradigm is a dominant belief about how the business and its environment operates. 1910). The first major discontinuity in the history of global business environment was the . The things happening around the firm when totally disconnected from the past leads to a paradigm shift. a radical change in the business environment brings about discontinuity.
– Homogeneous to heterogeneous products. 13 . performance across firms became differentiated. – Global market place.EVOLUTION OF STRATEGIC MANAGEMENT The second major discontinuity in the history of global economic environment – World War II.e. push to pull). – Affluence of the new customer (i. Efficiency and effectiveness are no longer sufficient. The question of outperforming the benchmark became the new buzzword. – Changes in the technology fore-front. 1960). From uniform performance. Survival of the most adaptable becomes a new management paradigm (Ansoff.
ENVIRONMENTAL CHANGE Phase IV: Horizon of Scenarios 2 1 Phase I: Extrapolation of the past 1 3 1990 onwards 1 2 1 3 1A 1B 2A Prior to 1950 Phase II: Discrete Scenarios Phase III: Range of Scenarios 1970 to 1990 2 2B 1950 to 1970 14 .
Ansoff (1960) – Strategy can be segregated into certain mutually exclusive and inter-related components aimed at managing the growth of an organization. – Biases and prejudices has a very little role to play in strategic choices pursued by managers. – The choice of strategy is primarily concerned with external ones rather than internal ones. – It is primarily the top management’s prerogative.APPROACHES TO STRATEGY Analytical Approach – Igor H. – The choice of product-market mix is based on conscious evaluation of risk – return factors. 15 . Learning always begin on a clean sheet of paper.
everything else follows. – Organization structure will precede and cause changes in strategy. 16 . Once the control systems are in place. how it will compete.APPROACHES TO STRATEGY Design Approach – Alfred Chandler (1970) – Structure follows strategy. The organization initially decides which industry to enter. Successful organizations align authority and responsibility of various departments in way to reach overall objectives. – Management control systems has a dominating role in influencing firm performance. – The top managers then decide on the type of organization structure & systems to be in place. who will be the top managers.
– An organization is seldom in a position to influence the larger business environment. – The organization will outperform the industry where environmental forces are weak and vice-versa. Porter (1980) – Choose a consumer segment and position your product accordingly. customer. – The environmental forces comprises of – supplier. – A firms performance is inversely related with the bargaining power of environmental forces to which it is exposed. new entrant. competitors.APPROACHES TO STRATEGY Positioning Approach – Michael E. substitutes. 17 .
– It enables a firm to deliver unimaginable value ahead of time. – Core competencies are a set of skills that are unique and can be leveraged. locating in most attractive industries and pursuing the same strategy.APPROACHES TO STRATEGY Core Competence – C. 18 . – Organizations can significantly alter the way an industry functions. They are complex resources and undermines a firms competitive advantage. but exploiting the resource differences among them. Prahalad (1990) – The key to superior performance is not doing the same as other organizations. K.
STRATEGIC MANAGEMENT PROCESS Strategic Intent Strategic Planning Strategic Gap – Environmental Scanning – Internal Appraisal of the Firm Strategy Formulation – Corporate Strategy – Business Strategy Strategic Choices – Functional Strategy Strategy Implementation Strategy Performance Strategy Evaluation & Control 19 .
TOP MANAGEMENT PERSPECTIVE 20 .
It is the cornerstone of an organizations strategic architecture reflecting its desired future state or its aspirations.STRATEGIC INTENT If you cannot see the future. A substantial gap between its resources and aspirations. 21 . It involves an obsession to be the best or outperform the best. A strategic intent is a statement of purpose of existence. It’s a philosophy that distinguishes it from its competitors. A gap that consciously manages between stagnation and atrophy. It provides a sense of direction and destiny. It implies a significant stretch. you cannot reach there.
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 .
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.e. It is core to the strategic intent of the firm. it can be perceived as a set of working rules (similar to thumb rules) that enables the top management to decide what can be done and more importantly what cannot be done. 23 . Dominant logic changes. strategic variety) is apparent. To put it more simply. when radical changes in the internal and external environment (i.
24 . but achievable aspirations. – It represents the company’s audacious. It ensures that the company does not wander off into unrelated zones or fall into an activity trap. – It stands for the unchanging core values of the company.VISION It is a dream (not a forecast) about what the company wants to become in the foreseeable future. beyond just making money. It enables the top management to remain focused. It provides an unity of purpose amidst diversity of personal goals. It is a combination of three basic elements – – An organizations fundamental reason for existence.
In Reliance when a new project becomes operational top managers hand over charge to the SBU heads and move on to a new project.VISION . Clarity – Vividly descriptive image of what the company wants to be known for in the future.CHARACTERISTICS Reliance – Where growth is a way of life. clear. Empathy – It should reflect the company’s beliefs to which it is sensitive. 25 . and memorizable. Brevity – It should be short. not an utopian dream. Sharing – The company across all hierarchies should have faith in it. Reachable – It should be within a reasonable target in the known future.
It makes strategic alignment easier.ADVANTAGES To stay focused on the right track. It provides a holistic picture. 26 . It gives enlightment.VISION . It facilitates development of skills & capabilities. It lends integrity and genuineness. It gives the impression of a forward-looking organisation. It fosters risk taking and experimentation. To prevent the fall in a activity trap. It gives a shared platform.
It serves as a road map to reach the vision. 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 . Although the purpose may change over time. its reason for existence. It enables the firm to define its business landscape and identify its competitive forces.MISSION Mission defines the space that a business wants to create for itself in a competitive terrain. A broad mission statement helps in fending competitors.
Some other examples – We do not offer shoes. All the businesses of the company are strongly integrated with their main business. We offer security. We offer comfort. – We do not offer software's. …………………. We offer solutions. though some may seem unrelated in nature. 28 . – We do not offer insurance. – We do not offer steel.MISSION – SOME IDEAS Reliance – We are in the business of integration. …………………. We offer strength. …………………. ………………….
It provides a quantitative feel to an abstract proposition. – It provides a benchmark for evaluation. – It keeps the mid management pre-occupied. – It lends direction – time frame in the medium term. 29 . 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 helps identifying key success factors. – It is based on Management by Objectives (MBO). – It prevents deviation.GOALS & OBJECTIVES Reliance – We want to become a Rs. – It adds legitimacy and motivation.
coordinating appropriate technologies. It is the process of garnering necessary inputs. – Compress project times. – Use price-elasticity to break market barriers. It is specific to a particular business. – Acquire a market share of indomitable position. 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. – Leverage economies of size and scale. The details of the plan Reliance Telecom adopted were – Backward integrate process technologies. 30 .
However. In such a context. past strategies tend to have a bearing on future strategies. When changes in the environment is incremental.STRATEGIC DRIFT Due to top management commitment. This state of affairs is known as strategic drift. This tendency to restore continuity is known as inertia (resistance to change). equilibrium is maintained. strategies lose touch with the emerging realities. 31 . It often leads to an organizational crisis. radical change may lead to disequilibrium. Historical studies have shown that most organizations tend to continue with their existing strategies.
STRATEGIC DRIFT FRAMEWORK Environmental Change Degree of change Strategic Change Radical Change Incremental Change State of Flux Continuity Stage of Transformation Strategic Drift Stage of Atrophy Time 32 .
ORGANIZATIONAL POLITICS Strategic drift often leads to organizational politics. – Distorting information to gain mileage. – Creating a favourable image. – Creating obligations of reciprocity. 33 . – Using covert tactics to pursue self interests. Organizational politics involves intentional acts of influence to enhance or protect the self-interest of individuals or groups over organizational goals. Some instances of organizational politics – Formation of powerful groups or coteries. – Hiding vulnerability. – Developing a platform of support.
Usually there is wide gap between the two when organizational politics is evident. – The environment context has changed. – 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. Other causes – – The plans are unworkable and utopian.
but the master scheme of the rational comprehensive scheme is not apparent. Learning is an integral part of logical incrementalism. this is not to be treated as “muddling”. However. They simply unfold the particulars of the sub-system in stages.LOGICAL INCREMENTALISM According to the incrementalism approach (contrary to integrated approach) practitioners simply do not arrive at goals and announce them in crafted and well defined packages. 35 . Strategy formulation and implementation are linked together in a continuous improvement cycle. but as a defensible response to the complexities of a large organization that mitigate against publicizing goals.
Agent of Change – Formal ratification of a change plan through MBO.IMPLEMENTING INCREMENTALISM General Concern – A vaguely felt awareness of an issue or opportunity. Leveraging Crisis – A sudden crisis or an opportunity should be used as a trigger to facilitate acceptance and implementation of change. 36 . The broader objective should serve the overall interest of the organization. Macro Broadcasting – The broad idea is floated without details to invite pros and cons leading to finer refinements. Adaptation – As implementation progresses.
Dominant logic’s are very rigid and sticky and prone to inertia. Strategic transformation becomes smooth through a change in top leadership. . Tampering with surface level factors often leads to atrophy. Dominant logic’s are the cornerstones of change when strategic transformation is apparent. As it brings 37 with it a different dominant logic.STRATEGIC TRANSFORMATION Strategic transformation (a complete overhauling of the strategic architecture) becomes inevitable whenever a strategic drift takes place. It creates blinders.
and skills that fosters experimentation and questioning and challenge around a shared purpose. Factors that fosters a learning organization – Pluralistic – An environment where different and even conflicting ideas are welcome. experience. – Experimentation – Fosters a culture of risk taking. – Organisational Slack – Enough free space. A learning organization must continuously focus on unlearning as well. – Constructive Bargaining – Agree to disagree.LEARNING ORGANIZATION A learning organization is capable of continual regeneration from knowledge. 38 . It helps prevent a strategic drift from occurring at the first place. – Informal Networks – Emerging of new ideas.
ENVIRONMENTAL CONDITIONS Dynamic Scenario Planning Learning Organization Static Forecasting Decentralization Simple Complex 39 .
ANALYZING BUSINESS ENVIRONMENT 40 .
Competitive advantage provides the surest way to fulfill the strategic gap. Strategic gap basically points towards a vacuum of where the organisation wants to be and where it is. gap analysis). 41 .PLANNING & STRATEGIC PLANNING Formal planning is a function of extrapolating the past. It requires a quantum leap (i. Strategic planning is a function of discounting the future. It is reactive in nature. It is based on the assumption of incremental change. It is pro-active in nature.e. It points to a position of superiority with relation to competition. It is based on the assumption of radical change.
Environmental factors can be external as well as internal to the organization. A manager has to continuously scan the environment to ensure alignment of the strategies with the radically changing environment.ENVIRONMENTAL SCANNING The environment is defined as the aggregate of conditions. and influences that affect an organizations way of doing things. events. It is exploratory in nature. Environmental scanning is very important component of strategic planning. The world is flat. The segments of the environment a top manager scans selectively depends upon his dominant logics. resources and ideas move unhindered. not guided by any boundaries. 42 .
but also to analyze the complex linkages across them. Understanding the composite effect is critical. It is not intended to be used as an exhaustive list. It is particularly important that PESTEL be used to look at the future impact of environmental factors. which may be different from the past impact. 43 . for which a holistic picture is required. It is important not only to identify the structural drivers of change.PESTEL PESTEL attempts to provide a broad framework on how the broader environmental forces affects an organization and influences the way it practices strategy.
Social Values. Capital Market & Forex Reserves. Licensing & Quotas. Economic Cycles. Inflation & Interest Rates. Literacy Levels. 44 . Infra-Structural Investments. Fiscal Deficit. Savings & Investment.PESTEL FRAMEWORK Political – Government Stability. Subsidies & Protection. Monsoon & Food Grains Reserves. Economic Model. Income & Age Distribution. FDI Inflows. Economic – GDP. Government Attitude. Social – Population Diversity. Language Barriers. Central – State Co-alignment. Religious Sentiments. Currency Stability.
Consumer Protection Laws. Environmental – Global Warming & CSR. Employment Laws. Pollution Control Laws. Environmentally Preferable Purchasing. Patent Laws. Direct & Indirect Taxes. Carbon Credits. 45 . Patents. Waste Disposal & Emissions. Product Design. Technological Convergence. ERP. Legal – Monopolies Legislation. Research & Development. Obsolescence Rate. Product Safety & Health Hazards. Extended Producer Responsibility. Non-Fossil & Alternative Fuels.PESTEL FRAMEWORK Technological – Innovation.
ECONOMIC LIBERALISATION New Industrial Policy (NIP) – Liberalizing industrial licensing. FERA Liberalization. 46 . Capital Market Reforms. New Trade Policy (NTP) – Lowering import tariffs. PSU Disinvestments.VRS. Rupee convertibility. Curtailment of PSU’s. Encouraging FDI. MRTP Liberalization. Dismantling price controls. Encouraging exports. Exit Policy. Banking Sector Reforms. Economic Reforms – Fiscal & Monetary Reforms. Abolition of import licenses. Structural Adjustments – Phasing out subsidies.
Mergers & Acquisitions 47 .DISCONTINUITY Destabilization due to entrepreneurial freedom – Cocoon of protection disappears – Diversification spree – Existing notions of size shaken – Industry structures change radically – Economic Darwinism .Survival of the fittest MNC Onslaught – Enhancing stakes – Power Equation – Joint Ventures – Technological Alliances – Take-over threat.
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 .
It is even wiser to apply the same at the product – market level. 51 . The model should not be used as a snapshot in time. but also used to understand how they can be countered and overcome. incremental or otherwise.FIVE FORCES MODEL ASSUMPTIONS The model is to be used at the SBU level and not at the industry level. It should not only be used to understand the forces. the forces are subject to changes. profit potential) per se.e. The five forces have strong cross-linkages. It depicts the attractiveness of an industry (i.
Industry stagnation. Government policy. Learning curve advantages. Capital requirements. Low customer switching costs. Unimportance of product quality. Product differentiation through proprietary technology or brand power. Presence of substitutes or unorganized sector. Low margins & stagnancy. Low relative importance of the segment.PORTERS FIVE FORCES ANALYSIS Threat to Entry – Economies of size and scale. Resource profile & fear of retaliation. Threat of Customers – Buyer concentration and volumes. Undifferentiated product. 52 . Access to distribution channels. Scope for backward integration. High switching costs.
Produced by industries earning high profits. High customer switching costs. Jockeying for position – Fragmented market. Low level of differentiation. 53 . Threat of Substitutes – Improvement in price -performance trade-off. High exit barriers. Diversity of players.PORTERS FIVE FORCES ANALYSIS Threat of Suppliers – Supplier monopoly. Differentiated inputs. Product perishability. Scope for forward integration. Unorganised sector. Buyer’s propensity to substitute. Low relative importance of the segment. Lack of substitute inputs. Piracy and counterfeits. Industry stagnancy. Intermittent overcapacity.
54 . Tata). Inertia – Excessive commitment to past strategies prevents firms from tapping emerging opportunities. Business Scope – The intention whether the firm wants to be in a single. Reliance).FIRM ENVIRONMENT Size and Scale of Operations – It is a very important component of competitiveness in today's global context (Bharti – MTN. dominant or related diversified or unrelated diversified businesses (Infosys. Resource Profile – It highlights the capabilities (generic) or competencies (business specific) of the firm. Cohesiveness – Degree of bonding existing across affiliated firms.
it can price its products more competitively. However. which further reduces costs. and with lower prices it can increase its sales volume. leverage it as a competitive advantage. experience teaches better and more effective way of doing things.EXPERIENCE CURVE The cost of performing an activity declines on per-unit basis as a firm becomes more efficient. 55 . With lower costs. The E-Curve thus enables organisations to build entry barriers. Experience curve has strong linkages with performance. an E-Curve can prove to be futile during discontinuity. Matured firms will always be positioned advantageously on the ECurve than new entrants.
EXPERIENCE CURVE Cost per unit of output Decreases at an increasing rate Point of inflexion Decreases at a constant rate Decreases at a decreasing rate Production / Volume 56 .
EXPERIENCE CURVE .TRADITIONAL VIEW Efficiency = Lower Costs 2 3 1 Experience = Efficiency Lower Costs = Higher Sales Entry Barrier = Better Performance 4 6 5 Higher Sales = Lower Costs Lower Costs = Entry Barrier 57 .
STRATEGIC VIEW Inertia = Limited Growth Experience = Inertia 2 3 1 Limited Growth = Diversification Strategic Failure = Poor Performance 6 5 4 Diversification = New Experience New Experience ≠ Old Experience 58 .EXPERIENCE CURVE .
Websites. Acronym for Strengths – Weaknesses – Opportunities – Threats. Competitors. 59 Analysts. It helps an organisation to capitalize on the opportunities by maximizing its strengths and neutralizing the threats minimizing the weaknesses. Business Intelligence – Bankers. Customers. Observation. A SWOT audit involves – Company Records – Annual Reports. Case Studies – Structured Questionnaires. Interviews. Press Clippings & Interviews. It is one of the earliest models in environmental scanning. .VULNERABILITY ANALYSIS . Suppliers.SWOT The framework was originally conceptualized by Kenneth Andrews in 1970.
SWOT ANALYSIS .FRAMEWORK Opportunities Nullify weaknesses which prevents you from exploiting opportunities Leverage strengths to make use of opportunities Weaknesses Minimize weaknesses which prevents you from countering threats Strengths Threats Utilise strengths to counter threats (?) 60 .
SBI. Large resource pool – Eg. Honda. Tata Steel. Siemens. Engineering Skills – Eg. Ranbaxy. Reliance. Reddy’s. Aditya Birla. HUL. Dr. Tata. Biocon. Infosys. Economies of scale – Eg. Toyota. Reliance. Infosys. Good credit rating – Eg.SOURCES OF STRENGTH Strong brand identity – Eg. 61 . ITC. Strong R&D base – Eg. Motivated employees & cordial industrial relations – Eg. Caterpillar. Excellent penetration – Eg. Strong after sales & service network – Eg. Sony. Volkswagen. High quality products – Eg.
Inefficient top management – Eg.Raymond. Narrow business scope – Eg. SAIL. Inertia – Eg. Bijoligrill. CMC (Tata Group) 62 . Ballarpur Inds. J. Lack of product / brand clout – Eg. Tatas. B. K. Hindustan Motors.SOURCES OF WEAKNESSES Outdated technology – Eg. Modi Group. Excess manpower – Eg. K. Lacking experimentation culture – Eg. Procter & Gamble. Organizational Politics – Eg. Group . Nirma. CESC. Strategic myopia – Eg. Excessive diversification – Eg. Single product syndrome – Eg.
Tata Motors. ECB’s. Banking. Growing population – Eg. Sugar. Maruti. Globalization – Eg. Market driven Interest rates – Eg. Fertilizers. Middle-class buying power. Market driven Pricing – Eg. Abolishing CCI. Free pricing – Eg. Abolishing MRTP – Eg. Capital market reforms – Eg. GDR’s. Fertilizer. 63 . Retailing.SOURCES OF OPPORTUNITIES Delicensing of Industries – Eg. Life style changes – Eg. Collaborations & Joint Ventures – Bharti & WalMart. Telecom. Insurance. Exit Policy – Eg. Sugar. VRS.
Tata Steel. (2008). Reliance. Lack of Corporate Governance – Eg. Nationalisation – Eg. Earth Quake. Hostile take-over – Eg. Natural disaster – Eg. Group disintegration – Eg. Satyam. 26/11. Economic recession – Eg. Dumping from China. 11/9. Onida. Bajoria – Bombay Dyeing. (1985–1990). Foreign Direct Investment (FDI) – Eg.Social activism – Eg. 64 . Terrorist attacks – Eg. Singur SEZ.SOURCES OF THREATS Political instability – Eg. Tsunami. Land acquisition . Import relaxation – Eg.
Stages in ETOP analysis – List the aspects of the environment that has a bearing on the organization. Forecasting – Predict the future (i. Assess the extent of impact of the factors. Delphi's technique. time series.e. scenario analysis). Holistic view – Prepare a complete overall picture. 65 .ETOP Acronym for Environment – Threat – Opportunity – Profile. Strategic responses (including adaptation) to opportunities and threats is critical for survival and success. It represents a summary picture of the external environmental factors and their likely impact on the organization.
It is also a form of assessing vulnerability through longitudinal analysis. 66 Vertical integration is a powerful strategy. selectively.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. An organization can draw upon the experience of its peers in similar situations. Some key findings on major performance drivers that explains 75% deviations in performance – Product quality and relative market share. . Relative attractiveness of the market. High investment intensity acts as a drag.
therefore 67 validity may be a question. – Contexts may vary over time. when radical changes in the economy takes place. .PIMS . – Contexts may vary across countries.LIMITATIONS The analysis is based on historical data and it does not take care of future challenges. 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. Managers should be particularly cautious while referring to such data during times of discontinuity as it makes past patterns futile.
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. It enables the top management to draw focus.KEY SUCCESS FACTORS (KSF) KSF relates to identification and putting concentrated effort on a particular activity or process which forms the very basis of competitive advantage.
IDENTIFYING ALTERNATIVE STRATEGIES 69 .
GRAND STRATEGY It is concerned with the overall business scope (single. A corporate strategy identifies and fixes the strategic gap it proposes to fill.CORPORATE . It determines the locus a firm encounters with internal and external environment. unrelated) and geographical scope (local. 70 . It indicates the quality of growth an organization is looking for. related. national. It reflects the customer needs it intends to satisfy. global) of a firm and deals with choices of allocating resources across them. dominant. It provides broad direction to the groups vision and mission.
CORPORATE STRATEGY MATRIX Corporate Strategy Stability Stability Growth Growth Combination Diversification Divestment Intensification Market Penetration Related Vertical Market Development Product Development Unrelated Horizontal 71 .
Stability however. The reasons for stability strategy – – Lack of attractive opportunities. does not relate to do-nothing (Eg. The scale and scope of present operations remains almost intact. Citibank). – Why disturb the existing equilibrium set up? – Limited resource position. Even during adverse times firms need to adopt a strategy to sustain current performance levels. (Eg. Hindustan Motors). – To stop for a while and assess past records. erosion of capabilities. 72 .STABILITY It involves maintaining status-quo or growing in a slow and selective manner. – The firm may not be willing to take additional risk associated with new projects.
GROWTH . 73 .ANSOFF’S MODEL New Product Existing Product Existing Market Market Penetration (+) Product Development (++) New Market Market Development (++) Diversificatio n (+++) Note: (+) indicates degree of growth and risk involved.
within a well defined market segment. (Eg. – Suitable for industries where scope for technological breakthrough is limited.MARKET PENETRATION It is a strategy where a firm directs its entire resources to the growth of a single product or a closely knit product set. Britannia). 74 . – Elongated product life-cycle. direct non-users to users. – Helps firms which are not comfortable with unfamiliar terrain. convert competitors customers. Nirma. Market penetration can be achieved by – increasing sales to current customers. – The company carries a risk of product obsolescence. Ujjala.
75 . fabrics. – Creativity and innovation – thinking out of the box. tyres.…… or Teflon: aircraft technologies to cutlery to paints or Raytheon Corp – Microwaves: radars to kitchen appliances). socks & stockings. – Unconventional and flexible distribution channels. – Immense customer reach & flexible advertising. (Eg. upholstery. – Stretches product life cycles. carpets. – Moves across geographical boundaries.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. Du Pont – Nylon: parachutes.
Refills) 76 . – Areas of product improvement – performance. – Substitutes that serve the same needs (Eg. – Deliverable through – redesigning or reengineering. reliability. features.Strolleys). – Leverage on customer and brand loyalty. durability.PRODUCT DEVELOPMENT It is a strategy where a firm tries to achieve growth through a radical new product (Eg. perception. Microsoft: DOS to Windows) or a substantial improved version (incremental) of an existing product to repeatedly enter the same market (Eg. aesthetics. Close Up: Fluoride – Gel toothpaste or VIP . – Leveraging through – innovation. conformance. serviceability.
– High transaction costs and institutional gaps. – Permits: quotas. thereby creating a new business. From the modern point of view they are strategically dissimilar. From the traditional point of view. licenses (i.DIVERSIFICATION It marks the entry of a firm into newer markets with new products. 77 .e. industrial embassies). the new business is distinct from the existing business in terms of – inputs – technologies – markets. dominance). – Internal capital market. – Risk reduction. Why do firms diversify in the Indian context? – Shift the growth trajectory or opportunistic. – Conglomerate or market power (i.e.
Let us assume that there are two businesses constituting the entire market – coffee and icecream. while the coffee business would register a return of 30%. either of which is equally likely to prevail. the ice-cream business would register a return of 30%. in which a given year is either under hot or cold wave. If the hot wave dominates the planet. cold wave dominates the planet. If on the other hand. ice-cream business would register a return of 10%. What would be your ideal diversification strategy through optimization? 78 . while the coffee business would register a return of 10%.HOW DIVERSIFICATION REDUCES RISK? Consider a hypothetical 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.
85 .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).QUASI & TAPERED INTEGRATION Full Integration . Ranbaxy.A firm produces part of its own requirements and buys the rest from outside suppliers with a variable degree of ownership and control. Quasi-integration .A firm gets most of its requirements from one or more outside suppliers that is under its partial control through value chain partnerships (Eg. Tapered integration . and out-sources the noncore activities (Eg. Reliance). Dr. Maruti – Sona Steering). Usually the firm concentrates on its core activities.
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 .
CONGLOMERATE DIVERSIFICATION It relates to entry of firms into businesses which are distinct in terms of – inputs – technologies – markets. synergies pulling in opposite directions). – Cost of neglect (i.e. – Cost of ignorance (i. lack of strategic intent. 87 .e.e. – Cost of dysynergy (i. Drawbacks of unrelated diversification – – Cost of failure (i.e. and are also strategically dissimilar. Firms usually engage in conglomerate diversification when emerging opportunities are very attractive and offers potential growth opportunities. myopia). lack of knowledge of competitive forces). core business).
CONGLOMERATE DIVERSIFICATION Paper & Packaging Edible Oils Tobacco Hotels Food & Confectionary 88 .
DIVESTMENT Divestment is a defensive strategy involving the sale of entire stake (Eg. 89 . It is may also be a pro-active strategy. (Eg. Glaxo’s “Glucon-D” to Heinz). Tata Press). ACC) in full to an independent entity. where a company simply exits because the business no longer contribute to or fit its dominant logic. In strategy there is no scope for sentimentality with divestment. Tata Pharma. Tatas sale of Goodlass Nerolac. reactive) and survival is at stake and the firm does not have resources to fend off competitive forces.e. It taken into account when performance is disappointing (i. L&TCement Division to Aditya Birla Group) technically known as divestiture or a product (Eg. It may also involve a SBU (Eg.
Leveraged Buy-Out (LBO) – Here the company’s shareholders are bought out through a negotiated deal using borrowed funds. (Eg. Tatas buy-out of Corus for US $ 11.DIVESTMENT . Hive-Off – A hive off is the creation of a new entity followed by transfer of assets.ROUTES Outright Sale – Popularly known as the asset route. Sale of Diamond Beverages to Coca-Cola for US $ 40 million). 1956 does not permit this mode. where the equity is allotted amongst the existing shareholders on a pro-rata basis. However.3 billion. (Eg. 90 . where 100% of the assets (including intangibles) are valued and paid for. involving 608 pence per share). the Companies Act.
91 .e. developing facilities right from the scratch) or through brown-field projects (i. A combination strategy can be implemented through green-field projects (i.e. and divestment strategies applied simultaneously or sequentially for a portfolio of businesses. There can be no ideal strategy for every business. joint ventures).COMBINATION STRATEGY It is a mixture of stability. It is usually pursued by a business group with diverse interests across multiple industries. mergers and acquisition. because every business has its own unique external and internal environment. growth.
STRATEGY CHOICE & PORTFOLIO ANALYSIS 92 .
Dominant logic enables top managers to selectively scan the environment and make trade-offs. In most cases the trade-off is between resources and opportunities. It attempts to answer the following questions – How effective has the existing strategy been? How effective will that strategy be in the future? What will be the effectiveness of alternative strategies? It is impossible for a manager to assess all the alternatives. 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.
will help the firm achieve its intent. 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 . if addressed. They must choose problems which will lead to the right kind of opportunities. managers need to ask the right questions. nor is to a define a problem for others to solve. To identify the right problems. The key task before a top manager is to identify the right problems.SELECTIVITY IS THE KEY The role of a top manager is not to solve a problem.
BRC). Their roots can be traced to a single family or clan and share broad similarities. Their origins can be traced back to market imperfections existing in an economy (MRTP Laws. . 95 Succession planning is critical to continuity. embassies). formal and informal ties. Licenses & Quotas. keiretsus in Japan. business houses in India.e. Resource sharing.DEFINITION A business group is known by various names in various countries – guanxique in China. Proximity to the corridors of power (i. Managing Agency). chaebols in Korea. High degree of centralized control (GEO.BUSINESS GROUP .
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 .
Relatedness across resources are difficult to realize. Power and resources often goes hand in hand. Rules of the game are different. Investing in emerging businesses may not actually be so simple as it appears to be. sometimes impossible. Why? Businesses are not about liquid assets. Redeployment of resources upsets the established power bases of a group. there are high costs associated with entry and exit. therefore. 99 . next only to choice of business.PORTFOLIO ANALYSIS Resource allocation across a portfolio of businesses is an important strategic choice.
BCG GROWTH MODEL Relative Market Share (%) Industry Growth (%) Low High High Low Stars Question Mark ? Cash Cow Dogs 100 .
TCS. Stars – They achievers in the near term.BUSINESS ANALYSIS – TATA GROUP Question Marks – They have potentials in the long term. Tata Steel). which remains a big? These businesses are net users of resources.e. market penetration. provided the industry growth rate continues and the company is able to maintain its growth (i. but to larger extent than a question mark. Tata Telecom. 101 . These businesses are also net users of resources (Eg. and their risk profile is high (Eg. diversification). product development).e. Tata-AIG). market development. Trent. provided the company is able to build up on its market-share (i.
Dogs – They are a drag on the group. Tata Pharma. stability). and they lack on competencies to take on competition and are basically cash traps (Eg. harvest. Given that the growth potential in the business is low. Tata Press). cash cows may also need to invest provided the industry takes an upswing (Eg.e. 102 . and the company dominates the industry ahead of competition (i.e. they are generators of resources. Indian Hotels. However. divest) as achieving a dominant position in these businesses is a difficult task. Tata Chemicals). Groups prefer to dispose off such businesses (i. Tata Tea. Tata Motors.BUSINESS ANALYSIS – TATA GROUP Cash Cow – These are matured businesses. Nelco.
The terminologies used are somewhat prohibitive.LIMITATIONS It does not address the concerns of a business which is in the average category (usually the majority). niche – Rolex. Cash cows may actually need substantial investments to retain their market position (Eg. 103 . Armani).BCG . Mercedes Benz. HUL). Data may be prohibitive. The model does not provide specific solutions within a particular category. Certain businesses in the low market share category may be the result of a conscious strategy (i.e. Cartier. factors are limited. neither in high or low.
MATRIX Distinctive Capabilities Strong High Medium Weak Stability Industry Attractiveness Diversify (++) Intensify (+) Med Intensify(+) Stability Harvest (-) Low Stability Harvest (-) Divest (.GE .-) 104 .
ARTHUR’ D. LITTLE Inception Dominant Strong Favourable Tenable Weak Growth Maturity Decline Improve Selective Niche Abandon Industry Life-Cycle Divest Harvest 105 Competitive Position Invest Consolidate Hold .
SHELL – DIRECTIONAL POLICY MATRIX Business Sector Prospects Attractive Average Unattractive Generate Cash Phased Withdrawal Distinctive Capabilities Strong Market Leadership Try Harder Double Or Quit Growth Average Custodial Weak Phased Expand Withdrawal Divest 106 .
BCG – Boston Consulting Group. Gap Analysis – It emphasizes what a firm wants to achieve. Disinvestment involves selling in phases.TERMINOLOGIES Harvest – It entails minimizing investments while trying to maximize short-run profits and cash flow with the intention to exit the business in the near future. 107 . Portfolio – An organization is perceived as a portfolio of businesses. SBU – A business unit which is strategically different from another and also shares a different SIC code. Divest – Selling a part or the entire business at one go.
BUSINESS STRATEGY & COMPETITION 108 .
Competitive advantage is the back-bone of strategy. 109 .e. Competitive advantage refers to a firms resources or activities in which it is way ahead of competition. rent). 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.COMPETITIVE STRATEGY A competitive strategy deals with how a firm competes in a particular business or product-market segment. The principal focus is on meeting competition. and earning super-normal profits (i.
Blue Ocean – Consciously moving away from overcrowded industries to uncharted territories and making competition irrelevant (Kim & Mauborgne). Resource Based View – Obsession with competence building. involving harmonizing and integrating multiple streams of technologies.BUSINESS STRATEGY FRAMEWORKS How to be distinctive and yet sustainable – Differentiation – Understanding of the dynamics of competition. developing competitive advantage (Porter). Delta Lock In – Two dominant players co-opt to selfreinforce and create or escalate an entry barrier. identifying critical success factors. preventing new entry and/or competition (Hax & Wilde). 110 . leveraging (Prahalad).
Sources of cost advantage are varied and depends on the structure of the industry – Economies of size. Steep experience curve effects. Nirma. preferential access to raw materials. The firm may retain the benefits of cost advantage by enjoying higher margins (Eg. proprietary technology. Compress project duration through crashing. Reliance) or may pass it to customers to increase market-share (Eg. Locational or early entry advantage. T-Series). backward integration. Ayur. 111 .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.
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. Sony. Creativity. 112 . (Eg. and sufficient slack. Feeling the pulse of the customer. innovation and out of the box thinking. Culture of experimentation. Successful product differentiation is often followed by premium pricing. undeterred attention to quality. Intel. It selects one or more attributes that buyers perceive as important. Means of product differentiation are peculiar to each industry. Rayban). Focus on brand loyalty. avoiding brand dilution.
coupled with fear of structural erosion. though it may not possess an overall competitive advantage. Armani). 113 . Maybach. The target segment must have unusual needs or the delivery system catering to this segment must be unique. Cartier.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. Mont-Blanc. Rolex. They are poorly served by mainstream players. Sub optimization alone may not be a source of superior performance. A focuser seeks to achieve a competitive advantage in its target segment.
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 . similarly differentiation may not always lead to rising costs (i. jugaad or frugal engineering). in a hyper competitive context the two strategies need not be mutually exclusive. and usually outperforms a stand alone generic strategy.HYBRID STRATEGY A hybrid strategy is the simultaneous pursuit of cost leadership and differentiation. Tata Nano). Reducing cost does not always involve a sacrifice in differentiation. Firms focusing on a hybrid strategy typically aim at shifting the productivity frontier and recreating a new product-market segment altogether (Eg. Though cost leadership and differentiation are inconsistent.e.
It will have a competitive disadvantage vis-à-vis a clearly positioned generic player. 116 . unless such a player is capable of discovering a profitable segment. Industry maturity will usually widen the gap. It is usually the result of a firm not willing to make trade offs. but achieves none.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 . It tries to compete through every means. leading to what is called – straddling.stuck in the middle. The positioning therefore gets – blurred.
First-time buyers.EMERGING INDUSTRY Emerging Industry – An evolving industry characterized by . Eg. (Eg. It is characterized by – High level of technological uncertainty. ending in a differential cost economics. leading to a blurred productivity frontier and steep learning curve.radical environmental changes. Speech recognition software's. There is a lot of scope to define the rules of competition. Market segmentation not well defined. Nano technology. coupled with low penetration levels. 3D imaging. Artificial intelligence). Consumer behaviour pattern unstable and evolving. technological innovations. changing customer needs.) Excessive turbulence in the dynamics of the environment. 117 .
Scope for players to change the rules of the game. IT. MRTP may also cause fragmentation. Eg. Consumer durables. Government regulations in the form Eg. It is characterized by – Low entry barriers. Retail and telecom.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). Paints. Eg. High exit barriers because of huge investment in CAPEX. Air Conditioning. because of lack of economies of size and scale. Eg. leading to clear fragmentation. 118 . Diverse customer needs.
Firms are rule takers in the segment as productivity frontier is well defined. technological maturity. because of economies of size and learning curve effects. early entry and location advantages. established industry dynamics. Limited scope for innovation . Cartel among existing players through collusion. collaboration and co-option. distribution networks.technological maturity. 119 . well defined consumer behavioral patterns and imperfect competition leading to near monopoly. Strong entry barriers.MATURED INDUSTRY Matured Industry – An industry characterized by saturation in growth rates.
scooters.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. 120 . Nature of competition extremely high. and costly price wars. backed by corporate espionage. with little or no signs of recovery. Learning abilities have been stunted and firms adverse to investment in R&D and make fresh investments. (Eg. dot-matrix printers). Firms facing a declining phase are characterized by inertia and slow to react to environmental changes. Typewriters. Exit barriers are extremely high because of limited prospective buyers.
move beyond boundaries. Matured Industry – Sophisticated cost analysis. recreate new markets. increasing scope. focus more on product differentiation or even a hybrid one. regenerate. strictly cost differentiation. branding and promotion. aggressive building of distribution networks. Declining Industry – Redesign. Fragmented Industry – Identify. strictly product differentiation and not standardization. reengineer. assess and overcome fragmentation. 121 . process innovation. premium pricing. or else exit the segment. strike alliances. Locate a defendable position.COMPETITIVE STRATEGIES Emerging Industry – Set benchmarks. mergers and acquisition.
and complex learning experiences in integrating and harmonizing technologies (distinctive capabilities) that play an important role in delivering competitive advantage through “causal ambiguity”. patents. However. A firms resources can be classified into – Tangible – These refer to real assets. brands. positions based on resources which are unique and inimitable are far more sustainable even in the long term. 122 . hence very rarely confer competitive advantage as can be easily acquired or replicated. Intangible – These refer to goodwill.RESOURCE BASED VIEW Differentiation based on cost or products saturates and ceases to exist beyond the medium term. They are a standard in nature.
There is a high degree of internal and external causal ambiguity involved in it. they are woven around technologies. Typically. Therefore firms should concentrate on developing complex resources that forms the very basis of differentiation. 123 . They play a very critical role in shaping competitive advantage. differentiation based on capabilities can be sustained even in the long run.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. can be leveraged across businesses) or specific to a particular business. Hence.
COMPETITIVE ADVANTAGE 124 .
It enlarges the scope of an organization.e. not absolute) to competition. Success of a strategy critically depends on SAP.COMPETITIVE ADVANTAGE A competitive advantage is a position of superiority relative (i. 125 . and results in well springs of new business development. A portfolio of competitive advantage comprises strategic advantage profile (SAP). It results in a distinct differentiation advantage or a cost advantage or hybrid as well. competitive advantage subsequently becomes the back bone for a competitive strategy. Strategy drives competitive advantage.
Identification of SAP is critical for and stretching and leveraging of resources.STRATEGIC ADVANTAGE PROFILE (SAP) Organizations have to systematically and continuously conduct exercises to identify its SAP. In most cases SAP is hidden and dormant. In today's world of discontinuity. 126 . Internal strategic fit between its strategy and dominant logics is essential for the top management to stretch and leverage SAP. SAP changes from time to time. Most successful organizations around the world have a well balanced SAP.
Substantial cost reductions also follow. kaizen or internal customer). Competitive advantage arises not from an individual activity but a stream of inter-related activities. A VC is often compared with a relay team. each of the players need to be efficient backed by sufficient coordination at the contact points (i.VALUE CHAIN ANALYSIS A value-chain segregates a firm into strategically relevant activities to understand its composite behaviour. and enhanced customer tracking – higher market share. Inventory Mgt to Logistics Mgt to Supply Chain Mgt (SCM). 127 .e. Today SCM is integrated with greening the environment as CSR practices. faster product launches. VC pay-offs: better product availability.
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. A high fit involving a complex chain of activities drives both competitive advantage and its sustainability.STRATEGIC FIT – THE PORTER WAY The sustainability of the value chain depends on the degree of fit between the activities. – First order fit refers to simple consistency between each activity and the overall strategy. A learning organization helps create strategic fit. Fit is important because discrete activities result in negative synergy and can also be easily copied by competitors. 129 . – Third order fit refers to optimization of effort. – Second order fit occurs when activities are reinforcing amongst them.
Core competence has a high degree of external and 130 internal causal ambiguity embedded in it. – Can be leveraged across businesses. but not necessarily. It forms the very basis of competitive advantage. These skills results in distinctive activities and processes.CORE COMPETENCE A core competence represents the collective learning's of an organization around diverse streams of technologies. – Can be sustained even in the long run. A core competence usually has its roots in technology. It should satisfy the following conditions – Contributes significantly to customer benefits. – Cannot be easily imitated or substituted. .
only global leaders possess a core competence. a core competence has its roots in a set of skills. Majority of the firms have competitive advantage.CORE COMPETENCE A competitive advantage does not necessarily imply a core competence. a core competence usually does. a core competence is sustainable even in the long-term. A competitive advantage may or may not lead to superior performance. A competitive advantage is sustainable in the shortmedium term. a core competence always implies a competitive advantage. A competitive advantage manifests from a function. 131 .
Subsequent work on game theory by John Nash led him to win the Nobel prize in 1994. the stringent assumptions of game theory and difficulty in ascertaining of pay-offs makes game theory application difficult in business. In a game (similar to a business) one players win is always another's loss. However. illustrations depicting a win-win situation. Here the magnitude of gain offsets the magnitude of loss equally. each of whom wants to win. 132 . A game is a contest involving two or more players. In fact there are no.GAME THEORY The game theory was developed in 1944 by Oscar Morgenstern. This is known as a zero-sum game.
An unbiased game is one where both the players have equal chances of winning. Firm Y’s Strategy Use Radio Use Radio +2 +6 Use Newspaper +7 -4 133 Firm X’s Strategy Use Newspaper Firm X’s Pay-Off Matrix .BIASED AND UNBIASED GAME A game is said to be biased when one of the players have a disproportionate chance of winning.
PURE STRATEGY GAME The strategy each player follows will always be the same regardless of the other players strategy. Firm Y’s Strategy Use Radio +3 +1 Use Newspaper +7 -2 134 Firm X’s Strategy Saddle Point Use Radio Use Newspaper Firm X’s Pay-Off Matrix . A saddle point is a situation where both the players are facing pure strategies.
collaboration or cooption.TYPES OF GAMES Simultaneous Games – This is a situation where the players have an option to choose to cooperate or not through collusion. This is usually through learning by “experience or observation” (i. 135 . However. It represents the classical “prisoner’s dilemma”. 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. Yahoo Vs Microsoft). Coke Vs Pepsi).e. Repeated Games – In this situation the players interact repeatedly with each other sub-optimizing the outcome possibilities. iteration) rather than through collusion (E.g.
It results in a shift in the productivity frontier. – Making pricing more transparent. 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. Game theory relies on the principle of rationality. . but 136 players do not always behave rationally. – Building incentives for customer loyalty.CHANGING THE RULES OF THE GAME In a situation where a player is unable to compete with the existing rules of the game may attempt to change the rules of the game altogether.
DELTA MODEL & LOCK-IN
Its a systematic approach where-in two or more industry majors, who by default has achieved a proprietary position (Microsoft – Software / IBM – Computers) which are not necessarily best-products in the industry, co-opt to create a lock-in. A lock-in implies that other players has to conform or relate to that standard in order to prosper. Becoming the industry standard requires – strong brand, causal ambiguity, and close relationship with other companies offering complimentary services. Lock-in is self reinforcing and escalating (i.e. accelerating effect).
THE THREE STRATEGIC POSITIONS
System Economics Market Dominance Complementary Share
Enabled through effective use of technology
Total Customer Solutions
Customer Economics Cooperation Customer Share
Product Economics Rivalry Product Share 138
Bill Gates is the richest man in the world not necessarily because he has developed the world’s best software's or excels at customer satisfaction; but he has got an army of people working for him who are not on his payroll – all the application software providers who are writing programs based on “Windows” compatible operating platform. Once you create the lock-in it is sustainable because of the “network effects”; which creates the proverbial “virtuous cycle” – customers want to buy the computer with largest set of applications and software developers want to write programs for the computers with the largest installed base.
The proponents (Hax & Wilde) believe that every organization has the ability to create and sustain a “lock-in” positioning (though in varying degree). This “system lock-in” is referred to as “delta” – delta being the Greek letter that stands for transformation and change amongst the players. The lock-in once created becomes very difficult for a firm to penetrate, and becomes a distinct entry barrier. The model is based on the belief that it compliments Porter’s differentiation model and RBV framework instead of contradicting them. In a lock-in strategy the performance outcomes are dependent on the success of another.
It relates to translating strategy formulations into practice. Performance realization of a strategy depends on the implementation effort. Successful implementation also depends on the appropriateness of the strategy. Since strategy implementation is a time bound process, alignment (i.e. strategic fit) is a key variable during times of radical change. Some of the other levers of successful strategy implementation are – Transformational leadership and motivating power. Resource allocation; its stretching and leveraging. Compatible organization structure & control systems. Inertia & resistance to change.
IMPORTANCE OF STRATEGIC FIT Strategic fit has a central role to play in strategic management. – Changing the rules of the game. A high strategic fit (co alignment) is useful because it enables – – Appropriate and timely response. – Unlearning & learning of new skill sets. – Better strategic and operational control. 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. – Development of capabilities & competencies. 143 .
e. formulation & implementation can occur simultaneously.FORMULATION Vs IMPLEMENTATION Traditionally. learning levels are very low. effective strategies are better crafted when there is a subtle overlapping between the two (i. According to Mintzberg. 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). In such a situation. while control is very effective. In such a situation. strategy formulation and implementation has been perceived to be distinct & independent. at the cost of sacrificing a lesser degree of control. 144 . In fact.
transformational leaders go one step beyond – Design a well crafted and designed strategic intent of the organization. In contrast. Install a system of shared beliefs and values. Pragmatism is the ability to make things happen.ROLE OF TOP MANAGEMENT To bring about change and to implement strategies successfully. shift from compliance to commitment. He should be an agent of change. bring about transparency. companies depend more on transformational leaders than transactional leaders. A transactional leader is usually confined to allocating tasks & responsibilities and extracting performance. 145 .
patents. Performance Budget – SBU managers need to justify the distinctive resources in terms of the opportunity it is pursuing yields the highest possible pay-offs. Zero Based Budget – In this case the budget of a SBU has to be worked out right from the scratch. skills) also includes complex resources like capabilities and competencies. brands. 146 .RESOURCE ALLOCATION Resources allocation includes tangible resources (Eg.e. The various methods of resource allocation includes Historical Budget – The budgets framed by HQ for a particular SBU keeping in mind past trends. machines) referred to as threshold resources (i. labour. minimum requirement). Intangible resources (Eg. land.
though not necessarily in the case of emerging markets. Due to causal ambiguity (complexity). these capabilities are sustainable even in the medium to long term. Distinctive capabilities are complex set of skills woven around technologies. Moreover. Distinctive capabilities helps in stretching and leveraging resources thereby overcoming two major constraints involved in strategy implementation – times & costs. 147 . 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. Mobiles). Flat Screen Displays.
STRATEGY & STRUCTURE It is a framework within which individual efforts are coordinated to bring synergy. An appropriate organization structure & adequate control systems are essential to implement strategies and achieve stated goals. A single product or a dominant business firm usually employs a functional structure. The level of centralization and decentralization is decisive. A firm in several unrelated businesses usually employs a SBU structure. Once the structure is in place. A firm in several related businesses usually employs a divisional structure. 148 . processes become people independent.
SBU Structure – Businesses segregated in terms of strategic dissimilarities (Eg. Output). or geographical locations. disbanded subsequently. Marketing.Technology. with team members having dual line of control. based on skills and competencies. Team Structure – An informal group formed for a crisis. Finance). Divisional Structure – Units grouped together in terms of products.TYPES OF STRUCTURES Functional Structure – Activities grouped together by a common function (Eg. processes. Project / Matrix Structure – A formal but temporary framework initiated for the completion of a particular project/crisis. Inputs . Virtual Structure – A boundary less or hollow organization. 149 .
Environment & People – Economic and political conditions have a major bearing on structure coupled with the attitude and aspirations of the people in the organization. It includes the desire for independence. facing challenges & crises. assuming responsibility. 150 . leading to a tall structure. structures are becoming flatter and more simpler. as span is broader.FACTORS INFLUENCING STRUCTURE Size – As an organizations size increases there is more specialization and differentiation leading to the top management moving away from operational issues and control. Technology – With more and more convergence of technologies in business.
Most firms undergo periods of strategic continuity rather than strategic discontinuity. Common sources of 151 inertia – complacency with past successes.e. Inertia is a characteristic of a firm that endures status quo (i. irrespective whether it is from worse to good or good to worse. there is a tendency to continue along the same lines. Changes in top management and unlearning helps overcome inertia. Inertia acts as an impediment in strategy implementation. co0ntinuity). Top managers resist change.INERTIA When a firm has been operating in a certain fashion for a long time. .
STRATEGY EVALUATION Strategy evaluation centers around assessment of strategic fit. Deviation of fit is detrimental to performance and may lead to strategic failure. Since the internal and external environment is in a state of continuous flux. However. firms should move beyond financial performance to strategic performance as organization systems are becoming complex. certain authors propose misfit as a source of superior 152 performance. strategies need to be evaluated on an ongoing basis to prevent deviations of fit. To prevent deviation of fit. .
. detecting changes in the external and internal environment and taking corrective action wherever necessary. It attempts to answer the following questions – Is the strategic intent appropriate to the changing context? Are the organizations capabilities still holding good.STRATEGY CONTROL It is concerned with trafficking a strategy as it is being implemented. competitive advantages becoming disadvantages? Has the company acquired any new competency? Has the company been able to overcome the 153 environmental threats.
Implementation Control – It aims at assessing whether key activities are proceeding as per schedule. Premise Control – Checking the validity of the assumptions on which a strategy was based. However. It is open-ended as well as . Special Alert Control – It intends to uncover unanticipated information having critical impact 154 on strategies. It involves assessing – strategic thrusts and milestones. checking every premise is costly as well as difficult.STRATEGY CONTROL IMPLEMENTATION It involves steering the company towards its original growth trajectory & stated goals.
low strategic fit due to consultants intervention. Strategy intent not linked with goals and objectives – Lack of coordination at lower levels leading to negative synergy. Performance measures are defective – What to evaluate against? How to measure the 155 construct? As a saying goes. “If you cannot . difficult to translate into practice. Strategy not linked to resource allocation & capabilities – Lacking commitment of top management.BARRIERS TO STRATEGY EXECUTION Vision and strategy not actionable – Utopian ideas.
important or not they're all interdependent. Managers should take into account all seven of these factors. Today it is considered one of the most powerful tools for strategy implementation determining success or failure. Together these factors determine the way in which a corporation operates. 156 . to be sure of successful implementation of a strategy. the relative importance of each factor may vary over time and context. this may effect all others as well. so if one fails to pay proper attention to one of them. Large or small.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. On top of that.
and was taken up as a basic tool by the global management consultancy company McKinsey. At around the same time in the US Tom Peters and Robert Waterman were exploring what made a company excellent.BACKGROUND & ORIGIN The 7-S Framework was first mentioned in "The Art Of Japanese Management" by Richard Pascale and Anthony Athos in 1981. 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. They had been investigating how Japanese industry had been so successful. The 7-S model was born at a meeting of these four authors in 1982. 157 .
Systems – The procedures. Staff – Human inter-relationships. Strategy – Trade-offs for the allocation of a firms scarce resources.THE 7’S Shared Values – It represents what the organization stands for and what the top management believes in. formal & informal . Style – The way in which the top management influences the functioning of an organization. processes and routines that characterize how work should be done. 158 . over time. Skills – An organizations capabilities and competencies. Structure – The way in which the organization's units relate to each other in terms of their commonalities. to reach identified & stated goals.
STRATEGIC FIT Strategy Structure Shared Values Systems Skills Staff Style 1st Order Fit 2nd Order Fit 3rd Order Fit 159 .
In contrast. the soft S’s (skill. A choice of an alphabet often limits the scope and skews the interpretation of a model. style. shared values) are very malleable and comparatively more difficult to identify & influence. Ineffective in case of a virtual company. Consider the 4P’s of marketing or 3R’s of SCM. because most often they are culturally embedded and often neglected.A CRITIC OF THE 7S MODEL While the hard S’s (strategy. While the American co’s focuses on the hard S’s. systems) are comparatively easy to identify and influence. their Japanese counterparts focus more on the soft S’s for their early success and sustainability. structure. staff. 160 .
Low Take Overs 161 .High Organic Growth Strategic Alliance Joint Venture Mergers & Acquisition Strategic Fit .STRATEGY IMPLEMENTATION ROUTES Strategic Fit .
i. 162 Risk of cost and time overruns.ORGANIC GROWTH Here a firm builds up its facilities right from the scratch and continues to do so without any external participation. . green-field projects. i.e. The entire infra-structural facilities are set up afresh having its own gestation and break-even. It has complete control over inputs. the entire value chain. Long gestation leads to delayed market entry. (Eg. tax holidays.e. Reliance Industries). soft loans. technologies. (Eg. subsidized power). SEZ’s. and markets. concessions are available for green-field projects. Govt.
Alliances are usually short-lived and disbanded once the purpose is achieved. There is no funding or equity participation from the alliance partner & both the firms continue to operate independently. It touches upon a limited aspects of a firms value chain.STRATEGIC ALLIANCE It involves a pro-active collaboration between two or more firms on a particular domain or function for mutual gain. Tata Motors & Fiat). 163 It is a form of competitive collaboration. It has limited intervention power and usually lacks holistic commitment from the alliance partner. Alliances are usually in the areas of technologies or markets (Eg. .
leaving minimum scope of overlapping.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. It is a win-win situation for both the companies. A comprehensive MOU is essential. Selecting the right partner is critical for success. Dominant logic of both the companies should be complimentary. (Eg. . Degree and extent of management control must be clearly 164 laid down. Tata – AIG.Honda). Hero .
ITC Tribeni Tissues. Economies in scale leading to lowering of costs. Acquisition is an outright purchase of a firm assets by another independent entity (Eg. Brooke Bond & Lipton). . Integrated distribution channel leads to better market penetration and overall synergy. Coca Cola – Thums Up). with the individual firms ceasing to exist any more (Eg.MERGERS & ACQUISITION It refers to the fusion of two or more firms into a single entity. Integration of assets and other financial resources. Revival of a sick-unit through better management practices is a major motive behind an acquisition 165 strategy.
Tata Steel . Instant access to capacities and markets. Integration of organization structure & cultures is difficult. Make a public offer of not less than . often the new firm is “left alone”.Corus).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. Inform SEBI / Stock Exchange after 5% stake is 166 acquired. Most countries have stringent laws that prevents hostile take over. Larger geo-graphical diversity. Consolidation in a fragmented industry.
MANAGEMENT TOOLS IN STRATEGY 167 .
Balanced Scorecard – Tracking strategy 3600.WHY MANAGEMENT TOOLS? Change is becoming pertinent in the business environment. it is also a source of potential threat. Change provides enormous opportunities. The past is ceasing to be an indication of the future. every time. 168 . Radical change is superseding incremental change. Companies therefore need to ensure competitive advantages doesn’t become competitive disadvantages. or better still create next practices Reengineering – Redesigning work processes right from the scratch. Some tools to ensure that – Benchmarking – Adopt certain best practices. TQM – Doing the right thing the first time.
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 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. clustering). It can at best complement it.BENCHMARKING . Strategy is more of creating best practices rather than copying them. . Benchmarking is useful for bringing about operational efficiency.e. but it cannot be used as a strategic decision making tool. While strategy is all about differentiation and not looking alike.LIMITATIONS More and more companies benchmark. the more similar they end up looking.
clean sheet). process mapping) and eliminating or improving them (E. Windows 95 to 97).g. Re-engineering attempts to radically change an organizational products or process by challenging the basic assumptions surrounding it. Re-engineering involves complete reconstruction and overhauling of job descriptions from the scratch (i. for achieving performance improvement (E.RE-ENGINEERING Redesigning leads to identification of superfluous activities or product features (i.e.e. . The task demands a total change in organisational 176 culture and mindset. DOS to Windows).g.
than people driven Innovative Vs Traditional Customer centric Vs Organisational centric 177 .REENGINEERING – KEY TENETS Ambition Focus Attitude Enabler Performance Large scale improvement by questioning basic assumptions about how work is done Micro Vs Macro Business Processes Vs Organisational Processes Starting right from the scratch Not historical More IT driven.
. customers and suppliers and protects the organization from the future (i. 178 .LEVELS Reengineering can be successfully leveraged at all levels of an organization with varying degree of results. Business – It looks into markets. Strategic – It looks into the process of strategic planning. structures.e. processes.REENGINEERING . resource allocation and prepares the organization for the future through a reorientation of the entire strategic architecture. It can be of the following types – Functional – It looks into the flow of operations (i. BPR). etc) and supports the organization for the present. products.e.
Indonesia). reverse engineering is a top-bottom 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. It generally acts as a threat to innovation. learning curve advantage. While traditional manufacturing is a bottom-up approach. Cheaper versions of Intel chips and mother-boards manufactured in Taiwan. – High cost and time acts as a deterrent. – Causal Ambiguity. – Early entry advantages. However. with an intention to copy it (Eg. protection can be had in the following ways – – Patenting. 179 .
180 . Implementation – Developing of a prototype.e. designing facilities. Introduction – Launching the product in the market. Inaccurate assessment at this stage may lead to a failure of the entire project. 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. nano-technology). cost and effort necessary for the purpose of reverse engineering. Actualization – Obtaining and dismantling of the product to assess how it functions. Usually in such cases segmentation and pricing is different from the original innovator.
Euro IV. – Aesthetics – Appeal in design.WHAT IS QUALITY? It involves the totality of a product or service in meeting certain stated or implied needs. It has eight dimensions (Eg. of service stations. – Reliability – Consistency in mileage. – Features – Anti-lock braking systems. – Serviceability – Large no. – Perception – Customer notions. – Durability – 1980 manufactured cars still on road. 181 . – Conformance – Emission standards . Air bags. Car) – – Performance – Mileage of 14 kms to a litre of fuel. More and more companies are moving towards meeting implied rather than stated needs.
TOTAL QUALITY MANAGEMENT Objective – Management of quality ensures conformance to certain pre-set standards.fix it in nature. touching upon a limited aspect of a value chain. 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. zero defects. Management of quality was traditionally inspect it . . It had little impact on improving overall productivity.
Looking at quality as an endless journey. not a final destination. 183 . fully involved in decision-making and fairly rewarded for results. Kaizen – Make continuous improvement a way of life. Empowerment – It takes place when employees are properly trained.TQM – KEY TENETS Do it right. the first time – From reactively fixing error in products to proactively preventing errors from occurring at the first place (Juran). Be customer centric – Generate the concept of internal customer (Ishikawa). provided with all relevant information and best possible tools.
6-Sigma). enabling the firm to concentrate on core activities essential to customer satisfaction. equal participation). saving precious top management time. It is based on the principles of MBO (i. of units meet preset standards (Eg. Quality Circles – It a small group of shop-floor employees who meet periodically to take decisions regarding operational problems and crises.e. 184 . SQC – It is a process used to determine how many units of a product should be inspected to calculate a probability that the total no.STRATEGIES Outsourcing – It is the process of self-contracting services and operations which are routine and mundane.TQM .
. Source: Fortune Magazine Why CEO’s fail? 185 .... – In the majority of failures – we estimate 70% – the real problem isn’t (bad strategy) .. – Less than 10% of strategies effectively formulated are effectively executed. – Efficiency and effectiveness is passé..BALANCED SCORE CARD Some interesting comments .. it’s bad execution..... strategy implementation has never been more important..
186 . Organizations need to move from financial to strategic performance. rather than effects.CONCEPTUALISATION A company’s performance depends on how it measures performance. Focus more on causes. These measures worked well when organizational systems were simple and unidirectional and more importantly the environment was static. In today’s context when organizational systems have become complex and multi-directional we need to have a holistic view of performance to cut the lag effects. Most managers tend to rely on traditional measures of performance having its origin in finance as they are well tried and tested.BSC .
The most critical element of a BSC is to measure these four dimensions. 187 . and distinguish strategic problems from operational ones. It has four dimensions – – How do customers see us? – What must we excel at? – Can we continue to improve and create value? – How do we look to shareholders? Firms more often have problems. because they have too many.BSC – KAPLAN & NORTON (1992) A BSC helps a manager to track and communicate the different elements of company’s strategy.
CUSTOMER PERSPECTIVE GOALS Products Supply Preference Relationship MEASURES Relative market share (%) % of sales from new Vs proprietary products Timely deliveries and service Customer credit analysis (i. ageing schedule) % of key customer transactions Ranking of key customer accounts No.e. of visits or calls made % of NPA’s 188 .
BUSINESS PERSPECTIVE GOALS Skills Excellence Exposure Introduction MEASURES New capabilities and competencies Implementation & gestation period Bank and supplier credit limits & PLR Unit Costs / Conversion Ratio / Defect Ratio No. of new product launches Vs competition Product pricing Vs competition 189 . of times covered in media No.
of 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 .
e. 194 performance will automatically follow.BSC . doing right things instead of doing things right). Shift from control to strategy (i. they don’t know . Focus on cause not effects. sharing of vision). The BSC brings together the different elements of a company’s strategy at a glance. .what they don’t know.e. Seek excellence. As a result.ADVANTAGES Most often top managers face information overload. It helps translating strategy into practice (i. Modern managers should be poised to ask the right questions.
EFFICIENCY Vs EFFECTIVENESS Ineffective Effective Inefficient Goes out of Business quickly Survives Efficient Dies Slowly Thrives 195 .
EFFECTIVENESS + STRATEGY A company which is effective as well as strategic. . but also sustains it. not only thrives. Porter 196 .Michael E.
CORPORATE RESTRUCTURING 197 .
CORPORATE RESTRUCTURING The only thing constant in today's business environment is change. Tata Group).. Strategic variety may be caused by changes in the as external well as internal environment. Radical change brings about strategic variety.. As Peter Drucker pointed out. Restructuring involves consciously driving significant changes in the way an organizations thinks and looks (Eg... to survival of the most adaptable. Strategic variety brings paradigm shift.” 198 ... from survival of the fittest . “every organization must be prepared to abandon everything it does. To adapt to the changing environment. firms use restructuring strategies.
. Instead.e. Internal customers should also not be neglected. etc).e. Structural Changes – Conventional hierarchical structures should be disbanded in favour of more 199 flexible ones (i. ATM.RESTRUCTURING – BASIC TENETS Customer Focus – Restructuring ideally begins and ends with the customer. downscoping). they should strive to provide unimaginable value ahead of its time (Eg. and dividing the core businesses into SBU’s (i. Core Business – Company’s should introspect – What business are we in? Business evolved out of opportunism or myopia should be divested. downsizing or rightsizing). Walkman. Company’s should go beyond just asking what he expects. Fax.
started focusing on their capabilities. Ratan Tata now drives the point the group means business.) Reliance dismantled their industrial embassies . 200 ..) The Aditya Birla group typically relied on the “marwari” community for key management positions . During the times of JRD.. ..RESTRUCTURING – BASIC TENETS Cultural Changes – A culture represents the values and beliefs of the people about the organization... Kumar Birla today is more dependent on professionals.. It is created and institutionalized by the top management.... Restructuring also requires cultural reorientation.. the Tatas were considered a benevolent and charitable organization...
” 201 .MOVING CLOSER TO THE CUSTOMER As companies evolve. Carry out PR campaigns. Honda’s ad says. “ … one reason our customers are satisfied is that we aren’t. Communicating to the media about organization efforts to deliver quality products. Use the reach of networking technologies. Restructuring provides a platform to close this gap. Organizing customer and supplier meets. Publicizing welfare projects to demonstrate CSR. Getting feedback & addressing customer complaints. they tend to move away from the customer.
ASSET RESTRUCTURING Asset Restructuring – The asset composition of a firm undergoes a major change. Further spin-off can be classified as split-off and split-up. it may be smooth (Eg. or conglo-merate. Hive Off – It involves siphoning of assets under control. 202 . spin-off and equity carve. It can have two forms. Further. including its intangibles – Mergers – It may be vertical. Asset Swaps – It entails divesting and acquisition simultaneously by two companies. horizontal. Tata – Corus) or hostile (Eg. where the difference in valuation is settled off through cash or equity (Eg. Mittal – Arcelor) and can take various forms. Glaxo – Heinz). It may include brands as well.
HIVE OFF Spin-Off – A spin off is the creation of a new entity. – Split-Off – In a split-off. Equity Carve – It involves selling a minority stake to a third party while retaining control (Eg. 203 . – Split-Up – In a split-up. Tata Industries selling 20% stake to Jardine Matheson). Most of these practices are not in consonance with Indian laws. the entire parent company loses its identity after being split into a number of subsidiaries. in which the equity is allotted amongst the existing shareholders on a pro-rata basis (Eg. the existing shareholders receive equity in the subsidiary in exchange for the stocks of the parent company. Reliance Ent).
204 . for a specified market or in general with full management control. repay long-term debts. Generic motives include – – Raise working capital. Selling out in phases is called disinvestment (IPCL). A complete sell-out is known as divestment (TOMCO).DIVESTITURE It involves the sale of a brand or a division of a company to a third party. In 1995. Parle sold its Thums Up brand to Coke for $40 million apprehending fierce competition. strategic misfit. L&T sold its cements division to Aditya Birla group. – Poor performance. In 2005. but retained its engineering division.
Tatas take-over of Corus for US $11.The internal & external liability composition undergoes a major change – LBO – Acquiring control over a substantially larger company through borrowed funds (Eg.CAPITAL RESTRUCTURING Capital Restructuring . Conversion – Replacing debt with equity or vice-versa or costlier with cheaper debt or cross currency debt. 205 . involving 608 pence per share). Share Buyback – It is a process of cancellation of shares out of free reserves to the extent of 25% of paid-up capital (Eg. It provides greater leverage as well as management control.3 billion. Wipro).
1860 cr .BUSINESS RESTRUCTURING – TATAS Divestments Lakme – Rs. 99 cr Tata Power – Rs. 230 cr Diversifications Tata Motors – Rs.Rs. 1890 cr CMC – Rs. 256 cr ACC – Rs. 1170 cr Goodlass Nerolac – Rs. 42 cr Voltas .Rs. 1439 cr 206 Tata Timken – Rs 120 cr Tata Telecom – Rs. 120 cr Tata AIG – Rs. 950 cr Merind . 1700 cr Trent – Rs. 150 cr VSNL – Rs. 250 cr Tata Tetley – Rs.
Turnaround is the primary motive. Downscoping – It involves reducing the business and/or geographical scope of a firm (Aditya Birla group). Rightsizing – It is phasing of excess and redundant employees resulted out of faulty internal planning (SAIL). usually as a result external turbulence. of operating units. It can be carried out in the following ways – Downsizing – It is a systematic one-time reduction in the no. Survival is the primary motive. of a firm’s employees and sometimes in the no.ORGANIZATIONAL RESTRUCTURING Organizational structure and systems calls for a change when strategic variety is apparent. keeping the composition of business intact (Jet Airways). 207 .
Strategy change is unviable without a preceding change in its dominant logics. The dominant logic represents the perceptions and biases (i. the more difficult it becomes to uproot the paradigm (i.e. 208 . Dominant logic becomes deep-rooted in organizational contexts depending on the period it is in place (tenure of the CEO). inertia). as strategies are based on such beliefs and biases. The longer the period. thumb rules) of the top management.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.e.
Successful transformation requires – incorporating employees fully into the process – leading from a different place so as to maintain employee involvement – instill mental disciplines that will enable employees to behave differently. In most organizations. 20% of the people carry out 80% of the changes). the factor that stifled change & performance was – culture.FORCES AGAINST STRATEGIC CHANGE The problem with strategic change is that the whole burden typically rests on few people (i. 209 .e. Companies achieve real agility only when people at every level rise above the ordinary to face the challenges – revitalization or transformation.
process ownership. Harness setbacks. it is not about winning but about learning.SUCCESSFUL TRANSFORMATION Build an intricate understanding of the business model at all levels of the organization. Understand and deliver the quid pro quo. The best way is to alter the institutional point of view. Create relentless discomfort with the status quo. Encourage uncompromising straight talk. Manage from the future. Questioning every basic action of the organization. never take no for an answer. 210 . Promote inventive accountability.
FORCE-FIELD ANALYSIS A force-field analysis provides an initial overview of change problems that needs to tackled. also known as cultural-web. by identifying forces for and against change. It involves identifying – Aspects of current culture which needs to be reinforced. Aspects of current culture which needs to be overcome. 211 . It involves diagnosing a change situation – systems & structures. that can be both enablers and blockages to change and restructuring. Culture and style of management are two main impediments in force-field analysis. Identify and implement facilitators of cultural change.
OUTCOMES Alternatives Organizational Short .RESTRUCTURING .Term Loss of human capital Lower performance Higher performance Capital .Term Reduced labour costs Reduced debt costs Emphasis on strategic control Business High debt costs Higher risk 212 Long .
the second one is a more viable strategy and sustainable option in the long run. hence go in for downsizing. reverse engineering and regenerating. In order to put back the company on the right track they are resort to – Denominator – It assumes that turnover cannot be increased. While the first strategy produces results instantaneously.NUMERATOR & DENOMINATOR MGT Most firms across emerging markets undergo strategic discontinuity and as a result are forced to restructure their businesses. focuses on reengineering. down-scoping or asset stripping. 213 . Numerator – It assumes that turnover is not a barrier or constraint.
TURNAROUND MANAGEMENT 214 .
.. 215 (Govindarajan and Trimble. – Less than 10% of the Fortune 500 companies as first published in 1955. still exist as on 2005... January 1997).WHY TURN AROUND MANAGEMENT? Some interesting insights . and that the thirty-two of the country’s largest business groups in 1969 are no longer among the top fifty today. – Only seven of the first fifty Indian business groups in 1947 were even in business by the turn of this century.. .. Source: Why do firms atrophy? (Business Today.
Both content (what) and process (how) are equally important for a successful turnaround. systems. A category of underlying principles and concepts. ends the threat with a combination of strategies.TURN AROUND MANAGEMENT A turnaround is said to occur when a firm perseveres through an existence threatening performance decline. skills. process focuses on – A logic to explain a causal relationship between intervening variables. Stage Theory). and capabilities. While content focuses on endogenous and exogenous variables.e. and achieves sustainable performance recovery. 216 . As a sequence of events describing how things change and why they change (i.
Low stakeholder confidence. especially in key positions. suppliers and bankers. Low employee morale leading to high employee attrition at all levels. Some indicators Continuous cash flow crises as a result of dwindling market-share and profits. Rising input costs. unavailability or radical lowering of substitute costs or technological obsolescence.TURNAROUND INDICATORS Most firms atrophy simply because they fail to diagnose the indicators that acts as threat to organizational existence. Substantial shifts in consumer preferences. 217 . leading to lack of acceptability from distributors and customers. Uncompetitive products or services.
Recalibrate prices. “all is not well”.. focus on power brands. liquidating dead assets. Extending work hours. 218 . Revamp product portfolio. based on elasticity. consider extension. 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 …. Product redesigning or reengineering. they adopt surface level measures (disprin popping) which most often fail. Emphasis on advertising and market penetration. prune work-force. be more customer centric. Hence.
TURNAROUND STAGE THEORY Stage 1 Decline Stage 2 Stage 3 Stage 4 Outcome Response Transition Performance Equilibrium Line Success Failure Indeterminate Nadir Time 219 .
Identification of the stimulus leads to the arrest of the downfall. primarily dwindling resources and capabilities are responsible for decline. It has its origin in “environment led fit” that subscribes to the view that a firm has little control over external factors. 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. 220 . R-Extinction – It suggests that organization factors.DECLINE Decline is the first stage in the turnaround process.
the response should be operational. The response must match the cause of the decline. If the decline stems from structural shifts. Operating responses typically focuses on the way the firm conducts business and involves tactics geared towards – cost cutting and process redesigning (BPR). If the underlying cause is internal efficiency. diversification.RESPONSE INITIATION Turnaround responses are typically categorized as operating or strategic. 221 . new market initiatives. Strategic responses focus on changing or adjusting the business the firm is engaged in through long term moves such as – integration. the response should be strategic. asset reduction.
when decline deepens shifts in strategic position becomes essential. Scope – A diversified conglomerate may acquire a distressed business to turn it around and gain valuable synergies. which may be unavailable to a focused firm. 222 . Similarly new market initiatives is feasible only for multi-product firms.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. Contour – It is easier to reverse decline in the earlier stages through operational measures.
TRANSITION Transition usually reflects the first signs of recovery. role model. However. The top management has a key role to play through empowerment. consensus). substantial amount of time usually passes before results begin to show (i. transparency. confidence building measures. Sustenance is the key factor in this stage. However. lead – lag). many a times early signs of recovery fades out.7 years with a range of (4-16) years. 223 . Effective levers of transition.e. participative management (i. Support from all the stake holders through resource commitment. Empirical studies show that average time is 7.e.
Regaining lost market share and distributor confidence. Failure is an indication that initial momentum was not sustainable characterized by irreversibility. Commanding a premium in the market. Share price indications and media coverage. Instead of focusing on financial parameters alone. Supplier and banker confidence. Revival of key customers and new product launches. it should adopt a holistic approach. 224 . Cut off points must be unequivocal.OUTCOME Outcome is said to be successful when a firm breaches the equilibrium performance level.
COOPERATIVE STRATEGIES & ALLIANCES 225 .
technology. Any cooperative strategy maybe between firms within the same country or cross border as well. It can assume any of the following forms – franchising. 226 . supply-chain partnership.COOPERATIVE STRATEGIES Cooperative strategies are a logical and timely response to changes in business dynamics. strategic alliance. the commitment and the involvement between the firms increases manifold. and globalization . In the cooperative strategy continuum as firms move up the value order. or joint venture. More and more companies worldwide are moving away from competition to co-option to leverage their resources and enhance bargaining power. consortia. licensing.
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. Branding is critical to franchising. owners of the brand Monginis allows its franchisees to sell its confectionary products. Switz Foods. Titan Inds. owners of the brand Tanishq allows its franchisees to sell its jewellery products. It is an effective strategy to penetrate markets in a shortest possible time at a minimum cost.
as in Tata Indica. Develop a product through its crude stage.LICENSING Licensing – It is a contractual agreement between two legally independent firms whereby the licensor grants the right to the licensee to manufacture the licensor’s product and do business under its brand-name in a given location for a specified period of time for a consideration. refine processes and adopt necessary technologies (SKD). Become a systems integrator (CKD). Different levels of licensing Manufacturing without embracing any technology (CBU). 228 . HM manufacturing GM range of cars in India with a buy-back arrangement is a perfect example of CBU.
Airbus – Boeing). Coke – Pepsi). Tata. leverage upon size to preempt competition by escalating entry barriers (Eg. enabling them to increase prices (Eg. Collusion – Few firms in a matured industry collude to reduce industry output below the equilibrium level. It can be of the following types – Multipartner – Intends to share an underlying technology or asset. Hyundai). 229 .CONSORTIA Consortia – They are defined as large inter-locking relationships & cross holdings between businesses in a similar industry. Cross Holdings – A maze of equity holdings through centralised control to ensure earnings stability & threshold resources for critical mass (Eg.
. Continuous sharing of knowledge is critical to the success of a supply chain partnership. otherwise it 230 becomes routine outsourcing. link their capabilities to create value for end users. Tata Motors – IDEA).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. It usually provides a platform to sort out differences between conceptualization and implementation to suit local market needs.
learning organization.STRATEGIC ALLIANCE It is an short to medium term understanding between two or more firms to share knowledge and risk. effective R&D management. to gain knowledge and to obtain access to new markets (Eg. preempt competition. Firm’s should undertake a long courtship with potential partners. instead of hurrying into a relationship. Partner selection is one of the critical success factors. Tata Motors – Fiat. Despite their popularity (50-60)% of the alliances fail to accomplish their stated objectives. Reliance – Du Pont). 231 . design next generation products. Generic motives involved are . enter newer markets. enhance credibility.
Maruti). Alliances of the Weak – An alliance is entered into to preempt competition (Eg. Complementary Equals – Two firms mutually promoting each others complimentary products (Eg. Airbus – Boeing). 232 . Bootstrap – An alliance between a weak and a strong company with an intention to acquire it. Coke – Pepsi). Whirlpool – Tide. Bajaj – Castrol).TYPES Collusion – Tacit top management understanding to neutralize price wars (Eg.STRATEGIC ALLIANCE . Backward – An alliance (quasi or tapered) with a supplier of critical components seeking commitment (Eg.
Too much stress on financials & structure be avoided. Cultural orientation has been found to have a profound effect on top management’s strategic orientation (Eg. – Japan Vs US). 233 .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. Differences in level of economic development can produce differences in alliances motives. Firms from developed markets seek access to markets and firms from emerging markets seeking access to technology.
PARTNER CHARACTERISTICS Complimentarity of Capabilities – The degree to which partners resources can be used in conjunction. Willingness to share knowledge and skills. Unique Resources – Abilities or skills which cannot be easily duplicated. 234 . Experience related to previous alliances. Partner’s ability to acquire fresh skills. Intangible Assets – Move beyond the financials of the firm. Dominant Logic’s – Similarity in beliefs & biases. Managerial capabilities. including ability to provide quality products and services.
Learning to collaborate – strategic. Getting Engaged – It should incorporate a specific joint activity. vows to include commitment to expand the relationship. Setting up the housekeeping. the value chain. instead of focusing controlling the relationship. degree of compatibility.MANAGING ALLIANCES Alliances are more than just a deal. Changing within. operational & cultural integration. Selection & Courtship – It involves self analyzing. 235 . partners should nurture it. understanding the chemistry. incorporating clear signs of continuing independence for all partners. differences not anticipated earlier.
whilst the partners continue to operate independently. synergy) rather than mere exchange (i.e. It aims at creating new value (i. a joint venture is a selection among modes by which two or more firms can transact.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. There are substantial linkages in the value-chain. separation is very 236 bitter. combining parts). Conceptually.e. It lasts till the vision is reached. .
The market fails as sellers are unwilling to reveal their technology and buyers are unwilling to purchase in the absence of inspection.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. in addition to a high degree of asset specificity. 237 . Strategic Behaviour – Firms may override transaction costs. Organizational Learning – It is a means through which a firm learns or seeks to retain their capabilities. though more profitable alternative to other choices.
– Eg. – Eg. Renault – Nissan (Minivans – Cars). TVS – Suzuki (4-Stroke Engines) Fill gaps in existing product lines. Essar – Hutch (Vodafone). – Eg. Endorsement from government authorities. Learning new technologies. – Eg. Maruti – Suzuki. – Eg. Sharing of resources. – Eg. Define future industry standards.OTHER MOTIVES Entry into newer markets. Eli Lily – Ranbaxy. Daimler – Chrysler (Premium Cars) 238 . Yamaha – Escorts.
– Maruti – Suzuki. – Godrej – Procter & Gamble. Tata – Aditya Birla in Idea Cellular 239 . LML – Piaggio Differences in size and resource base.Enka. Risk of over dependence. Modi – Telstra What after exit (parenting disadvantage)? – Eg. technology) drain.RISKS INVOLVED Incompatibility – Differences in cultural background. PAL – Fiat If the cost of continuing exceeds the exit costs? – Eg.e. – Eg. – Eg. Risk of brain (i. Century .
Focus – Avoid strategic myopia. time sharing. Objectives – Shared vision. Agreement – Clarity on operational control. Culture – Reconcile gaps.PRE-REQUISITES FOR SUCCESS Commitment – Mutual trust. Inertia – Differences in age and evolution patterns. Costs – Other modes of transaction becomes cheaper. respect. Partner – Avoid duplication of skills and capabilities. Equality – Lack of dominance. Incompatibility – Performance expectations. 240 . Flexibility – Sufficient space to breathe and adjust.
MERGERS & ACQUISITION 241 .
Daichi) and hostile if it is without the consent of the management (Eg. The larger objective is to leverage on size. HLL – Tomco). An acquisition is said be smooth if it is with the consent of the management (Eg. 2002). reverses are also taking place through LBO) with a view to acquire conglomerate power and induce synergy (Eg. Brooke Bond – Lipton). Most countries have stringent laws that prevents hostile takeovers (Eg. Mittal Arcelor). Ranbaxy . An acquisition is the purchase of a firm by a firm (of larger size.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. however. SEBI Takeover Code. 242 .
. Preferential – A preferential allottee ending up acquiring 5% stake also comes under its purview.e. Control – A special resolution of 75% of the share 243 holders approving the change of guard. Acquirer – Someone (individual or firm) who picks up an atleast 5% stake without mandatory disclosure having an intention to wrest management control (i. 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. Hike – An acquirer who has already picked up a 5% has to make a mandatory disclosure for every additional 1% stake that it acquires. creeping acquisition).SEBI TAKEOVER CODE.
e. and/or does not enjoy the confidence of the different stake holders. 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 . SEBI – In case of a hostile take over. asset stripping). Grasim – L&T Cement. whichever is higher as an exit route (Eg. credentials or track record is at stake. 2002 Pricing – Acquirers will have to offer minority shareholders (at least 20%) the past 26 weeks or past 2 weeks average price. the SEBI can intervene and block share transfers if: the acquirer has ulterior motives (i. Gujarat Ambuja – ACC).SEBI TAKEOVER CODE.
Vertical – It involves complimentarily (partially related) in terms of supply of inputs or marketing activities (Eg. Godrej. Reliance). 245 .Kelvinator). ITC). usually opportunistic (Eg. Electrolux .TYPES OF MERGERS A business is an activity that involves procuring of desired inputs to transform it to an output by using appropriate technologies and thereby creating value for its stake holders in the process. Conglomerate – It involves integration of two distinctly unrelated businesses. Horizontal – It involves integration of two highly related businesses (Eg. The type of merger is depends on the degree of relatedness (strategic) between the two businesses.
Reduced gestation (i. 246 . Ulterior motives – (Eg. Overcoming entry barriers (Eg. quick access). ITC Bhadrachalam). ICICI –ITC Classic). Tata Steel – Corus). Reduction in risk.MERGERS & ACQUISITION .e. Global image (Eg. Mittal – Arcelor). Economies of size. Acquiring assets or capabilities (Eg. Ranbaxy – Crosslands). Access to newer segments (Eg. Avoiding risk of new product development. scale and scope. Coinsurance effect – Higher debt raising capability. Asset Stripping – Shaw Wallace).MOTIVES Increased market / conglomerate power. Tax benefits (Eg.
Overvaluation is often as a result of an ego drive and substantially affects future returns. neglecting core business. Inability to achieve synergy. When Tata Steel started negotiations with Corus. Managing over-diversification. their initial offer was around 420 pence/share. Managing size. Overvaluation of buying firms (Eg. 247 .MERGERS & ACQUISITIONS PITFALLS Cultural differences (Eg. Merging of organisational structures. while the ultimate acquisition was made at 607 pence/share). Top management overtly focused on due diligence exercise and negotiations. Tata – Corus).
Tata Steel – Corus). Maturity – A larger firm acquires a smaller firm with an objective to achieve economies of scale and experience curve effects (Eg. 248 . Kingfisher – Air Deccan).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. Brooke Bond – Lipton). vertical to save transactions costs. Growth – This stage may witness parallel merger of two firms of similar size. with an objective to reinforce its growth trajectory or to take on the might of a comparatively larger player (Eg. Decline – Horizontal mergers are undertaken to ensure survival.
INTERNATIONAL M&A . Blanket promotions across entities and confidence building exercises needs to be practiced. A concern of respect and trust for the business of the acquired company. Immediate attempts to super impose structure and culture may cause bottle necks. A common shared vision. 249 . active top management intervention in phases. An acquisition just for the sake of it or reputation yields very little value in the long term. Strong differences may stifle plans and its execution.FRAMEWORK Positive contribution to the acquired company. Left alone syndrome.
It will enable focus on customers and key people. Decide upon management control systems. promptly.BLUEPRINT Take the media into confidence. They can carry the message to the various stake holders. 250 Do not ignore the “people factor”. Determine business strategy.INTEGRATION . Decide on the new hierarchy. Shift attention from business portfolio to people and processes. . Redefine responsibilities and authority. Integrating work processes.
Valuation decisions are arrived through a due diligence process when the prospective acquirer gets access to the books of accounts of acquiring company. over valuation can become a curse. operational & financial).e.M&A . Financial motives – Undervaluation relative to true value. 251 . – Unstated reasons – Personal self interest and hubris.VALUATION The process of valuation is central to M&A. The process takes (6-12) months. While under valuation may be a significant opportunity. – Market for corporate control. – Synergy – Potential value gain from combining operations (i.
when the “fit” between the two entities is very poor. Sources of operational synergy – Horizontal Synergy – Gains come from economies of scale which reduces costs. Synergy can be negative as well. – Conglomerate Synergy – Gains come when one firm complements the resources or capabilities of another (Eg. or from increased market power which increases sales and margins. – Vertical Synergy – Gains come from controlling the supplychain and savings in transaction costs. 252 . Innovative product – Good distribution network).VALUING OPERATIONAL SYNERGY Synergy – It refers to the potential value gain where the whole is greater than the sum of the parts.
Synergy comes from projects which would not have been undertaken if the two firms stayed apart (Eg. shareholders can accomplish the same at a much lesser cost. However. Tax Benefits – Tax benefits may accrue from tax entitlements and depreciation benefits unutilized by a loss making firm.VALUING FINANCIAL SYNERGY Diversification – Reduce variability in earnings by diversifying into unrelated industries. ITC – Bhadrachalam Paper). Hotmail). but availed after being merged with a profitable firm (Eg. 253 . and without paying take-over premiums. Cash Slack – It reduces asymmetry between cash starved firms with deserving projects and cash cows with no investment opportunities.
the cash flow the merged firm will be less variable than the individual firms. hence better performance. as risky debt is spread across the new firm's operations. – Coupon rates may also be negotiated at lower rates. higher leverage. This will induce higher debt capacity. It relates to the concept of diversification.VALUING FINANCIAL SYNERGY Co-Insurance Effect – If the cash flows of the two firms are less than perfectly correlated. – Default risk comes down and credit rating improves. 254 . The likelihood of default decreases when two firms' assets and liabilities are combined through a M&A compared to the likelihood of default in the individual companies.
VALUING CORPORATE CONTROL Premium of M&A are often justified to control the management of the firm. Assessment of perceived quality is critical. 255 . The value of control can be substantial for firms that are operating well below optimal value. The value of wrestling control is inversely proportional to the perceived quality of that management. While value of corporate control is negligible for firms that are operating close to their optimal value. – – Value of Control = Value of firm after restructuring Value of firm before restructuring. since a restructuring can lead to significant increase in value.
Confidence of investment bankers and the international financial community is essential. The assets of the acquired company are used as collateral for the borrowed capital.LEVERAGE BUYOUT (LBO) The basic difference between a take-over and a LBO is the high inherent leverage (i. debt component) at the time of buyout and rapid changes in capital structure over time. 256 .e. sometimes in combination with the assets of the acquiring company. 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.
access to financial markets. – Increased information needs.TO GO PUBLIC OR NOT? However. – The need to satisfy analysts and shareholders. 257 . A research study showed that 30% of the publicly listed firms reported above average returns after going private. on-going valuation. off-late many publicly traded firms have gone private keeping in mind the following – – The fear of LBO. However. – Separation of ownership from management. the advantages of going public includes . The increased benefit showed in the following way – reduced costs and increased revenue. liquidity.
– Cost of debt coming down (i. co-insurance effect).e. – Debts repaid off from increased value after successful restructuring and wresting management control.RATIONALE FOR HIGH LEVERAGE The high leverage in a LBO can be justified by – – If the target firm has too little debt (relative to its optimal capital structure). – It is a temporary phenomenon. – Managers cannot be trusted to invest free cash flows wisely. which disappears once assets are liquidated and significant portion of debt is paid off. – Cash trapped company unable to utilize opportunities. 258 .
Therefore. Lack of sufficient cash flows to repay costly debts resulting in a possible debt trap. Any discounting has to reflect these changing cost of capital. leverage is expected to decrease over time. initial rise in leverage is anticipated.EFFECT OF HIGH LEVERAGE Increases the riskiness of dividend flows to shareholders by increasing the interest cost to debt holders. – Increase equity valuation. 259 . A LBO has to pass two tests to be viable – – Restructuring to pay-off increased debt. As the firm liquidates / pledges assets and pays off debt.
Objectives – – Traditional route of filing prospectus and undergoing an IPO is costly.REVERSE MERGER Reverse Merger – The acquisition of a public company. – Prevents dilution of equity. small in size but having a promising business. – Tax shelter. – Automatic listing in major exchanges.e. which has discontinued its operations (i. or costly. shell company) by a private company. – Facilitates better valuation and forthcoming offerings. 260 . allowing the private company to bypass the usually lengthy and complex process of going public. time-barred.
EFFECT OF TAKE-OVER ANNOUNCEMENT The shareholders of target firms are the clear winners. 261 . – Takeover announcements reported 30% excess returns. Excess returns also vary across time periods. Most target firms are taken over within (6090) days. However. – Merger announcements reported 20% excess returns. and 35% during bullish periods. During bearish periods excess returns were 19%. Initial anomaly in stock prices usually normalizes over a period of time (6-12) months. takeover failures have only initial negative effects on stock prices.
1983. 262 Jarrel. Desai. 1988 . – However. Bradley. and Kim. and Netter. in the event of take-over failure negative returns to the extent of 5% on bidder firm stock prices is reflected.EFFECT OF TAKE-OVER ANNOUNCEMENT The effect of take-over announcement on bidder firm’s stock prices are not clear cut. over time. Brickley. 1983. as stock markets become more and more perfect such anomalies would reduce Source: Jensen and Ruback. – Most studies reported insignificant excess returns around take-over offers or merger announcements. – However.
Poison Pill – An offer to existing shareholders to buy shares at a substantial discount to increase their voting rights (Eg.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. 263 . so that nothing is left for the raider to strip off. Rights). Poison Put – Premature retirement of bonds at attractive rates to pour surplus cash and make target investment unattractive.
264 . East India Hotels – Reliance Industries – ITC). thus thwarting the raider company’s attention. Green Mail – The targeted company buys large blocks from holders either through premium or through pressure tactics (Eg. Shapoorji Pallonji). Gray Knight – The target company takes the help of friendly company to buy the shares of the raiding company. But often the White Knight turns a betrayer himself (Eg.DEFENSIVE STRATEGIES White Knight – It is the placing of stocks to a cash rich investor and bargaining for protection in return. Pac Man – The target company makes a counter bid to take over the raider company.
COMPETING FOR THE FUTURE 265 .
GETTING OFF THE TREADMILL Canon overpowering Xerox. Most companies were too preoccupied with the present than the future? 99% of the companies overpowered. What went wrong???? What were they doing with the present? What were they pre-occupied with? 266 . Honda overpowering GM. Honda overpowering Volkswagen. Compaq overpowering IBM. Nokia overpowering Motorola. British Air overpowering Pan Am. Hitachi overpowering Westinghouse. were spending 99% of their precious time dealing with present. The reverse was true for the companies overpowering. Wal-Mart overpowering Sears.
decluttering. Not knowing when to stop. Thus efficiency was grievously hurt. most often they ended up cutting corporate muscle as well and became anorexic. declining margins. downsizing). falling market share). These denominator based managers stuck to their restructuring strategies (like building pyramids) and didn't know what to do next? Thus they became history? (like the pharaohs) 267 .THE PAST OF COMPETITION Beyond Restructuring – When a competitiveness become inescapable problem (stagnant growth. CEO’s brutally pick up the knife and ruthlessly carve away layers of corporate flab (delayering.
However. On the contrary only 20% of Japanese managers believed that quality will be a source of competitive advantage of the future. but forging ahead in competition.THE PRESENT OF COMPETITION Beyond Reengineering – Numerator based managers (innovation) at least offers some hope. The future is not about catching up with competition. incrementalism or nominal innovation has almost reached a plateau. top managers believed that quality will be a source of competitive advantage of the future. A poll in circa 2000 revealed that 80% of the U. 268 . ensuring only survival of the present. but not of the future.S.
It is based on deep insights into trends in technology. they are not enough to get a company to the future. Empower from bottom to top. as important as these may be. It involves Dream about the company’s future. reinvent its industry. better. not just the organization.THE FUTURE OF COMPETITION Regenerating – Leaner. demographics and lifestyles. not the other way. faster. 269 . and regenerate its strategies (breaking its – managerial frames). don’t predict. Creating the future requires industry foresight. Companies need to fundamentally reconcieve itself. aspirations and resources. Transform the industry. Create a potential gap.
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 .
271 . Change in at least one fundamental way the rules of engagement in an industry.ABOUT THE TRANSFORMATION The future does not belong to those who take the industry for granted. by converging technologies complex. It drives a hunger and a passion to transform.e. It is about deliberately creating a strategic misfit. hence do not fall sick in the first place. Create entirely new industries (i. blue oceans). Therefore. Redraw the boundaries between industries. they do not need to restructure. Successful companies have a complete grip over the industry.
Most successful revolutions (Gandhi to Mandela) rose from the dispossessed. Such a process is called institutionalization (from people centric to organisational centric). the revolution must start at the bottom and spread in all directions of the organization. Transformational leaders merely lead the way. More importantly. The middle management plays a strong moderating role. A revolution that is thrust upon from the top seldom sustains. 272 .ABOUT THE EMPOWERMENT Bring about a revolution (a paradigm shift) in the organization.
Apple – iphone). A process for finding and gaining insight into tomorrows opportunities (Eg. Get to the future first. An ability to energize the company. Toshiba – LCD. without taking undue risk. It requires a lot of common sense and a little bit of out of the box thinking. 273 . Apply the 40 – 30 – 20 principle.THE FUTURE OF STRATEGY A company must get to the future not only first but also for less. 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. South West Airlines – LCC.
Companies of the future will be not based so much on the strength of their resources. greatness from mediocrity. What distinguishes a leader from a laggard. is the ability to imagine in a different way what the future could be. as on their aspirations. We are in the midst of a 3600 vacuum. each point in space represents a unique business opportunity. As there is no one future. The farther one can see in this endless space. but hundreds.HOW DOES THE FUTURE LOOK LIKE? There is no rule which says that for every leader there will be a follower. the farther it will be away from competition. 274 .
THE EMERGING STRATEGY PARADIGM Not Only Reengineering Processes But Also Regenerating Strategy The Competitive Challenge Organizational Transformation Industry Transformation Competing for Market Share Competing for Opportunity Share Finding the Future Strategy as Learning Strategy as Positioning Strategy as Engineering Strategy as Unlearning Strategy as Dream Strategy as Architecture 275 .
THE EMERGING STRATEGY PARADIGM Not Only But Also Mobilising for the Future Strategic Fit Resource Allocation Strategic Misfit Resource Stretch & Leverage Getting to the Future First Existing Industry Structure Product Leadership Single Entity Product Hits & Timing Future Industry Structure Competency Leadership Dominant Coalitions / Co-option Market Learning & Preemption 276 .
Degree of Learning Unlearning Curve P2: Unlearning in previous period does not necessarily ensure learning in the current period. Learning Curve t1 t2 t3 Time t4 t5 277 .LEARNING TO FORGET P1: The degree of learning in current period is directly proportional to the degree of unlearning in the previous period.
Leverage – They are the gateways to future markets. It is characterized by the following – Unique – It provides unimaginable customer value ahead of its times.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 cannot be matched even by its closest competitors. Inimitable & Insubstitutable – A high degree causal ambiguity between these skills yield sustainable competitive advantage. It represents the collective learning's of an organization centering around diverse streams of technologies. 278 .
Canon – imaging. Most companies around the world do not possess one. leaders have one.MORE ABOUT CORE COMPETENCE Sony – miniaturization. Wal-Mart – logistics. it is deeply embedded in the heart of the organization. at the most three to four. Although a core competence may lose value over time. Toshiba – flat screen displays. Nike – designing. 279 . Toyota – lean manufacturing. SKF – antifriction and precision. Intel – nano-electronics. A core competency cannot be outsourced. Core competencies are the roots of the organization. Honda – engines. Coca Cola – brand. it gets more refined and valuable through use.
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 .
and high transaction costs. strategies suited for the developed markets may not be appropriate for emerging markets. Emerging markets are characterised by infrastructural bottlenecks. high levels of market imperfection).e. Therefore. China. Chile) provide a different context (i. Diversified groups in operating in emerging markets therefore benefit from unrelated diversification. institutional gaps.EMERGING MARKETS Emerging markets (India. 288 . Therefore focused strategies based on core competence may not be suitable for emerging markets (Khanna & Palepu. Korea. 1997).
Size & Scale.DIVERSITY . Experience Strategic Fit Diversity Palich. subsequently negatively related across developed markets. et al.PERFORMANCE (I) Diversity attempts to measure the degree and extent of diversification (Herfindahl. Entropy). Optimum level of diversification Performance Diversity is initially positively related with performance. (2000) 289 . Synergy. Concentric.
2001) 290 .DIVERSITY . brand building Risk diversification. conglomerate power Threshold level of diversification Performance Diversity (Khanna & Palepu.PERFORMANCE (II) Diversity is initially negatively related with performance. subsequently positively related across emerging markets. Huge initial investment.
291 . It should have a spread of assets. revenues and profits. It should think globally. Characteristics – It should have a spread of affiliates or subsidiaries. It should have a spread of interest groups / stake holders. HSBC). act locally (Eg. It should have a spread of manufacturing facilities.INTERNATIONAL IDENTITY MNC’s consciously engage in FDI in different parts of the globe to forge resource diversity as a distinct competitive advantage.
It reflects the disparities in women in workforce (Eg.GLOBAL BUSINESS ENVIRONMENT Power Distance – It reflects the disparities in income and intellectual development (Eg. Feminity Index . low power distance in developed markets and vice versa for emerging markets). 292 . low risk profile in developed markets and vice versa for emerging markets). Risk Profile – It reflects the risk attitude of the top management (Eg. high feminity index in developed markets and vice versa for emerging markets).It reflects the relative role of team building (Eg. Group Scale . low group scale in developed markets and vice versa for emerging markets).
credit rating. political stability. FOREX reserves. interest rates. corruption. high cultural adaptability in developed markets and vice versa for emerging markets). attitude. inflation.culture. terrorism (9/11). code of conduct. low country risk in developed markets and vice versa for emerging markets). customs. flexibility (Eg. 293 . way of life. dress sense. judiciary) of doing business in a particular country (Eg. time value.GLOBAL BUSINESS ENVIRONMENT Cultural Adaptability – It reflects the adaptive ability to a changing environment . currency. Country Risk – It reflects the political and economic risk (Eg.
in most emerging markets use of an interpreter may be a standard protocol. and vice-versa. time-zones. Other factors – local celebrations. Language Barriers – Developed country managers expect foreign partners to communicate in their languages. however. 294 .GLOBAL BUSINESS ENVIRONMENT Time Sensitiveness – Developed country managers regard time as precious. Ethnocentrism – Developed country managers tend to regard their own culture as superior. in most emerging markets meetings are delayed and lasts unusually long. High levels of ethnocentrism usually has a negative effect on business.
It also initiated provisions on anti-dumping. It a multi-lateral treaty with 143 (as on 2002) member countries to reduce tariff and non-tariff (quota) barriers. ASEAN. It also highlighted the nexus between US & WTO. BRIC). The 2001 (Doha Round) focused on power blocks (NAFTA. copyrights. In 1995 (Uruguay Round) GATT was renamed to WTO. trademarks). The 1999 (Seattle Round) saw a lot of protest amidst bringing agriculture under the purview of TRIPS. It focused largely on TRIPS (patents. 295 .GATT GATT was a bi-lateral treaty initiated between US and some member countries in 1947 to promote free trade.
However. The Euro was significantly devalued against the Dollar till 2002. 296 . However with current recession in the US 2002 onwards.Pound).e. The notable exception was Great Britain which still continues with its local currency (i. Euro). the Dollar still remains the most preferred currency globally.EURO – SINGLE CURRENCY In 1999 twelve member countries in Europe joined hands to move over to a single currency (i. Sterling . primarily the OPEC countries. three countries joined in 2002 increasing it to fifteen members as of 2008. the Euro slowly started outperforming the Dollar.e.
However. Transparency – A single currency is transparent and competitive.SINGLE Vs MULTIPLE CURRENCY Transaction Costs – Though the initial cost of introduction of a single currency is very complicated and costly. a multiple currency is preferable where the business cycles of member nations are different. it helps avoiding transaction costs associated with a multiple currency. Trade Block – It will strengthen the EU identity which would not have been possible otherwise. but it may have spill-over effects. Rate Uncertainty – A single currency eliminates the risk of competitive devaluations. 297 .
– FII (transfer of intangible resources) is fast but may have strong repercussions (i. It is long term with high levels of commitment.FII Vs FDI INVESTMENT Classical economists believed that foreign investment (in any form) is basically a zero sum game (i.e. It is short-medium term with comparatively low levels of commitment. Neo classical economists believe that foreign investment may in fact be a win-win game. the gain of one country is loss of another).e. – FDI (transfer of tangible resources) is slow but steady for the purpose of economic growth. hot money). 298 .
lifestyle (petroleum 299 outlets – departmental stores). customer awareness (microwaves). economic (middle class buying power). Pricing – It depends on the competitive structure (PLC – Kellogg's). . promotion (surrogate advertising). technology (microchip). Distribution – It depends on the market characteristics (fragmented – concentrated). buying patterns (spread).culture (food habits).INTERNATION MARKETING Product – The various attributes of a product may receive different degrees of emphasis depending on differences in . usage (talk time).
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).INTERNATION FINANCE Currency Risk – Many Indian IT companies (Rs) having business in US (Dollar) are asking for quotes in (Euro) or are shifting bases out of US to avoid risk of devaluation of Dollar. . Accounting Norms – The accounting norms of one country (AS . Cost Structure – Companies in India need to investment in fixed costs due to poor infra-structure 300 compared to developed markets.India) may be different from that another trading country (US – GAAP or IRS).
Recruitment – In local recruitment. skills are more important that cultural fit and vice-versa.INTERNATIONAL HR An uniform HR policy is idealistic to enable parity in performance appraisal. and cultural barriers (language) vis-à-vis emerging markets. social security. Compensation – Differential pay packages exists because of differences in purchasing power. labour laws. double taxation. 301 . however. technology (convergence. shortened life cycles). Training – It is a pre-requisite for international business to reduce language. in most cases it is not desirable nor practiced.
Bosch spark plugs are used by car manufacturers worldwide). Outsourcing – A company having a core competence may be the source of global outsourcing (Eg. SCM – Use of ERP to network the extended enterprise 302 across the globe. . reduce power costs) vis-à-vis infrastructural bottlenecks. Technology – The cost to be evaluated in terms of latest technology (Euro VI) vis-à-vis effective cost of appropriate technology (Euro II).INTERNATIONAL OPERATIONS Location Incentives – FDI in emerging markets should explore options for SEZ’s to explore benefits (tax holidays.
CONTEMPORARY TOPICS 303 .
but has inherent risks involved as well. While innovation typically adds value for organizations. Innovation is all about staying ahead of competition. Innovation is the most preferred strategy today to maintain competitive advantage in the present turbulent business environment. it has destructive effects as well. innovation is the first attempt to carry it out in practice. 304 . Innovations typically paves the way for more secured and improved lifestyle for consumers in general.INNOVATION An invention is the first occurrence of an idea for a new product or process.
However. process innovations are organizational driven. process innovation is necessary to sustain the competitive advantage of product innovation. 305 .TYPES OF INNOVATION A key challenge is maintaining a balance between process and product innovations. Process innovation usually follows product innovation. Tangible impact of product innovation on performance is significantly higher than process innovation. Strategic innovation has the potential to change the rules of the game. While product innovations are typically customer driven.
putting an idea into practice). Innovations are the back-bone of successful business models . about how an organization makes money (i. 306 . Processors (Pentium). a paradigm shift). Telecom (CDMA Technology).e. It leads to a shift in the price – performance envelope. Data Storage (Pen Drives).e.BUSINESS MODEL It is a simplified description and representation of a complex real world. Medical Surgery (Lasik). Drug Development (Bio Chemicals). Disruptive business models brings in a new frame of reference (i.
The channels to reach out to the clients. The segment(s) of clients to be addressed. 307 . The proposed relationships established with clients. The key partners involved in the activities. The key activities / processes necessary for execution. The revenue streams generated by the activities.NINE BUILDING BLOCKS Value proposition offered to the market. The key resources and capabilities required. The cost structure resulting from the business model.
BUSINESS MODEL FRAMEWORK 308 .
The revenue model described here are the means to generate revenues. 309 . It is just one piece of the puzzle. Investment Banking.REVENUE MODEL Positioning is just not sufficient. 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. innovative companies to carve out unique business models to fend off competition. With the rapid erosion of certain industries (IT.
Provide reasonable incentives (not necessarily monetary). Promote the grape-vine. 310 . Allow the workforce idiosyncrasies for their errors.HOW TO MAKE INNOVATIVE CO’S Innovative company’s are a matter of culture and aspirations rather than tangible resources. Have a lean and a flat organization structure. Promote the culture of experimentation. A favourable intellectual property (IP) climate. Allow the management sufficient slack to be future oriented.
In most emerging markets where the IP climate is not so favorable. companies are increasingly relying on internal protection to sustain innovation effects.HOW TO PROTECT INNOVATION? Without adequate protection (external or otherwise) the effects of innovation does not translate to performance. 311 311 . Collusion with the judiciary is also another distinct possibility in emerging markets. however that possibility is slowly atrophying. The most preferred strategy of internal protection includes imbibing “causal ambiguity” in the production process to make reverse engineering difficult.
CORPORATE GOVERNANCE The basic theme of corporate governance is to ensure that professional managers are identified and made accountable in terms of clear business processes or activities and held responsible through adequate mechanisms & control systems for channelizing their decisions for the benefit of stakeholders at large. In fact the principles of corporate governance implies that managers go beyond in satisfying the stated and unstated needs of the multiple stakeholders. 312 312 . Corporate governance aims to reduce the principal-agent problem present in most professional managed organizations through appropriate forms of accountability and control mechanisms.
also known as the principal-agent problem or agency dilemma. 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.AGENCY THEORY The root of Corporate Governance goes back to the Agency Theory. From the strategic point of view managers tend to diversify into unrelated businesses as it provides higher returns hence a more favourable appraisal. According to the agency theory top managers and shareholders interests are usually conflicting in nature and tend to pull in opposite directions. 313 . However.
defines corporate governance (headed by Kumar Mangalam Birla) as the acceptance by management of the inalienable rights of shareholders as the true owners of the corporation and of their own role as trustees on behalf of the 314 shareholders. various laws were enacted to ensure proper usage of these funds. 2002 to restore public confidence in corporate governance. the US government passed the Sarbanes – Oxley Act. . After the Enron downfall. SEBI Report – 2005.ORIGIN & CONTEXT Since the early 20th century since a large part of public funds were held by publicly traded firms in the US.
GOVERNANCE PRINCIPLES Rights and equitable treatment of shareholders: Help shareholders exercise their rights by effectively communicating information in transparent ways that is understandable and accessible and encouraging shareholders to participate in general meetings. Role and responsibilities of the board: It deals with issues about an appropriate mix of executive and nonexecutive directors. including the society at large. 315 . The key roles of chairperson and CEO should not be held by the same person and their offices be clearly separated. Interests of other stakeholders: Recognize the legal and other obligations of all legitimate stakeholders.
. They should also implement systems to independently verify and safeguard the integrity of the company's financial reporting. assessment and mitigation of risks and retirement by rotation over a fixed period of time.GOVERNANCE PRINCIPLES Integrity and ethical behaviour: Organizations should develop a code of conduct for their top management that promotes ethical and responsible decision making. Disclosure and transparency: Disclosure of information should be timely and balanced to ensure that investors have clear access to data and facts. Independence of the entity's auditors: Identification. 316 316 .
discussed and resolved.GOVERNANCE STRATEGIES Monitoring by the board of directors: The board of directors. a person benefitting from a decision should abstain from it. they should provide no mechanism or scope for opportunistic behaviour. with its legal authority to hire. However. 317 . 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. safeguards invested capital.
GOVERNANCE & PERFORMANCE In its “Global Investor Opinion Survey” of over 200 institutional investors in 2002. and was responsive to investors' requests for information on governance issues. Egypt and Russia) to around 40% for Canadian & European companies. McKinsey found that 80% of the respondents would pay a premium for wellgoverned companies. who had no management ties. The size of the premium varied by market. from 10% for companies where the regulatory backdrop was least certain (those in Morocco. They defined a well-governed company as one that had mostly out-side directors. undertook formal evaluation of its directors. 318 .
SHAREHODER – STAKE HOLDER THEORY Till the early part of the 20th the basic objective of modern organizations was to provide goods and services for public consumption for profit maximisation. the short-term view of profit maximisation gave way to a more broader and mediumterm view wealth maximisation of the shareholders. Over a period of time. corporate philanthropy should be a part of every corporate mission. However. The basic premise is that firms cannot exist in vacuum. Therefore. today economic institutions are considered as a major drivers of improvement in quality of life in general and therefore needs to include multiple stakeholders. 319 .
CSR can be defined as. Therefore. Therefore. “a healthy business cannot exist in a sick and impoverished society”. “an enterprises decisions and actions being taken for reasons at least partially beyond its immediate economic interests”. economic and social responsibilities cannot be mutually exclusive.CORPORATE SOCIAL RESPONSIBILITY As Peter Drucker rightly pointed out that. However. in fact a large part of it is significantly overlapping. the debate on CRS still continues whether firms should detract its focus from its business? 320 . giving a very important message that one cannot exist without the other.
MRTP). The role of media: The media and various consumer organizations have come up in protecting consumer rights and exposing mal-practices. Fear of government interference: Excessive quench for profits may lead to build up of adverse public opinion compelling the government to intervene (Eg. 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.
Paper packaging. Literacy & Training Programs – (Eg. and extended producer responsibility (Eg.CSR STRATEGIES Green Supply Chain Management: It includes environmentally preferable purchasing. designing eco-friendly products. 322 . Tata Steel – Life Line Express). Aditya Birla Research Centre – LBS). Exide – Product take back). Education. Health & Hygiene – Attending the health hazards due to wastes and by-products to employees and society in proximity (Eg. eco efficiency. Refrigerators – CFC. Cement .
In turn companies by serving these markets. C. 323 . They represent an enormous opportunity for companies who learn how to serve them. Strategic innovations leading to disruptive business models can show the way out. across the world's billions of poor people having immense untapped buying power. Prahalad notes that future markets exist collectively. K.BOTTOM OF THE PYRAMID With the market across most developed markets including the US getting saturated. they're helping millions of the world's poorest people to escape poverty.
BLUE OCEAN STRATEGY 324 .
MARKETSPACE .TWO WORLDS 325 .
In today’s red oceans. . battled over market-share. They have fought for profits. and struggled for differentiation (cost or product). competing head on results in nothing but a bloody red ocean of rivals fighting over a shrinking profit pool.WHAT IS RED OCEAN? Companies have long engaged in head-to-head competition in search of sustained. one companies gain is always at the 326 cost of another companies loss. profitable growth. where most industries are saturated. Yet in today’s overcrowded industries.
Such strategic moves are possible through the pursuit of product differentiation and low cost simultaneously. but by creating blue oceans of uncontested market space ripe for growth . it will exist 327 in the future as well.WHAT IS BLUE OCEAN? Tomorrow’s leading companies will succeed not by battling in red oceans. It is only the frames of the . rendering rivals obsolete and unleashing new demand. Blue Ocean’s have existed in the past. It helps in creating powerful leaps in value for both the firm and its buyers.
RED OCEAN Vs BLUE OCEAN Compete in existing markets Compete in uncontested markets Beat the competition Exploit existing demand Make the competition irrelevant Create and capture demand Make the value-cost trade off Break the value-cost trade off Demand is the limiting factor Supply is the limiting factor 328 .
information imperfections atrophy instantly. As trade barriers between nations & regions fall. Niche markets & monopoly havens are continuing to disappear. Population shrinkage across a no. Technological advances have substantially 329 improved industrial productivity.BLUE OCEAN STRATEGY IMPERATIVES Prospects in most established market spaces – red oceans – are shrinking steadily. . Demand across developed markets reaching a plateau. of European nations.
. Incumbents often create blue oceans within the ambit of their core business. History indicates that blue oceans exist in three basic industries – automobiles (how people get to work) – computers (what people use at work) – entertainment (what people do after work). managerial moves are.CONCEPTUAL UNDERPINNINGS Blue oceans have existed in the past and will exist in the future as well. They are not necessarily about technology. the underlying technology was often already in existence. Company & industry are the wrong units of 330 strategic analysis.
BLUE OCEAN .IMPLEMENTATION Reduce Which factors to be reduced below the industry standard Eliminate Which of the industry factors that the industry takes for granted should be eliminated Create VI Which factors should be created that the industry has not offered Raise Which of the factors should be raised above the industry’s standard 331 .
IMPLEMENTATION SEQUENCE Buyer Utility (1) Is there exceptional buyer utility in your business idea? Price (2) Is your price easily accessible to the mass of buyers? Blue Ocean Strategy Adoption (4) What are the adoption hurdles in actualizing your business idea? Are you addressing them up front? Cost (3) Can you attain your cost target to profit at your strategic price? 332 .
Sony Play Station: Redefining machine-human interface in entertainment and targeting an altogether new user base. Citibank – Automated teller machines & credit 333 cards.SOME GLARING EXAMPLES In the last century authors Kim and Mauborgne have documented the creation of more than 150 blue ocean creations across 30 industries – Virgin Atlantic: Fractional jet ownership or travel to space. Southwest Airlines: Pioneering the concept of LCC. .
334 . According to this view managers need not be constrained to act within the confines of their industry.WHAT THEN IS THE HANDICAP? Most of the traditional views in strategy having its origin in (Economic Theory) led to what is called the – structuralist paradigm. All they need to do is change their managerial frames. According to this view. Off late emerging views in strategy having its origin in (Organization Theory) led to a paradigm shift to what is called the – reconstructionist view. greater than themselves. companies & managers are largely at the mercy of economic forces.
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