This action might not be possible to undo. Are you sure you want to continue?
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
STRATEGIC MANAGEMENT . It is irreversible. It provides broad guidelines.FEATURES It forms the core activity of the top management. It is all about creativity and innovation. It is about adaptation and response to the same. It is long-term in nature. It requires full commitment of the top management. It involves substantial resource outlay. 7 . It is a holistic and integrated approach.
It is about forecasting. It brings instant success. It involves only the top management. It is about a definite formula.STRATEGIC MANAGEMENT – MYTHS It involves short-cuts. It involves nitty-gritty's. It attempts to minimize risk. It a bundle of techniques or even tricks. It about mere data and facts. 8 . It is rocket science. It is fool-proof in nature.
To assimilate change faster. scale and scope. To be future oriented. To tap markets across boundaries. To generate large resource pool. To innovate. rather than reactive. To be proactive. . To leverage size. To be insulated against environmental threats.STRATEGIC MANAGEMENT IMPERATIVES To be continuously alert. To gain expertise in technologies. again and again ……. 9 To develop core–competencies.
STRATEGY . battles fought on the market front are won by companies by virtue of their obsession & strategies. and more importantly . obsession. In the ancient days battles were won not by virtue of size of the army or armory. but with a lot a rigour and robustness. whose origin can be traced to some of the greatest battles fought in the ancient days. In contrast.ORIGIN The word strategy has its origin from the Greek word strategia meaning Military Commander. Even in today’s markets. In the ancient days battles were fought over land. 10 .strategies. It is an old wine in a new bottle. today's battles are fought over markets. but by virtue of their courage.
US attack of Morocco to capture Germany – Strategy: Pin-hole strategy – Wal-Mart challenging Sears by entering small towns. challenging GM and Ford. – Reliance’s entry into telecom. – Toyota’s entry in the US. 11 . Allied Forces Vs Germany (WW-II) – Strategy: Forging alliances. Napoleon’s attack on Russia – Strategy: Waiting for the right time. – Yahoo and Microsoft challenging Google.SOME PARALLELS Japan’s attack on Pearl Harbour – Strategy: Attack where it hurts the most.
12 .EVOLUTION OF MANAGEMENT As Peter Drucker refers to it. The first major discontinuity in the history of global business environment was the . A paradigm is a dominant belief about how the business and its environment operates.Industrial Revolution. 1910). 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. – Mass Production Organization Size – Complicated Processes – Complex Structures Evolving of an emerging paradigm – survival of the fittest (Fayol & Taylor.
push to pull). The question of outperforming the benchmark became the new buzzword. – Affluence of the new customer (i. 13 . 1960). performance across firms became differentiated. – Homogeneous to heterogeneous products. – Changes in the technology fore-front.e. – Global market place. Survival of the most adaptable becomes a new management paradigm (Ansoff. From uniform performance. Efficiency and effectiveness are no longer sufficient.EVOLUTION OF STRATEGIC MANAGEMENT The second major discontinuity in the history of global economic environment – World War II.
ENVIRONMENTAL CHANGE Phase IV: Horizon of Scenarios 2 1 Phase I: Extrapolation of the past 1 3 1990 onwards 1 2 1 3 1A 1B 2A Prior to 1950 Phase II: Discrete Scenarios Phase III: Range of Scenarios 1970 to 1990 2 2B 1950 to 1970 14 .
– The choice of strategy is primarily concerned with external ones rather than internal ones. – It is primarily the top management’s prerogative. – Biases and prejudices has a very little role to play in strategic choices pursued by managers.APPROACHES TO STRATEGY Analytical Approach – Igor H. Ansoff (1960) – Strategy can be segregated into certain mutually exclusive and inter-related components aimed at managing the growth of an organization. 15 . Learning always begin on a clean sheet of paper. – The choice of product-market mix is based on conscious evaluation of risk – return factors.
everything else follows. – Organization structure will precede and cause changes in strategy. – The top managers then decide on the type of organization structure & systems to be in place. 16 . – Management control systems has a dominating role in influencing firm performance. Once the control systems are in place. The organization initially decides which industry to enter. who will be the top managers. how it will compete. Successful organizations align authority and responsibility of various departments in way to reach overall objectives.APPROACHES TO STRATEGY Design Approach – Alfred Chandler (1970) – Structure follows strategy.
customer. 17 . – The environmental forces comprises of – supplier. – A firms performance is inversely related with the bargaining power of environmental forces to which it is exposed.APPROACHES TO STRATEGY Positioning Approach – Michael E. – An organization is seldom in a position to influence the larger business environment. new entrant. competitors. substitutes. – The organization will outperform the industry where environmental forces are weak and vice-versa. Porter (1980) – Choose a consumer segment and position your product accordingly.
They are complex resources and undermines a firms competitive advantage. – Core competencies are a set of skills that are unique and can be leveraged. locating in most attractive industries and pursuing the same strategy. 18 . – It enables a firm to deliver unimaginable value ahead of time. but exploiting the resource differences among them. – Organizations can significantly alter the way an industry functions.APPROACHES TO STRATEGY Core Competence – C. 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 .
A gap that consciously manages between stagnation and atrophy. It is the cornerstone of an organizations strategic architecture reflecting its desired future state or its aspirations. 21 .STRATEGIC INTENT If you cannot see the future. It’s a philosophy that distinguishes it from its competitors. It provides a sense of direction and destiny. A substantial gap between its resources and aspirations. It implies a significant stretch. It involves an obsession to be the best or outperform the best. A strategic intent is a statement of purpose of existence. you cannot reach there.
STRATEGIC INTENT .HIERARCHY Integrativ e m Do an in Visio n Mission Dominant Objective s Goal s Plans Lo g ic Single Specifi c Man y 22 t .
it can be perceived as a set of working rules (similar to thumb rules) that enables the top management to decide what can be done and more importantly what cannot be done. It is core to the strategic intent of the firm.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. when radical changes in the internal and external environment (i. To put it more simply. strategic variety) is apparent. 23 . Dominant logic changes.
beyond just making money. It enables the top management to remain focused. – It stands for the unchanging core values of the company. but achievable aspirations. 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.VISION It is a dream (not a forecast) about what the company wants to become in the foreseeable future. It ensures that the company does not wander off into unrelated zones or fall into an activity trap. – It represents the company’s audacious. 24 .
and memorizable. 25 . Brevity – It should be short. Reachable – It should be within a reasonable target in the known future. In Reliance when a new project becomes operational top managers hand over charge to the SBU heads and move on to a new project. clear. Empathy – It should reflect the company’s beliefs to which it is sensitive.CHARACTERISTICS Reliance – Where growth is a way of life.VISION . Sharing – The company across all hierarchies should have faith in it. not an utopian dream. Clarity – Vividly descriptive image of what the company wants to be known for in the future.
It gives the impression of a forward-looking organisation. It provides a holistic picture. To prevent the fall in a activity trap. It gives a shared platform. It makes strategic alignment easier. It fosters risk taking and experimentation. It lends integrity and genuineness.VISION .ADVANTAGES To stay focused on the right track. It facilitates development of skills & capabilities. 26 . It gives enlightment.
It serves as a road map to reach the vision. It enables the firm to define its business landscape and identify its competitive forces. its reason for existence. It is intuitive for managers to conceive their business in terms of the customer needs they are serving – What business are we in? – Which customer needs are we serving? It should be broad based and relevant to all stake-holders. Although the purpose may change over time.MISSION Mission defines the space that a business wants to create for itself in a competitive terrain. 27 . A broad mission statement helps in fending competitors.
MISSION – SOME IDEAS Reliance – We are in the business of integration. – We do not offer steel. – We do not offer insurance. We offer strength. Some other examples – We do not offer shoes. though some may seem unrelated in nature. We offer security. We offer solutions. …………………. …………………. – We do not offer software's. We offer comfort. …………………. 28 . …………………. All the businesses of the company are strongly integrated with their main business.
It is an end result (quantifiable) something a firm aims and tries to reach in a time bound frame. – It keeps the mid management pre-occupied. – It is based on Management by Objectives (MBO). – It adds legitimacy and motivation. – It prevents deviation. 29 . It provides a quantitative feel to an abstract proposition. – It provides a benchmark for evaluation.GOALS & OBJECTIVES Reliance – We want to become a Rs. – It helps identifying key success factors. – It lends direction – time frame in the medium term.100K crore company by the year 2005.
– Compress project times. It is specific to a particular business. It is the process of garnering necessary inputs. – Leverage economies of size and scale. 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. 30 . coordinating appropriate technologies. The details of the plan Reliance Telecom adopted were – Backward integrate process technologies. – Use price-elasticity to break market barriers. – Acquire a market share of indomitable position.
past strategies tend to have a bearing on future strategies. However. When changes in the environment is incremental. Historical studies have shown that most organizations tend to continue with their existing strategies. It often leads to an organizational crisis. radical change may lead to disequilibrium. This tendency to restore continuity is known as inertia (resistance to change).STRATEGIC DRIFT Due to top management commitment. In such a context. 31 . equilibrium is maintained. strategies lose touch with the emerging realities. This state of affairs is known as strategic drift.
STRATEGIC DRIFT FRAMEWORK Environmental Change Degree of change Strategic Change Radical Change Incremental Change State of Flux Continuity Stage of Transformation Strategic Drift Stage of Atrophy Time 32 .
– Creating a favourable image. 33 . – Distorting information to gain mileage. – Creating obligations of reciprocity. Organizational politics involves intentional acts of influence to enhance or protect the self-interest of individuals or groups over organizational goals.ORGANIZATIONAL POLITICS Strategic drift often leads to organizational politics. – Developing a platform of support. – Using covert tactics to pursue self interests. – Hiding vulnerability. Some instances of organizational politics – Formation of powerful groups or coteries.
Other causes – – The plans are unworkable and utopian.INTENDED & REALISED STRATEGIES An intended strategy is an expression of interest of a desired strategic direction. – Influential stake-holders back out. A realized strategy is what the top management actually translates into practice. Usually there is wide gap between the two when organizational politics is evident. – The environment context has changed. – Persons responsible for strategy conceptualization and implementation are34 divergent. .
Strategy formulation and implementation are linked together in a continuous improvement cycle. However.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. but the master scheme of the rational comprehensive scheme is not apparent. but as a defensible response to the complexities of a large organization that mitigate against publicizing goals. 35 . They simply unfold the particulars of the sub-system in stages. Learning is an integral part of logical incrementalism. this is not to be treated as “muddling”.
Leveraging Crisis – A sudden crisis or an opportunity should be used as a trigger to facilitate acceptance and implementation of change. 36 . Adaptation – As implementation progresses. The broader objective should serve the overall interest of the organization. Agent of Change – Formal ratification of a change plan through MBO.IMPLEMENTING INCREMENTALISM General Concern – A vaguely felt awareness of an issue or opportunity. Macro Broadcasting – The broad idea is floated without details to invite pros and cons leading to finer refinements.
Dominant logic’s are very rigid and sticky and prone to inertia. Tampering with surface level factors often leads to atrophy.STRATEGIC TRANSFORMATION Strategic transformation (a complete overhauling of the strategic architecture) becomes inevitable whenever a strategic drift takes place. As it brings 37 with it a different dominant logic. Strategic transformation becomes smooth through a change in top leadership. . Dominant logic’s are the cornerstones of change when strategic transformation is apparent. It creates blinders.
It helps prevent a strategic drift from occurring at the first place. experience. Factors that fosters a learning organization – Pluralistic – An environment where different and even conflicting ideas are welcome. – Informal Networks – Emerging of new ideas. A learning organization must continuously focus on unlearning as well. – Experimentation – Fosters a culture of risk taking. and skills that fosters experimentation and questioning and challenge around a shared purpose.LEARNING ORGANIZATION A learning organization is capable of continual regeneration from knowledge. 38 . – Organisational Slack – Enough free space. – Constructive Bargaining – Agree to disagree.
ENVIRONMENTAL CONDITIONS Dynamic Scenario Planning Learning Organization Static Forecasting Decentralization Simple Complex 39 .
ANALYZING BUSINESS ENVIRONMENT 40 .
It points to a position of superiority with relation to competition. Strategic gap basically points towards a vacuum of where the organisation wants to be and where it is. gap analysis).PLANNING & STRATEGIC PLANNING Formal planning is a function of extrapolating the past. Strategic planning is a function of discounting the future. It is reactive in nature. It is pro-active in nature. 41 .e. It requires a quantum leap (i. Competitive advantage provides the surest way to fulfill the strategic gap. It is based on the assumption of radical change. It is based on the assumption of incremental change.
not guided by any boundaries. 42 . A manager has to continuously scan the environment to ensure alignment of the strategies with the radically changing environment. Environmental factors can be external as well as internal to the organization. The segments of the environment a top manager scans selectively depends upon his dominant logics. The world is flat. It is exploratory in nature. events. resources and ideas move unhindered. Environmental scanning is very important component of strategic planning. and influences that affect an organizations way of doing things.ENVIRONMENTAL SCANNING The environment is defined as the aggregate of conditions.
It is important not only to identify the structural drivers of change. but also to analyze the complex linkages across them. which may be different from the past impact.PESTEL PESTEL attempts to provide a broad framework on how the broader environmental forces affects an organization and influences the way it practices strategy. It is particularly important that PESTEL be used to look at the future impact of environmental factors. Understanding the composite effect is critical. 43 . It is not intended to be used as an exhaustive list. for which a holistic picture is required.
Capital Market & Forex Reserves. Savings & Investment. Subsidies & Protection. Religious Sentiments. Social – Population Diversity. Inflation & Interest Rates. FDI Inflows. Monsoon & Food Grains Reserves. Economic – GDP. 44 . Fiscal Deficit. Income & Age Distribution. Currency Stability. Government Attitude. Language Barriers.PESTEL FRAMEWORK Political – Government Stability. Central – State Co-alignment. Licensing & Quotas. Literacy Levels. Economic Model. Infra-Structural Investments. Social Values. Economic Cycles.
Patent Laws. ERP. Waste Disposal & Emissions. Pollution Control Laws. Direct & Indirect Taxes. Non-Fossil & Alternative Fuels. Environmental – Global Warming & CSR. 45 . Extended Producer Responsibility. Product Design. Technological Convergence. Research & Development. Carbon Credits. Product Safety & Health Hazards. Environmentally Preferable Purchasing. Consumer Protection Laws. Patents. Employment Laws. Legal – Monopolies Legislation. Obsolescence Rate.PESTEL FRAMEWORK Technological – Innovation.
Rupee convertibility. New Trade Policy (NTP) – Lowering import tariffs.VRS. MRTP Liberalization. Encouraging exports. Economic Reforms – Fiscal & Monetary Reforms. Abolition of import licenses. FERA Liberalization. Capital Market Reforms.ECONOMIC LIBERALISATION New Industrial Policy (NIP) – Liberalizing industrial licensing. Dismantling price controls. PSU Disinvestments. Curtailment of PSU’s. Structural Adjustments – Phasing out subsidies. Exit Policy. Encouraging FDI. Banking Sector Reforms. 46 .
DISCONTINUITY Destabilization due to entrepreneurial freedom – Cocoon of protection disappears – Diversification spree – Existing notions of size shaken – Industry structures change radically – Economic Darwinism . Mergers & Acquisitions 47 .Survival of the fittest MNC Onslaught – Enhancing stakes – Power Equation – Joint Ventures – Technological Alliances – Take-over threat.
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 .
PORTER Threat of New Entrants Bargainin g power of Suppliers Competition from Existing Players Bargainin gBargainin power g of power of Suppliers Customer s Threat of Substitutes 50 .FIVE FORCES MODEL .
It is even wiser to apply the same at the product – market level.e. It depicts the attractiveness of an industry (i. incremental or otherwise. the forces are subject to changes. but also used to understand how they can be countered and overcome. 51 . profit potential) per se. The model should not be used as a snapshot in time. The five forces have strong cross-linkages. It should not only be used to understand the forces.FIVE FORCES MODEL ASSUMPTIONS The model is to be used at the SBU level and not at the industry level.
Resource profile & fear of retaliation. Capital requirements. Low relative importance of the segment. Threat of Customers – Buyer concentration and volumes.PORTERS FIVE FORCES ANALYSIS Threat to Entry – Economies of size and scale. Undifferentiated product. Unimportance of product quality. Learning curve advantages. 52 . Low customer switching costs. Industry stagnation. Scope for backward integration. Access to distribution channels. Low margins & stagnancy. High switching costs. Presence of substitutes or unorganized sector. Government policy. Product differentiation through proprietary technology or brand power.
Lack of substitute inputs. Low relative importance of the segment. Diversity of players. Industry stagnancy. Unorganised sector. High customer switching costs. Product perishability. Buyer’s propensity to substitute.PORTERS FIVE FORCES ANALYSIS Threat of Suppliers – Supplier monopoly. Threat of Substitutes – Improvement in price -performance trade-off. Intermittent overcapacity. High exit barriers. 53 . Low level of differentiation. Jockeying for position – Fragmented market. Differentiated inputs. Scope for forward integration. Produced by industries earning high profits. Piracy and counterfeits.
Resource Profile – It highlights the capabilities (generic) or competencies (business specific) of the firm. Inertia – Excessive commitment to past strategies prevents firms from tapping emerging opportunities. dominant or related diversified or unrelated diversified businesses (Infosys. 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. Cohesiveness – Degree of bonding existing across affiliated firms. 54 . Tata).
which further reduces costs. it can price its products more competitively. and with lower prices it can increase its sales volume. leverage it as a competitive advantage. an E-Curve can prove to be futile during discontinuity. Matured firms will always be positioned advantageously on the ECurve than new entrants. The E-Curve thus enables organisations to build entry barriers. With lower costs. Experience curve has strong linkages with performance. 55 .EXPERIENCE CURVE The cost of performing an activity declines on per-unit basis as a firm becomes more efficient. experience teaches better and more effective way of doing things. However.
EXPERIENCE CURVE Cost per unit of output Decreases at an increasing rate Point of inflexion Decreases at a constant rate Decreases at a decreasing rate Production / Volume 56 .
TRADITIONAL VIEW Efficiency = Lower Costs 2 3 1 Experience = Efficiency Lower Costs = Higher Sales Entry Barrier = Better Performance 4 6 5 Higher Sales = Lower Costs Lower Costs = Entry Barrier 57 .EXPERIENCE CURVE .
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 .
Business Intelligence – Bankers. Suppliers. It helps an organisation to capitalize on the opportunities by maximizing its strengths and neutralizing the threats minimizing the weaknesses.VULNERABILITY ANALYSIS . Customers. Websites. Press Clippings & Interviews. It is one of the earliest models in environmental scanning. Case Studies – Structured Questionnaires. 59 Analysts. . A SWOT audit involves – Company Records – Annual Reports.SWOT The framework was originally conceptualized by Kenneth Andrews in 1970. Competitors. Acronym for Strengths – Weaknesses – Opportunities – Threats. Interviews. Observation.
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 .
Caterpillar. ITC. Reddy’s. Strong R&D base – Eg. Honda. Ranbaxy. Economies of scale – Eg. Tata Steel. Infosys. SBI. Engineering Skills – Eg. HUL. Reliance. Tata. Volkswagen. Excellent penetration – Eg. Dr. Large resource pool – Eg. Infosys. Strong after sales & service network – Eg. Siemens. Reliance. Biocon. Sony. Motivated employees & cordial industrial relations – Eg. Good credit rating – Eg.SOURCES OF STRENGTH Strong brand identity – Eg. High quality products – Eg. 61 . Aditya Birla. Toyota.
Ballarpur Inds. Organizational Politics – Eg. Inefficient top management – Eg. Lack of product / brand clout – Eg. CMC (Tata Group) 62 . CESC. J. SAIL. Group . Tatas. Procter & Gamble. Nirma. K. Modi Group. Lacking experimentation culture – Eg.SOURCES OF WEAKNESSES Outdated technology – Eg. Single product syndrome – Eg. Narrow business scope – Eg. Hindustan Motors. Bijoligrill. B.Raymond. Inertia – Eg. K. Excessive diversification – Eg. Excess manpower – Eg. Strategic myopia – Eg.
Sugar. Fertilizers. Middle-class buying power. Free pricing – Eg. Abolishing CCI. Sugar. Retailing. ECB’s. Market driven Pricing – Eg. Maruti. Abolishing MRTP – Eg. VRS. Growing population – Eg. Globalization – Eg. Collaborations & Joint Ventures – Bharti & WalMart. Banking.Tata Motors. Exit Policy – Eg. Capital market reforms – Eg. Life style changes – Eg. Insurance. GDR’s. Fertilizer.SOURCES OF OPPORTUNITIES Delicensing of Industries – Eg. Market driven Interest rates – Eg. 63 . Telecom.
11/9. Onida.SOURCES OF THREATS Political instability – Eg. Tata Steel. Bajoria – Bombay Dyeing. 26/11. Singur SEZ. Reliance. Hostile take-over – Eg. Group disintegration – Eg. Lack of Corporate Governance – Eg. Dumping from China. Tsunami. Earth Quake. 64 . Import relaxation – Eg. (2008). Satyam.Social activism – Eg. Land acquisition . (1985–1990). Terrorist attacks – Eg. Foreign Direct Investment (FDI) – Eg. Natural disaster – Eg. Economic recession – Eg. Nationalisation – Eg.
Forecasting – Predict the future (i.ETOP Acronym for Environment – Threat – Opportunity – Profile. 65 . Delphi's technique. scenario analysis). Assess the extent of impact of the factors. It represents a summary picture of the external environmental factors and their likely impact on the organization. Holistic view – Prepare a complete overall picture. Strategic responses (including adaptation) to opportunities and threats is critical for survival and success. time series.e. Stages in ETOP analysis – List the aspects of the environment that has a bearing on the organization.
selectively. Relative attractiveness of the market. 66 Vertical integration is a powerful strategy. High investment intensity acts as a drag. . It is also a form of assessing vulnerability through longitudinal analysis. An organization can draw upon the experience of its peers in similar situations.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. Some key findings on major performance drivers that explains 75% deviations in performance – Product quality and relative market share.
As every organization is unique in its own way. .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. therefore 67 validity may be a question. Managers should be particularly cautious while referring to such data during times of discontinuity as it makes past patterns futile. – Contexts may vary over time. when radical changes in the economy takes place.PIMS . – Contexts may vary across countries.
It enables the top management to draw focus. It involves a three-stage process – Identify KSF – What does it take to be successful in a business? Drawing KSF – What should be the organizations response to the same? Benchmarking KSF – How do we evaluate organization success on this factor? 68 . KSF helps organizations spot early opportunities and convert them into value adding business propositions.KEY SUCCESS FACTORS (KSF) KSF relates to identification and putting concentrated effort on a particular activity or process which forms the very basis of competitive advantage.
IDENTIFYING ALTERNATIVE STRATEGIES 69 .
It indicates the quality of growth an organization is looking for. A corporate strategy identifies and fixes the strategic gap it proposes to fill. It determines the locus a firm encounters with internal and external environment.CORPORATE . It provides broad direction to the groups vision and mission. national.GRAND STRATEGY It is concerned with the overall business scope (single. unrelated) and geographical scope (local. 70 . dominant. It reflects the customer needs it intends to satisfy. related. global) of a firm and deals with choices of allocating resources across them.
CORPORATE STRATEGY MATRIX Corporate Strategy Stability Stability Growth Growth Combination Diversification Divestment Intensification Market Penetration Related Vertical Market Development Product Development Unrelated Horizontal 71 .
Hindustan Motors). Citibank).STABILITY It involves maintaining status-quo or growing in a slow and selective manner. Even during adverse times firms need to adopt a strategy to sustain current performance levels. does not relate to do-nothing (Eg. 72 . – To stop for a while and assess past records. The reasons for stability strategy – – Lack of attractive opportunities. The scale and scope of present operations remains almost intact. – The firm may not be willing to take additional risk associated with new projects. – Why disturb the existing equilibrium set up? – Limited resource position. erosion of capabilities. (Eg. Stability however.
73 .GROWTH .ANSOFF’S MODEL New Product Existing Product Existing Market Market Penetration (+) Product Development (++) New Market Market Development (++) Diversificatio n (+++) Note: (+) indicates degree of growth and risk involved.
74 . Britannia). – The company carries a risk of product obsolescence. Market penetration can be achieved by – increasing sales to current customers. Nirma. (Eg. – Helps firms which are not comfortable with unfamiliar terrain.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. Ujjala. – Suitable for industries where scope for technological breakthrough is limited. within a well defined market segment. – Elongated product life-cycle. direct non-users to users. convert competitors customers.
(Eg. 75 . – Moves across geographical boundaries. upholstery. socks & stockings. carpets. tyres. – Stretches product life cycles. fabrics. – Creativity and innovation – thinking out of the box. Du Pont – Nylon: parachutes. – Unconventional and flexible distribution channels.…… or Teflon: aircraft technologies to cutlery to paints or Raytheon Corp – Microwaves: radars to kitchen appliances).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. – Immense customer reach & flexible advertising.
Close Up: Fluoride – Gel toothpaste or VIP . Refills) 76 . reliability. – Areas of product improvement – performance. features. conformance. aesthetics. durability.Strolleys). Microsoft: DOS to Windows) or a substantial improved version (incremental) of an existing product to repeatedly enter the same market (Eg. perception.PRODUCT DEVELOPMENT It is a strategy where a firm tries to achieve growth through a radical new product (Eg. – Substitutes that serve the same needs (Eg. – Leveraging through – innovation. – Leverage on customer and brand loyalty. – Deliverable through – redesigning or reengineering. serviceability.
thereby creating a new business. dominance). industrial embassies).e. From the modern point of view they are strategically dissimilar. Why do firms diversify in the Indian context? – Shift the growth trajectory or opportunistic.DIVERSIFICATION It marks the entry of a firm into newer markets with new products. – Permits: quotas. – High transaction costs and institutional gaps. 77 . – Internal capital market. the new business is distinct from the existing business in terms of – inputs – technologies – markets.e. – Risk reduction. From the traditional point of view. – Conglomerate or market power (i. licenses (i.
ice-cream business would register a return of 10%. while the coffee business would register a return of 10%. If the hot wave dominates the planet. while the coffee business would register a return of 30%. the ice-cream business would register a return of 30%. What would be your ideal diversification strategy through optimization? 78 . Let us assume that there are two businesses constituting the entire market – coffee and icecream. If on the other hand. in which a given year is either under hot or cold wave. cold wave dominates the planet.HOW DIVERSIFICATION REDUCES RISK? Consider a hypothetical planet. either of which is equally likely to prevail.
If we diversified in either of the two businesses, our expected return will be 20%, with a possible risk of 10%. If, we split our investment between the two businesses in equal proportion, half of our investment will earn a return of 30%, while the other half would earn 10%, so our expected return would still be 20%. But in the second instance there is no possibility of deviation of returns (i.e. risk). Diversification results in 20% expected return with zero risk, whereas investing in individual businesses was yielding an expected return of 20% with a risk factor of 10%. The pivotal point is that the two businesses are negatively correlated. 79
It takes place when a company increases the breadth of a firms business or geographical scope by getting into product – market segments which compliments its existing businesses (Eg. Reliance). Alternatively, existing business may recreate new businesses, which are distinct, but supplements its existing business (Eg. Bajaj – scooters to motorcycles, Dove – soaps to shampoo). – It results in increased market power. – Leveraging existing capabilities. – Resources can be shared for mutual benefit. – Reduces economic risk (i.e. business cycles). – Enables brand or product line extension.
It increases the depth of its business scope either in a backward business process or in a forward one. Backward integration occurs when the company starts manufacturing its inputs or catalysts. In forward integration a firm moves into marketing of its products and services. Advantages of backward integration – – Cost competitiveness – entry barrier. – Better operational control – timely supplies, quality control, coordination – JIT, savings in indirect taxes. Disadvantages of backward integration – – It may spark of a chain reaction - contagion effect. – Long gestation & break even - investment in CAPEX.
Oil & Gas exploration Naptha-cracking Acetic Acid Paraxylene (PX)
Purified tetra-pthalic acid
Polyester Filament Polyester Staple Fibre (PSF) Yarn (PFY) Textiles 83
DIVERSIFICATION SUCCESS ?
While diversifying into new businesses, the scope of relatedness or unrelatedness should not be judged from the traditional static view, but from the modern dynamic view which incorporates strategic factors like capabilities and dominant logic. Countermanding reasons – Potential to reap economies of scope across SBU’s that can share the same strategic asset. Potential to use an existing capability to help improve the quality of a strategic asset in another business. Potential to use an existing capability to create a new strategic asset in another business. Potential to expand the existing pool of capabilities. Dominant logic ensures timely & appropriate response.
Quasi-integration . Tapered integration . 85 . Dr. Usually the firm concentrates on its core activities. Reddy’s).Where one firm has full ownership and control over all the stages of a value-chain in the manufacturing of a product (Eg. Ranbaxy. Maruti – Sona Steering). and out-sources the noncore activities (Eg.A firm produces part of its own requirements and buys the rest from outside suppliers with a variable degree of ownership and control. Reliance).QUASI & TAPERED INTEGRATION Full Integration .A firm gets most of its requirements from one or more outside suppliers that is under its partial control through value chain partnerships (Eg.
A 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 .
Firms usually engage in conglomerate diversification when emerging opportunities are very attractive and offers potential growth opportunities.CONGLOMERATE DIVERSIFICATION It relates to entry of firms into businesses which are distinct in terms of – inputs – technologies – markets. synergies pulling in opposite directions). Drawbacks of unrelated diversification – – Cost of failure (i.e.e. lack of strategic intent. – Cost of ignorance (i.e. core business). myopia). and are also strategically dissimilar. – Cost of dysynergy (i. – Cost of neglect (i. lack of knowledge of competitive forces). 87 .e.
CONGLOMERATE DIVERSIFICATION Paper & Packaging Edible Oils Tobacco Hotels Food & Confectionary 88 .
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 may also involve a SBU (Eg. Tata Press). Glaxo’s “Glucon-D” to Heinz). L&TCement Division to Aditya Birla Group) technically known as divestiture or a product (Eg.DIVESTMENT Divestment is a defensive strategy involving the sale of entire stake (Eg. ACC) in full to an independent entity. where a company simply exits because the business no longer contribute to or fit its dominant logic. (Eg. It is may also be a pro-active strategy. 89 . It taken into account when performance is disappointing (i. In strategy there is no scope for sentimentality with divestment. Tata Pharma.
where 100% of the assets (including intangibles) are valued and paid for. Hive-Off – A hive off is the creation of a new entity followed by transfer of assets. where the equity is allotted amongst the existing shareholders on a pro-rata basis. 1956 does not permit this mode.3 billion. involving 608 pence per share). Sale of Diamond Beverages to Coca-Cola for US $ 40 million). the Companies Act. (Eg.ROUTES Outright Sale – Popularly known as the asset route. Leveraged Buy-Out (LBO) – Here the company’s shareholders are bought out through a negotiated deal using borrowed funds. However. (Eg. Tatas buy-out of Corus for US $ 11. 90 .DIVESTMENT .
and divestment strategies applied simultaneously or sequentially for a portfolio of businesses. A combination strategy can be implemented through green-field projects (i. developing facilities right from the scratch) or through brown-field projects (i. joint ventures). mergers and acquisition.e.e. 91 . There can be no ideal strategy for every business. growth.COMBINATION STRATEGY It is a mixture of stability. because every business has its own unique external and internal environment. It is usually pursued by a business group with diverse interests across multiple industries.
STRATEGY CHOICE & PORTFOLIO ANALYSIS 92 .
It attempts to answer the following questions – How effective has the existing strategy been? How effective will that strategy be in the future? What will be the effectiveness of alternative strategies? It is impossible for a manager to assess all the alternatives. Dominant logic enables top managers to selectively scan the environment and make trade-offs. What then is the magical number? 93 .STRATEGIC CHOICE A strategic choice seeks to determine the alternative courses of action available before top managers to achieve its strategic intent. In most cases the trade-off is between resources and opportunities.
will help the firm achieve its intent. 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. For an optimal choice the following four issues need to be resolved – Is the strategy clearly identifiable? Is it consistent with the resources of the firm? Will it be able to exploit the opportunities in full? Is it in tune with the values and beliefs of the firm? 94 . managers need to ask the right questions. if addressed. They must choose problems which will lead to the right kind of opportunities.SELECTIVITY IS THE KEY The role of a top manager is not to solve a problem.
Proximity to the corridors of power (i.BUSINESS GROUP .e. . embassies). Their roots can be traced to a single family or clan and share broad similarities. Resource sharing. Licenses & Quotas. chaebols in Korea. 95 Succession planning is critical to continuity. Their origins can be traced back to market imperfections existing in an economy (MRTP Laws. keiretsus in Japan. Managing Agency). BRC). formal and informal ties. High degree of centralized control (GEO.DEFINITION A business group is known by various names in various countries – guanxique in China. business houses in India.
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 .
99 . Power and resources often goes hand in hand. Rules of the game are different. next only to choice of business. sometimes impossible. Relatedness across resources are difficult to realize. Investing in emerging businesses may not actually be so simple as it appears to be.PORTFOLIO ANALYSIS Resource allocation across a portfolio of businesses is an important strategic choice. there are high costs associated with entry and exit. therefore. Why? Businesses are not about liquid assets. Redeployment of resources upsets the established power bases of a group.
BCG GROWTH MODEL Relative Market Share (%) Industry Growth (%) Low High High Low Stars Question Mark ? Cash Cow Dogs 100 .
Tata Steel).e. Tata-AIG). market development. 101 . provided the company is able to build up on its market-share (i. but to larger extent than a question mark.BUSINESS ANALYSIS – TATA GROUP Question Marks – They have potentials in the long term. provided the industry growth rate continues and the company is able to maintain its growth (i. and their risk profile is high (Eg. which remains a big? These businesses are net users of resources. product development). Stars – They achievers in the near term. Trent. Tata Telecom. TCS. market penetration. These businesses are also net users of resources (Eg.e. diversification).
e. However.BUSINESS ANALYSIS – TATA GROUP Cash Cow – These are matured businesses. Tata Pharma. 102 . and they lack on competencies to take on competition and are basically cash traps (Eg.e. Tata Press). divest) as achieving a dominant position in these businesses is a difficult task. harvest. Tata Motors. Given that the growth potential in the business is low. Dogs – They are a drag on the group. Tata Chemicals). Tata Tea. cash cows may also need to invest provided the industry takes an upswing (Eg. Nelco. and the company dominates the industry ahead of competition (i. they are generators of resources. Indian Hotels. stability). Groups prefer to dispose off such businesses (i.
The terminologies used are somewhat prohibitive.BCG .e. HUL). Armani). factors are limited. Mercedes Benz. Cash cows may actually need substantial investments to retain their market position (Eg. Cartier. The model does not provide specific solutions within a particular category. niche – Rolex. Certain businesses in the low market share category may be the result of a conscious strategy (i. neither in high or low. Data may be prohibitive. 103 .LIMITATIONS It does not address the concerns of a business which is in the average category (usually the majority).
-) 104 .MATRIX Distinctive Capabilities Strong High Medium Weak Stability Industry Attractiveness Diversify (++) Intensify (+) Med Intensify(+) Stability Harvest (-) Low Stability Harvest (-) Divest (.GE .
ARTHUR’ D. LITTLE Inception Dominant Strong Favourable Tenable Weak Growth Maturity Decline Improve Selective Niche Abandon Industry Life-Cycle Divest Harvest 105 Competitive Position Invest Consolidate Hold .
SHELL – DIRECTIONAL POLICY MATRIX Business Sector Prospects Attractive Average Unattractive Generate Cash Phased Withdrawal Distinctive Capabilities Strong Market Leadership Try Harder Double Or Quit Growth Average Custodial Weak Phased Expand Withdrawal Divest 106 .
107 . Portfolio – An organization is perceived as a portfolio of businesses. BCG – Boston Consulting Group. Divest – Selling a part or the entire business at one go. Gap Analysis – It emphasizes what a firm wants to achieve.TERMINOLOGIES Harvest – It entails minimizing investments while trying to maximize short-run profits and cash flow with the intention to exit the business in the near future. SBU – A business unit which is strategically different from another and also shares a different SIC code. Disinvestment involves selling in phases.
BUSINESS STRATEGY & COMPETITION 108 .
Such resources or activities should be distinctive and sustainable over time.e. building market-share. The principal focus is on meeting competition.COMPETITIVE STRATEGY A competitive strategy deals with how a firm competes in a particular business or product-market segment. rent). 109 . Competitive advantage refers to a firms resources or activities in which it is way ahead of competition. and earning super-normal profits (i. The strength of a firm in a particular business usually stems from its competitive advantage. Competitive advantage is the back-bone of strategy.
BUSINESS STRATEGY FRAMEWORKS How to be distinctive and yet sustainable – Differentiation – Understanding of the dynamics of competition. Delta Lock In – Two dominant players co-opt to selfreinforce and create or escalate an entry barrier. involving harmonizing and integrating multiple streams of technologies. preventing new entry and/or competition (Hax & Wilde). developing competitive advantage (Porter). 110 . Resource Based View – Obsession with competence building. identifying critical success factors. Blue Ocean – Consciously moving away from overcrowded industries to uncharted territories and making competition irrelevant (Kim & Mauborgne). leveraging (Prahalad).
Locational or early entry advantage. Reliance) or may pass it to customers to increase market-share (Eg. proprietary technology. The firm may retain the benefits of cost advantage by enjoying higher margins (Eg. Ayur. backward integration. preferential access to raw materials. Sources of cost advantage are varied and depends on the structure of the industry – Economies of size. 111 . Compress project duration through crashing.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. T-Series). Steep experience curve effects. Nirma.
(Eg. Intel. Rayban).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. and sufficient slack. avoiding brand dilution. Means of product differentiation are peculiar to each industry. Successful product differentiation is often followed by premium pricing. Creativity. innovation and out of the box thinking. Sony. It selects one or more attributes that buyers perceive as important. Feeling the pulse of the customer. 112 . Focus on brand loyalty. undeterred attention to quality. Culture of experimentation.
Mont-Blanc. 113 . though it may not possess an overall competitive advantage. They are poorly served by mainstream players. A focuser seeks to achieve a competitive advantage in its target segment. Sub optimization alone may not be a source of superior performance. coupled with fear of structural erosion. Armani).PORTERS NICHE OR FOCUS Focus / Niche – It is a variant strategy of cost leadership or product differentiation targeting a specific market or buyer sub-segment with the exclusion of others (Eg. The target segment must have unusual needs or the delivery system catering to this segment must be unique. Rolex. Cartier. Maybach.
COMPETITIVE POSITIONS Competitive Advantage Cost Differentiation Product Differentiation Competitive Scope Broad Cost Leadership (Toyota) Product Differentiation (General Motors) Narrow Cost Focus (Hyundai) Differentiation Focus (Mercedes) 114 .
Reducing cost does not always involve a sacrifice in differentiation. jugaad or frugal engineering). Tata Nano). Firms focusing on a hybrid strategy typically aim at shifting the productivity frontier and recreating a new product-market segment altogether (Eg. and usually outperforms a stand alone generic strategy. similarly differentiation may not always lead to rising costs (i.e.HYBRID STRATEGY A hybrid strategy is the simultaneous pursuit of cost leadership and differentiation. 115 . Though cost leadership and differentiation are inconsistent. in a hyper competitive context the two strategies need not be mutually exclusive.
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 .stuck in the middle. unless such a player is capable of discovering a profitable segment. leading to what is called – straddling. It will have a competitive disadvantage vis-à-vis a clearly positioned generic player. 116 . The positioning therefore gets – blurred. Industry maturity will usually widen the gap. It is usually the result of a firm not willing to make trade offs. It tries to compete through every means. but achieves none.
(Eg.EMERGING INDUSTRY Emerging Industry – An evolving industry characterized by .radical environmental changes.) Excessive turbulence in the dynamics of the environment. Nano technology. changing customer needs. Eg. There is a lot of scope to define the rules of competition. coupled with low penetration levels. Market segmentation not well defined. ending in a differential cost economics. It is characterized by – High level of technological uncertainty. Speech recognition software's. Consumer behaviour pattern unstable and evolving. 3D imaging. technological innovations. First-time buyers. leading to a blurred productivity frontier and steep learning curve. Artificial intelligence). 117 .
Scope for players to change the rules of the game. Retail and telecom. High exit barriers because of huge investment in CAPEX.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). Government regulations in the form Eg. IT. Consumer durables. leading to clear fragmentation. Paints. Diverse customer needs. MRTP may also cause fragmentation. Air Conditioning. because of lack of economies of size and scale. 118 . Eg. Eg. It is characterized by – Low entry barriers. Eg.
collaboration and co-option. well defined consumer behavioral patterns and imperfect competition leading to near monopoly. 119 . Firms are rule takers in the segment as productivity frontier is well defined. established industry dynamics. early entry and location advantages. distribution networks. Limited scope for innovation . because of economies of size and learning curve effects.technological maturity. Strong entry barriers. technological maturity.MATURED INDUSTRY Matured Industry – An industry characterized by saturation in growth rates. Cartel among existing players through collusion.
(Eg.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. Learning abilities have been stunted and firms adverse to investment in R&D and make fresh investments. Exit barriers are extremely high because of limited prospective buyers. 120 . scooters. backed by corporate espionage. with little or no signs of recovery. Nature of competition extremely high. and costly price wars. Typewriters. dot-matrix printers). Firms facing a declining phase are characterized by inertia and slow to react to environmental changes.
Fragmented Industry – Identify. reengineer. focus more on product differentiation or even a hybrid one. mergers and acquisition. strictly product differentiation and not standardization.COMPETITIVE STRATEGIES Emerging Industry – Set benchmarks. move beyond boundaries. Locate a defendable position. assess and overcome fragmentation. 121 . strike alliances. process innovation. premium pricing. increasing scope. or else exit the segment. recreate new markets. aggressive building of distribution networks. strictly cost differentiation. branding and promotion. Declining Industry – Redesign. Matured Industry – Sophisticated cost analysis. regenerate.
They are a standard in nature. brands. positions based on resources which are unique and inimitable are far more sustainable even in the long term.RESOURCE BASED VIEW Differentiation based on cost or products saturates and ceases to exist beyond the medium term. and complex learning experiences in integrating and harmonizing technologies (distinctive capabilities) that play an important role in delivering competitive advantage through “causal ambiguity”. Intangible – These refer to goodwill. However. patents. 122 . hence very rarely confer competitive advantage as can be easily acquired or replicated. A firms resources can be classified into – Tangible – These refer to real assets.
Hence. differentiation based on capabilities can be sustained even in the long run. they are woven around technologies. Therefore firms should concentrate on developing complex resources that forms the very basis of differentiation.e. can be leveraged across businesses) or specific to a particular business. 123 . There is a high degree of internal and external causal ambiguity involved in it. Typically. They play a very critical role in shaping competitive advantage. 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.
COMPETITIVE ADVANTAGE 124 .
A portfolio of competitive advantage comprises strategic advantage profile (SAP). Success of a strategy critically depends on SAP. It results in a distinct differentiation advantage or a cost advantage or hybrid as well. 125 .COMPETITIVE ADVANTAGE A competitive advantage is a position of superiority relative (i. not absolute) to competition.e. and results in well springs of new business development. Strategy drives competitive advantage. competitive advantage subsequently becomes the back bone for a competitive strategy. It enlarges the scope of an organization.
In most cases SAP is hidden and dormant. Internal strategic fit between its strategy and dominant logics is essential for the top management to stretch and leverage SAP. In today's world of discontinuity. Identification of SAP is critical for and stretching and leveraging of resources. Most successful organizations around the world have a well balanced SAP. 126 .STRATEGIC ADVANTAGE PROFILE (SAP) Organizations have to systematically and continuously conduct exercises to identify its SAP. SAP changes from time to time.
A VC is often compared with a relay team. kaizen or internal customer). Competitive advantage arises not from an individual activity but a stream of inter-related activities. each of the players need to be efficient backed by sufficient coordination at the contact points (i. 127 . Inventory Mgt to Logistics Mgt to Supply Chain Mgt (SCM). Substantial cost reductions also follow. and enhanced customer tracking – higher market share. VC pay-offs: better product availability.VALUE CHAIN ANALYSIS A value-chain segregates a firm into strategically relevant activities to understand its composite behaviour.e. Today SCM is integrated with greening the environment as CSR practices. faster product launches.
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 .
129 . A high fit involving a complex chain of activities drives both competitive advantage and its sustainability. Operational effectiveness is not strategy. Fit is important because discrete activities result in negative synergy and can also be easily copied by competitors. – Second order fit occurs when activities are reinforcing amongst them. – First order fit refers to simple consistency between each activity and the overall strategy. – Third order fit refers to optimization of effort. A learning organization helps create strategic fit.STRATEGIC FIT – THE PORTER WAY The sustainability of the value chain depends on the degree of fit between the activities.
but not necessarily. – Can be sustained even in the long run. It should satisfy the following conditions – Contributes significantly to customer benefits. – Cannot be easily imitated or substituted. It forms the very basis of competitive advantage. These skills results in distinctive activities and processes. . Core competence has a high degree of external and 130 internal causal ambiguity embedded in it. – Can be leveraged across businesses. A core competence usually has its roots in technology.CORE COMPETENCE A core competence represents the collective learning's of an organization around diverse streams of technologies.
CORE COMPETENCE A competitive advantage does not necessarily imply a core competence. A competitive advantage may or may not lead to superior performance. a core competence usually does. only global leaders possess a core competence. A competitive advantage is sustainable in the shortmedium term. a core competence always implies a competitive advantage. 131 . a core competence is sustainable even in the long-term. A competitive advantage manifests from a function. a core competence has its roots in a set of skills. Majority of the firms have competitive advantage.
In a game (similar to a business) one players win is always another's loss. illustrations depicting a win-win situation. This is known as a zero-sum game. Here the magnitude of gain offsets the magnitude of loss equally. However. 132 . the stringent assumptions of game theory and difficulty in ascertaining of pay-offs makes game theory application difficult in business. each of whom wants to win. Subsequent work on game theory by John Nash led him to win the Nobel prize in 1994.GAME THEORY The game theory was developed in 1944 by Oscar Morgenstern. In fact there are no. A game is a contest involving two or more players.
An unbiased game is one where both the players have equal chances of winning.BIASED AND UNBIASED GAME A game is said to be biased when one of the players have a disproportionate chance of winning. Firm Y’s Strategy Use Radio Use Radio +2 +6 Use Newspaper +7 -4 133 Firm X’s Strategy Use Newspaper Firm X’s Pay-Off Matrix .
Firm Y’s Strategy Use Radio +3 +1 Use Newspaper +7 -2 134 Firm X’s Strategy Saddle Point Use Radio Use Newspaper Firm X’s Pay-Off Matrix .PURE STRATEGY GAME The strategy each player follows will always be the same regardless of the other players strategy. A saddle point is a situation where both the players are facing pure strategies.
TYPES OF GAMES Simultaneous Games – This is a situation where the players have an option to choose to cooperate or not through collusion.e. However. collaboration or cooption. This is usually through learning by “experience or observation” (i. Repeated Games – In this situation the players interact repeatedly with each other sub-optimizing the outcome possibilities. It represents the classical “prisoner’s dilemma”.g. 135 . Yahoo Vs Microsoft). iteration) rather than through collusion (E. there is likely to be temptation by any of the players to try to steal the advantage over the other by breaking the rules of the game (Eg. Coke Vs Pepsi).
.CHANGING THE RULES OF THE GAME In a situation where a player is unable to compete with the existing rules of the game may attempt to change the rules of the game altogether. – Making pricing more transparent. In a market dominated by price-based differentiation one may attempt to change the rules of the game by/when – – Bases of differentiation dependent on clear identification of what customer wants or value. but 136 players do not always behave rationally. It results in a shift in the productivity frontier. Game theory relies on the principle of rationality. – Building incentives for customer loyalty.
DELTA MODEL & LOCK-IN
Its a systematic approach where-in two or more industry majors, who by default has achieved a proprietary position (Microsoft – Software / IBM – Computers) which are not necessarily best-products in the industry, co-opt to create a lock-in. A lock-in implies that other players has to conform or relate to that standard in order to prosper. Becoming the industry standard requires – strong brand, causal ambiguity, and close relationship with other companies offering complimentary services. Lock-in is self reinforcing and escalating (i.e. accelerating effect).
THE THREE STRATEGIC POSITIONS
System Economics Market Dominance Complementary Share
Enabled through effective use of technology
Total Customer Solutions
Customer Economics Cooperation Customer Share
Product Economics Rivalry Product Share 138
Bill Gates is the richest man in the world not necessarily because he has developed the world’s best software's or excels at customer satisfaction; but he has got an army of people working for him who are not on his payroll – all the application software providers who are writing programs based on “Windows” compatible operating platform. Once you create the lock-in it is sustainable because of the “network effects”; which creates the proverbial “virtuous cycle” – customers want to buy the computer with largest set of applications and software developers want to write programs for the computers with the largest installed base.
The proponents (Hax & Wilde) believe that every organization has the ability to create and sustain a “lock-in” positioning (though in varying degree). This “system lock-in” is referred to as “delta” – delta being the Greek letter that stands for transformation and change amongst the players. The lock-in once created becomes very difficult for a firm to penetrate, and becomes a distinct entry barrier. The model is based on the belief that it compliments Porter’s differentiation model and RBV framework instead of contradicting them. In a lock-in strategy the performance outcomes are dependent on the success of another.
It relates to translating strategy formulations into practice. Performance realization of a strategy depends on the implementation effort. Successful implementation also depends on the appropriateness of the strategy. Since strategy implementation is a time bound process, alignment (i.e. strategic fit) is a key variable during times of radical change. Some of the other levers of successful strategy implementation are – Transformational leadership and motivating power. Resource allocation; its stretching and leveraging. Compatible organization structure & control systems. Inertia & resistance to change.
143 . – Better strategic and operational control. – Unlearning & learning of new skill sets. internal strategic fit (strategy – dominant logic) is critical to strategy implementation. – Resource commitment from top management. A high strategic fit (co alignment) is useful because it enables – – Appropriate and timely response.IMPORTANCE OF STRATEGIC FIT Strategic fit has a central role to play in strategic management. – Development of capabilities & competencies. While external strategic fit (strategy – environment) is relevant for strategy formulation. – Changing the rules of the game.
formulation & implementation can occur simultaneously. According to Mintzberg. learning levels are very high. learning levels are very low. In fact. at the cost of sacrificing a lesser degree of control. 144 .FORMULATION Vs IMPLEMENTATION Traditionally. while control is very effective.e. emergent strategy vis-à-vis intended & realized). strategy formulation and implementation has been perceived to be distinct & independent. Some of the key strategic learning's exists at the contact point between the organization and its customer. In such a situation. In such a situation. effective strategies are better crafted when there is a subtle overlapping between the two (i.
Pragmatism is the ability to make things happen. shift from compliance to commitment. bring about transparency. In contrast. transformational leaders go one step beyond – Design a well crafted and designed strategic intent of the organization. 145 . A transactional leader is usually confined to allocating tasks & responsibilities and extracting performance.ROLE OF TOP MANAGEMENT To bring about change and to implement strategies successfully. companies depend more on transformational leaders than transactional leaders. He should be an agent of change. Install a system of shared beliefs and values.
skills) also includes complex resources like capabilities and competencies. Performance Budget – SBU managers need to justify the distinctive resources in terms of the opportunity it is pursuing yields the highest possible pay-offs. labour. The various methods of resource allocation includes Historical Budget – The budgets framed by HQ for a particular SBU keeping in mind past trends. Intangible resources (Eg. Zero Based Budget – In this case the budget of a SBU has to be worked out right from the scratch.RESOURCE ALLOCATION Resources allocation includes tangible resources (Eg. brands. 146 . minimum requirement).e. land. patents. machines) referred to as threshold resources (i.
these capabilities are sustainable even in the medium to long term. though not necessarily in the case of emerging markets. Moreover. 147 . Mobiles). Due to causal ambiguity (complexity). Flat Screen Displays. Distinctive capabilities helps in stretching and leveraging resources thereby overcoming two major constraints involved in strategy implementation – times & costs.CAPABILITIES & COMPETENCIES Technology and business are slowly becoming in – separable. convergence of multiple streams of technologies at the product – market level is becoming increasingly evident (Eg. Distinctive capabilities are complex set of skills woven around technologies.
A single product or a dominant business firm usually employs a functional structure. 148 . An appropriate organization structure & adequate control systems are essential to implement strategies and achieve stated goals. processes become people independent. A firm in several unrelated businesses usually employs a SBU structure. The level of centralization and decentralization is decisive. A firm in several related businesses usually employs a divisional structure.STRATEGY & STRUCTURE It is a framework within which individual efforts are coordinated to bring synergy. Once the structure is in place.
Marketing.Technology. processes.TYPES OF STRUCTURES Functional Structure – Activities grouped together by a common function (Eg. Output). 149 . SBU Structure – Businesses segregated in terms of strategic dissimilarities (Eg. Virtual Structure – A boundary less or hollow organization. Project / Matrix Structure – A formal but temporary framework initiated for the completion of a particular project/crisis. or geographical locations. Finance). based on skills and competencies. Inputs . Divisional Structure – Units grouped together in terms of products. Team Structure – An informal group formed for a crisis. with team members having dual line of control. disbanded subsequently.
assuming responsibility. structures are becoming flatter and more simpler. It includes the desire for independence. leading to a tall structure. 150 . Environment & People – Economic and political conditions have a major bearing on structure coupled with the attitude and aspirations of the people in the organization. Technology – With more and more convergence of technologies in business. facing challenges & crises.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. as span is broader.
irrespective whether it is from worse to good or good to worse. Most firms undergo periods of strategic continuity rather than strategic discontinuity. there is a tendency to continue along the same lines. Inertia acts as an impediment in strategy implementation.e. Inertia is a characteristic of a firm that endures status quo (i. Common sources of 151 inertia – complacency with past successes. .INERTIA When a firm has been operating in a certain fashion for a long time. co0ntinuity). Changes in top management and unlearning helps overcome inertia. Top managers resist change.
However. strategies need to be evaluated on an ongoing basis to prevent deviations of fit. To prevent deviation of fit. Deviation of fit is detrimental to performance and may lead to strategic failure. firms should move beyond financial performance to strategic performance as organization systems are becoming complex. certain authors propose misfit as a source of superior 152 performance. .STRATEGY EVALUATION Strategy evaluation centers around assessment of strategic fit. Since the internal and external environment is in a state of continuous flux.
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. 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 IMPLEMENTATION It involves steering the company towards its original growth trajectory & stated goals. It involves assessing – strategic thrusts and milestones. However. It is open-ended as well as . Implementation Control – It aims at assessing whether key activities are proceeding as per schedule. Premise Control – Checking the validity of the assumptions on which a strategy was based. Special Alert Control – It intends to uncover unanticipated information having critical impact 154 on strategies. checking every premise is costly as well as difficult.
low strategic fit due to consultants intervention.BARRIERS TO STRATEGY EXECUTION Vision and strategy not actionable – Utopian ideas. difficult to translate into practice. Strategy not linked to resource allocation & capabilities – Lacking commitment of top management. Strategy intent not linked with goals and objectives – Lack of coordination at lower levels leading to negative synergy. “If you cannot . Performance measures are defective – What to evaluate against? How to measure the 155 construct? As a saying goes.
Together these factors determine the way in which a corporation operates. this may effect all others as well. On top of that. Today it is considered one of the most powerful tools for strategy implementation determining success or failure. the relative importance of each factor may vary over time and context. to be sure of successful implementation of a strategy. important or not they're all interdependent. so if one fails to pay proper attention to one of them. Large or small. 156 .7S FRAMEWORK OF Mc KINSEY The 7-S Framework of McKinsey is a management model that describes 7 factors to organize a company in an holistic and effective way. Managers should take into account all seven of these factors.
The 7-S model was born at a meeting of these four authors in 1982. Since then it is known as their 7-S model and is extensively used by corporations worldwide to implement their strategies. It appeared also in "In Search of Excellence" by Peters and Waterman. 157 .BACKGROUND & ORIGIN The 7-S Framework was first mentioned in "The Art Of Japanese Management" by Richard Pascale and Anthony Athos in 1981. They had been investigating how Japanese industry had been so successful. and was taken up as a basic tool by the global management consultancy company McKinsey. At around the same time in the US Tom Peters and Robert Waterman were exploring what made a company excellent.
Structure – The way in which the organization's units relate to each other in terms of their commonalities. Style – The way in which the top management influences the functioning of an organization. over time.THE 7’S Shared Values – It represents what the organization stands for and what the top management believes in. Staff – Human inter-relationships. Systems – The procedures. to reach identified & stated goals. Strategy – Trade-offs for the allocation of a firms scarce resources. formal & informal . 158 . processes and routines that characterize how work should be done. Skills – An organizations capabilities and competencies.
STRATEGIC FIT Strategy Structure Shared Values Systems Skills Staff Style 1st Order Fit 2nd Order Fit 3rd Order Fit 159 .
the soft S’s (skill. In contrast. their Japanese counterparts focus more on the soft S’s for their early success and sustainability. A choice of an alphabet often limits the scope and skews the interpretation of a model. style. structure. shared values) are very malleable and comparatively more difficult to identify & influence. systems) are comparatively easy to identify and influence. staff. 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. Ineffective in case of a virtual company. While the American co’s focuses on the hard S’s. 160 .
High Organic Growth Strategic Alliance Joint Venture Mergers & Acquisition Strategic Fit .STRATEGY IMPLEMENTATION ROUTES Strategic Fit .Low Take Overs 161 .
technologies. subsidized power).e. . tax holidays. 162 Risk of cost and time overruns. The entire infra-structural facilities are set up afresh having its own gestation and break-even. It has complete control over inputs. Govt. concessions are available for green-field projects. green-field projects. (Eg. (Eg. and markets. i. the entire value chain. i.ORGANIC GROWTH Here a firm builds up its facilities right from the scratch and continues to do so without any external participation. soft loans.e. Reliance Industries). SEZ’s. Long gestation leads to delayed market entry.
Alliances are usually in the areas of technologies or markets (Eg. Alliances are usually short-lived and disbanded once the purpose is achieved.STRATEGIC ALLIANCE It involves a pro-active collaboration between two or more firms on a particular domain or function for mutual gain. It touches upon a limited aspects of a firms value chain. . It has limited intervention power and usually lacks holistic commitment from the alliance partner. Tata Motors & Fiat). 163 It is a form of competitive collaboration. There is no funding or equity participation from the alliance partner & both the firms continue to operate independently.
Dominant logic of both the companies should be complimentary. A comprehensive MOU is essential. Tata – AIG.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. .Honda). Degree and extent of management control must be clearly 164 laid down. leaving minimum scope of overlapping. (Eg. Hero . Selecting the right partner is critical for success.
Integrated distribution channel leads to better market penetration and overall synergy. Acquisition is an outright purchase of a firm assets by another independent entity (Eg. .MERGERS & ACQUISITION It refers to the fusion of two or more firms into a single entity. Coca Cola – Thums Up). Brooke Bond & Lipton). Economies in scale leading to lowering of costs. Integration of assets and other financial resources. ITC Tribeni Tissues. with the individual firms ceasing to exist any more (Eg. Revival of a sick-unit through better management practices is a major motive behind an acquisition 165 strategy.
Inform SEBI / Stock Exchange after 5% stake is 166 acquired. Larger geo-graphical diversity. Integration of organization structure & cultures is difficult. often the new firm is “left alone”. Consolidation in a fragmented industry. Most countries have stringent laws that prevents hostile take over. Tata Steel .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. Instant access to capacities and markets.Corus). Make a public offer of not less than .
MANAGEMENT TOOLS IN STRATEGY 167 .
WHY MANAGEMENT TOOLS? Change is becoming pertinent in the business environment. The past is ceasing to be an indication of the future. it is also a source of potential threat. TQM – Doing the right thing the first time. Balanced Scorecard – Tracking strategy 3600. 168 . 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. Radical change is superseding incremental change. Change provides enormous opportunities. every time. Some tools to ensure that – Benchmarking – Adopt certain best practices.
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
e. .BENCHMARKING . It can at best complement it.LIMITATIONS More and more companies benchmark. the more similar they end up looking. Benchmarking is useful for bringing about operational efficiency. It does not shifts the growth 175 trajectory of the industry as a whole. While strategy is all about differentiation and not looking alike. Benchmarking merely reorients profits in the hands of few to profits in the hands in the hands of many (i. Strategy is more of creating best practices rather than copying them. clustering). but it cannot be used as a strategic decision making tool.
RE-ENGINEERING Redesigning leads to identification of superfluous activities or product features (i. Windows 95 to 97). DOS to Windows).e. Re-engineering attempts to radically change an organizational products or process by challenging the basic assumptions surrounding it.e. clean sheet). for achieving performance improvement (E. The task demands a total change in organisational 176 culture and mindset.g. . process mapping) and eliminating or improving them (E. Re-engineering involves complete reconstruction and overhauling of job descriptions from the scratch (i.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.
e. products.LEVELS Reengineering can be successfully leveraged at all levels of an organization with varying degree of results. Business – It looks into markets. BPR).REENGINEERING . Strategic – It looks into the process of strategic planning. 178 . It can be of the following types – Functional – It looks into the flow of operations (i. structures. . resource allocation and prepares the organization for the future through a reorientation of the entire strategic architecture. etc) and supports the organization for the present. processes.e. customers and suppliers and protects the organization from the future (i.
REVERSE ENGINEERING It is a process by which a product is dismantled and analyzed in order to understand how the product was designed and manufactured. learning curve advantage. – Causal Ambiguity. Cheaper versions of Intel chips and mother-boards manufactured in Taiwan. It generally acts as a threat to innovation. – Early entry advantages. – High cost and time acts as a deterrent. reverse engineering is a top-bottom approach. However. Indonesia). 179 . with an intention to copy it (Eg. protection can be had in the following ways – – Patenting. While traditional manufacturing is a bottom-up approach.
designing facilities.STAGES IN REVERSE ENGINEERING Awareness – Recognizing whether the product is found to be worth the time. Usually in such cases segmentation and pricing is different from the original innovator. nano-technology). Inaccurate assessment at this stage may lead to a failure of the entire project. Actualization – Obtaining and dismantling of the product to assess how it functions. machine tools to convert ideas into a marketable product (i. 180 . cost and effort necessary for the purpose of reverse engineering.e. Introduction – Launching the product in the market. Implementation – Developing of a prototype.
– Durability – 1980 manufactured cars still on road. – Features – Anti-lock braking systems.Euro IV. 181 . – Aesthetics – Appeal in design. More and more companies are moving towards meeting implied rather than stated needs. Air bags. It has eight dimensions (Eg. of service stations. – Perception – Customer notions. Car) – – Performance – Mileage of 14 kms to a litre of fuel. – Serviceability – Large no. – Conformance – Emission standards . – Reliability – Consistency in mileage.WHAT IS QUALITY? It involves the totality of a product or service in meeting certain stated or implied needs.
It had little impact on improving overall productivity. Management of quality was traditionally inspect it . It is deeply embedded as an aspect of 182 organisational life & culture. touching upon a limited aspect of a value chain.fix it in nature. zero defects. which ensures good market standing. TQM is a way of creating an organization culture committed to the continuous improvement of work processes – Deming.TOTAL QUALITY MANAGEMENT Objective – Management of quality ensures conformance to certain pre-set standards. .
Be customer centric – Generate the concept of internal customer (Ishikawa). Empowerment – It takes place when employees are properly trained. provided with all relevant information and best possible tools. Looking at quality as an endless journey. not a final destination.TQM – KEY TENETS Do it right. fully involved in decision-making and fairly rewarded for results. 183 . Kaizen – Make continuous improvement a way of life. the first time – From reactively fixing error in products to proactively preventing errors from occurring at the first place (Juran).
of units meet preset standards (Eg. 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. saving precious top management time. It is based on the principles of MBO (i.TQM . Quality Circles – It a small group of shop-floor employees who meet periodically to take decisions regarding operational problems and crises. equal participation).STRATEGIES Outsourcing – It is the process of self-contracting services and operations which are routine and mundane.e. enabling the firm to concentrate on core activities essential to customer satisfaction. 184 . 6-Sigma).
...BALANCED SCORE CARD Some interesting comments .. – In the majority of failures – we estimate 70% – the real problem isn’t (bad strategy) ....... Source: Fortune Magazine Why CEO’s fail? 185 . – Efficiency and effectiveness is passé. strategy implementation has never been more important. – Less than 10% of strategies effectively formulated are effectively executed. it’s bad execution...
Organizations need to move from financial to strategic performance.CONCEPTUALISATION A company’s performance depends on how it measures performance. 186 . Focus more on causes. Most managers tend to rely on traditional measures of performance having its origin in finance as they are well tried and tested.BSC . 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. rather than effects.
BSC – KAPLAN & NORTON (1992) A BSC helps a manager to track and communicate the different elements of company’s strategy. The most critical element of a BSC is to measure these four dimensions. because they have too many. 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. 187 .
of visits or calls made % of NPA’s 188 .e.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.
of new product launches Vs competition Product pricing Vs competition 189 .BUSINESS PERSPECTIVE GOALS Skills Excellence Exposure Introduction MEASURES New capabilities and competencies Implementation & gestation period Bank and supplier credit limits & PLR Unit Costs / Conversion Ratio / Defect Ratio No. of times covered in media No.
of new patents registered Time to develop next generation products Average and spread in operating cycle % of products that equal 2/3 sales No.LEARNING PERSPECTIVE GOALS Technology Manufacturing Focus Timing MEASURES No. of product innovations 190 .
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 .
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 .BSC .
ADVANTAGES Most often top managers face information overload.BSC . Modern managers should be poised to ask the right questions. doing right things instead of doing things right). . sharing of vision).e. 194 performance will automatically follow. they don’t know .e. Shift from control to strategy (i. The BSC brings together the different elements of a company’s strategy at a glance. As a result.what they don’t know. Focus on cause not effects. Seek excellence. It helps translating strategy into practice (i.
EFFICIENCY Vs EFFECTIVENESS Ineffective Effective Inefficient Goes out of Business quickly Survives Efficient Dies Slowly Thrives 195 .
. not only thrives. but also sustains it. Porter 196 .Michael E.EFFECTIVENESS + STRATEGY A company which is effective as well as strategic.
CORPORATE RESTRUCTURING 197 .
Tata Group). Radical change brings about strategic variety.. to survival of the most adaptable. Strategic variety may be caused by changes in the as external well as internal environment.. Strategic variety brings paradigm shift. firms use restructuring strategies..CORPORATE RESTRUCTURING The only thing constant in today's business environment is change. “every organization must be prepared to abandon everything it does.” 198 . As Peter Drucker pointed out. To adapt to the changing environment. Restructuring involves consciously driving significant changes in the way an organizations thinks and looks (Eg.... from survival of the fittest .
downscoping). Walkman. and dividing the core businesses into SBU’s (i. ATM. Fax.e. Internal customers should also not be neglected. Instead. . they should strive to provide unimaginable value ahead of its time (Eg. Core Business – Company’s should introspect – What business are we in? Business evolved out of opportunism or myopia should be divested. downsizing or rightsizing).RESTRUCTURING – BASIC TENETS Customer Focus – Restructuring ideally begins and ends with the customer. Structural Changes – Conventional hierarchical structures should be disbanded in favour of more 199 flexible ones (i. Company’s should go beyond just asking what he expects. etc).e.
...... Kumar Birla today is more dependent on professionals. 200 .) The Aditya Birla group typically relied on the “marwari” community for key management positions .) Reliance dismantled their industrial embassies ... Ratan Tata now drives the point the group means business. Restructuring also requires cultural reorientation... It is created and institutionalized by the top management. During the times of JRD. started focusing on their capabilities. the Tatas were considered a benevolent and charitable organization.RESTRUCTURING – BASIC TENETS Cultural Changes – A culture represents the values and beliefs of the people about the organization.. ..
Honda’s ad says. Carry out PR campaigns. Communicating to the media about organization efforts to deliver quality products.MOVING CLOSER TO THE CUSTOMER As companies evolve. “ … one reason our customers are satisfied is that we aren’t. Use the reach of networking technologies. Organizing customer and supplier meets. Restructuring provides a platform to close this gap. Getting feedback & addressing customer complaints. they tend to move away from the customer.” 201 . Publicizing welfare projects to demonstrate CSR.
202 . it may be smooth (Eg. Mittal – Arcelor) and can take various forms. horizontal. It may include brands as well. where the difference in valuation is settled off through cash or equity (Eg. Tata – Corus) or hostile (Eg. Glaxo – Heinz). or conglo-merate. Further. It can have two forms. including its intangibles – Mergers – It may be vertical. spin-off and equity carve. Hive Off – It involves siphoning of assets under control. Further spin-off can be classified as split-off and split-up.ASSET RESTRUCTURING Asset Restructuring – The asset composition of a firm undergoes a major change. Asset Swaps – It entails divesting and acquisition simultaneously by two companies.
Reliance Ent).HIVE OFF Spin-Off – A spin off is the creation of a new entity. 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. – Split-Off – In a split-off. in which the equity is allotted amongst the existing shareholders on a pro-rata basis (Eg. – Split-Up – In a split-up. Equity Carve – It involves selling a minority stake to a third party while retaining control (Eg. Tata Industries selling 20% stake to Jardine Matheson). the existing shareholders receive equity in the subsidiary in exchange for the stocks of the parent company. 203 .
204 .DIVESTITURE It involves the sale of a brand or a division of a company to a third party. for a specified market or in general with full management control. strategic misfit. – Poor performance. A complete sell-out is known as divestment (TOMCO). Selling out in phases is called disinvestment (IPCL). In 2005. L&T sold its cements division to Aditya Birla group. repay long-term debts. but retained its engineering division. Generic motives include – – Raise working capital. In 1995. Parle sold its Thums Up brand to Coke for $40 million apprehending fierce competition.
It provides greater leverage as well as management control. Share Buyback – It is a process of cancellation of shares out of free reserves to the extent of 25% of paid-up capital (Eg. Tatas take-over of Corus for US $11. 205 .3 billion. involving 608 pence per share).The internal & external liability composition undergoes a major change – LBO – Acquiring control over a substantially larger company through borrowed funds (Eg. Conversion – Replacing debt with equity or vice-versa or costlier with cheaper debt or cross currency debt.CAPITAL RESTRUCTURING Capital Restructuring . Wipro).
256 cr ACC – Rs. 1700 cr Trent – Rs. 120 cr Tata AIG – Rs. 1890 cr CMC – Rs.Rs. 42 cr Voltas .BUSINESS RESTRUCTURING – TATAS Divestments Lakme – Rs. 150 cr VSNL – Rs. 1860 cr . 1170 cr Goodlass Nerolac – Rs. 950 cr Merind . 99 cr Tata Power – Rs. 230 cr Diversifications Tata Motors – Rs.Rs. 250 cr Tata Tetley – Rs. 1439 cr 206 Tata Timken – Rs 120 cr Tata Telecom – Rs.
of operating units. usually as a result external turbulence. It can be carried out in the following ways – Downsizing – It is a systematic one-time reduction in the no. 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). of a firm’s employees and sometimes in the no. 207 . Turnaround is the primary motive. Survival is the primary motive. keeping the composition of business intact (Jet Airways).ORGANIZATIONAL RESTRUCTURING Organizational structure and systems calls for a change when strategic variety is apparent.
inertia). thumb rules) of the top management. The longer the period. The dominant logic represents the perceptions and biases (i. the more difficult it becomes to uproot the paradigm (i. Dominant logic becomes deep-rooted in organizational contexts depending on the period it is in place (tenure of the CEO). as strategies are based on such beliefs and biases.e.e. 208 . Strategy change is unviable without a preceding change in its dominant logics.STRATEGIC CHANGE One of the most difficult components of organization restructuring is the mindset of the top management represented through its dominant logic and its shared values reflected in cultural orientation.
FORCES AGAINST STRATEGIC CHANGE The problem with strategic change is that the whole burden typically rests on few people (i.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. Companies achieve real agility only when people at every level rise above the ordinary to face the challenges – revitalization or transformation. In most organizations. 20% of the people carry out 80% of the changes). 209 . the factor that stifled change & performance was – culture.
The best way is to alter the institutional point of view. process ownership. Promote inventive accountability. Questioning every basic action of the organization. Understand and deliver the quid pro quo. Harness setbacks. 210 . never take no for an answer. Create relentless discomfort with the status quo. Manage from the future.SUCCESSFUL TRANSFORMATION Build an intricate understanding of the business model at all levels of the organization. Encourage uncompromising straight talk. it is not about winning but about learning.
Aspects of current culture which needs to be overcome. It involves identifying – Aspects of current culture which needs to be reinforced. 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. It involves diagnosing a change situation – systems & structures. by identifying forces for and against change. 211 . also known as cultural-web.FORCE-FIELD ANALYSIS A force-field analysis provides an initial overview of change problems that needs to tackled.
OUTCOMES Alternatives Organizational Short .Term Reduced labour costs Reduced debt costs Emphasis on strategic control Business High debt costs Higher risk 212 Long .Term Loss of human capital Lower performance Higher performance Capital .RESTRUCTURING .
213 . down-scoping or asset stripping. reverse engineering and regenerating. hence go in for downsizing. focuses on reengineering. 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. the second one is a more viable strategy and sustainable option in the long run. In order to put back the company on the right track they are resort to – Denominator – It assumes that turnover cannot be increased. Numerator – It assumes that turnover is not a barrier or constraint.
TURNAROUND MANAGEMENT 214 .
215 (Govindarajan and Trimble.... . January 1997). – Less than 10% of the Fortune 500 companies as first published in 1955.. still exist as on 2005.WHY TURN AROUND MANAGEMENT? Some interesting insights ... – Only seven of the first fifty Indian business groups in 1947 were even in business by the turn of this century. and that the thirty-two of the country’s largest business groups in 1969 are no longer among the top fifty today. Source: Why do firms atrophy? (Business Today.
and achieves sustainable performance recovery.e. systems. While content focuses on endogenous and exogenous variables. ends the threat with a combination of strategies. process focuses on – A logic to explain a causal relationship between intervening variables. Stage Theory). Both content (what) and process (how) are equally important for a successful turnaround. A category of underlying principles and concepts.TURN AROUND MANAGEMENT A turnaround is said to occur when a firm perseveres through an existence threatening performance decline. and capabilities. As a sequence of events describing how things change and why they change (i. 216 . skills.
Substantial shifts in consumer preferences. 217 . unavailability or radical lowering of substitute costs or technological obsolescence. Rising input costs. leading to lack of acceptability from distributors and customers. Low stakeholder confidence. Some indicators Continuous cash flow crises as a result of dwindling market-share and profits.TURNAROUND INDICATORS Most firms atrophy simply because they fail to diagnose the indicators that acts as threat to organizational existence. Low employee morale leading to high employee attrition at all levels. suppliers and bankers. especially in key positions. Uncompetitive products or services.
. Emphasis on advertising and market penetration. Product redesigning or reengineering. Revamp product portfolio. Recalibrate prices. consider extension. focus on power brands. Common approaches adopted Change in key positions. they adopt surface level measures (disprin popping) which most often fail.TURNAROUND ILLUSION The first step to a successful turnaround is the basic acceptance of the fact that …. liquidating dead assets. Extending work hours. which most top managers fail to appreciate. be more customer centric. based on elasticity. prune work-force. Hence. 218 . “all is not well”.
TURNAROUND STAGE THEORY Stage 1 Decline Stage 2 Stage 3 Stage 4 Outcome Response Transition Performance Equilibrium Line Success Failure Indeterminate Nadir Time 219 .
Identification of the stimulus leads to the arrest of the downfall. It involves the identification of the theoretical perspectives that explains performance decline – K-Extinction – It suggests that macro economic and industry wide factors are responsible for decline. primarily dwindling resources and capabilities are responsible for decline. R-Extinction – It suggests that organization factors. It has its origin in “environment led fit” that subscribes to the view that a firm has little control over external factors.DECLINE Decline is the first stage in the turnaround process. It has its origin in “resource led stretch” and subscribes to the view that a firm has substantial power to override the context. 220 .
asset reduction. 221 . new market initiatives. The response must match the cause of the decline. Strategic responses focus on changing or adjusting the business the firm is engaged in through long term moves such as – integration. If the decline stems from structural shifts.RESPONSE INITIATION Turnaround responses are typically categorized as operating or strategic. If the underlying cause is internal efficiency. diversification. Operating responses typically focuses on the way the firm conducts business and involves tactics geared towards – cost cutting and process redesigning (BPR). the response should be strategic. the response should be operational.
when decline deepens shifts in strategic position becomes essential. Untangling this question brings into focus three events – Domain – Many of the strategic cures have limited applicability for an affiliated firm. 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. Contour – It is easier to reverse decline in the earlier stages through operational measures. Similarly new market initiatives is feasible only for multi-product firms. 222 .RESPONSE DICHOTOMY The response initiation is somewhat dichotomous and cannot be universally applicable.
Effective levers of transition. transparency.7 years with a range of (4-16) years. The top management has a key role to play through empowerment.e. participative management (i. Empirical studies show that average time is 7. many a times early signs of recovery fades out.TRANSITION Transition usually reflects the first signs of recovery. consensus). substantial amount of time usually passes before results begin to show (i. 223 . lead – lag). confidence building measures.e. However. role model. Support from all the stake holders through resource commitment. Sustenance is the key factor in this stage. However.
it should adopt a holistic approach. Failure is an indication that initial momentum was not sustainable characterized by irreversibility. Regaining lost market share and distributor confidence. Share price indications and media coverage. Commanding a premium in the market.OUTCOME Outcome is said to be successful when a firm breaches the equilibrium performance level. Instead of focusing on financial parameters alone. Revival of key customers and new product launches. 224 . Cut off points must be unequivocal. Supplier and banker confidence.
COOPERATIVE STRATEGIES & ALLIANCES 225 .
In the cooperative strategy continuum as firms move up the value order. consortia. strategic alliance. and globalization . 226 .COOPERATIVE STRATEGIES Cooperative strategies are a logical and timely response to changes in business dynamics. or joint venture. licensing. supply-chain partnership. More and more companies worldwide are moving away from competition to co-option to leverage their resources and enhance bargaining power. Any cooperative strategy maybe between firms within the same country or cross border as well. the commitment and the involvement between the firms increases manifold. It can assume any of the following forms – franchising. technology.
owners of the brand Monginis allows its franchisees to sell its confectionary products. Branding is critical to franchising. 227 . Titan Inds.FRANCHISING Franchising – It is a contractual agreement between two legally independent firms whereby the franchiser grants the right to the franchisee to sell the franchisor’s product or service or do business under its brand-name in a given location for a specified period of time for a consideration. It is an effective strategy to penetrate markets in a shortest possible time at a minimum cost. owners of the brand Tanishq allows its franchisees to sell its jewellery products. Switz Foods.
Become a systems integrator (CKD). HM manufacturing GM range of cars in India with a buy-back arrangement is a perfect example of CBU. as in Tata Indica. 228 . Develop a product through its crude stage. refine processes and adopt necessary technologies (SKD). Different levels of licensing Manufacturing without embracing any technology (CBU).LICENSING Licensing – It is a contractual agreement between two legally independent firms whereby the licensor grants the right to the licensee to manufacture the licensor’s product and do business under its brand-name in a given location for a specified period of time for a consideration.
CONSORTIA Consortia – They are defined as large inter-locking relationships & cross holdings between businesses in a similar industry. Coke – Pepsi). Collusion – Few firms in a matured industry collude to reduce industry output below the equilibrium level. Airbus – Boeing). leverage upon size to preempt competition by escalating entry barriers (Eg. Cross Holdings – A maze of equity holdings through centralised control to ensure earnings stability & threshold resources for critical mass (Eg. It can be of the following types – Multipartner – Intends to share an underlying technology or asset. Tata. 229 . enabling them to increase prices (Eg. Hyundai).
link their capabilities to create value for end users. Continuous sharing of knowledge is critical to the success of a supply chain partnership. otherwise it 230 becomes routine outsourcing. . Companies in different industries with different but complimentary skills.SUPPLY CHAIN PARTNERSHIP It is a pro-active & collaborative arrangement between supplier and customer aimed at achieving better control over the value chain (Eg. Tata Motors – IDEA). It usually provides a platform to sort out differences between conceptualization and implementation to suit local market needs.
learning organization. enhance credibility. instead of hurrying into a relationship. preempt competition.STRATEGIC ALLIANCE It is an short to medium term understanding between two or more firms to share knowledge and risk. effective R&D management. Reliance – Du Pont). Firm’s should undertake a long courtship with potential partners. 231 . enter newer markets. Despite their popularity (50-60)% of the alliances fail to accomplish their stated objectives. Partner selection is one of the critical success factors. Tata Motors – Fiat. Generic motives involved are . to gain knowledge and to obtain access to new markets (Eg. design next generation products.
TYPES Collusion – Tacit top management understanding to neutralize price wars (Eg. Coke – Pepsi). Alliances of the Weak – An alliance is entered into to preempt competition (Eg. Bootstrap – An alliance between a weak and a strong company with an intention to acquire it. Bajaj – Castrol). Backward – An alliance (quasi or tapered) with a supplier of critical components seeking commitment (Eg.STRATEGIC ALLIANCE . Airbus – Boeing). Complementary Equals – Two firms mutually promoting each others complimentary products (Eg. Whirlpool – Tide. 232 . Maruti).
Too much stress on financials & structure be avoided.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. – Japan Vs US). 233 . Firms from developed markets seek access to markets and firms from emerging markets seeking access to technology. Cultural orientation has been found to have a profound effect on top management’s strategic orientation (Eg.
including ability to provide quality products and services. Dominant Logic’s – Similarity in beliefs & biases. Willingness to share knowledge and skills. 234 . Experience related to previous alliances. Partner’s ability to acquire fresh skills. Intangible Assets – Move beyond the financials of the firm. Unique Resources – Abilities or skills which cannot be easily duplicated. Managerial capabilities.PARTNER CHARACTERISTICS Complimentarity of Capabilities – The degree to which partners resources can be used in conjunction.
incorporating clear signs of continuing independence for all partners. understanding the chemistry. vows to include commitment to expand the relationship. Selection & Courtship – It involves self analyzing.MANAGING ALLIANCES Alliances are more than just a deal. 235 . Changing within. degree of compatibility. differences not anticipated earlier. Setting up the housekeeping. the value chain. Learning to collaborate – strategic. instead of focusing controlling the relationship. Getting Engaged – It should incorporate a specific joint activity. partners should nurture it. operational & cultural integration.
e. There are substantial linkages in the value-chain. whilst the partners continue to operate independently. . combining parts). synergy) rather than mere exchange (i. It lasts till the vision is reached. a joint venture is a selection among modes by which two or more firms can transact. separation is very 236 bitter.JOINT VENTURE A joint venture is a long term association between two equal partners to create an independent firm (SPV) by complementing their resources and capabilities to explore newer businesses or markets for achieving a shared vision. It aims at creating new value (i.e. Conceptually.
in addition to a high degree of asset specificity. It may also be linked to deterring entry or eroding competitors position.JOINT VENTURE – GENERIC MOTIVES Transaction Cost – The situational characteristics best suited for a JV are high performance uncertainty. though more profitable alternative to other choices. Organizational Learning – It is a means through which a firm learns or seeks to retain their capabilities. 237 . Strategic Behaviour – Firms may override transaction costs. The market fails as sellers are unwilling to reveal their technology and buyers are unwilling to purchase in the absence of inspection.
Define future industry standards. – Eg. Endorsement from government authorities. – Eg.OTHER MOTIVES Entry into newer markets. Yamaha – Escorts. TVS – Suzuki (4-Stroke Engines) Fill gaps in existing product lines. Daimler – Chrysler (Premium Cars) 238 . – Eg. Essar – Hutch (Vodafone). Sharing of resources. – Eg. Learning new technologies. – Eg. – Eg. Renault – Nissan (Minivans – Cars). Maruti – Suzuki. Eli Lily – Ranbaxy.
Risk of brain (i. Century . PAL – Fiat If the cost of continuing exceeds the exit costs? – Eg. – Maruti – Suzuki. – Godrej – Procter & Gamble. LML – Piaggio Differences in size and resource base. Risk of over dependence.Enka. Tata – Aditya Birla in Idea Cellular 239 .e.RISKS INVOLVED Incompatibility – Differences in cultural background. technology) drain. – Eg. Modi – Telstra What after exit (parenting disadvantage)? – Eg. – Eg.
Incompatibility – Performance expectations. Costs – Other modes of transaction becomes cheaper. 240 . Culture – Reconcile gaps.PRE-REQUISITES FOR SUCCESS Commitment – Mutual trust. Inertia – Differences in age and evolution patterns. Equality – Lack of dominance. Focus – Avoid strategic myopia. Flexibility – Sufficient space to breathe and adjust. Agreement – Clarity on operational control. Objectives – Shared vision. Partner – Avoid duplication of skills and capabilities. time sharing. respect.
MERGERS & ACQUISITION 241 .
Most countries have stringent laws that prevents hostile takeovers (Eg. The larger objective is to leverage on size. SEBI Takeover Code. 242 . 2002). Ranbaxy .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. HLL – Tomco). An acquisition is the purchase of a firm by a firm (of larger size. reverses are also taking place through LBO) with a view to acquire conglomerate power and induce synergy (Eg. An acquisition is said be smooth if it is with the consent of the management (Eg.Daichi) and hostile if it is without the consent of the management (Eg. Mittal Arcelor). Brooke Bond – Lipton).
. Preferential – A preferential allottee ending up acquiring 5% stake also comes under its purview.e. Acquirer – Someone (individual or firm) who picks up an atleast 5% stake without mandatory disclosure having an intention to wrest management control (i.SEBI TAKEOVER CODE. creeping acquisition). 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. Control – A special resolution of 75% of the share 243 holders approving the change of guard. Hike – An acquirer who has already picked up a 5% has to make a mandatory disclosure for every additional 1% stake that it acquires.
credentials or track record is at stake. asset stripping). and/or does not enjoy the confidence of the different stake holders. 2002 Pricing – Acquirers will have to offer minority shareholders (at least 20%) the past 26 weeks or past 2 weeks average price. whichever is higher as an exit route (Eg.SEBI TAKEOVER CODE. the SEBI can intervene and block share transfers if: the acquirer has ulterior motives (i. Gujarat Ambuja – ACC). Grasim – L&T Cement. SEBI – In case of a hostile take over.e. Disclosure – All acquirers have to inform the respective stock exchanges where it is listed and SEBI upon acquiring the basic limit and upon every incremental limit thereon. 244 .
Electrolux . Conglomerate – It involves integration of two distinctly unrelated businesses.Kelvinator). Vertical – It involves complimentarily (partially related) in terms of supply of inputs or marketing activities (Eg. Godrej. 245 . 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. ITC).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. usually opportunistic (Eg. Reliance).
Reduction in risk. Economies of size. Tax benefits (Eg. Avoiding risk of new product development. Acquiring assets or capabilities (Eg.MOTIVES Increased market / conglomerate power. Ulterior motives – (Eg. Mittal – Arcelor). ICICI –ITC Classic). Access to newer segments (Eg. scale and scope. Tata Steel – Corus).e. Asset Stripping – Shaw Wallace). 246 . Coinsurance effect – Higher debt raising capability. Reduced gestation (i. quick access). Ranbaxy – Crosslands).MERGERS & ACQUISITION . ITC Bhadrachalam). Global image (Eg. Overcoming entry barriers (Eg.
Overvaluation of buying firms (Eg.MERGERS & ACQUISITIONS PITFALLS Cultural differences (Eg. Merging of organisational structures. 247 . Top management overtly focused on due diligence exercise and negotiations. Managing size. Inability to achieve synergy. When Tata Steel started negotiations with Corus. Managing over-diversification. Overvaluation is often as a result of an ego drive and substantially affects future returns. their initial offer was around 420 pence/share. Tata – Corus). neglecting core business. while the ultimate acquisition was made at 607 pence/share).
Kingfisher – Air Deccan). with an objective to reinforce its growth trajectory or to take on the might of a comparatively larger player (Eg. Brooke Bond – Lipton).MERGER TYPE & PLC Introduction – A larger firm may acquire a newly formed entity with an objective to preempt new competition or acquire its license (Eg. Tata Steel – Corus). Maturity – A larger firm acquires a smaller firm with an objective to achieve economies of scale and experience curve effects (Eg. Growth – This stage may witness parallel merger of two firms of similar size. 248 . Decline – Horizontal mergers are undertaken to ensure survival. vertical to save transactions costs.
FRAMEWORK Positive contribution to the acquired company. A concern of respect and trust for the business of the acquired company. An acquisition just for the sake of it or reputation yields very little value in the long term.INTERNATIONAL M&A . active top management intervention in phases. Immediate attempts to super impose structure and culture may cause bottle necks. Blanket promotions across entities and confidence building exercises needs to be practiced. A common shared vision. Strong differences may stifle plans and its execution. Left alone syndrome. 249 .
It will enable focus on customers and key people. promptly. . Redefine responsibilities and authority. Decide upon management control systems. They can carry the message to the various stake holders. Shift attention from business portfolio to people and processes. Decide on the new hierarchy.INTEGRATION .BLUEPRINT Take the media into confidence. Integrating work processes. 250 Do not ignore the “people factor”. Determine business strategy.
– Unstated reasons – Personal self interest and hubris. – Market for corporate control. operational & financial). While under valuation may be a significant opportunity.M&A . 251 . over valuation can become a curse.VALUATION The process of valuation is central to M&A. – Synergy – Potential value gain from combining operations (i. Financial motives – Undervaluation relative to true value. Valuation decisions are arrived through a due diligence process when the prospective acquirer gets access to the books of accounts of acquiring company. The process takes (6-12) months.e.
or from increased market power which increases sales and margins. 252 . when the “fit” between the two entities is very poor.VALUING OPERATIONAL SYNERGY Synergy – It refers to the potential value gain where the whole is greater than the sum of the parts. – Vertical Synergy – Gains come from controlling the supplychain and savings in transaction costs. – Conglomerate Synergy – Gains come when one firm complements the resources or capabilities of another (Eg. Synergy can be negative as well. Innovative product – Good distribution network). Sources of operational synergy – Horizontal Synergy – Gains come from economies of scale which reduces costs.
Hotmail). ITC – Bhadrachalam Paper). and without paying take-over premiums. 253 .VALUING FINANCIAL SYNERGY Diversification – Reduce variability in earnings by diversifying into unrelated industries. shareholders can accomplish the same at a much lesser cost. but availed after being merged with a profitable firm (Eg. Cash Slack – It reduces asymmetry between cash starved firms with deserving projects and cash cows with no investment opportunities. Synergy comes from projects which would not have been undertaken if the two firms stayed apart (Eg. Tax Benefits – Tax benefits may accrue from tax entitlements and depreciation benefits unutilized by a loss making firm. However.
This will induce higher debt capacity.VALUING FINANCIAL SYNERGY Co-Insurance Effect – If the cash flows of the two firms are less than perfectly correlated. – Coupon rates may also be negotiated at lower rates. the cash flow the merged firm will be less variable than the individual firms. – Default risk comes down and credit rating improves. higher leverage. as risky debt is spread across the new firm's operations. hence better performance. 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. It relates to the concept of diversification.
While value of corporate control is negligible for firms that are operating close to their optimal value. The value of control can be substantial for firms that are operating well below optimal value.VALUING CORPORATE CONTROL Premium of M&A are often justified to control the management of the firm. 255 . – – Value of Control = Value of firm after restructuring Value of firm before restructuring. since a restructuring can lead to significant increase in value. Assessment of perceived quality is critical. The value of wrestling control is inversely proportional to the perceived quality of that management.
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. Confidence of investment bankers and the international financial community is essential. It is a very costly and risky proposition. sometimes in combination with the assets of the acquiring company.e. LBO facilitates a relatively smaller firm to bid for a comparatively larger firm in the bid for management control. 256 . The assets of the acquired company are used as collateral for the borrowed capital.
the advantages of going public includes . on-going valuation. 257 . However. A research study showed that 30% of the publicly listed firms reported above average returns after going private. – Separation of ownership from management.access to financial markets. – The need to satisfy analysts and shareholders. – Increased information needs.TO GO PUBLIC OR NOT? However. off-late many publicly traded firms have gone private keeping in mind the following – – The fear of LBO. liquidity. The increased benefit showed in the following way – reduced costs and increased revenue.
e. co-insurance effect). – Cost of debt coming down (i. – 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). 258 . – It is a temporary phenomenon. which disappears once assets are liquidated and significant portion of debt is paid off. – Managers cannot be trusted to invest free cash flows wisely. – Cash trapped company unable to utilize opportunities.
initial rise in leverage is anticipated. – Increase equity valuation. 259 . leverage is expected to decrease over time. 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. Lack of sufficient cash flows to repay costly debts resulting in a possible debt trap. Therefore. Any discounting has to reflect these changing cost of capital.EFFECT OF HIGH LEVERAGE Increases the riskiness of dividend flows to shareholders by increasing the interest cost to debt holders.
allowing the private company to bypass the usually lengthy and complex process of going public. – Tax shelter. Objectives – – Traditional route of filing prospectus and undergoing an IPO is costly. – Facilitates better valuation and forthcoming offerings. time-barred. – Automatic listing in major exchanges.e. small in size but having a promising business. shell company) by a private company. – Prevents dilution of equity. or costly. which has discontinued its operations (i. 260 .REVERSE MERGER Reverse Merger – The acquisition of a public company.
– Takeover announcements reported 30% excess returns. Excess returns also vary across time periods. However. 261 . During bearish periods excess returns were 19%. and 35% during bullish periods. Initial anomaly in stock prices usually normalizes over a period of time (6-12) months. Most target firms are taken over within (6090) days. – Merger announcements reported 20% excess returns. takeover failures have only initial negative effects on stock prices.EFFECT OF TAKE-OVER ANNOUNCEMENT The shareholders of target firms are the clear winners.
and Kim. as stock markets become more and more perfect such anomalies would reduce Source: Jensen and Ruback. Desai. Bradley. – Most studies reported insignificant excess returns around take-over offers or merger announcements.EFFECT OF TAKE-OVER ANNOUNCEMENT The effect of take-over announcement on bidder firm’s stock prices are not clear cut. – However. in the event of take-over failure negative returns to the extent of 5% on bidder firm stock prices is reflected. over time. 1983. 1988 . Brickley. and Netter. – However. 262 Jarrel. 1983.
Poison Put – Premature retirement of bonds at attractive rates to pour surplus cash and make target investment unattractive. Rights).DEFENSIVE STRATEGIES Golden Parachute – An employment contract that compensates top managers for loss of jobs as a result of change in management control. Poison Pill – An offer to existing shareholders to buy shares at a substantial discount to increase their voting rights (Eg. so that nothing is left for the raider to strip off. Asset Stripping – The targeted company hives off its key assets to another subsidiary. 263 .
But often the White Knight turns a betrayer himself (Eg. Gray Knight – The target company takes the help of friendly company to buy the shares of the raiding company. 264 . East India Hotels – Reliance Industries – ITC). Pac Man – The target company makes a counter bid to take over the raider company. Green Mail – The targeted company buys large blocks from holders either through premium or through pressure tactics (Eg. Shapoorji Pallonji). thus thwarting the raider company’s attention.DEFENSIVE STRATEGIES White Knight – It is the placing of stocks to a cash rich investor and bargaining for protection in return.
COMPETING FOR THE FUTURE 265 .
Nokia overpowering Motorola. Wal-Mart overpowering Sears. Most companies were too preoccupied with the present than the future? 99% of the companies overpowered. Honda overpowering Volkswagen. What went wrong???? What were they doing with the present? What were they pre-occupied with? 266 . Honda overpowering GM. The reverse was true for the companies overpowering. Compaq overpowering IBM.GETTING OFF THE TREADMILL Canon overpowering Xerox. were spending 99% of their precious time dealing with present. British Air overpowering Pan Am. Hitachi overpowering Westinghouse.
downsizing). falling market share). CEO’s brutally pick up the knife and ruthlessly carve away layers of corporate flab (delayering. Not knowing when to stop. These denominator based managers stuck to their restructuring strategies (like building pyramids) and didn't know what to do next? Thus they became history? (like the pharaohs) 267 . most often they ended up cutting corporate muscle as well and became anorexic. declining margins. Thus efficiency was grievously hurt. decluttering.THE PAST OF COMPETITION Beyond Restructuring – When a competitiveness become inescapable problem (stagnant growth.
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. incrementalism or nominal innovation has almost reached a plateau. 268 . The future is not about catching up with competition.S. However. A poll in circa 2000 revealed that 80% of the U. ensuring only survival of the present. but not of the future.THE PRESENT OF COMPETITION Beyond Reengineering – Numerator based managers (innovation) at least offers some hope. top managers believed that quality will be a source of competitive advantage of the future.
THE FUTURE OF COMPETITION Regenerating – Leaner. Empower from bottom to top. It involves Dream about the company’s future. 269 . Companies need to fundamentally reconcieve itself. not the other way. reinvent its industry. as important as these may be. Create a potential gap. and regenerate its strategies (breaking its – managerial frames). they are not enough to get a company to the future. faster. Creating the future requires industry foresight. don’t predict. better. Transform the industry. aspirations and resources. It is based on deep insights into trends in technology. not just the organization. demographics and lifestyles.
ABOUT THE DREAM Which customers will you be serving? What will the potential customer look like? Who will be your future competitors? What will be the basis of your competitive advantage? Where would your margins come from? What will be your future competencies? Which end product markets would you cater? 270 .
ABOUT THE TRANSFORMATION The future does not belong to those who take the industry for granted. they do not need to restructure.e. by converging technologies complex. Therefore. 271 . Redraw the boundaries between industries. Successful companies have a complete grip over the industry. hence do not fall sick in the first place. Create entirely new industries (i. It is about deliberately creating a strategic misfit. blue oceans). Change in at least one fundamental way the rules of engagement in an industry. It drives a hunger and a passion to transform.
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. A revolution that is thrust upon from the top seldom sustains.ABOUT THE EMPOWERMENT Bring about a revolution (a paradigm shift) in the organization. The middle management plays a strong moderating role. Transformational leaders merely lead the way. More importantly. Most successful revolutions (Gandhi to Mandela) rose from the dispossessed. 272 .
What does it take to get to the future first? Understanding how competition for the future is different. without taking undue risk. Apple – iphone). An ability to energize the company. Apply the 40 – 30 – 20 principle. Get to the future first. It requires a lot of common sense and a little bit of out of the box thinking. 273 . A process for finding and gaining insight into tomorrows opportunities (Eg. Toshiba – LCD. Companies need to strategize (think ahead of times).THE FUTURE OF STRATEGY A company must get to the future not only first but also for less. South West Airlines – LCC.
as on their aspirations. The farther one can see in this endless space. each point in space represents a unique business opportunity. As there is no one future.HOW DOES THE FUTURE LOOK LIKE? There is no rule which says that for every leader there will be a follower. greatness from mediocrity. Companies of the future will be not based so much on the strength of their resources. What distinguishes a leader from a laggard. but hundreds. is the ability to imagine in a different way what the future could be. the farther it will be away from competition. 274 . We are in the midst of a 3600 vacuum.
THE EMERGING STRATEGY PARADIGM Not Only Reengineering Processes But Also Regenerating Strategy The Competitive Challenge Organizational Transformation Industry Transformation Competing for Market Share Competing for Opportunity Share Finding the Future Strategy as Learning Strategy as Positioning Strategy as Engineering Strategy as Unlearning Strategy as Dream Strategy as Architecture 275 .
THE EMERGING STRATEGY PARADIGM Not Only But Also Mobilising for the Future Strategic Fit Resource Allocation Strategic Misfit Resource Stretch & Leverage Getting to the Future First Existing Industry Structure Product Leadership Single Entity Product Hits & Timing Future Industry Structure Competency Leadership Dominant Coalitions / Co-option Market Learning & Preemption 276 .
Learning 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. Degree of Learning Unlearning Curve P2: Unlearning in previous period does not necessarily ensure learning in the current period.
It is characterized by the following – Unique – It provides unimaginable customer value ahead of its times. Inimitable & Insubstitutable – A high degree causal ambiguity between these skills yield sustainable competitive advantage.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 represents the collective learning's of an organization centering around diverse streams of technologies. 278 . It cannot be matched even by its closest competitors. Leverage – They are the gateways to future markets.
Honda – engines. it is deeply embedded in the heart of the organization. Core competencies are the roots of the organization. Although a core competence may lose value over time. leaders have one. A core competency cannot be outsourced.MORE ABOUT CORE COMPETENCE Sony – miniaturization. Nike – designing. SKF – antifriction and precision. Intel – nano-electronics. Wal-Mart – logistics. 279 . it gets more refined and valuable through use. Canon – imaging. Toyota – lean manufacturing. at the most three to four. Most companies around the world do not possess one. Toshiba – flat screen displays. Coca Cola – brand.
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 .
EMERGING MARKETS Emerging markets (India. Emerging markets are characterised by infrastructural bottlenecks. strategies suited for the developed markets may not be appropriate for emerging markets. Diversified groups in operating in emerging markets therefore benefit from unrelated diversification. and high transaction costs. Korea. Therefore focused strategies based on core competence may not be suitable for emerging markets (Khanna & Palepu. China. Therefore.e. high levels of market imperfection). institutional gaps. 288 . 1997). Chile) provide a different context (i.
Optimum level of diversification Performance Diversity is initially positively related with performance. Synergy. et al. Size & Scale. Concentric.DIVERSITY . Entropy). (2000) 289 .PERFORMANCE (I) Diversity attempts to measure the degree and extent of diversification (Herfindahl. Experience Strategic Fit Diversity Palich. subsequently negatively related across developed markets.
conglomerate power Threshold level of diversification Performance Diversity (Khanna & Palepu. subsequently positively related across emerging markets.DIVERSITY . brand building Risk diversification. 2001) 290 .PERFORMANCE (II) Diversity is initially negatively related with performance. Huge initial investment.
HSBC). It should have a spread of interest groups / stake holders. It should have a spread of assets. Characteristics – It should have a spread of affiliates or subsidiaries. act locally (Eg. 291 . It should think globally. It should have a spread of manufacturing facilities. revenues and profits.INTERNATIONAL IDENTITY MNC’s consciously engage in FDI in different parts of the globe to forge resource diversity as a distinct competitive advantage.
Feminity Index . low risk profile in developed markets and vice versa for emerging markets). high feminity index in developed markets and vice versa for emerging markets). Risk Profile – It reflects the risk attitude of the top management (Eg. low power distance in developed markets and vice versa for emerging markets).GLOBAL BUSINESS ENVIRONMENT Power Distance – It reflects the disparities in income and intellectual development (Eg.It reflects the disparities in women in workforce (Eg. low group scale in developed markets and vice versa for emerging markets). Group Scale . 292 .It reflects the relative role of team building (Eg.
terrorism (9/11). political stability. FOREX reserves. customs. 293 . flexibility (Eg. low country risk in developed markets and vice versa for emerging markets). time value.culture.GLOBAL BUSINESS ENVIRONMENT Cultural Adaptability – It reflects the adaptive ability to a changing environment . dress sense. judiciary) of doing business in a particular country (Eg. attitude. code of conduct. currency. interest rates. corruption. way of life. credit rating. inflation. high cultural adaptability in developed markets and vice versa for emerging markets). Country Risk – It reflects the political and economic risk (Eg.
Ethnocentrism – Developed country managers tend to regard their own culture as superior.GLOBAL BUSINESS ENVIRONMENT Time Sensitiveness – Developed country managers regard time as precious. in most emerging markets use of an interpreter may be a standard protocol. Other factors – local celebrations. however. and vice-versa. 294 . Language Barriers – Developed country managers expect foreign partners to communicate in their languages. High levels of ethnocentrism usually has a negative effect on business. time-zones. in most emerging markets meetings are delayed and lasts unusually long.
BRIC). It a multi-lateral treaty with 143 (as on 2002) member countries to reduce tariff and non-tariff (quota) barriers. The 1999 (Seattle Round) saw a lot of protest amidst bringing agriculture under the purview of TRIPS.GATT GATT was a bi-lateral treaty initiated between US and some member countries in 1947 to promote free trade. The 2001 (Doha Round) focused on power blocks (NAFTA. ASEAN. In 1995 (Uruguay Round) GATT was renamed to WTO. 295 . It focused largely on TRIPS (patents. trademarks). It also highlighted the nexus between US & WTO. copyrights. It also initiated provisions on anti-dumping.
primarily the OPEC countries. Euro). the Dollar still remains the most preferred currency globally. The Euro was significantly devalued against the Dollar till 2002. Sterling .e. However with current recession in the US 2002 onwards. three countries joined in 2002 increasing it to fifteen members as of 2008.EURO – SINGLE CURRENCY In 1999 twelve member countries in Europe joined hands to move over to a single currency (i. However.Pound). 296 . The notable exception was Great Britain which still continues with its local currency (i.e. the Euro slowly started outperforming the Dollar.
However. a multiple currency is preferable where the business cycles of member nations are different. 297 . it helps avoiding transaction costs associated with a multiple currency. Trade Block – It will strengthen the EU identity which would not have been possible otherwise. but it may have spill-over effects. Rate Uncertainty – A single currency eliminates the risk of competitive devaluations. Transparency – A single currency is transparent and competitive.SINGLE Vs MULTIPLE CURRENCY Transaction Costs – Though the initial cost of introduction of a single currency is very complicated and costly.
– FII (transfer of intangible resources) is fast but may have strong repercussions (i. – FDI (transfer of tangible resources) is slow but steady for the purpose of economic growth.FII Vs FDI INVESTMENT Classical economists believed that foreign investment (in any form) is basically a zero sum game (i. hot money). It is short-medium term with comparatively low levels of commitment.e. the gain of one country is loss of another).e. Neo classical economists believe that foreign investment may in fact be a win-win game. It is long term with high levels of commitment. 298 .
Pricing – It depends on the competitive structure (PLC – Kellogg's). . economic (middle class buying power). Distribution – It depends on the market characteristics (fragmented – concentrated). buying patterns (spread). usage (talk time).INTERNATION MARKETING Product – The various attributes of a product may receive different degrees of emphasis depending on differences in . lifestyle (petroleum 299 outlets – departmental stores).culture (food habits). promotion (surrogate advertising). technology (microchip). customer awareness (microwaves).
. Leverage – The leverage may vary across countries depending upon money and capital market conditions (Eg. debt is cheap in US.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 . equity is cheap in India).India) may be different from that another trading country (US – GAAP or IRS). Cost Structure – Companies in India need to investment in fixed costs due to poor infra-structure 300 compared to developed markets.
skills are more important that cultural fit and vice-versa. in most cases it is not desirable nor practiced. Compensation – Differential pay packages exists because of differences in purchasing power. and cultural barriers (language) vis-à-vis emerging markets. Training – It is a pre-requisite for international business to reduce language. however. Recruitment – In local recruitment.INTERNATIONAL HR An uniform HR policy is idealistic to enable parity in performance appraisal. shortened life cycles). double taxation. social security. technology (convergence. labour laws. 301 .
Technology – The cost to be evaluated in terms of latest technology (Euro VI) vis-à-vis effective cost of appropriate technology (Euro II). Outsourcing – A company having a core competence may be the source of global outsourcing (Eg. reduce power costs) vis-à-vis infrastructural bottlenecks. . Bosch spark plugs are used by car manufacturers worldwide).INTERNATIONAL OPERATIONS Location Incentives – FDI in emerging markets should explore options for SEZ’s to explore benefits (tax holidays. SCM – Use of ERP to network the extended enterprise 302 across the globe.
CONTEMPORARY TOPICS 303 .
304 .INNOVATION An invention is the first occurrence of an idea for a new product or process. it has destructive effects as well. While innovation typically adds value for organizations. but has inherent risks involved as well. Innovation is the most preferred strategy today to maintain competitive advantage in the present turbulent business environment. Innovation is all about staying ahead of competition. Innovations typically paves the way for more secured and improved lifestyle for consumers in general. innovation is the first attempt to carry it out in practice.
While product innovations are typically customer driven. However. Process innovation usually follows product innovation. process innovations are organizational driven. Tangible impact of product innovation on performance is significantly higher than process innovation. process innovation is necessary to sustain the competitive advantage of product innovation. 305 .TYPES OF INNOVATION A key challenge is maintaining a balance between process and product innovations. Strategic innovation has the potential to change the rules of the game.
It leads to a shift in the price – performance envelope.e. 306 . Medical Surgery (Lasik). a paradigm shift).e. Disruptive business models brings in a new frame of reference (i.BUSINESS MODEL It is a simplified description and representation of a complex real world. Drug Development (Bio Chemicals). Telecom (CDMA Technology). Data Storage (Pen Drives). Processors (Pentium). about how an organization makes money (i. putting an idea into practice). Innovations are the back-bone of successful business models .
The segment(s) of clients to be addressed. The revenue streams generated by the activities. The key activities / processes necessary for execution. The channels to reach out to the clients. The proposed relationships established with clients.NINE BUILDING BLOCKS Value proposition offered to the market. 307 . The cost structure resulting from the business model. The key partners involved in the activities. The key resources and capabilities required.
BUSINESS MODEL FRAMEWORK 308 .
The revenue model described here are the means to generate revenues. innovative companies to carve out unique business models to fend off competition. Real Estate) companies need to untangle and understand the intricacies of their business model. It involves – Product Visualization – Product Prototype – Product Test – Capacity – Pricing – Distribution. It is just one piece of the puzzle. 309 . Investment Banking. With the rapid erosion of certain industries (IT.REVENUE MODEL Positioning is just not sufficient.
Allow the workforce idiosyncrasies for their errors. Allow the management sufficient slack to be future oriented. 310 . A favourable intellectual property (IP) climate. Promote the grape-vine.HOW TO MAKE INNOVATIVE CO’S Innovative company’s are a matter of culture and aspirations rather than tangible resources. Have a lean and a flat organization structure. Promote the culture of experimentation. Provide reasonable incentives (not necessarily monetary).
however that possibility is slowly atrophying. companies are increasingly relying on internal protection to sustain innovation effects. The most preferred strategy of internal protection includes imbibing “causal ambiguity” in the production process to make reverse engineering difficult.HOW TO PROTECT INNOVATION? Without adequate protection (external or otherwise) the effects of innovation does not translate to performance. 311 311 . In most emerging markets where the IP climate is not so favorable. Collusion with the judiciary is also another distinct possibility in emerging markets.
312 312 .CORPORATE GOVERNANCE The basic theme of corporate governance is to ensure that professional managers are identified and made accountable in terms of clear business processes or activities and held responsible through adequate mechanisms & control systems for channelizing their decisions for the benefit of stakeholders at large. Corporate governance aims to reduce the principal-agent problem present in most professional managed organizations through appropriate forms of accountability and control mechanisms. In fact the principles of corporate governance implies that managers go beyond in satisfying the stated and unstated needs of the multiple stakeholders.
AGENCY THEORY The root of Corporate Governance goes back to the Agency Theory. shareholders can diversify their portfolio at a much lesser risk and cost. This exposes the shareholders to additional risks and higher costs. not present in portfolio diversifications. also known as the principal-agent problem or agency dilemma. From the strategic point of view managers tend to diversify into unrelated businesses as it provides higher returns hence a more favourable appraisal. However. According to the agency theory top managers and shareholders interests are usually conflicting in nature and tend to pull in opposite directions. 313 .
. 2002 to restore public confidence in corporate governance. After the Enron downfall. defines corporate governance (headed by Kumar Mangalam Birla) as the acceptance by management of the inalienable rights of shareholders as the true owners of the corporation and of their own role as trustees on behalf of the 314 shareholders. the US government passed the Sarbanes – Oxley Act. various laws were enacted to ensure proper usage of these funds.ORIGIN & CONTEXT Since the early 20th century since a large part of public funds were held by publicly traded firms in the US. SEBI Report – 2005.
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.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. Interests of other stakeholders: Recognize the legal and other obligations of all legitimate stakeholders.
Disclosure and transparency: Disclosure of information should be timely and balanced to ensure that investors have clear access to data and facts.. 316 316 . 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. Independence of the entity's auditors: Identification.
they should provide no mechanism or scope for opportunistic behaviour. 317 . However.GOVERNANCE STRATEGIES Monitoring by the board of directors: The board of directors. with its legal authority to hire. a person benefitting from a decision should abstain from it. discussed and resolved. fire and compensate top management. Regular board meetings allow potential problems to be identified. safeguards invested capital. Remuneration: Performance-based remuneration is designed to relate some proportion of salary to individual performance. Balance of power: The simplest balance of power is very common.
They defined a well-governed company as one that had mostly out-side directors. McKinsey found that 80% of the respondents would pay a premium for wellgoverned companies. who had no management ties. and was responsive to investors' requests for information on governance issues. from 10% for companies where the regulatory backdrop was least certain (those in Morocco. Egypt and Russia) to around 40% for Canadian & European companies. undertook formal evaluation of its directors. The size of the premium varied by market. 318 .GOVERNANCE & PERFORMANCE In its “Global Investor Opinion Survey” of over 200 institutional investors in 2002.
corporate philanthropy should be a part of every corporate mission. 319 . However. Over a period of time.SHAREHODER – STAKE HOLDER THEORY Till the early part of the 20th the basic objective of modern organizations was to provide goods and services for public consumption for profit maximisation. today economic institutions are considered as a major drivers of improvement in quality of life in general and therefore needs to include multiple stakeholders. The basic premise is that firms cannot exist in vacuum. the short-term view of profit maximisation gave way to a more broader and mediumterm view wealth maximisation of the shareholders. Therefore.
“a healthy business cannot exist in a sick and impoverished society”. Therefore. “an enterprises decisions and actions being taken for reasons at least partially beyond its immediate economic interests”.CORPORATE SOCIAL RESPONSIBILITY As Peter Drucker rightly pointed out that. giving a very important message that one cannot exist without the other. However. economic and social responsibilities cannot be mutually exclusive. 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 . CSR can be defined as. Therefore.
Fear of government interference: Excessive quench for profits may lead to build up of adverse public opinion compelling the government to intervene (Eg. The role of media: The media and various consumer organizations have come up in protecting consumer rights and exposing mal-practices.GROWING CONCERN FOR CSR Awareness due to education: With growing literacy. people are becoming increasingly aware of their right to a decent and healthy life. 321 . MRTP). Public image: Entrepreneurs are increasingly relying on public image as a source of competitive advantage and a higher financial discounting.
Tata Steel – Life Line Express). Aditya Birla Research Centre – LBS). Education. 322 . Cement . Exide – Product take back). Literacy & Training Programs – (Eg. and extended producer responsibility (Eg. Refrigerators – CFC.Paper packaging. eco efficiency. designing eco-friendly products.CSR STRATEGIES Green Supply Chain Management: It includes environmentally preferable purchasing. Health & Hygiene – Attending the health hazards due to wastes and by-products to employees and society in proximity (Eg.
323 . Strategic innovations leading to disruptive business models can show the way out.BOTTOM OF THE PYRAMID With the market across most developed markets including the US getting saturated. K. In turn companies by serving these markets. They represent an enormous opportunity for companies who learn how to serve them. Prahalad notes that future markets exist collectively. C. across the world's billions of poor people having immense untapped buying power. they're helping millions of the world's poorest people to escape poverty.
BLUE OCEAN STRATEGY 324 .
TWO WORLDS 325 .MARKETSPACE .
competing head on results in nothing but a bloody red ocean of rivals fighting over a shrinking profit pool. one companies gain is always at the 326 cost of another companies loss. They have fought for profits. . and struggled for differentiation (cost or product). battled over market-share.WHAT IS RED OCEAN? Companies have long engaged in head-to-head competition in search of sustained. In today’s red oceans. profitable growth. Yet in today’s overcrowded industries. where most industries are saturated.
but by creating blue oceans of uncontested market space ripe for growth . it will exist 327 in the future as well. It helps in creating powerful leaps in value for both the firm and its buyers. rendering rivals obsolete and unleashing new demand. It is only the frames of the . Such strategic moves are possible through the pursuit of product differentiation and low cost simultaneously. Blue Ocean’s have existed in the past.WHAT IS BLUE OCEAN? Tomorrow’s leading companies will succeed not by battling in red oceans.
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 .
. Population shrinkage across a no. information imperfections atrophy instantly. Niche markets & monopoly havens are continuing to disappear.BLUE OCEAN STRATEGY IMPERATIVES Prospects in most established market spaces – red oceans – are shrinking steadily. of European nations. Demand across developed markets reaching a plateau. As trade barriers between nations & regions fall. Technological advances have substantially 329 improved industrial productivity.
They are not necessarily about technology. . Company & industry are the wrong units of 330 strategic analysis. the underlying technology was often already in existence. managerial moves are.CONCEPTUAL UNDERPINNINGS Blue oceans have existed in the past and will exist in the future as well. 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).
IMPLEMENTATION Reduce Which factors to be reduced below the industry standard Eliminate Which of the industry factors that the industry takes for granted should be eliminated Create VI Which factors should be created that the industry has not offered Raise Which of the factors should be raised above the industry’s standard 331 .BLUE OCEAN .
IMPLEMENTATION SEQUENCE Buyer Utility (1) Is there exceptional buyer utility in your business idea? Price (2) Is your price easily accessible to the mass of buyers? Blue Ocean Strategy Adoption (4) What are the adoption hurdles in actualizing your business idea? Are you addressing them up front? Cost (3) Can you attain your cost target to profit at your strategic price? 332 .
Citibank – Automated teller machines & credit 333 cards. .SOME GLARING EXAMPLES In the last century authors Kim and Mauborgne have documented the creation of more than 150 blue ocean creations across 30 industries – Virgin Atlantic: Fractional jet ownership or travel to space. Southwest Airlines: Pioneering the concept of LCC. Sony Play Station: Redefining machine-human interface in entertainment and targeting an altogether new user base.
334 . Off late emerging views in strategy having its origin in (Organization Theory) led to a paradigm shift to what is called the – reconstructionist view.WHAT THEN IS THE HANDICAP? Most of the traditional views in strategy having its origin in (Economic Theory) led to what is called the – structuralist paradigm. greater than themselves. All they need to do is change their managerial frames. According to this view managers need not be constrained to act within the confines of their industry. companies & managers are largely at the mercy of economic forces. According to this view.
This action might not be possible to undo. Are you sure you want to continue?
We've moved you to where you read on your other device.
Get the full title to continue reading from where you left off, or restart the preview.