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BUSINESS STRATEGY

Course Code: 611 & 612


Dr. Subir Sen – Faculty Member, IBS
E-Mail: subir@ibsindia.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.
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6) HBR – Articles & Case Studies.
INTRODUCTION

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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
better still adopting new processes altogether.
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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.
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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.
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STRATEGIC MANAGEMENT -
FRAMEWORK

Economic
al
Fit Strategic Fit

Technological
Management
Finance
Fit
Operatio
Strategic
Political

HR
PoliticalIntent
Strategic
Fit
Political
Marketin
n

g
Fit Manageme Fit
nt
Social & 6
Cultural
STRATEGIC MANAGEMENT - FEATURES

 It forms the core activity of the top


management.
 It requires full commitment of the top
management.
 It is long-term in nature.
 It is all about creativity and innovation.
 It is about adaptation and response to the
same.
 It involves substantial resource outlay.
 It is irreversible.
 It is a holistic and integrated approach. 7

 It provides broad guidelines.


STRATEGIC MANAGEMENT – MYTHS

 It involves short-cuts.
 It is about forecasting.
 It is about a definite formula.
 It attempts to minimize risk.
 It brings instant success.
 It about mere data and facts.
 It involves nitty-gritty's.
 It a bundle of techniques or even tricks.
 It involves only the top management.
 It is fool-proof in nature.
 It is rocket science. 8
STRATEGIC MANAGEMENT -
IMPERATIVES

 To be continuously alert.
 To assimilate change faster.
 To be future oriented.
 To tap markets across boundaries.
 To be insulated against environmental threats.
 To leverage size, scale and scope.
 To generate large resource pool.
 To gain expertise in technologies.
 To innovate, again and again …….
 To be proactive, rather than reactive.
 To develop core–competencies. 9
STRATEGY - ORIGIN

 The word strategy has its origin from the Greek word
strategia meaning Military Commander. In the ancient days
battles were fought over land. In contrast, today's battles
are fought over markets.
 In the ancient days battles were won not by virtue of size of
the army or armory; but by virtue of their courage,
obsession, and more importantly - strategies.
 Even in today’s markets, battles fought on the market front
are won by companies by virtue of their obsession &
strategies, whose origin can be traced to some of the
greatest battles fought in the ancient days.
 It is an old wine in a new bottle; but with a lot a rigour and
robustness.

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SOME PARALLELS

 Japan’s attack on Pearl Harbour


– Strategy: Attack where it hurts the most.
– Toyota’s entry in the US, challenging GM and Ford.
 US attack of Morocco to capture Germany
– Strategy: Pin-hole strategy
– Wal-Mart challenging Sears by entering small towns.
 Allied Forces Vs Germany (WW-II)
– Strategy: Forging alliances.
– Yahoo and Microsoft challenging Google.
 Napoleon’s attack on Russia
– Strategy: Waiting for the right time.
– Reliance’s entry into telecom.
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EVOLUTION OF MANAGEMENT

 As Peter Drucker refers to it, a radical change in the


business environment brings about discontinuity. The
things happening around the firm when totally
disconnected from the past leads to a paradigm shift.
 A paradigm is a dominant belief about how the
business and its environment operates.
 The first major discontinuity in the history of global
business environment was the - Industrial Revolution.
– Mass Production
– Complicated Processes Organization Size
– Complex Structures
 Evolving of an emerging paradigm – survival of the
fittest (Fayol & Taylor, 1910).
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EVOLUTION OF STRATEGIC
MANAGEMENT

 The second major discontinuity in the history of global


economic environment – World War II.
– Global market place.
– Affluence of the new customer (i.e. push to pull).
– Changes in the technology fore-front.
– Homogeneous to heterogeneous products.
 From uniform performance, performance across firms became
differentiated. The question of outperforming the benchmark
became the new buzzword.
 Survival of the most adaptable becomes a new management
paradigm (Ansoff, 1960). Efficiency and effectiveness are no
longer sufficient.

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ENVIRONMENTAL CHANGE

Phase IV: Horizon of Phase I: Extrapolation of the past


Scenarios
2
1 1

Prior to
3 1990 1950
onwards
Phase III: Range of Scenarios Phase II: Discrete Scenarios
1 2
1A
1
3 1B

2A

2 2B 1950 to
1970 to 1970
14

1990
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.
– The choice of strategy is primarily concerned with
external ones rather than internal ones.
– The choice of product-market mix is based on conscious
evaluation of risk – return factors.
– Biases and prejudices has a very little role to play in
strategic choices pursued by managers. Learning always
begin on a clean sheet of paper.
– It is primarily the top management’s prerogative.

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APPROACHES TO STRATEGY

 Design Approach – Alfred Chandler (1970)


– Structure follows strategy. The organization initially
decides which industry to enter, how it will
compete, who will be the top managers.
– The top managers then decide on the type of
organization structure & systems to be in place.
– Organization structure will precede and cause
changes in strategy. Successful organizations align
authority and responsibility of various departments
in way to reach overall objectives.
– Management control systems has a dominating role
in influencing firm performance. Once the control
systems are in place, everything else follows.
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APPROACHES TO STRATEGY

 Positioning Approach – Michael E. Porter (1980)


– Choose a consumer segment and position your product
accordingly.
– A firms performance is inversely related with the
bargaining power of environmental forces to which it is
exposed.
– The environmental forces comprises of – supplier,
customer, new entrant, substitutes, competitors.
– The organization will outperform the industry where
environmental forces are weak and vice-versa.
– An organization is seldom in a position to influence the
larger business environment.

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APPROACHES TO STRATEGY

 Core Competence – C. K. Prahalad (1990)


– The key to superior performance is not doing the same as
other organizations, locating in most attractive industries
and pursuing the same strategy; but exploiting the
resource differences among them.
– Core competencies are a set of skills that are unique and
can be leveraged. They are complex resources and
undermines a firms competitive advantage.
– It enables a firm to deliver unimaginable value ahead of
time.
– Organizations can significantly alter the way an industry
functions.

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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

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STRATEGIC INTENT

 If you cannot see the future, you cannot reach there.


 A strategic intent is a statement of purpose of existence. It
involves an obsession to be the best or outperform the best. It
is the cornerstone of an organizations strategic architecture
reflecting its desired future state or its aspirations.
 It provides a sense of direction and destiny.
 It’s a philosophy that distinguishes it from its competitors.
 It implies a significant stretch. A substantial gap between its
resources and aspirations. A gap that consciously manages
between stagnation and atrophy.

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STRATEGIC INTENT - HIERARCHY

Visio
Integrativ n Single
e Mission
Dominant
Objective
Do

s
m

g ic
in

Goal Man
an

Specifi

Lo
s y
t

c
Plans
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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.
 To put it more simply, 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 changes, when radical changes in the internal
and external environment (i.e. strategic variety) is apparent.

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VISION

 It is a dream (not a forecast) about what the company


wants to become in the foreseeable future. It provides an
unity of purpose amidst diversity of personal goals. It
ensures that the company does not wander off into
unrelated zones or fall into an activity trap. It enables the
top management to remain focused.
 It is a combination of three basic elements –
– An organizations fundamental reason for existence;
beyond just making money.
– It stands for the unchanging core values of the company.
– It represents the company’s audacious, but achievable
aspirations.

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VISION - CHARACTERISTICS

 Reliance – Where growth is a way of life. In Reliance


when a new project becomes operational top managers
hand over charge to the SBU heads and move on to a
new project.
 Clarity – Vividly descriptive image of what the company
wants to be known for in the future.
 Reachable – It should be within a reasonable target in
the known future; not an utopian dream.
 Brevity – It should be short, clear, and memorizable.
 Empathy – It should reflect the company’s beliefs to
which it is sensitive.
 Sharing – The company across all hierarchies should
have faith in it.
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VISION - ADVANTAGES

 To stay focused on the right track.


 To prevent the fall in a activity trap.
 It gives enlightment.
 It gives the impression of a forward-looking
organisation.
 It provides a holistic picture.
 It gives a shared platform.
 It fosters risk taking and experimentation.
 It lends integrity and genuineness.
 It makes strategic alignment easier.
 It facilitates development of skills & capabilities.
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MISSION

 Mission defines the space that a business wants to create for


itself in a competitive terrain. It enables the firm to define its
business landscape and identify its competitive forces.
 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. A broad mission
statement helps in fending competitors.
 It serves as a road map to reach the vision; its reason for
existence.

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MISSION – SOME IDEAS

 Reliance – We are in the business of integration. All the


businesses of the company are strongly integrated with their
main business, though some may seem unrelated in nature.
Some other examples -
– We do not offer shoes,
…………………. We offer comfort.
– We do not offer steel,
…………………. We offer strength.
– We do not offer software's,
…………………. We offer solutions.
– We do not offer insurance,
…………………. We offer security.

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GOALS & OBJECTIVES

 Reliance – We want to become a Rs.100K crore company by


the year 2005. It is an end result (quantifiable) something a
firm aims and tries to reach in a time bound frame. It
provides a quantitative feel to an abstract proposition.
– It lends direction – time frame in the medium term.
– It provides a benchmark for evaluation.
– It helps identifying key success factors.
– It is based on Management by Objectives (MBO).
– It adds legitimacy and motivation.
– It keeps the mid management pre-occupied.
– It prevents deviation.

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PLANS

 Reliance – Desire to invest 25K crore in telecom business by circa


2010. It is the process of garnering necessary inputs, coordinating
appropriate technologies, and gaining access to desired markets to
achieve the desired goals and objectives. It is specific to a particular
business. The details of the plan Reliance Telecom adopted were -
– Backward integrate process technologies.
– Compress project times.
– Leverage economies of size and scale.
– Use price-elasticity to break market barriers.
– Acquire a market share of indomitable position.

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STRATEGIC DRIFT

 Due to top management commitment, past strategies


tend to have a bearing on future strategies. Historical
studies have shown that most organizations tend to
continue with their existing strategies. This tendency to
restore continuity is known as inertia (resistance to
change).
 When changes in the environment is incremental,
equilibrium is maintained. However, radical change may
lead to disequilibrium. This state of affairs is known as
strategic drift. It often leads to an organizational crisis.
 In such a context, strategies lose touch with the
emerging realities.

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STRATEGIC DRIFT FRAMEWORK

Environmental Change
Radical Change
Strategic Change
Degree of change

Incremental Change

State of Flux Stage of Transformation


Continuity
Strategic Drift

Stage of Atrophy

Time 32
ORGANIZATIONAL POLITICS

 Strategic drift often leads to organizational politics.


Organizational politics involves intentional acts of
influence to enhance or protect the self-interest of
individuals or groups over organizational goals. Some
instances of organizational politics -
– Formation of powerful groups or coteries.
– Creating obligations of reciprocity.
– Hiding vulnerability.
– Using covert tactics to pursue self interests.
– Creating a favourable image.
– Developing a platform of support.
– Distorting information to gain mileage.
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INTENDED & REALISED STRATEGIES

 An intended strategy is an expression of


interest of a desired strategic direction. A
realized strategy is what the top management
actually translates into practice. Usually there
is wide gap between the two when
organizational politics is evident. Other causes

– The plans are unworkable and utopian.
– The environment context has changed.
– Influential stake-holders back out.
– Persons responsible for strategy
conceptualization and implementation are34
divergent.
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. They
simply unfold the particulars of the sub-system in stages, but
the master scheme of the rational comprehensive scheme is not
apparent.
 However, this is not to be treated as “muddling”; but as a
defensible response to the complexities of a large organization
that mitigate against publicizing goals.
 Strategy formulation and implementation are linked together in
a continuous improvement cycle. Learning is an integral part of
logical incrementalism.

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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.
 Agent of Change – Formal ratification of a change plan
through MBO.
 Leveraging Crisis – A sudden crisis or an opportunity
should be used as a trigger to facilitate acceptance
and implementation of change. The broader objective
should serve the overall interest of the organization.
 Adaptation – As implementation progresses.
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STRATEGIC TRANSFORMATION

 Strategic transformation (a complete


overhauling of the strategic architecture)
becomes inevitable whenever a strategic drift
takes place. Tampering with surface level
factors often leads to atrophy.
 Dominant logic’s are the cornerstones of
change when strategic transformation is
apparent.
 Dominant logic’s are very rigid and sticky and
prone to inertia. It creates blinders.
 Strategic transformation becomes smooth
through a change in top leadership. As it brings
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with it a different dominant logic.
LEARNING ORGANIZATION

 A learning organization is capable of continual regeneration from


knowledge, experience, and skills that fosters experimentation
and questioning and challenge around a shared purpose. It helps
prevent a strategic drift from occurring at the first place. A
learning organization must continuously focus on unlearning as
well. Factors that fosters a learning organization -
– Pluralistic – An environment where different and even
conflicting ideas are welcome.
– Experimentation – Fosters a culture of risk taking.
– Informal Networks – Emerging of new ideas.
– Constructive Bargaining – Agree to disagree.
– Organisational Slack – Enough free space.

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ENVIRONMENTAL CONDITIONS
Dynamic

Scenario Learning
Planning Organization
Static

Forecasting Decentralization

Simple Complex 39
ANALYZING
BUSINESS ENVIRONMENT

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PLANNING & STRATEGIC PLANNING

 Formal planning is a function of extrapolating the


past. It is based on the assumption of incremental
change. It is reactive in nature.
 Strategic planning is a function of discounting the
future. It is based on the assumption of radical
change. It is pro-active in nature.
 Strategic gap basically points towards a vacuum of
where the organisation wants to be and where it is. It
requires a quantum leap (i.e. gap analysis).
 Competitive advantage provides the surest way to
fulfill the strategic gap. It points to a position of
superiority with relation to competition.
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ENVIRONMENTAL SCANNING

 The environment is defined as the aggregate of


conditions, events, and influences that affect an
organizations way of doing things.
 Environmental scanning is very important component
of strategic planning. 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. It is exploratory in
nature; not guided by any boundaries. The world is
flat, resources and ideas move unhindered.
 The segments of the environment a top manager
scans selectively depends upon his dominant logics.
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PESTEL

 PESTEL attempts to provide a broad framework on how the


broader environmental forces affects an organization and
influences the way it practices strategy.
 It is not intended to be used as an exhaustive list.
 It is particularly important that PESTEL be used to look at
the future impact of environmental factors, which may be
different from the past impact.
 It is important not only to identify the structural drivers of
change, but also to analyze the complex linkages across
them.
 Understanding the composite effect is critical, for which a
holistic picture is required.

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PESTEL FRAMEWORK

 Political – Government Stability, Government Attitude, Economic Model,


Central – State Co-alignment, Subsidies & Protection, Licensing & Quotas.
 Economic – GDP, Fiscal Deficit, Savings & Investment, Inflation & Interest
Rates, Monsoon & Food Grains Reserves, Economic Cycles, Capital Market &
Forex Reserves, Currency Stability, Infra-Structural Investments, FDI Inflows.
 Social – Population Diversity, Religious Sentiments, Literacy Levels, Income
& Age Distribution, Language Barriers, Social Values.

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PESTEL FRAMEWORK

 Technological – Innovation, Obsolescence Rate,


Patents, Research & Development, ERP,
Technological Convergence.
 Environmental – Global Warming & CSR, Product
Design, Environmentally Preferable Purchasing,
Extended Producer Responsibility, Waste Disposal &
Emissions, Non-Fossil & Alternative Fuels, Carbon
Credits, Pollution Control Laws.
 Legal – Monopolies Legislation, Employment Laws,
Product Safety & Health Hazards, Direct & Indirect
Taxes, Patent Laws, Consumer Protection Laws.
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ECONOMIC LIBERALISATION

 New Industrial Policy (NIP) – Liberalizing industrial licensing,


FERA Liberalization, MRTP Liberalization, Curtailment of PSU’s,
Encouraging FDI.
 Economic Reforms – Fiscal & Monetary Reforms, Banking
Sector Reforms, Capital Market Reforms.
 New Trade Policy (NTP) – Lowering import tariffs, Abolition of
import licenses, Encouraging exports, Rupee convertibility.
 Structural Adjustments – Phasing out subsidies, Dismantling
price controls, PSU Disinvestments, Exit Policy- VRS.

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DISCONTINUITY

 Destabilization due to entrepreneurial freedom -


– Cocoon of protection disappears
– Diversification spree
– Existing notions of size shaken
– Industry structures change radically
– Economic Darwinism - Survival of the fittest
 MNC Onslaught
– Enhancing stakes – Power Equation
– Joint Ventures – Technological Alliances
– Take-over threat, Mergers & Acquisitions
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DISCONTINUITY

 Hyper Competition
– MNC’s - Globalization
– Cheap Imports & Dumping
– Push to Pull Marketing
 Buyers exacting demands
– Shortage to surplus – Price competition
– Life-style changes
– Stress on quality, Consumerism
 Challenges on the technology front
– Competencies become technology based
– Investment in R&D become inescapable
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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
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FIVE FORCES MODEL - PORTER

Threat of New Entrants

Bargainin
Bargainin Competition gBargainin
power
g power from Existing ofg power
of Players of
Suppliers
Suppliers Customer
s

Threat of Substitutes
50
FIVE FORCES MODEL -
ASSUMPTIONS

 The model is to be used at the SBU level and not at


the industry level. It is even wiser to apply the same
at the product – market level.
 It depicts the attractiveness of an industry (i.e. profit
potential) per se.
 The model should not be used as a snapshot in time;
the forces are subject to changes, incremental or
otherwise.
 It should not only be used to understand the forces,
but also used to understand how they can be
countered and overcome.
 The five forces have strong cross-linkages.
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PORTERS FIVE FORCES ANALYSIS

 Threat to Entry – Economies of size and scale, Product


differentiation through proprietary technology or brand power,
Capital requirements, Learning curve advantages, Access to
distribution channels, Government policy, Resource profile & fear
of retaliation, High switching costs, Industry stagnation.
 Threat of Customers – Buyer concentration and volumes,
Undifferentiated product, Low relative importance of the
segment, Low margins & stagnancy, Unimportance of product
quality, Scope for backward integration, Presence of substitutes
or unorganized sector, Low customer switching costs.

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PORTERS FIVE FORCES ANALYSIS

 Threat of Suppliers – Supplier monopoly, Differentiated inputs,


Lack of substitute inputs, High customer switching costs,
Scope for forward integration, Low relative importance of the
segment.
 Threat of Substitutes – Improvement in price -performance
trade-off, Produced by industries earning high profits, Buyer’s
propensity to substitute.
 Jockeying for position – Fragmented market, Industry
stagnancy, Intermittent overcapacity, Low level of
differentiation, High exit barriers, Unorganised sector, Piracy
and counterfeits, Product perishability, Diversity of players.

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FIRM ENVIRONMENT

 Size and Scale of Operations – It is a very important component


of competitiveness in today's global context (Bharti – MTN,
Reliance).
 Business Scope – The intention whether the firm wants to be in
a single, dominant or related diversified or unrelated diversified
businesses (Infosys, Tata).
 Inertia – Excessive commitment to past strategies prevents
firms from tapping emerging opportunities.
 Cohesiveness – Degree of bonding existing across affiliated
firms.
 Resource Profile – It highlights the capabilities (generic) or
competencies (business specific) of the firm.

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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.
 With lower costs, it can price its products more competitively, and
with lower prices it can increase its sales volume, which further
reduces costs.
 Matured firms will always be positioned advantageously on the E-
Curve than new entrants.
 The E-Curve thus enables organisations to build entry barriers,
leverage it as a competitive advantage.
 Experience curve has strong linkages with performance. However,
an E-Curve can prove to be futile during discontinuity.

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EXPERIENCE CURVE
Cost per unit of output

Decreases at an increasing
rate
Point of inflexion

Decreases at a constant rate

Decreases at a decreasing rate

Production / Volume 56
EXPERIENCE CURVE - TRADITIONAL
VIEW
Efficiency = Lower Costs
2
1 3
Experience = Efficiency Lower Costs = Higher Sales

Entry Barrier = Better Performance 4


6 Higher Sales = Lower Costs
5
Lower Costs = Entry Barrier
57
EXPERIENCE CURVE - STRATEGIC
VIEW

Inertia = Limited Growth 2

Experience = Inertia 3
1 Limited Growth = Diversification

Strategic Failure = Poor Performance


4
6
Diversification = New Experience
5
New Experience ≠ Old Experience
58
VULNERABILITY ANALYSIS - SWOT

 The framework was originally conceptualized by


Kenneth Andrews in 1970. Acronym for Strengths –
Weaknesses – Opportunities – Threats. It helps an
organisation to capitalize on the opportunities by
maximizing its strengths and neutralizing the threats
minimizing the weaknesses. It is one of the earliest
models in environmental scanning. A SWOT audit
involves –
 Company Records – Annual Reports, Websites, Press
Clippings & Interviews.
 Case Studies – Structured Questionnaires, Interviews,
Observation.
 Business Intelligence – Bankers, Suppliers, Customers,
Analysts, Competitors. 59
SWOT ANALYSIS - FRAMEWORK

Opportunities
Nullify weaknesses which
prevents you from Leverage strengths to make
exploiting opportunities use of opportunities

Weaknesses Threats Strengths

Minimize weaknesses which Utilise strengths to


prevents you from counter threats (?)
countering threats
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SOURCES OF STRENGTH

 Strong brand identity – Eg. Tata.


 High quality products – Eg. Sony, Toyota, Honda.
 Excellent penetration – Eg. HUL, ITC.
 Strong R&D base – Eg. Dr. Reddy’s, Ranbaxy, Biocon.
 Economies of scale – Eg. Reliance.
 Good credit rating – Eg. Infosys, SBI.
 Motivated employees & cordial industrial relations – Eg.
Tata Steel, Infosys.
 Large resource pool – Eg. Aditya Birla, Reliance.
 Strong after sales & service network – Eg. Caterpillar.
 Engineering Skills – Eg. Volkswagen, Siemens.

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SOURCES OF WEAKNESSES

 Outdated technology – Eg. Hindustan Motors.


 Strategic myopia – Eg. CESC.
 Excess manpower – Eg. SAIL.
 Single product syndrome – Eg. Procter & Gamble.
 Inefficient top management – Eg. Ballarpur Inds.
 Narrow business scope – Eg. Nirma.
 Excessive diversification – Eg. Tatas.
 Inertia – Eg. J. K. Group - Raymond.
 Lacking experimentation culture – Eg. B. K. Modi Group.
 Lack of product / brand clout – Eg. Bijoligrill.
 Organizational Politics – Eg. CMC (Tata Group)

62
SOURCES OF OPPORTUNITIES

 Delicensing of Industries – Eg. Telecom, Banking.


 Capital market reforms – Eg. Abolishing CCI.
 Abolishing MRTP – Eg. Maruti.
 Life style changes – Eg. Retailing.
 Growing population – Eg. Middle-class buying power.
 Globalization – Eg. GDR’s, ECB’s.
 Free pricing – Eg. Fertilizers, Insurance, Sugar.
 Exit Policy – Eg. VRS.
 Collaborations & Joint Ventures – Bharti & WalMart.
 Market driven Interest rates – Eg.Tata Motors.
 Market driven Pricing – Eg. Fertilizer, Sugar.

63
SOURCES OF THREATS

 Political instability – Eg. (1985–1990).


 Land acquisition - Social activism – Eg. Singur SEZ.
 Terrorist attacks – Eg. 11/9, 26/11.
 Import relaxation – Eg. Dumping from China.
 Foreign Direct Investment (FDI) – Eg. Onida.
 Economic recession – Eg. (2008).
 Natural disaster – Eg. Tsunami, Earth Quake.
 Nationalisation – Eg. Tata Steel.
 Hostile take-over – Eg. Bajoria – Bombay Dyeing.
 Group disintegration – Eg. Reliance.
 Lack of Corporate Governance – Eg. Satyam.
64
ETOP

 Acronym for Environment – Threat – Opportunity –


Profile. It represents a summary picture of the
external environmental factors and their likely impact
on the organization. Stages in ETOP analysis –
 List the aspects of the environment that has a bearing
on the organization.
 Assess the extent of impact of the factors.
 Holistic view – Prepare a complete overall picture.
 Forecasting – Predict the future (i.e. time series,
Delphi's technique, scenario analysis).
 Strategic responses (including adaptation) to
opportunities and threats is critical for survival and
success.
65
PROFIT IMPACT OF MARKET
STRATEGY

 PIMS is a database model developed by GE and


later extended by HBS to examine the impact of a
wide range of strategy variables on business
performance. It is also a form of assessing
vulnerability through longitudinal analysis.
 An organization can draw upon the experience of
its peers in similar situations. Some key findings on
major performance drivers that explains 75%
deviations in performance –
 Product quality and relative market share.
 High investment intensity acts as a drag.
 Relative attractiveness of the market.
 Vertical integration is a powerful strategy; 66

selectively.
PIMS - LIMITATIONS

 The analysis is based on historical data and it does


not take care of future challenges. Managers should
be particularly cautious while referring to such data
during times of discontinuity as it makes past
patterns futile. Authenticity of data is of prime
importance -
– Contexts drawn across one organization may not
be applicable to another. As every organization is
unique in its own way.
– Contexts may vary over time, when radical
changes in the economy takes place.
– Contexts may vary across countries, therefore
67
validity may be a question.
KEY SUCCESS FACTORS (KSF)

 KSF relates to identification and putting concentrated


effort on a particular activity or process which forms
the very basis of competitive advantage. It enables
the top management to draw focus. KSF helps
organizations spot early opportunities and convert
them into value adding business propositions. 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
IDENTIFYING ALTERNATIVE
STRATEGIES

69
CORPORATE - GRAND STRATEGY

 It is concerned with the overall business scope (single,


dominant, related, unrelated) and geographical scope
(local, national, global) of a firm and deals with
choices of allocating resources across them.
 It provides broad direction to the groups vision and
mission.
 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.
 It indicates the quality of growth an organization is
looking for.
 It reflects the customer needs it intends to satisfy.
70
CORPORATE STRATEGY MATRIX

Corporate Strategy

Stability
Stability Growth
Growth Combination Divestment

Intensification Diversification

Market Penetration Market Development Product Development

Related Unrelated

Vertical Horizontal 71
STABILITY

 It involves maintaining status-quo or growing in a slow


and selective manner. The scale and scope of present
operations remains almost intact. Stability however,
does not relate to do-nothing (Eg. Hindustan Motors).
Even during adverse times firms need to adopt a
strategy to sustain current performance levels. (Eg.
Citibank). The reasons for stability strategy –
– Lack of attractive opportunities.
– The firm may not be willing to take additional risk
associated with new projects.
– To stop for a while and assess past records.
– Why disturb the existing equilibrium set up?
– Limited resource position; erosion of capabilities.
72
GROWTH - ANSOFF’S MODEL

Existing Market New Market


New Product Existing Product

Market Market
Penetration Development
(+) (++)

Product Diversificatio
Development n (+++)
(++)

Note: (+) indicates degree of growth and risk 73

involved.
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, within a
well defined market segment. Market penetration can be achieved
by – increasing sales to current customers, convert competitors
customers, direct non-users to users. (Eg. Nirma, Ujjala, Britannia).
– Suitable for industries where scope for technological break-
through is limited.
– Elongated product life-cycle.
– Helps firms which are not comfortable with unfamiliar terrain.
– The company carries a risk of product obsolescence.

74
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. (Eg. Du Pont – Nylon:
parachutes, socks & stockings, fabrics, tyres, upholstery,
carpets,…… or Teflon: aircraft technologies to cutlery to
paints or Raytheon Corp – Microwaves: radars to kitchen
appliances).
– Creativity and innovation – thinking out of the box.
– Stretches product life cycles.
– Unconventional and flexible distribution channels.
– Moves across geographical boundaries.
– Immense customer reach & flexible advertising.

75
PRODUCT DEVELOPMENT

 It is a strategy where a firm tries to achieve growth through a


radical new product (Eg. Microsoft: DOS to Windows) or a
substantial improved version (incremental) of an existing
product to repeatedly enter the same market (Eg. Close Up:
Fluoride – Gel toothpaste or VIP - Strolleys).
– Areas of product improvement – performance, features,
reliability, conformance, durability, serviceability,
aesthetics, perception.
– Deliverable through – redesigning or reengineering.
– Leverage on customer and brand loyalty.
– Leveraging through – innovation.
– Substitutes that serve the same needs (Eg. Refills)

76
DIVERSIFICATION

 It marks the entry of a firm into newer markets with new


products, thereby creating a new business. From the traditional
point of view, the new business is distinct from the existing
business in terms of – inputs – technologies – markets. From the
modern point of view they are strategically dissimilar. Why do
firms diversify in the Indian context?
– Shift the growth trajectory or opportunistic.
– Risk reduction.
– High transaction costs and institutional gaps.
– Internal capital market.
– Permits: quotas, licenses (i.e. industrial embassies).
– Conglomerate or market power (i.e. dominance).

77
HOW DIVERSIFICATION REDUCES
RISK?

Consider a hypothetical planet, in which a given year is


either under hot or cold wave, either of which is equally
likely to prevail. Let us assume that there are two
businesses constituting the entire market – coffee and ice-
cream. If the hot wave dominates the planet, the ice-cream
business would register a return of 30%, while the coffee
business would register a return of 10%. If on the other
hand, cold wave dominates the planet, ice-cream business
would register a return of 10%, while the coffee business
would register a return of 30%. What would be your ideal
diversification strategy through optimization?

78
DIVERSIFICATION STRATEGY

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
79
HORIZONTAL INTEGRATION

 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.

80
HORIZONTAL INTEGRATION

Reliance Capital

Reliance
Reliance Industries Reliance Ports
Infrastructure

Reliance Power
81
VERTICAL INTEGRATION

 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.

82
VERTICAL INTEGRATION

Oil & Gas exploration

Naptha-cracking
Acetic Acid
Paraxylene (PX)
(PTA) (MEG)
Purified tetra-pthalic Mono-ethylene glycol
acid
Polyester Filament Polyester Staple Fibre
Yarn (PFY) (PSF)
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.

84
QUASI & TAPERED INTEGRATION

 Full Integration - Where one firm has full ownership and


control over all the stages of a value-chain in the
manufacturing of a product (Eg. Reliance).
 Quasi-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. Ranbaxy, Dr. Reddy’s).
 Tapered integration - A firm produces part of its own
requirements and buys the rest from outside suppliers with a
variable degree of ownership and control. Usually the firm
concentrates on its core activities, and out-sources the non-
core activities (Eg. Maruti – Sona Steering).

85
A CASE OF TAPERED INTEGRATION

Very Critical Critical

Zero Ownership
Component Component
s s

Components
Full Ownership
Partial

Ordinary
Ownershi
p

Transmission

Engine Design Electricals


Steering
Windscreen Seats & Carpets
86
CONGLOMERATE DIVERSIFICATION

 It relates to entry of firms into businesses which are


distinct in terms of – inputs – technologies – markets.
and are also strategically dissimilar. Firms usually
engage in conglomerate diversification when emerging
opportunities are very attractive and offers potential
growth opportunities. Drawbacks of unrelated
diversification –
– Cost of failure (i.e. lack of strategic intent, myopia).
– Cost of ignorance (i.e. lack of knowledge of
competitive forces).
– Cost of neglect (i.e. core business).
– Cost of dysynergy (i.e. synergies pulling in opposite
directions).
87
CONGLOMERATE DIVERSIFICATION

Paper & Packaging

Edible Oils Tobacco Hotels

Food & Confectionary


88
DIVESTMENT

 Divestment is a defensive strategy involving the sale of entire


stake (Eg. ACC) in full to an independent entity. It taken into
account when performance is disappointing (i.e. reactive) and
survival is at stake and the firm does not have resources to
fend off competitive forces. It may also involve a SBU (Eg. L&T-
Cement Division to Aditya Birla Group) technically known as
divestiture or a product (Eg. Glaxo’s “Glucon-D” to Heinz). In
strategy there is no scope for sentimentality with divestment.
 It is may also be a pro-active strategy, where a company
simply exits because the business no longer contribute to or fit
its dominant logic. (Eg. Tatas sale of Goodlass Nerolac, Tata
Pharma, Tata Press).

89
DIVESTMENT - ROUTES

 Outright Sale – Popularly known as the asset route; where 100%


of the assets (including intangibles) are valued and paid for. (Eg.
Sale of Diamond Beverages to Coca-Cola for US $ 40 million).
 Leveraged Buy-Out (LBO) – Here the company’s shareholders
are bought out through a negotiated deal using borrowed funds.
(Eg. Tatas buy-out of Corus for US $ 11.3 billion, involving 608
pence per share).
 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. However, the
Companies Act, 1956 does not permit this mode.

90
COMBINATION STRATEGY

 It is a mixture of stability, growth, and divestment


strategies applied simultaneously or sequentially for
a portfolio of businesses.
 It is usually pursued by a business group with
diverse interests across multiple industries.
 There can be no ideal strategy for every business,
because every business has its own unique external
and internal environment.
 A combination strategy can be implemented through
green-field projects (i.e. developing facilities right
from the scratch) or through brown-field projects
(i.e. mergers and acquisition, joint ventures). 91
STRATEGY CHOICE
&
PORTFOLIO ANALYSIS

92
STRATEGIC CHOICE

 A strategic choice seeks to determine the alternative


courses of action available before top managers to achieve
its strategic intent. It attempts to answer the following
questions –
 How effective has the existing strategy been?
 How effective will that strategy be in the future?
 What will be the effectiveness of alternative strategies?
 It is impossible for a manager to assess all the alternatives.
Dominant logic enables top managers to selectively scan
the environment and make trade-offs. In most cases the
trade-off is between resources and opportunities. What
then is the magical number?

93
SELECTIVITY IS THE KEY

 The role of a top manager is not to solve a problem, nor is to a


define a problem for others to solve. The key task before a top
manager is to identify the right problems. To identify the right
problems, managers need to ask the right questions.
 They must choose problems which will lead to the right kind of
opportunities; if addressed, will help the firm achieve its intent. For
an optimal choice the following four issues need to be resolved –
 Is the strategy clearly identifiable?
 Is it consistent with the resources of the firm?
 Will it be able to exploit the opportunities in full?
 Is it in tune with the values and beliefs of the firm?

94
BUSINESS GROUP - DEFINITION

 A business group is known by various names in


various countries – guanxique in China, keiretsus
in Japan, chaebols in Korea, business houses in
India. Their roots can be traced to a single family
or clan and share broad similarities.
 Their origins can be traced back to market
imperfections existing in an economy (MRTP
Laws, Licenses & Quotas, Managing Agency).
 Proximity to the corridors of power (i.e.
embassies).
 High degree of centralized control (GEO, BRC).
 Resource sharing, formal and informal ties. 95
 Succession planning is critical to continuity.
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

Re-
Engineering
Maturity -
Growth (%)

Stability
Decline - Divestment

Growth -
Diversification

Duration (Yrs)

Inception -
Intensification 98
PORTFOLIO ANALYSIS

 Resource allocation across a portfolio of businesses is an


important strategic choice, next only to choice of
business. Why?
 Businesses are not about liquid assets; therefore, there
are high costs associated with entry and exit.
 Relatedness across resources are difficult to realize;
sometimes impossible.
 Investing in emerging businesses may not actually be so
simple as it appears to be. Rules of the game are
different.
 Redeployment of resources upsets the established
power bases of a group. Power and resources often goes
hand in hand.
99
BCG GROWTH MODEL

Relative Market Share (%)

High Low
High

?
Industry Growth

Stars Question Mark


Low
(%)

Cash Cow Dogs100


BUSINESS ANALYSIS – TATA GROUP

 Question Marks – They have potentials in the long term,


provided the company is able to build up on its market-share
(i.e. market penetration, market development, product
development), which remains a big? These businesses are
net users of resources, and their risk profile is high (Eg.
Trent, Tata Telecom, Tata-AIG).
 Stars – They achievers in the near term, provided the
industry growth rate continues and the company is able to
maintain its growth (i.e. diversification). These businesses
are also net users of resources (Eg. TCS, Tata Steel), but to
larger extent than a question mark.

101
BUSINESS ANALYSIS – TATA GROUP

 Cash Cow – These are matured businesses, and the


company dominates the industry ahead of competition (i.e.
stability). Given that the growth potential in the business is
low, they are generators of resources. However, cash cows
may also need to invest provided the industry takes an
upswing (Eg. Tata Motors, Indian Hotels, Tata Tea, Tata
Chemicals).
 Dogs – They are a drag on the group, and they lack on
competencies to take on competition and are basically cash
traps (Eg. Nelco, Tata Pharma, Tata Press). Groups prefer to
dispose off such businesses (i.e. harvest, divest) as
achieving a dominant position in these businesses is a
difficult task.

102
BCG - LIMITATIONS

 It does not address the concerns of a business which is in the


average category (usually the majority); neither in high or low.
 Certain businesses in the low market share category may be
the result of a conscious strategy (i.e. niche – Rolex, Cartier,
Mercedes Benz, Armani).
 Cash cows may actually need substantial investments to retain
their market position (Eg. HUL).
 The model does not provide specific solutions within a
particular category.
 The terminologies used are somewhat prohibitive.
 Data may be prohibitive; factors are limited.

103
GE - MATRIX

Distinctive Capabilities
Strong Medium Weak
High

Diversify (++) Intensify (+) Stability


Attractiveness
Med
Industry

Intensify(+) Stability Harvest (-)


Low

Stability Harvest (-) Divest (- -)


104
ARTHUR’ D. LITTLE
Inception Growth Maturity Decline

Dominant Invest Consolidate Hold

Competitive Position
Strong Improve

Favourable Selective Harvest

Tenable Niche

Weak Abandon Divest

Industry Life-Cycle 105


SHELL – DIRECTIONAL POLICY
MATRIX
Business Sector Prospects
Attractive Average Unattractive
Distinctive Capabilities

Market Generate
Strong Growth
Leadership Cash

Try Phased
Custodial
Average Harder Withdrawal

Double
Phased
Or Expand Divest
Withdrawal
Weak Quit
106
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.
 Divest – Selling a part or the entire business at one go.
Disinvestment involves selling in phases.
 SBU – A business unit which is strategically different from
another and also shares a different SIC code.
 Portfolio – An organization is perceived as a portfolio of
businesses.
 BCG – Boston Consulting Group.
 Gap Analysis – It emphasizes what a firm wants to achieve.

107
BUSINESS STRATEGY
&
COMPETITION

108
COMPETITIVE STRATEGY

 A competitive strategy deals with how a firm competes


in a particular business or product-market segment. The
principal focus is on meeting competition, building
market-share, and earning super-normal profits (i.e.
rent).
 The strength of a firm in a particular business usually
stems from its competitive advantage. Competitive
advantage refers to a firms resources or activities in
which it is way ahead of competition.
 Such resources or activities should be distinctive and
sustainable over time.
 Competitive advantage is the back-bone of strategy.
109
BUSINESS STRATEGY -
FRAMEWORKS

 How to be distinctive and yet sustainable –


 Differentiation – Understanding of the dynamics of
competition, identifying critical success factors, developing
competitive advantage (Porter).
 Resource Based View – Obsession with competence
building, involving harmonizing and integrating multiple
streams of technologies, leveraging (Prahalad).
 Delta Lock In – Two dominant players co-opt to self-
reinforce and create or escalate an entry barrier, preventing
new entry and/or competition (Hax & Wilde).
 Blue Ocean – Consciously moving away from overcrowded
industries to uncharted territories and making competition
irrelevant (Kim & Mauborgne).

110
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. The firm may retain the
benefits of cost advantage by enjoying higher margins
(Eg. Reliance) or may pass it to customers to increase
market-share (Eg. Nirma, Ayur, T-Series). Sources of
cost advantage are varied and depends on the structure
of the industry –
 Economies of size, backward integration, proprietary
technology, preferential access to raw materials.
 Compress project duration through crashing.
 Locational or early entry advantage.
 Steep experience curve effects.
111
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. It selects one or more attributes that
buyers perceive as important. Means of product
differentiation are peculiar to each industry. Successful
product differentiation is often followed by premium
pricing. (Eg. Intel, Sony, Rayban).
 Creativity, innovation and out of the box thinking.
 Culture of experimentation, and sufficient slack.
 Focus on brand loyalty, avoiding brand dilution,
undeterred attention to quality.
 Feeling the pulse of the customer.
112
PORTERS NICHE OR FOCUS

 Focus / Niche – It is a variant strategy of cost leadership or


product differentiation targeting a specific market or buyer
sub-segment with the exclusion of others (Eg. Rolex,
Maybach, Mont-Blanc, Cartier, Armani). A focuser seeks to
achieve a competitive advantage in its target segment, though
it may not possess an overall competitive advantage.
 The target segment must have unusual needs or the delivery
system catering to this segment must be unique.
 They are poorly served by mainstream players.
 Sub optimization alone may not be a source of superior
performance; coupled with fear of structural erosion.

113
COMPETITIVE POSITIONS

Competitive Advantage
Cost Differentiation Product Differentiation
Competitive Scope
Broad

Product
Cost Leadership
Differentiation
(Toyota)
(General Motors)
Narrow

Differentiation
Cost Focus
Focus
(Hyundai)
(Mercedes)
114
HYBRID STRATEGY

 A hybrid strategy is the simultaneous pursuit of cost


leadership and differentiation, and usually outperforms a
stand alone generic strategy.
 Though cost leadership and differentiation are
inconsistent, in a hyper competitive context the two
strategies need not be mutually exclusive.
 Reducing cost does not always involve a sacrifice in
differentiation; similarly differentiation may not always
lead to rising costs (i.e. jugaad or frugal engineering).
 Firms focusing on a hybrid strategy typically aim at
shifting the productivity frontier and recreating a new
product-market segment altogether (Eg. Tata Nano).

115
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.
 It will have a competitive disadvantage vis-à-vis a
clearly positioned generic player.
 Industry maturity will usually widen the gap, unless
such a player is capable of discovering a profitable
segment.
 It is usually the result of a firm not willing to make trade
offs, leading to what is called – straddling. It tries to
compete through every means, but achieves none. The
positioning therefore gets – blurred.

116
EMERGING INDUSTRY

 Emerging Industry – An evolving industry characterized by - radical


environmental changes, changing customer needs, technological
innovations, ending in a differential cost economics. Eg. 3D imaging,
Nano technology, Artificial intelligence). It is characterized by –
 High level of technological uncertainty, leading to a blurred productivity
frontier and steep learning curve.
 First-time buyers. Consumer behaviour pattern unstable and evolving.
(Eg. Speech recognition software's.)
 Excessive turbulence in the dynamics of the environment, coupled with
low penetration levels.
 Market segmentation not well defined. There is a lot of scope to define
the rules of competition.

117
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), leading to clear
fragmentation. It is characterized by –
 Low entry barriers, because of lack of economies of size and
scale. Eg. Consumer durables. High exit barriers because of
huge investment in CAPEX. Eg. Retail and telecom, IT.
 Government regulations in the form Eg. MRTP may also
cause fragmentation.
 Diverse customer needs. Eg. Air Conditioning, Paints.
 Scope for players to change the rules of the game.

118
MATURED INDUSTRY

 Matured Industry – An industry characterized by


saturation in growth rates, technological maturity,
established industry dynamics, well defined consumer
behavioral patterns and imperfect competition leading
to near monopoly.
 Cartel among existing players through collusion,
collaboration and co-option.
 Strong entry barriers, because of economies of size
and learning curve effects, distribution networks, early
entry and location advantages.
 Limited scope for innovation - technological maturity.
 Firms are rule takers in the segment as productivity
frontier is well defined.
119
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,
with little or no signs of recovery. (Eg. Typewriters, scooters,
dot-matrix printers).
 Firms facing a declining phase are characterized by inertia and
slow to react to environmental changes.
 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, backed by corporate espionage, and costly price wars.
 Nature of competition extremely high.

120
COMPETITIVE STRATEGIES

 Emerging Industry – Set benchmarks, strictly product


differentiation and not standardization, premium pricing,
aggressive building of distribution networks, branding and
promotion.
 Fragmented Industry – Identify, assess and overcome
fragmentation. Locate a defendable position, focus more on
product differentiation or even a hybrid one.
 Matured Industry – Sophisticated cost analysis, process
innovation, increasing scope, mergers and acquisition, strictly
cost differentiation.
 Declining Industry – Redesign, reengineer, regenerate, move
beyond boundaries, recreate new markets, strike alliances, or
else exit the segment.

121
RESOURCE BASED VIEW

 Differentiation based on cost or products saturates and


ceases to exist beyond the medium term. However, positions
based on resources which are unique and inimitable are far
more sustainable even in the long term. A firms resources
can be classified into –
 Tangible – These refer to real assets. They are a standard in
nature, hence very rarely confer competitive advantage as
can be easily acquired or replicated.
 Intangible – These refer to goodwill, patents, brands, and
complex learning experiences in integrating and harmonizing
technologies (distinctive capabilities) that play an important
role in delivering competitive advantage through “causal
ambiguity”.

122
CAPABILITIES & COPMPETENCIES

 These include a complex combinations of tangible and


intangible resources that organizations use to convert
inputs to outputs. Typically, they are woven around
technologies; but not necessarily. There is a high degree
of internal and external causal ambiguity involved in it.
Hence, differentiation based on capabilities can be
sustained even in the long run.
 They play a very critical role in shaping competitive
advantage. Therefore firms should concentrate on
developing complex resources that forms the very basis
of differentiation. Capabilities can be generic (i.e. can be
leveraged across businesses) or specific to a particular
business.
123
COMPETITIVE ADVANTAGE

124
COMPETITIVE ADVANTAGE

 A competitive advantage is a position of superiority


relative (i.e. not absolute) to competition.
 It results in a distinct differentiation advantage or a
cost advantage or hybrid as well.
 Strategy drives competitive advantage; competitive
advantage subsequently becomes the back bone for a
competitive strategy.
 It enlarges the scope of an organization, and results in
well springs of new business development.
 A portfolio of competitive advantage comprises
strategic advantage profile (SAP).
 Success of a strategy critically depends on SAP.
125
STRATEGIC ADVANTAGE PROFILE
(SAP)

 Organizations have to systematically and continuously


conduct exercises to identify its SAP.
 In most cases SAP is hidden and dormant.
 Identification of SAP is critical for and stretching and
leveraging of resources.
 In today's world of discontinuity, SAP changes from
time to time.
 Internal strategic fit between its strategy and dominant
logics is essential for the top management to stretch
and leverage SAP.
 Most successful organizations around the world have a
well balanced SAP.
126
VALUE CHAIN ANALYSIS

 A value-chain segregates a firm into strategically relevant


activities to understand its composite behaviour. Inventory
Mgt to Logistics Mgt to Supply Chain Mgt (SCM). Today SCM is
integrated with greening the environment as CSR practices.
 A VC is often compared with a relay team; each of the players
need to be efficient backed by sufficient coordination at the
contact points (i.e. kaizen or internal customer). Competitive
advantage arises not from an individual activity but a stream
of inter-related activities.
 VC pay-offs: better product availability, faster product
launches, and enhanced customer tracking – higher market
share. Substantial cost reductions also follow.

127
THE VALUE CHAIN

Infrastructure
Support

M
Human Resource Management

ar
gi
Technology Development

n
Procurement
Out Logistics

Mktg & Sales

Service
Operations
In Logistics
Primary

n
gi
ar
M
128
STRATEGIC FIT – THE PORTER WAY

 The sustainability of the value chain depends on the


degree of fit between the activities. Fit is important
because discrete activities result in negative synergy
and can also be easily copied by competitors.
Operational effectiveness is not strategy.
– First order fit refers to simple consistency between
each activity and the overall strategy.
– Second order fit occurs when activities are
reinforcing amongst them.
– Third order fit refers to optimization of effort.
 A learning organization helps create strategic fit. A
high fit involving a complex chain of activities drives
both competitive advantage and its sustainability.
129
CORE COMPETENCE

 A core competence represents the collective


learning's of an organization around diverse streams
of technologies. It forms the very basis of competitive
advantage. These skills results in distinctive activities
and processes. It should satisfy the following
conditions -
– Contributes significantly to customer benefits.
– Cannot be easily imitated or substituted.
– Can be leveraged across businesses.
– Can be sustained even in the long run.
 A core competence usually has its roots in technology,
but not necessarily.
 Core competence has a high degree of external and
130
internal causal ambiguity embedded in it.
CORE COMPETENCE

 A competitive advantage does not necessarily imply a


core competence; a core competence always implies a
competitive advantage.
 A competitive advantage may or may not lead to
superior performance, a core competence usually does.
 A competitive advantage manifests from a function; a
core competence has its roots in a set of skills.
 A competitive advantage is sustainable in the short-
medium term; a core competence is sustainable even in
the long-term.
 Majority of the firms have competitive advantage, only
global leaders possess a core competence.
131
GAME THEORY

 The game theory was developed in 1944 by Oscar


Morgenstern. Subsequent work on game theory by
John Nash led him to win the Nobel prize in 1994.
 A game is a contest involving two or more players,
each of whom wants to win. In a game (similar to a
business) one players win is always another's loss. This
is known as a zero-sum game.
 Here the magnitude of gain offsets the magnitude of
loss equally.
 However, the stringent assumptions of game theory
and difficulty in ascertaining of pay-offs makes game
theory application difficult in business. In fact there are
no. illustrations depicting a win-win situation.
132
BIASED AND UNBIASED GAME

 A game is said to be biased when one of the


players have a disproportionate chance of
winning. An unbiased game is one where both
the players have equal chances of winning.
Firm Y’s Strategy
Firm X’s Strategy

Use Radio Use Newspaper

Use Radio +2 +7

Use Newspaper +6 -4

Firm X’s Pay-Off Matrix 133


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.
Firm Y’s Strategy
Saddle Point
Firm X’s Strategy

Use Radio Use Newspaper

Use Radio +3 +7

Use Newspaper +1 -2
134
Firm X’s Pay-Off Matrix
TYPES OF GAMES

 Simultaneous Games – This is a situation where the


players have an option to choose to cooperate or not
through collusion, collaboration or cooption. It
represents the classical “prisoner’s dilemma”. However,
there is likely to be temptation by any of the players to
try to steal the advantage over the other by breaking
the rules of the game (Eg. Coke Vs Pepsi).
 Repeated Games – In this situation the players interact
repeatedly with each other sub-optimizing the outcome
possibilities. This is usually through learning by
“experience or observation” (i.e. iteration) rather than
through collusion (E.g. Yahoo Vs Microsoft).

135
CHANGING THE RULES OF THE GAME

 In a situation where a player is unable to compete


with the existing rules of the game may attempt to
change the rules of the game altogether. It results in
a shift in the productivity frontier.
 In a market dominated by price-based differentiation
one may attempt to change the rules of the game
by/when –
– Bases of differentiation dependent on clear
identification of what customer wants or value.
– Building incentives for customer loyalty.
– Making pricing more transparent.
 Game theory relies on the principle of rationality; but
136
players do not always behave rationally.
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).

137
THE THREE STRATEGIC POSITIONS

System Lock-In
System Economics
Market Dominance
Complementary Share

Enabled through
effective use
of technology

Total Customer Proprietary Product


Solutions Product Economics
Customer Economics Rivalry
Cooperation Product Share 138
138
Customer Share
LOCK-IN PAYOFFS

 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.
LOCK-IN SUSTAINABILITY

 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.
STRATEGY
IMPLEMENTATION

141
STRATEGY IMPLEMENTATION

 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.

142
IMPORTANCE OF STRATEGIC FIT

 Strategic fit has a central role to play in strategic


management. While external strategic fit (strategy –
environment) is relevant for strategy formulation;
internal strategic fit (strategy – dominant logic) is
critical to strategy implementation. A high strategic fit
(co alignment) is useful because it enables –
– Appropriate and timely response.
– Unlearning & learning of new skill sets.
– Better strategic and operational control.
– Resource commitment from top management.
– Development of capabilities & competencies.
– Changing the rules of the game.
143
FORMULATION Vs IMPLEMENTATION

 Traditionally, strategy formulation and implementation has


been perceived to be distinct & independent.
 In such a situation, while control is very effective; learning
levels are very low.
 According to Mintzberg, effective strategies are better crafted
when there is a subtle overlapping between the two (i.e.
emergent strategy vis-à-vis intended & realized).
 In such a situation, learning levels are very high; at the cost of
sacrificing a lesser degree of control. In fact, formulation &
implementation can occur simultaneously.
 Some of the key strategic learning's exists at the contact point
between the organization and its customer.

144
ROLE OF TOP MANAGEMENT

 To bring about change and to implement strategies


successfully, companies depend more on transformational
leaders than transactional leaders. A transactional leader is
usually confined to allocating tasks & responsibilities and
extracting performance. In contrast, transformational leaders
go one step beyond –
 Design a well crafted and designed strategic intent of the
organization. Install a system of shared beliefs and values.
 Pragmatism is the ability to make things happen.
 He should be an agent of change; shift from compliance to
commitment; bring about transparency.

145
RESOURCE ALLOCATION

 Resources allocation includes tangible resources (Eg. land,


labour, machines) referred to as threshold resources (i.e.
minimum requirement). Intangible resources (Eg. brands,
patents, skills) also includes complex resources like
capabilities and competencies. The various methods of
resource allocation includes -
 Historical Budget – The budgets framed by HQ for a
particular SBU keeping in mind past trends.
 Zero Based Budget – In this case the budget of a SBU has to
be worked out right from the scratch.
 Performance Budget – SBU managers need to justify the
distinctive resources in terms of the opportunity it is
pursuing yields the highest possible pay-offs.

146
CAPABILITIES & COMPETENCIES

 Technology and business are slowly becoming in – separable.


Moreover, convergence of multiple streams of technologies at
the product – market level is becoming increasingly evident
(Eg. Flat Screen Displays, Mobiles).
 Distinctive capabilities are complex set of skills woven around
technologies; though not necessarily in the case of emerging
markets.
 Distinctive capabilities helps in stretching and leveraging
resources thereby overcoming two major constraints involved
in strategy implementation – times & costs.
 Due to causal ambiguity (complexity), these capabilities are
sustainable even in the medium to long term.

147
STRATEGY & STRUCTURE

 It is a framework within which individual efforts are coordinated to bring synergy. An


appropriate organization structure & adequate control systems are essential to
implement strategies and achieve stated goals. The level of centralization and
decentralization is decisive. Once the structure is in place, processes become
people independent.
 A single product or a dominant business firm usually employs a functional structure.
 A firm in several related businesses usually employs a divisional structure.
 A firm in several unrelated businesses usually employs a SBU structure.

148
TYPES OF STRUCTURES

 Functional Structure – Activities grouped together by a common


function (Eg. Marketing, Finance).
 Divisional Structure – Units grouped together in terms of products,
processes, or geographical locations.
 SBU Structure – Businesses segregated in terms of strategic
dissimilarities (Eg. Inputs ,Technology, Output).
 Project / Matrix Structure – A formal but temporary framework initiated
for the completion of a particular project/crisis; with team members
having dual line of control; disbanded subsequently.
 Team Structure – An informal group formed for a crisis, based on skills
and competencies.
 Virtual Structure – A boundary less or hollow organization.

149
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, leading to a tall structure.
 Technology – With more and more convergence of
technologies in business, structures are becoming flatter and
more simpler, as span is broader.
 Environment & People – Economic and political conditions
have a major bearing on structure coupled with the attitude
and aspirations of the people in the organization. It includes
the desire for independence, assuming responsibility, facing
challenges & crises.

150
INERTIA

 When a firm has been operating in a certain


fashion for a long time, there is a tendency to
continue along the same lines. Inertia is a
characteristic of a firm that endures status quo (i.e.
co0ntinuity). Most firms undergo periods of
strategic continuity rather than strategic
discontinuity.
 Inertia acts as an impediment in strategy
implementation. Changes in top management and
unlearning helps overcome inertia. Top managers
resist change, irrespective whether it is from worse
to good or good to worse. Common sources of 151
inertia – complacency with past successes,
STRATEGY EVALUATION

 Strategy evaluation centers around assessment


of strategic fit. Since the internal and external
environment is in a state of continuous flux,
strategies need to be evaluated on an ongoing
basis to prevent deviations of fit.
 To prevent deviation of fit, firms should move
beyond financial performance to strategic
performance as organization systems are
becoming complex.
 Deviation of fit is detrimental to performance and
may lead to strategic failure. However, certain
authors propose misfit as a source of superior
performance. 152


STRATEGY CONTROL

 It is concerned with trafficking a strategy as it is


being implemented, 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, competitive advantages becoming
disadvantages?
 Has the company acquired any new competency?
 Has the company been able to overcome the
environmental threats. 153
STRATEGY CONTROL -
IMPLEMENTATION

 It involves steering the company towards its


original growth trajectory & stated goals.
 Premise Control – Checking the validity of the
assumptions on which a strategy was based.
However, checking every premise is costly as
well as difficult.
 Implementation Control – It aims at assessing
whether key activities are proceeding as per
schedule. It involves assessing – strategic thrusts
and milestones.
 Special Alert Control – It intends to uncover
unanticipated information having critical impact
154
on strategies. It is open-ended as well as
BARRIERS TO STRATEGY EXECUTION

 Vision and strategy not actionable – Utopian


ideas, difficult to translate into practice.
 Strategy intent not linked with goals and
objectives – Lack of coordination at lower levels
leading to negative synergy.
 Strategy not linked to resource allocation &
capabilities – Lacking commitment of top
management, low strategic fit due to consultants
intervention.
 Performance measures are defective – What to
evaluate against? How to measure the
construct? As a saying goes, “If you cannot
155
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. Together these factors determine the way in which
a corporation operates. Managers should take into account all
seven of these factors, to be sure of successful implementation of
a strategy. Large or small, important or not they're all
interdependent, so if one fails to pay proper attention to one of
them, this may effect all others as well. On top of that, the
relative importance of each factor may vary over time and
context. Today it is considered one of the most powerful tools for
strategy implementation determining success or failure.

156
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. At around the same time in the US Tom Peters
and Robert Waterman were exploring what made a company
excellent. The 7-S model was born at a meeting of these four
authors in 1982. It appeared also in "In Search of Excellence" by
Peters and Waterman, and was taken up as a basic tool by the
global management consultancy company McKinsey. Since then
it is known as their 7-S model and is extensively used by
corporations worldwide to implement their strategies.

157
THE 7’S

 Shared Values – It represents what the organization stands for


and what the top management believes in.
 Strategy – Trade-offs for the allocation of a firms scarce
resources, over time, to reach identified & stated goals.
 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.
 Systems – The procedures, processes and routines that
characterize how work should be done.
 Staff – Human inter-relationships, formal & informal .
 Skills – An organizations capabilities and competencies.

158
STRATEGIC FIT

Strategy

Structure Systems

Shared Values

Skills Style

1st Order Fit


Staff
2nd Order Fit 159
3rd Order Fit
A CRITIC OF THE 7S MODEL

 While the hard S’s (strategy, structure, systems) are


comparatively easy to identify and influence. In
contrast, the soft S’s (skill, staff, style, shared values)
are very malleable and comparatively more difficult to
identify & influence, because most often they are
culturally embedded and often neglected.
 While the American co’s focuses on the hard S’s; 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. Consider the 4P’s
of marketing or 3R’s of SCM.
 Ineffective in case of a virtual company.
160
STRATEGY IMPLEMENTATION -
ROUTES

Strategic Fit - High Organic Growth

Strategic Alliance

Joint Venture

Mergers & Acquisition

Strategic Fit - Low Take Overs


161
ORGANIC GROWTH

 Here a firm builds up its facilities right from the


scratch and continues to do so without any
external participation. The entire infra-structural
facilities are set up afresh having its own
gestation and break-even, i.e. green-field
projects. (Eg. Reliance Industries).
 It has complete control over inputs, technologies,
and markets, i.e. the entire value chain.
 Govt. concessions are available for green-field
projects. (Eg. SEZ’s, tax holidays, soft loans,
subsidized power).
 Long gestation leads to delayed market entry. 162
 Risk of cost and time overruns.
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. Alliances are usually in the
areas of technologies or markets (Eg. Tata Motors
& Fiat). Alliances are usually short-lived and
disbanded once the purpose is achieved.
 There is no funding or equity participation from
the alliance partner & both the firms continue to
operate independently.
 It has limited intervention power and usually lacks
holistic commitment from the alliance partner.
 It is a form of competitive collaboration. 163
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.
(Eg. Tata – AIG, Hero - Honda).
 Dominant logic of both the companies should be
complimentary, leaving minimum scope of
overlapping.
 Selecting the right partner is critical for success.
 A comprehensive MOU is essential. Degree and
extent of management control must be clearly
laid down. 164
MERGERS & ACQUISITION

 It refers to the fusion of two or more firms into a


single entity; with the individual firms ceasing to
exist any more (Eg. Brooke Bond & Lipton).
Acquisition is an outright purchase of a firm
assets by another independent entity (Eg. ITC -
Tribeni Tissues, Coca Cola – Thums Up).
 Economies in scale leading to lowering of costs.
 Integrated distribution channel leads to better
market penetration and overall synergy.
 Integration of assets and other financial resources.
 Revival of a sick-unit through better management
practices is a major motive behind an acquisition
165
strategy.
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. Tata Steel - Corus).
 Integration of organization structure & cultures
is difficult, often the new firm is “left alone”.
 Instant access to capacities and markets. Larger
geo-graphical diversity. Consolidation in a
fragmented industry.
 Most countries have stringent laws that prevents
hostile take over.
 Inform SEBI / Stock Exchange after 5% stake is
166
acquired. Make a public offer of not less than
MANAGEMENT TOOLS
IN STRATEGY

167
WHY MANAGEMENT TOOLS?

 Change is becoming pertinent in the business environment. Radical


change is superseding incremental change. The past is ceasing to be
an indication of the future. Change provides enormous opportunities; it
is also a source of potential threat. Companies therefore need to
ensure competitive advantages doesn’t become competitive
disadvantages. Some tools to ensure that –
 Benchmarking – Adopt certain best practices, or better still create next
practices
 Reengineering – Redesigning work processes right from the scratch.
 TQM – Doing the right thing the first time, every time.
 Balanced Scorecard – Tracking strategy 3600.

168
BENCHMARKING

 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.

169
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.

170
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.
171
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.

172
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.
173
BENCHMARKING - ADVANTAGES

 Finding better ways of meeting stakeholder needs.


Organizational learning comes from internal as well
as external sources.
 Establishing goals based on formal assessment of
external conditions.
 Defining effective measure of indicators, facilitate
comparison, adopt from other organizations.
 Ensuring a continuous learning organization.
 Reducing competitive disadvantage.
 Organizational turnaround, especially effective in
case of a wide strategic drift when differentiation
strategies fail to work. 174
BENCHMARKING - LIMITATIONS

 More and more companies benchmark, the more


similar they end up looking. While strategy is all
about differentiation and not looking alike.
 Benchmarking is useful for bringing about
operational efficiency; but it cannot be used as a
strategic decision making tool. It can at best
complement it.
 Strategy is more of creating best practices rather
than copying them.
 Benchmarking merely reorients profits in the hands
of few to profits in the hands in the hands of many
(i.e. clustering). It does not shifts the growth
175
trajectory of the industry as a whole.
RE-ENGINEERING

 Redesigning leads to identification of superfluous


activities or product features (i.e. process mapping)
and eliminating or improving them (E.g. Windows
95 to 97).
 Re-engineering attempts to radically change an
organizational products or process by challenging
the basic assumptions surrounding it, for achieving
performance improvement (E.g. DOS to Windows).
 Re-engineering involves complete reconstruction
and overhauling of job descriptions from the
scratch (i.e. clean sheet).
 The task demands a total change in organisational
176

culture and mindset.


REENGINEERING – KEY TENETS

Large scale improvement by questioning


Ambition
basic assumptions about how work is done

Micro Vs Macro
Focus
Business Processes Vs Organisational Processes

Starting right from the scratch


Attitude
Not historical

Enabler More IT driven, than people driven

Innovative Vs Traditional
Performance
Customer centric Vs Organisational centric
177
REENGINEERING - LEVELS

 Reengineering can be successfully leveraged at all levels of


an organization with varying degree of results. It can be of
the following types –
 Functional – It looks into the flow of operations (i.e.
products, structures, processes, etc) and supports the
organization for the present.
 Business – It looks into markets, customers and suppliers
and protects the organization from the future (i.e. BPR).
 Strategic – It looks into the process of strategic planning,
resource allocation and prepares the organization for the
future through a reorientation of the entire strategic
architecture. .

178
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, with an intention to copy it (Eg. Cheaper versions of
Intel chips and mother-boards manufactured in Taiwan, Indonesia).
 While traditional manufacturing is a bottom-up approach; reverse
engineering is a top-bottom approach.
 It generally acts as a threat to innovation. However, protection can
be had in the following ways –
– Patenting.
– Early entry advantages, learning curve advantage.
– High cost and time acts as a deterrent.
– Causal Ambiguity.

179
STAGES IN REVERSE ENGINEERING

 Awareness – Recognizing whether the product is found


to be worth the time, cost and effort necessary for the
purpose of reverse engineering. 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.
 Implementation – Developing of a prototype, designing
facilities, machine tools to convert ideas into a
marketable product (i.e. nano-technology).
 Introduction – Launching the product in the market.
Usually in such cases segmentation and pricing is
different from the original innovator.
180
WHAT IS QUALITY?

 It involves the totality of a product or service in meeting


certain stated or implied needs. More and more
companies are moving towards meeting implied rather
than stated needs. It has eight dimensions (Eg. Car) –
– Performance – Mileage of 14 kms to a litre of fuel.
– Features – Anti-lock braking systems, Air bags.
– Reliability – Consistency in mileage.
– Conformance – Emission standards - Euro IV.
– Durability – 1980 manufactured cars still on road.
– Serviceability – Large no. of service stations.
– Aesthetics – Appeal in design.
– Perception – Customer notions.
181
TOTAL QUALITY MANAGEMENT

 Objective – Management of quality ensures


conformance to certain pre-set standards, zero
defects, which ensures good market standing.
 Management of quality was traditionally inspect it
- fix it in nature, touching upon a limited aspect of
a value chain. It had little impact on improving
overall productivity.
 TQM is a way of creating an organization culture
committed to the continuous improvement of
work processes – Deming.
 It is deeply embedded as an aspect of
organisational life & culture. 182
TQM – KEY TENETS

 Do it right, the first time – From reactively fixing


error in products to proactively preventing errors
from occurring at the first place (Juran).
 Be customer centric – Generate the concept of -
internal customer (Ishikawa).
 Kaizen – Make continuous improvement a way of
life. Looking at quality as an endless journey; not a
final destination.
 Empowerment – It takes place when employees
are properly trained, provided with all relevant
information and best possible tools, fully involved
in decision-making and fairly rewarded for results.
183
TQM - STRATEGIES

 Outsourcing – It is the process of self-contracting


services and operations which are routine and
mundane, enabling the firm to concentrate on core
activities essential to customer satisfaction.
 SQC – It is a process used to determine how many units
of a product should be inspected to calculate a
probability that the total no. of units meet preset
standards (Eg. 6-Sigma).
 Quality Circles – It a small group of shop-floor
employees who meet periodically to take decisions
regarding operational problems and crises, saving
precious top management time. It is based on the
principles of MBO (i.e. equal participation).
184
BALANCED SCORE CARD

 Some interesting comments .........


– Efficiency and effectiveness is passé,
strategy implementation has never been
more important.
– Less than 10% of strategies effectively
formulated are effectively executed.
– In the majority of failures – we estimate
70% – the real problem isn’t (bad
strategy) ..... it’s bad execution.
Source: Fortune Magazine
Why CEO’s fail?
185
BSC - CONCEPTUALISATION

 A company’s performance depends on how it measures


performance. Most managers tend to rely on traditional
measures of performance having its origin in finance as
they are well tried and tested.
 These measures worked well when organizational systems
were simple and unidirectional and more importantly the
environment was static.
 In today’s context when organizational systems have
become complex and multi-directional we need to have a
holistic view of performance to cut the lag effects.
 Organizations need to move from financial to strategic
performance. Focus more on causes, rather than effects.

186
BSC – KAPLAN & NORTON (1992)

 A BSC helps a manager to track and communicate


the different elements of company’s strategy. It has
four dimensions –
– How do customers see us?
– What must we excel at?
– Can we continue to improve and create value?
– How do we look to shareholders?
 Firms more often have problems, because they
have too many.
 The most critical element of a BSC is to measure
these four dimensions, and distinguish strategic
problems from operational ones.
187
CUSTOMER PERSPECTIVE

GOALS MEASURES

Relative market share (%)


Products
% of sales from new Vs proprietary products

Timely deliveries and service


Supply
Customer credit analysis (i.e. ageing schedule)

% of key customer transactions


Preference
Ranking of key customer accounts

No. of visits or calls made


Relationship
% of NPA’s
188
BUSINESS PERSPECTIVE

GOALS MEASURES

New capabilities and competencies


Skills
Implementation & gestation period

Bank and supplier credit limits & PLR


Excellence
Unit Costs / Conversion Ratio / Defect Ratio

Exposure No. of times covered in media

No. of new product launches Vs competition


Introduction
Product pricing Vs competition
189
LEARNING PERSPECTIVE

GOALS MEASURES

No. of new patents registered


Technology
Time to develop next generation products

Manufacturing Average and spread in operating cycle

Focus % of products that equal 2/3 sales

Timing No. of product innovations


190
FINANCIAL PERSPECTIVE

GOALS MEASURES

Survival Cash flows

Success Growth in Sales and Profits

Prosper EPS, Return on Investment

Divestment Market Capitalization / PE ratio


191
STRATEGY MAPPING

192
BSC - IMPLEMENTATION
1
2
Mobilize change through
Translate strategy into effective leadership
operational terms

STRATEGY Make strategy a


continual process

3 4
Align the organization Make strategy
to the strategy everyone’s job
193
BSC - ADVANTAGES

 Most often top managers face information


overload. As a result, they don’t know - what
they don’t know. Modern managers should be
poised to ask the right questions.
 The BSC brings together the different elements
of a company’s strategy at a glance.
 It helps translating strategy into practice (i.e.
sharing of vision).
 Shift from control to strategy (i.e. doing right
things instead of doing things right).
 Focus on cause not effects. Seek excellence,
performance will automatically follow.
194
EFFICIENCY Vs EFFECTIVENESS

Ineffective Effective
Inefficient

Goes out of
Business Survives
quickly
Efficient

Dies
Thrives
Slowly

195
EFFECTIVENESS + STRATEGY

 A company which is effective as well as


strategic, not only thrives, but also sustains
it.
- Michael E. Porter

196
CORPORATE
RESTRUCTURING

197
CORPORATE RESTRUCTURING

 The only thing constant in today's business environment is


change. Radical change brings about strategic variety. Strategic
variety may be caused by changes in the as external well as
internal environment.
 Strategic variety brings paradigm shift, from survival of the
fittest ....... to survival of the most adaptable.
 To adapt to the changing environment, firms use restructuring
strategies.
 Restructuring involves consciously driving significant changes in
the way an organizations thinks and looks (Eg. Tata Group).
 As Peter Drucker pointed out, “every organization must be
prepared to abandon everything it does.”

198
RESTRUCTURING – BASIC TENETS

 Customer Focus – Restructuring ideally begins and


ends with the customer. Company’s should go
beyond just asking what he expects. Instead, they
should strive to provide unimaginable value ahead of
its time (Eg. Walkman, Fax, ATM, etc). Internal
customers should also not be neglected.
 Core Business – Company’s should introspect – What
business are we in? Business evolved out of
opportunism or myopia should be divested, and
dividing the core businesses into SBU’s (i.e. down-
scoping).
 Structural Changes – Conventional hierarchical
structures should be disbanded in favour of more
flexible ones (i.e. downsizing or rightsizing). 199
RESTRUCTURING – BASIC TENETS

 Cultural Changes – A culture represents the values and beliefs


of the people about the organization. Restructuring also
requires cultural reorientation. It is created and institutionalized
by the top management.
 During the times of JRD, the Tatas were considered a
benevolent and charitable organization, ..... Ratan Tata now
drives the point the group means business.)
 Reliance dismantled their industrial embassies ..... started
focusing on their capabilities.)
 The Aditya Birla group typically relied on the “marwari”
community for key management positions ..... Kumar Birla
today is more dependent on professionals.

200
MOVING CLOSER TO THE CUSTOMER

 As companies evolve, they tend to move away from


the customer. Restructuring provides a platform to
close this gap.
 Communicating to the media about organization
efforts to deliver quality products.
 Getting feedback & addressing customer complaints.
 Organizing customer and supplier meets.
 Publicizing welfare projects to demonstrate CSR.
 Carry out PR campaigns.
 Use the reach of networking technologies.
 Honda’s ad says, “ … one reason our customers are
satisfied is that we aren’t.”
201
ASSET RESTRUCTURING

 Asset Restructuring – The asset composition of a firm undergoes


a major change, including its intangibles –
 Mergers – It may be vertical, horizontal, or conglo-merate.
Further, it may be smooth (Eg. Tata – Corus) or hostile (Eg. Mittal
– Arcelor) and can take various forms.
 Asset Swaps – It entails divesting and acquisition simultaneously
by two companies, where the difference in valuation is settled off
through cash or equity (Eg. Glaxo – Heinz).
 Hive Off – It involves siphoning of assets under control. It may
include brands as well. It can have two forms; spin-off and equity
carve. Further spin-off can be classified as split-off and split-up.

202
HIVE OFF

 Spin-Off – A spin off is the creation of a new entity; in which the


equity is allotted amongst the existing shareholders on a pro-rata
basis (Eg. Reliance Ent).
– Split-Off – In a split-off, the existing shareholders receive equity
in the subsidiary in exchange for the stocks of the parent
company.
– Split-Up – In a split-up, the entire parent company loses its
identity after being split into a number of subsidiaries. Most of
these practices are not in consonance with Indian laws.
 Equity Carve – It involves selling a minority stake to a third party
while retaining control (Eg. Tata Industries selling 20% stake to
Jardine Matheson).

203
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. Generic motives include –
– Raise working capital; repay long-term debts.
– Poor performance; strategic misfit.
 In 1995, Parle sold its Thums Up brand to Coke for $40 million
apprehending fierce competition.
 In 2005, L&T sold its cements division to Aditya Birla group,
but retained its engineering division.
 A complete sell-out is known as divestment (TOMCO).
 Selling out in phases is called disinvestment (IPCL).

204
CAPITAL RESTRUCTURING

 Capital Restructuring - The internal & external liability


composition undergoes a major change –
 LBO – Acquiring control over a substantially larger
company through borrowed funds (Eg. Tatas take-over of
Corus for US $11.3 billion, involving 608 pence per share).
 Share Buyback – It is a process of cancellation of shares
out of free reserves to the extent of 25% of paid-up capital
(Eg. Wipro). It provides greater leverage as well as
management control.
 Conversion – Replacing debt with equity or vice-versa or
costlier with cheaper debt or cross currency debt.

205
BUSINESS RESTRUCTURING – TATAS

Divestments Diversifications
Lakme – Rs. 256 cr Tata Motors – Rs. 1700 cr
ACC – Rs. 950 cr Trent – Rs. 120 cr
Merind - Rs. 42 cr Tata AIG – Rs. 250 cr
Tata Timken – Rs 120 cr Tata Telecom – Rs. 1170 cr
Voltas - Rs. 230 cr Tata Tetley – Rs. 1890 cr
Goodlass Nerolac – Rs. 99 cr Tata Power – Rs. 1860 cr
CMC – Rs. 150 cr
VSNL – Rs. 1439 cr

206
ORGANIZATIONAL RESTRUCTURING

 Organizational structure and systems calls for a change


when strategic variety is apparent. It can be carried out in
the following ways –
 Downsizing – It is a systematic one-time reduction in the no.
of a firm’s employees and sometimes in the no. of operating
units, usually as a result external turbulence, keeping the
composition of business intact (Jet Airways). Survival is the
primary motive.
 Rightsizing – It is phasing of excess and redundant
employees resulted out of faulty internal planning (SAIL).
Turnaround is the primary motive.
 Downscoping – It involves reducing the business and/or
geographical scope of a firm (Aditya Birla group).

207
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.
 The dominant logic represents the perceptions and biases
(i.e. thumb rules) of the top management.
 Dominant logic becomes deep-rooted in organizational
contexts depending on the period it is in place (tenure of the
CEO). The longer the period, the more difficult it becomes to
uproot the paradigm (i.e. inertia).
 Strategy change is unviable without a preceding change in
its dominant logics, as strategies are based on such beliefs
and biases.

208
FORCES AGAINST STRATEGIC
CHANGE

 The problem with strategic change is that the whole


burden typically rests on few people (i.e. 20% of the
people carry out 80% of the changes).
 Companies achieve real agility only when people at
every level rise above the ordinary to face the
challenges – revitalization or transformation.
 In most organizations, the factor that stifled change &
performance was – culture.
 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.
209
SUCCESSFUL TRANSFORMATION

 Build an intricate understanding of the business model at all


levels of the organization.
 Encourage uncompromising straight talk.
 Manage from the future. The best way is to alter the
institutional point of view.
 Harness setbacks, it is not about winning but about learning.
 Promote inventive accountability; process ownership.
 Understand and deliver the quid pro quo.
 Create relentless discomfort with the status quo. Questioning
every basic action of the organization, never take no for an
answer.

210
FORCE-FIELD ANALYSIS

 A force-field analysis provides an initial overview of change


problems that needs to tackled, by identifying forces for and
against change.
 Culture and style of management are two main impediments in
force-field analysis, also known as cultural-web. It involves
identifying –
 Aspects of current culture which needs to be reinforced.
 Aspects of current culture which needs to be overcome.
 Identify and implement facilitators of cultural change.
 It involves diagnosing a change situation – systems &
structures, that can be both enablers and blockages to change
and restructuring.

211
RESTRUCTURING - OUTCOMES

Short - Term Long - Term


Alternatives
Reduced labour Loss of
Organizational costs human capital

Reduced debt Lower


costs performance
Capital

Emphasis on Higher
strategic control performance
Business
High debt Higher
costs risk 212
NUMERATOR & DENOMINATOR MGT

 Most firms across emerging markets undergo strategic


discontinuity and as a result are forced to restructure
their businesses. In order to put back the company on
the right track they are resort to –
 Denominator – It assumes that turnover cannot be
increased, hence go in for downsizing, down-scoping or
asset stripping.
 Numerator – It assumes that turnover is not a barrier or
constraint; focuses on reengineering, reverse
engineering and regenerating.
 While the first strategy produces results
instantaneously; the second one is a more viable
strategy and sustainable option in the long run.
213
TURNAROUND
MANAGEMENT

214
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.
– Less than 10% of the Fortune 500 companies
as first published in 1955, still exist as on
2005.
Source:
 Why do firms atrophy?
(Business Today, January
1997).
215
(Govindarajan and Trimble,
TURN AROUND MANAGEMENT

 A turnaround is said to occur when a firm perseveres


through an existence threatening performance decline;
ends the threat with a combination of strategies, skills,
systems, and capabilities; and achieves sustainable
performance recovery. Both content (what) and process
(how) are equally important for a successful turnaround.
 While content focuses on endogenous and exogenous
variables; process focuses on –
 A logic to explain a causal relationship between
intervening variables.
 A category of underlying principles and concepts.
 As a sequence of events describing how things change
and why they change (i.e. Stage Theory).
216
TURNAROUND INDICATORS

 Most firms atrophy simply because they fail to


diagnose the indicators that acts as threat to
organizational existence. Some indicators -
 Continuous cash flow crises as a result of dwindling
market-share and profits.
 Substantial shifts in consumer preferences.
 Low employee morale leading to high employee
attrition at all levels, especially in key positions.
 Uncompetitive products or services, leading to lack
of acceptability from distributors and customers.
 Rising input costs, unavailability or radical lowering
of substitute costs or technological obsolescence.
 Low stakeholder confidence; suppliers and bankers. 217
TURNAROUND ILLUSION

 The first step to a successful turnaround is the basic


acceptance of the fact that ….. “all is not well”, which
most top managers fail to appreciate. Hence, they adopt
surface level measures (disprin popping) which most
often fail. Common approaches adopted -
 Change in key positions, be more customer centric.
 Recalibrate prices, based on elasticity.
 Product redesigning or reengineering.
 Revamp product portfolio, focus on power brands,
consider extension, liquidating dead assets.
 Emphasis on advertising and market penetration.
 Extending work hours, prune work-force.
218
TURNAROUND STAGE THEORY

Stage 1 Stage 2 Stage 3 Stage 4

Decline Response Transition Outcome


Performance

Success
Equilibrium Line

Failure
Nadir

Indeterminate
Time
219
DECLINE

 Decline is the first stage in the turnaround process. It


involves the identification of the theoretical
perspectives that explains performance decline –
 K-Extinction – It suggests that macro economic and
industry wide factors are responsible for decline. It has
its origin in “environment led fit” that subscribes to the
view that a firm has little control over external factors.
 R-Extinction – It suggests that organization factors,
primarily dwindling resources and capabilities are
responsible for decline. It has its origin in “resource led
stretch” and subscribes to the view that a firm has
substantial power to override the context. Identification
of the stimulus leads to the arrest of the downfall.
220
RESPONSE INITIATION

 Turnaround responses are typically categorized as operating


or strategic. Operating responses typically focuses on the way
the firm conducts business and involves tactics geared
towards – cost cutting and process redesigning (BPR).
 Strategic responses focus on changing or adjusting the
business the firm is engaged in through long term moves such
as – integration, diversification, new market initiatives, asset
reduction.
 The response must match the cause of the decline. If the
decline stems from structural shifts, the response should be
strategic. If the underlying cause is internal efficiency, the
response should be operational.

221
RESPONSE DICHOTOMY

 The response initiation is somewhat dichotomous and cannot be


universally applicable. Untangling this question brings into focus
three events –
 Domain – Many of the strategic cures have limited applicability
for an affiliated firm. Similarly new market initiatives is feasible
only for multi-product firms.
 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; when decline deepens shifts in
strategic position becomes essential.

222
TRANSITION

 Transition usually reflects the first signs of recovery. However,


substantial amount of time usually passes before results begin to
show (i.e. lead – lag).
 Empirical studies show that average time is 7.7 years with a range
of (4-16) years. However, many a times early signs of recovery
fades out. Sustenance is the key factor in this stage. Effective
levers of transition.
 The top management has a key role to play through -
empowerment, transparency, role model, confidence building
measures, participative management (i.e. consensus).
 Support from all the stake holders through resource commitment.

223
OUTCOME

 Outcome is said to be successful when a firm breaches


the equilibrium performance level. Failure is an
indication that initial momentum was not sustainable
characterized by irreversibility.
 Instead of focusing on financial parameters alone, it
should adopt a holistic approach. Cut off points must be
unequivocal.
 Share price indications and media coverage.
 Regaining lost market share and distributor confidence.
 Revival of key customers and new product launches.
 Commanding a premium in the market.
 Supplier and banker confidence.
224
COOPERATIVE STRATEGIES
&
ALLIANCES

225
COOPERATIVE STRATEGIES

 Cooperative strategies are a logical and timely response to


changes in business dynamics, technology, and
globalization . It can assume any of the following forms –
franchising, licensing, consortia, supply-chain partnership,
strategic alliance, or joint venture.
 Any cooperative strategy maybe between firms within the
same country or cross border as well.
 In the cooperative strategy continuum as firms move up the
value order, the commitment and the involvement between
the firms increases manifold.
 More and more companies worldwide are moving away from
competition to co-option to leverage their resources and
enhance bargaining power.

226
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. Branding is
critical to franchising.
 Switz Foods, owners of the brand Monginis allows its
franchisees to sell its confectionary products.
 Titan Inds, owners of the brand Tanishq allows its
franchisees to sell its jewellery products.
227
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. Different levels of licensing -
 Manufacturing without embracing any technology (CBU).
 Develop a product through its crude stage, refine processes and
adopt necessary technologies (SKD).
 Become a systems integrator (CKD), as in Tata Indica.
 HM manufacturing GM range of cars in India with a buy-back
arrangement is a perfect example of CBU.

228
CONSORTIA

 Consortia – They are defined as large inter-locking relationships &


cross holdings between businesses in a similar industry. It can be
of the following types –
 Multipartner – Intends to share an underlying technology or asset,
leverage upon size to preempt competition by escalating entry
barriers (Eg. Airbus – Boeing).
 Cross Holdings – A maze of equity holdings through centralised
control to ensure earnings stability & threshold resources for
critical mass (Eg. Tata, Hyundai).
 Collusion – Few firms in a matured industry collude to reduce
industry output below the equilibrium level, enabling them to
increase prices (Eg. Coke – Pepsi).

229
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).
 Companies in different industries with different but
complimentary skills, link their capabilities to create
value for end users.
 It usually provides a platform to sort out differences
between conceptualization and implementation to
suit local market needs.
 Continuous sharing of knowledge is critical to the
success of a supply chain partnership, otherwise it
becomes routine outsourcing. 230
STRATEGIC ALLIANCE

 It is an short to medium term understanding between two


or more firms to share knowledge and risk, to gain
knowledge and to obtain access to new markets (Eg. Tata
Motors – Fiat, Reliance – Du Pont).
 Despite their popularity (50-60)% of the alliances fail to
accomplish their stated objectives. Partner selection is
one of the critical success factors.
 Firm’s should undertake a long courtship with potential
partners, instead of hurrying into a relationship.
 Generic motives involved are - learning organization,
design next generation products, effective R&D
management, enhance credibility, preempt competition,
enter newer markets.
231
STRATEGIC ALLIANCE - TYPES

 Collusion – Tacit top management understanding to


neutralize price wars (Eg. Coke – Pepsi).
 Complementary Equals – Two firms mutually
promoting each others complimentary products (Eg.
Whirlpool – Tide, Bajaj – Castrol).
 Bootstrap – An alliance between a weak and a strong
company with an intention to acquire it.
 Alliances of the Weak – An alliance is entered into to
preempt competition (Eg. Airbus – Boeing).
 Backward – An alliance (quasi or tapered) with a
supplier of critical components seeking commitment
(Eg. Maruti).
232
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.
 Cultural orientation has been found to have a profound
effect on top management’s strategic orientation (Eg. –
Japan Vs US).
 Differences in level of economic development can
produce differences in alliances motives. Firms from
developed markets seek access to markets and firms
from emerging markets seeking access to technology.
 Too much stress on financials & structure be avoided.
233
PARTNER CHARACTERISTICS

 Complimentarity of Capabilities – The degree to which


partners resources can be used in conjunction.
 Dominant Logic’s – Similarity in beliefs & biases.
 Unique Resources – Abilities or skills which cannot be
easily duplicated.
 Intangible Assets – Move beyond the financials of the firm.
 Willingness to share knowledge and skills.
 Partner’s ability to acquire fresh skills.
 Experience related to previous alliances.
 Managerial capabilities, including ability to provide quality
products and services.

234
MANAGING ALLIANCES

 Alliances are more than just a deal; instead of focusing controlling the
relationship, partners should nurture it.
 Selection & Courtship – It involves self analyzing, understanding the
chemistry, degree of compatibility.
 Getting Engaged – It should incorporate a specific joint activity; vows
to include commitment to expand the relationship; incorporating clear
signs of continuing independence for all partners.
 Setting up the housekeeping, the value chain.
 Learning to collaborate – strategic, operational & cultural integration.
 Changing within; differences not anticipated earlier.

235
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, whilst the partners
continue to operate independently.
 Conceptually, a joint venture is a selection among
modes by which two or more firms can transact.
 It aims at creating new value (i.e. synergy) rather
than mere exchange (i.e. combining parts).
 There are substantial linkages in the value-chain.
 It lasts till the vision is reached; separation is very
236
bitter.
JOINT VENTURE – GENERIC MOTIVES

 Transaction Cost – The situational characteristics best suited for a JV


are high performance uncertainty; in addition to a high degree of
asset specificity.
 The market fails as sellers are unwilling to reveal their technology
and buyers are unwilling to purchase in the absence of inspection.
 Strategic Behaviour – Firms may override transaction costs, though
more profitable alternative to other choices. It may also be linked to
deterring entry or eroding competitors position.
 Organizational Learning – It is a means through which a firm learns
or seeks to retain their capabilities.

237
OTHER MOTIVES

 Entry into newer markets.


– Eg. Yamaha – Escorts, Eli Lily – Ranbaxy.
 Learning new technologies.
– Eg. TVS – Suzuki (4-Stroke Engines)
 Fill gaps in existing product lines.
– Eg. Renault – Nissan (Minivans – Cars).
 Endorsement from government authorities.
– Eg. Maruti – Suzuki.
 Sharing of resources.
– Eg. Essar – Hutch (Vodafone).
 Define future industry standards.
– Eg. Daimler – Chrysler (Premium Cars)

238
RISKS INVOLVED

 Incompatibility – Differences in cultural background.


– Godrej – Procter & Gamble, Century - Enka.
 Risk of brain (i.e. technology) drain.
– Maruti – Suzuki.
 Risk of over dependence.
– Eg. LML – Piaggio
 Differences in size and resource base.
– Eg. Modi – Telstra
 What after exit (parenting disadvantage)?
– Eg. PAL – Fiat
 If the cost of continuing exceeds the exit costs?
– Eg. Tata – Aditya Birla in Idea Cellular

239
PRE-REQUISITES FOR SUCCESS

 Commitment – Mutual trust, respect, time sharing.


 Objectives – Shared vision.
 Partner – Avoid duplication of skills and capabilities.
 Agreement – Clarity on operational control.
 Flexibility – Sufficient space to breathe and adjust.
 Culture – Reconcile gaps.
 Inertia – Differences in age and evolution patterns.
 Incompatibility – Performance expectations.
 Equality – Lack of dominance.
 Focus – Avoid strategic myopia.
 Costs – Other modes of transaction becomes cheaper.

240
MERGERS
&
ACQUISITION

241
MERGERS & ACQUISITION

 A merger is a mutually beneficial consent between two


or more firms (usually of similar size) to form a newly
evolved entity by absolving their individual entities to
preempt competition (Eg. Brooke Bond – Lipton). The
larger objective is to leverage on size.
 An acquisition is the purchase of a firm by a firm (of
larger size, however, reverses are also taking place
through LBO) with a view to acquire conglomerate power
and induce synergy (Eg. HLL – Tomco).
 An acquisition is said be smooth if it is with the consent
of the management (Eg. Ranbaxy - Daichi) and hostile if
it is without the consent of the management (Eg. Mittal -
Arcelor).
 Most countries have stringent laws that prevents hostile
takeovers (Eg. SEBI Takeover Code, 2002).
242
SEBI TAKEOVER CODE, 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.
 Acquirer – Someone (individual or firm) who picks
up an atleast 5% stake without mandatory
disclosure having an intention to wrest
management control (i.e. creeping acquisition).
 Hike – An acquirer who has already picked up a 5%
has to make a mandatory disclosure for every
additional 1% stake that it acquires.
 Preferential – A preferential allottee ending up
acquiring 5% stake also comes under its purview.
 Control – A special resolution of 75% of the share
holders approving the change of guard. 243
SEBI TAKEOVER CODE, 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. Grasim – L&T Cement,
Gujarat Ambuja – ACC).
 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.
 SEBI – In case of a hostile take over, the SEBI can intervene and
block share transfers if: the acquirer has ulterior motives (i.e.
asset stripping), credentials or track record is at stake, and/or
does not enjoy the confidence of the different stake holders.

244
TYPES OF MERGERS

 A business is an activity that involves procuring of desired


inputs to transform it to an output by using appropriate
technologies and thereby creating value for its stake holders in
the process.
 The type of merger is depends on the degree of relatedness
(strategic) between the two businesses.
 Horizontal – It involves integration of two highly related
businesses (Eg. Electrolux - Kelvinator).
 Vertical – It involves complimentarily (partially related) in terms
of supply of inputs or marketing activities (Eg. Godrej, Reliance).
 Conglomerate – It involves integration of two distinctly unrelated
businesses, usually opportunistic (Eg. ITC).

245
MERGERS & ACQUISITION - MOTIVES

 Increased market / conglomerate power.


 Reduction in risk.
 Economies of size, scale and scope.
 Overcoming entry barriers (Eg. Tata Steel – Corus).
 Avoiding risk of new product development.
 Access to newer segments (Eg. Ranbaxy – Crosslands).
 Reduced gestation (i.e. quick access).
 Tax benefits (Eg. ITC Bhadrachalam).
 Acquiring assets or capabilities (Eg. ICICI –ITC Classic).
 Global image (Eg. Mittal – Arcelor).
 Ulterior motives – (Eg. Asset Stripping – Shaw Wallace).
 Coinsurance effect – Higher debt raising capability.

246
MERGERS & ACQUISITIONS -
PITFALLS

 Cultural differences (Eg. Tata – Corus).


 Overvaluation of buying firms (Eg. When Tata Steel started
negotiations with Corus, their initial offer was around 420
pence/share; while the ultimate acquisition was made at 607
pence/share). Overvaluation is often as a result of an ego
drive and substantially affects future returns.
 Merging of organisational structures.
 Inability to achieve synergy.
 Managing over-diversification.
 Managing size.
 Top management overtly focused on due diligence exercise
and negotiations; neglecting core business.

247
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. Kingfisher – Air Deccan).
 Growth – This stage may witness parallel merger of two firms of
similar size; with an objective to reinforce its growth trajectory or
to take on the might of a comparatively larger player (Eg. Brooke
Bond – Lipton).
 Maturity – A larger firm acquires a smaller firm with an objective
to achieve economies of scale and experience curve effects (Eg.
Tata Steel – Corus).
 Decline – Horizontal mergers are undertaken to ensure survival;
vertical to save transactions costs.

248
INTERNATIONAL M&A - FRAMEWORK

 Positive contribution to the acquired company. An


acquisition just for the sake of it or reputation yields
very little value in the long term.
 A common shared vision. Strong differences may stifle
plans and its execution.
 A concern of respect and trust for the business of the
acquired company.
 Left alone syndrome; 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.
249
INTEGRATION - BLUEPRINT

 Take the media into confidence. They can carry


the message to the various stake holders.
 Shift attention from business portfolio to people
and processes.
 Decide on the new hierarchy; promptly. It will
enable focus on customers and key people.
 Redefine responsibilities and authority.
 Decide upon management control systems.
 Integrating work processes.
 Determine business strategy.
 Do not ignore the “people factor”. 250
M&A - VALUATION

 The process of valuation is central to M&A. While under


valuation may be a significant opportunity; over
valuation can become a curse.
 Valuation decisions are arrived through a due diligence
process when the prospective acquirer gets access to
the books of accounts of acquiring company. The
process takes (6-12) months. Financial motives -
– Undervaluation relative to true value.
– Market for corporate control.
– Unstated reasons – Personal self interest and hubris.
– Synergy – Potential value gain from combining
operations (i.e. operational & financial).
251
VALUING OPERATIONAL SYNERGY

 Synergy – It refers to the potential value gain where the whole is


greater than the sum of the parts. Synergy can be negative as
well; when the “fit” between the two entities is very poor. Sources
of operational synergy -
– Horizontal Synergy – Gains come from economies of scale
which reduces costs; or from increased market power which
increases sales and margins.
– Vertical Synergy – Gains come from controlling the supply-
chain and savings in transaction costs.
– Conglomerate Synergy – Gains come when one firm
complements the resources or capabilities of another (Eg.
Innovative product – Good distribution network).

252
VALUING FINANCIAL SYNERGY

 Diversification – Reduce variability in earnings by


diversifying into unrelated industries. However,
shareholders can accomplish the same at a much lesser
cost, and without paying take-over premiums.
 Cash Slack – It reduces asymmetry between cash starved
firms with deserving projects and cash cows with no
investment opportunities. Synergy comes from projects
which would not have been undertaken if the two firms
stayed apart (Eg. Hotmail).
 Tax Benefits – Tax benefits may accrue from tax
entitlements and depreciation benefits unutilized by a loss
making firm, but availed after being merged with a
profitable firm (Eg. ITC – Bhadrachalam Paper).
253
VALUING FINANCIAL SYNERGY

 Co-Insurance Effect – If the cash flows of the two firms are less than
perfectly correlated, the cash flow the merged firm will be less variable
than the individual firms. This will induce higher debt capacity, higher
leverage, hence better performance.
 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, as risky debt is spread across the new firm's operations.
– Default risk comes down and credit rating improves.
– Coupon rates may also be negotiated at lower rates.

254
VALUING CORPORATE CONTROL

 Premium of M&A are often justified to control the management


of the firm. The value of wrestling control is inversely
proportional to the perceived quality of that management.
– Value of Control = Value of firm after restructuring –
Value of firm before restructuring.
 The value of control can be substantial for firms that are
operating well below optimal value, since a restructuring can
lead to significant increase in value.
 While value of corporate control is negligible for firms that are
operating close to their optimal value.
 Assessment of perceived quality is critical.

255
LEVERAGE BUYOUT (LBO)

 The basic difference between a take-over and a LBO is


the high inherent leverage (i.e. debt component) at the
time of buyout and rapid changes in capital structure
over time.
 LBO facilitates a relatively smaller firm to bid for a
comparatively larger firm in the bid for management
control. Confidence of investment bankers and the
international financial community is essential.
 It is a very costly and risky proposition.
 The assets of the acquired company are used as
collateral for the borrowed capital, sometimes in
combination with the assets of the acquiring company.
256
TO GO PUBLIC OR NOT?

 However, off-late many publicly traded firms have gone


private keeping in mind the following –
– The fear of LBO.
– The need to satisfy analysts and shareholders.
– Separation of ownership from management.
– Increased information needs.
 A research study showed that 30% of the publicly listed firms
reported above average returns after going private. The
increased benefit showed in the following way – reduced
costs and increased revenue.
 However, the advantages of going public includes - access
to financial markets, liquidity, on-going valuation.

257
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).
– Managers cannot be trusted to invest free cash flows
wisely.
– It is a temporary phenomenon; which disappears once
assets are liquidated and significant portion of debt is paid
off.
– Debts repaid off from increased value after successful
restructuring and wresting management control.
– Cost of debt coming down (i.e. co-insurance effect).
– Cash trapped company unable to utilize opportunities.

258
EFFECT OF HIGH LEVERAGE

 Increases the riskiness of dividend flows to shareholders by


increasing the interest cost to debt holders. Therefore, initial
rise in leverage is anticipated.
 As the firm liquidates / pledges assets and pays off debt,
leverage is expected to decrease over time.
 Any discounting has to reflect these changing cost of capital.
 Lack of sufficient cash flows to repay costly debts resulting in
a possible debt trap.
 A LBO has to pass two tests to be viable –
– Restructuring to pay-off increased debt.
– Increase equity valuation.

259
REVERSE MERGER

 Reverse Merger – The acquisition of a public company, which


has discontinued its operations (i.e. shell company) by a
private company, small in size but having a promising
business, allowing the private company to bypass the usually
lengthy and complex process of going public. Objectives –
– Traditional route of filing prospectus and undergoing an IPO
is costly, time-barred, or costly.
– Prevents dilution of equity.
– Automatic listing in major exchanges.
– Tax shelter.
– Facilitates better valuation and forthcoming offerings.

260
EFFECT OF TAKE-OVER
ANNOUNCEMENT

 The shareholders of target firms are the clear winners.


– Takeover announcements reported 30% excess returns.
– Merger announcements reported 20% excess returns.
 Excess returns also vary across time periods. During bearish
periods excess returns were 19%; and 35% during bullish
periods.
 However, takeover failures have only initial negative effects
on stock prices. Most target firms are taken over within (60-
90) days.
 Initial anomaly in stock prices usually normalizes over a period
of time (6-12) months.

261
EFFECT OF TAKE-OVER
ANNOUNCEMENT

 The effect of take-over announcement on bidder


firm’s stock prices are not clear cut.
– Most studies reported insignificant excess
returns around take-over offers or merger
announcements.
– However, in the event of take-over failure
negative returns to the extent of 5% on
bidder firm stock prices is reflected.
– However, as stock markets become more and
more perfect such anomalies
Source: Jensen and would
Ruback,reduce
1983.
over time. Bradley, Desai, and Kim, 1983.
262
Jarrel, Brickley, and Netter, 1988
DEFENSIVE STRATEGIES

 Golden Parachute – An employment contract that


compensates top managers for loss of jobs as a
result of change in management control.
 Poison Put – Premature retirement of bonds at
attractive rates to pour surplus cash and make
target investment unattractive.
 Poison Pill – An offer to existing shareholders to buy
shares at a substantial discount to increase their
voting rights (Eg. Rights).
 Asset Stripping – The targeted company hives off its
key assets to another subsidiary, so that nothing is
left for the raider to strip off. 263
DEFENSIVE STRATEGIES

 White Knight – It is the placing of stocks to a cash rich


investor and bargaining for protection in return. But often
the White Knight turns a betrayer himself (Eg. East India
Hotels – Reliance Industries – ITC).
 Pac Man – The target company makes a counter bid to take
over the raider company, thus thwarting the raider
company’s attention.
 Gray Knight – The target company takes the help of friendly
company to buy the shares of the raiding company.
 Green Mail – The targeted company buys large blocks from
holders either through premium or through pressure tactics
(Eg. Shapoorji Pallonji).

264
COMPETING FOR
THE
FUTURE

265
GETTING OFF THE TREADMILL

 Canon overpowering Xerox; Honda overpowering


Volkswagen; Honda overpowering GM; Nokia
overpowering Motorola; Hitachi overpowering
Westinghouse; Wal-Mart overpowering Sears; Compaq
overpowering IBM; British Air overpowering Pan Am.
 Most companies were too preoccupied with the present
than the future? 99% of the companies overpowered,
were spending 99% of their precious time dealing with
present. The reverse was true for the companies
overpowering.
 What went wrong???? What were they doing with the
present? What were they pre-occupied with?

266
THE PAST OF COMPETITION

 Beyond Restructuring – When a competitiveness


become inescapable problem (stagnant growth,
declining margins, falling market share), CEO’s brutally
pick up the knife and ruthlessly carve away layers of
corporate flab (delayering, decluttering, downsizing).
 Not knowing when to stop; most often they ended up
cutting corporate muscle as well and became anorexic.
Thus efficiency was grievously hurt.
 These denominator based managers stuck to their
restructuring strategies (like building pyramids) and
didn't know what to do next?
 Thus they became history? (like the pharaohs)
267
THE PRESENT OF COMPETITION

 Beyond Reengineering – Numerator based managers


(innovation) at least offers some hope. However,
incrementalism or nominal innovation has almost
reached a plateau; ensuring only survival of the present;
but not of the future.
 A poll in circa 2000 revealed that 80% of the U.S. top
managers believed that quality will be a source of
competitive advantage of the future. On the contrary
only 20% of Japanese managers believed that quality
will be a source of competitive advantage of the future.
 The future is not about catching up with competition;
but forging ahead in competition.

268
THE FUTURE OF COMPETITION

 Regenerating – Leaner, better, faster; as important as these may be,


they are not enough to get a company to the future. Companies need
to fundamentally reconcieve itself; reinvent its industry; and
regenerate its strategies (breaking its – managerial frames).
 Creating the future requires industry foresight. It is based on deep
insights into trends in technology, demographics and lifestyles. It
involves -
 Dream about the company’s future; don’t predict.
 Create a potential gap; aspirations and resources.
 Transform the industry; not just the organization.
 Empower from bottom to top; not the other way.

269
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. Successful companies have a
complete grip over the industry, hence do not fall
sick in the first place. Therefore, they do not need to
restructure.
 It is about deliberately creating a strategic misfit. It
drives a hunger and a passion to transform.
 Change in at least one fundamental way the rules of
engagement in an industry.
 Redraw the boundaries between industries, by
converging technologies complex.
 Create entirely new industries (i.e. blue oceans).
271
ABOUT THE EMPOWERMENT

 Bring about a revolution (a paradigm shift) in the


organization. More importantly, 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.
 Most successful revolutions (Gandhi to Mandela)
rose from the dispossessed.
 The middle management plays a strong moderating
role.
 Transformational leaders merely lead the way.
 Such a process is called institutionalization (from
people centric to organisational centric). 272
THE FUTURE OF STRATEGY

 A company must get to the future not only first but also
for less. What does it take to get to the future first?
 Understanding how competition for the future is
different.
 A process for finding and gaining insight into tomorrows
opportunities (Eg. Toshiba – LCD; South West Airlines –
LCC, Apple – iphone). It requires a lot of common sense
and a little bit of out of the box thinking.
 An ability to energize the company.
 Get to the future first, without taking undue risk.
 Companies need to strategize (think ahead of times).
Apply the 40 – 30 – 20 principle.
273
HOW DOES THE FUTURE LOOK LIKE?

 There is no rule which says that for every leader there will be a
follower. As there is no one future; but hundreds.
 We are in the midst of a 3600 vacuum; each point in space
represents a unique business opportunity. The farther one can see
in this endless space, the farther it will be away from competition.
 Companies of the future will be not based so much on the
strength of their resources, as on their aspirations.
 What distinguishes a leader from a laggard; greatness from
mediocrity, is the ability to imagine in a different way what the
future could be.

274
THE EMERGING STRATEGY
PARADIGM

Not Only But Also


The Competitive Challenge
Reengineering Processes Regenerating Strategy

Organizational Transformation Industry Transformation

Competing for Market Share


Competing for Opportunity Share

Finding the Future


Strategy as Learning Strategy as Unlearning

Strategy as Positioning Strategy as Dream

Strategy as Engineering Strategy as Architecture275


THE EMERGING STRATEGY
PARADIGM
Not Only But Also
Mobilising for the Future
Strategic Fit Strategic Misfit

Resource Allocation Resource Stretch & Leverage

Getting to the Future First


Existing Industry Structure Future Industry Structure

Product Leadership Competency Leadership

Single Entity Dominant Coalitions / Co-option

Product Hits & Timing Market Learning & Preemption


276
LEARNING TO FORGET

P1: The degree of learning in current period is


directly proportional to the degree of unlearning in
the previous period.
Degree of Learning

Unlearning
Curve
P2: Unlearning in previous period does not
necessarily ensure learning in the current period.
Learning
Curve

t1 t2 t3 t4 t5
277
Time
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. 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.
It cannot be matched even by its closest competitors.
 Leverage – They are the gateways to future markets.

278
MORE ABOUT CORE COMPETENCE

 Sony – miniaturization; Honda – engines; Wal-Mart – logistics;


SKF – antifriction and precision, Coca Cola – brand, Nike –
designing; Canon – imaging; Intel – nano-electronics; Toyota –
lean manufacturing; Toshiba – flat screen displays.
 Core competencies are the roots of the organization.
 Although a core competence may lose value over time; it gets
more refined and valuable through use.
 A core competency cannot be outsourced; it is deeply
embedded in the heart of the organization.
 Most companies around the world do not possess one; leaders
have one, at the most three to four.

279
ROOTS OF COMPETITIVENESS

End 1 2 3 4 5 6 7 8 9 10
Products

Core Core Core Core


Business Business Business Business
Core 1 2 3 4
Businesses

Core Product 2
Core
Products
Core Product 1

Core
Competence Competence Competence Competence
Competencies
1 2 3 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.
281
CONCENTRATING 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.

282
ACCUMULATING RESOURCES

 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.

283
COMPLEMENTING RESOURCES

 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).

284
CONSERVING RESOURCES

 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.

285
RECOVERING RESOURCES

 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.

286
INTERNATIONAL
BUSINESS ENVIRONMENT

287
EMERGING MARKETS

 Emerging markets (India, China, Korea, Chile) provide a


different context (i.e. high levels of market imperfection).
Therefore, strategies suited for the developed markets
may not be appropriate for emerging markets.
 Emerging markets are characterised by infrastructural
bottlenecks, institutional gaps, and high transaction costs.
Therefore focused strategies based on core competence
may not be suitable for emerging markets (Khanna &
Palepu, 1997).
 Diversified groups in operating in emerging markets
therefore benefit from unrelated diversification.

288
DIVERSITY - PERFORMANCE (I)

Diversity attempts to measure the degree and


extent of diversification (Herfindahl, Concentric,
Entropy).
Optimum level of diversification
Performance

Diversity is initially positively related


with performance, subsequently
negatively related across developed
markets.
Synergy, Size & Scale, Experience

Strategic Fit

Diversity Palich, et al. (2000)


289
DIVERSITY - PERFORMANCE (II)

Diversity is initially negatively related


with performance, subsequently
positively related across emerging
markets.
Performance

Huge initial investment, brand building

Risk diversification,
conglomerate power

Threshold level of diversification

Diversity (Khanna & Palepu, 2001) 290


INTERNATIONAL IDENTITY

 MNC’s consciously engage in FDI in different parts of


the globe to forge resource diversity as a distinct
competitive advantage. Characteristics –
 It should have a spread of affiliates or subsidiaries.
 It should have a spread of manufacturing facilities.
 It should have a spread of assets, revenues and
profits.
 It should have a spread of interest groups / stake
holders.
 It should think globally; act locally (Eg. HSBC).

291
GLOBAL BUSINESS ENVIRONMENT

 Power Distance – It reflects the disparities in income and


intellectual development (Eg. low power distance in
developed markets and vice versa for emerging markets).
 Feminity Index - It reflects the disparities in women in
workforce (Eg. 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 risk profile in developed markets
and vice versa for emerging markets).
 Group Scale - It reflects the relative role of team building
(Eg. low group scale in developed markets and vice versa
for emerging markets).

292
GLOBAL BUSINESS ENVIRONMENT

 Cultural Adaptability – It reflects the adaptive ability to a


changing environment - culture, way of life, attitude, code of
conduct, dress sense, customs, time value, flexibility (Eg. high
cultural adaptability in developed markets and vice versa for
emerging markets).
 Country Risk – It reflects the political and economic risk (Eg.
political stability, credit rating, currency, FOREX reserves,
inflation, interest rates, terrorism (9/11), corruption, judiciary)
of doing business in a particular country (Eg. low country risk
in developed markets and vice versa for emerging markets).

293
GLOBAL BUSINESS ENVIRONMENT

 Time Sensitiveness – Developed country managers


regard time as precious, however, in most emerging
markets meetings are delayed and lasts unusually long.
Other factors – local celebrations, time-zones.
 Language Barriers – Developed country managers
expect foreign partners to communicate in their
languages; in most emerging markets use of an
interpreter may be a standard protocol.
 Ethnocentrism – Developed country managers tend to
regard their own culture as superior; and vice-versa.
High levels of ethnocentrism usually has a negative
effect on business.
294
GATT

 GATT was a bi-lateral treaty initiated between US and


some member countries in 1947 to promote free
trade. In 1995 (Uruguay Round) GATT was renamed to
WTO. It a multi-lateral treaty with 143 (as on 2002)
member countries to reduce tariff and non-tariff
(quota) barriers. It focused largely on TRIPS (patents,
copyrights, trademarks). It also initiated provisions on
anti-dumping.
 The 1999 (Seattle Round) saw a lot of protest amidst
bringing agriculture under the purview of TRIPS. It also
highlighted the nexus between US & WTO.
 The 2001 (Doha Round) focused on power blocks
(NAFTA, ASEAN, BRIC).
295
EURO – SINGLE CURRENCY

 In 1999 twelve member countries in Europe joined


hands to move over to a single currency (i.e. Euro);
three countries joined in 2002 increasing it to fifteen
members as of 2008. The notable exception was Great
Britain which still continues with its local currency (i.e.
Sterling - Pound).
 The Euro was significantly devalued against the Dollar
till 2002. However with current recession in the US 2002
onwards, the Euro slowly started outperforming the
Dollar.
 However, the Dollar still remains the most preferred
currency globally; primarily the OPEC countries.
296
SINGLE Vs MULTIPLE CURRENCY

 Transaction Costs – Though the initial cost of


introduction of a single currency is very complicated and
costly; it helps avoiding transaction costs associated
with a multiple currency.
 Rate Uncertainty – A single currency eliminates the risk
of competitive devaluations. However, a multiple
currency is preferable where the business cycles of
member nations are different.
 Transparency – A single currency is transparent and
competitive, but it may have spill-over effects.
 Trade Block – It will strengthen the EU identity which
would not have been possible otherwise.
297
FII Vs FDI INVESTMENT

 Classical economists believed that foreign investment


(in any form) is basically a zero sum game (i.e. the
gain of one country is loss of another). Neo classical
economists believe that foreign investment may in
fact be a win-win game.
– FDI (transfer of tangible resources) is slow but
steady for the purpose of economic growth. It is
long term with high levels of commitment.
– FII (transfer of intangible resources) is fast but may
have strong repercussions (i.e. hot money). It is
short-medium term with comparatively low levels
of commitment.
298
INTERNATION MARKETING

 Product – The various attributes of a product may


receive different degrees of emphasis depending
on differences in - culture (food habits), economic
(middle class buying power), technology (micro-
chip).
 Pricing – It depends on the competitive structure
(PLC – Kellogg's), customer awareness (micro-
waves), usage (talk time), promotion (surrogate
advertising).
 Distribution – It depends on the market
characteristics (fragmented – concentrated),
buying patterns (spread), lifestyle (petroleum 299
outlets – departmental stores).
INTERNATION FINANCE

 Currency Risk – Many Indian IT companies (Rs)


having business in US (Dollar) are asking for quotes
in (Euro) or are shifting bases out of US to avoid risk
of devaluation of Dollar.
 Accounting Norms – The accounting norms of one
country (AS - India) may be different from that
another trading country (US – GAAP or IRS).
 Leverage – The leverage may vary across countries
depending upon money and capital market
conditions (Eg. debt is cheap in US; equity is cheap in
India).
 Cost Structure – Companies in India need to
investment in fixed costs due to poor infra-structure
300
compared to developed markets.
INTERNATIONAL HR

 An uniform HR policy is idealistic to enable parity in


performance appraisal; however, in most cases it is not
desirable nor practiced.
 Recruitment – In local recruitment, skills are more
important that cultural fit and vice-versa.
 Compensation – Differential pay packages exists
because of differences in purchasing power, social
security, double taxation, labour laws.
 Training – It is a pre-requisite for international business
to reduce language, technology (convergence,
shortened life cycles), and cultural barriers (language)
vis-à-vis emerging markets.
301
INTERNATIONAL OPERATIONS

 Location Incentives – FDI in emerging markets should


explore options for SEZ’s to explore benefits (tax
holidays, reduce power costs) vis-à-vis infrastructural
bottlenecks.
 Technology – The cost to be evaluated in terms of
latest technology (Euro VI) vis-à-vis effective cost of
appropriate technology (Euro II).
 Outsourcing – A company having a core competence
may be the source of global outsourcing (Eg. Bosch
spark plugs are used by car manufacturers
worldwide).
 SCM – Use of ERP to network the extended enterprise
across the globe. 302
CONTEMPORARY
TOPICS

303
INNOVATION

 An invention is the first occurrence of an idea for a new


product or process; innovation is the first attempt to carry
it out in practice.
 Innovations typically paves the way for more secured and
improved lifestyle for consumers in general.
 Innovation is the most preferred strategy today to
maintain competitive advantage in the present turbulent
business environment.
 Innovation is all about staying ahead of competition, but
has inherent risks involved as well.
 While innovation typically adds value for organizations; it
has destructive effects as well.

304
TYPES OF INNOVATION

 A key challenge is maintaining a balance between process and


product innovations.
 While product innovations are typically customer driven; process
innovations are organizational driven.
 Tangible impact of product innovation on performance is
significantly higher than process innovation. However, process
innovation is necessary to sustain the competitive advantage of
product innovation.
 Process innovation usually follows product innovation.
 Strategic innovation has the potential to change the rules of the
game.

305
BUSINESS MODEL

 It is a simplified description and representation of a complex


real world; about how an organization makes money (i.e.
putting an idea into practice).
 Innovations are the back-bone of successful business models .
 Disruptive business models brings in a new frame of reference
(i.e. a paradigm shift). It leads to a shift in the price –
performance envelope.
 Telecom (CDMA Technology), Data Storage (Pen Drives), Drug
Development (Bio Chemicals), Medical Surgery (Lasik),
Processors (Pentium).

306
NINE BUILDING BLOCKS

 Value proposition offered to the market.


 The segment(s) of clients to be addressed.
 The channels to reach out to the clients.
 The proposed relationships established with clients.
 The key resources and capabilities required.
 The key activities / processes necessary for execution.
 The key partners involved in the activities.
 The cost structure resulting from the business model.
 The revenue streams generated by the activities.

307
BUSINESS MODEL FRAMEWORK

308
REVENUE MODEL

 Positioning is just not sufficient; innovative companies to


carve out unique business models to fend off competition.
 With the rapid erosion of certain industries (IT, Investment
Banking, Real Estate) companies need to untangle and
understand the intricacies of their business model.
 The revenue model described here are the means to
generate revenues. It is just one piece of the puzzle.
 It involves – Product Visualization – Product Prototype –
Product Test – Capacity – Pricing – Distribution.

309
HOW TO MAKE INNOVATIVE CO’S

 Innovative company’s are a matter of culture and


aspirations rather than tangible resources.
 A favourable intellectual property (IP) climate.
 Allow the workforce idiosyncrasies for their errors.
 Allow the management sufficient slack to be future
oriented.
 Have a lean and a flat organization structure.
 Promote the grape-vine.
 Provide reasonable incentives (not necessarily monetary).
 Promote the culture of experimentation.

310
HOW TO PROTECT INNOVATION?

 Without adequate protection (external or otherwise) the


effects of innovation does not translate to performance.
 In most emerging markets where the IP climate is not so
favorable, 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.
 Collusion with the judiciary is also another distinct
possibility in emerging markets, however that possibility
is slowly atrophying.

311
311
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.

312
312
AGENCY THEORY

 The root of Corporate Governance goes back to the Agency


Theory; also known as the principal-agent problem or
agency dilemma.
 According to the agency theory top managers and
shareholders interests are usually conflicting in nature and
tend to pull in opposite directions.
 From the strategic point of view managers tend to diversify
into unrelated businesses as it provides higher returns
hence a more favourable appraisal. However, 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.

313
ORIGIN & CONTEXT

 Since the early 20th century since a large part of


public funds were held by publicly traded firms in the
US, various laws were enacted to ensure proper
usage of these funds.
 After the Enron downfall, the US government passed
the Sarbanes – Oxley Act, 2002 to restore public
confidence in corporate governance.
 SEBI Report – 2005, 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
shareholders. 314
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.
 Interests of other stakeholders: Recognize the legal and
other obligations of all legitimate stakeholders,
including the society at large.
 Role and responsibilities of the board: It deals with
issues about an appropriate mix of executive and non-
executive directors. The key roles of chairperson and
CEO should not be held by the same person and their
offices be clearly separated.
315
GOVERNANCE PRINCIPLES

 Integrity and ethical behaviour: Organizations should


develop a code of conduct for their top management
that promotes ethical and responsible decision making.
 Disclosure and transparency: Disclosure of information
should be timely and balanced to ensure that investors
have clear access to data and facts. They should also
implement systems to independently verify and
safeguard the integrity of the company's financial
reporting.
 Independence of the entity's auditors: Identification,
assessment and mitigation of risks and retirement by
rotation over a fixed period of time..

316
316
GOVERNANCE STRATEGIES

 Monitoring by the board of directors: The board of


directors, with its legal authority to hire, fire and
compensate top management, safeguards invested
capital. Regular board meetings allow potential problems
to be identified, discussed and resolved.
 Balance of power: The simplest balance of power is very
common; a person benefitting from a decision should
abstain from it.
 Remuneration: Performance-based remuneration is
designed to relate some proportion of salary to individual
performance. However, they should provide no
mechanism or scope for opportunistic behaviour.
317
GOVERNANCE & PERFORMANCE

 In its “Global Investor Opinion Survey” of over 200


institutional investors in 2002, McKinsey found that 80%
of the respondents would pay a premium for well-
governed companies. They defined a well-governed
company as one that had mostly out-side directors, who
had no management ties, undertook formal evaluation
of its directors, and was responsive to investors'
requests for information on governance issues. The size
of the premium varied by market, from 10% for
companies where the regulatory backdrop was least
certain (those in Morocco, Egypt and Russia) to around
40% for Canadian & European companies.

318
SHAREHODER – STAKE HOLDER
THEORY

 Till the early part of the 20th the basic objective of


modern organizations was to provide goods and services
for public consumption for profit maximisation.
 Over a period of time, the short-term view of profit
maximisation gave way to a more broader and medium-
term view wealth maximisation of the shareholders.
 However, 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. Therefore, corporate philanthropy
should be a part of every corporate mission.

319
CORPORATE SOCIAL
RESPONSIBILITY

 As Peter Drucker rightly pointed out that, “a healthy


business cannot exist in a sick and impoverished society”.
Therefore, giving a very important message that one
cannot exist without the other.
 Therefore, economic and social responsibilities cannot be
mutually exclusive; in fact a large part of it is significantly
overlapping.
 CSR can be defined as, “an enterprises decisions and
actions being taken for reasons at least partially beyond its
immediate economic interests”.
 However, the debate on CRS still continues whether firms
should detract its focus from its business?

320
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.
 The role of media: The media and various consumer
organizations have come up in protecting consumer rights
and exposing mal-practices.
 Fear of government interference: Excessive quench for
profits may lead to build up of adverse public opinion
compelling the government to intervene (Eg. MRTP).
 Public image: Entrepreneurs are increasingly relying on
public image as a source of competitive advantage and a
higher financial discounting.

321
CSR STRATEGIES

 Green Supply Chain Management: It includes


environmentally preferable purchasing, eco efficiency,
designing eco-friendly products, and extended producer
responsibility (Eg. Cement - Paper packaging,
Refrigerators – CFC, Exide – Product take back).
 Health & Hygiene – Attending the health hazards due to
wastes and by-products to employees and society in
proximity (Eg. Tata Steel – Life Line Express).
 Education, Literacy & Training Programs – (Eg. Aditya Birla
Research Centre – LBS).

322
BOTTOM OF THE PYRAMID

 With the market across most developed markets including


the US getting saturated, C. K. Prahalad notes that future
markets exist collectively, across the world's billions of poor
people having immense untapped buying power.
 They represent an enormous opportunity for companies who
learn how to serve them. In turn companies by serving these
markets, they're helping millions of the world's poorest
people to escape poverty.
 Strategic innovations leading to disruptive business models
can show the way out.

323
BLUE OCEAN
STRATEGY

324
MARKETSPACE - TWO WORLDS

325
WHAT IS RED OCEAN?

 Companies have long engaged in head-to-head


competition in search of sustained, profitable
growth. They have fought for profits, battled over
market-share, and struggled for differentiation
(cost or product).
 Yet in today’s overcrowded industries, competing
head on results in nothing but a bloody red
ocean of rivals fighting over a shrinking profit
pool.
 In today’s red oceans, where most industries are
saturated, one companies gain is always at the
cost of another companies loss. 326
WHAT IS BLUE OCEAN?

 Tomorrow’s leading companies will succeed not


by battling in red oceans, but by creating blue
oceans of uncontested market space ripe for
growth .
 Such strategic moves are possible through the
pursuit of product differentiation and low cost
simultaneously. It helps in creating powerful
leaps in value for both the firm and its buyers,
rendering rivals obsolete and unleashing new
demand.
 Blue Ocean’s have existed in the past; it will exist
in the future as well. It is only the frames of the
327
RED OCEAN Vs BLUE OCEAN

Compete in existing marketsCompete in uncontested markets

Beat the competition Make the competition irrelevant

Exploit existing demand 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
BLUE OCEAN STRATEGY -
IMPERATIVES

 Prospects in most established market spaces –


red oceans – are shrinking steadily.
 Population shrinkage across a no. of European
nations.
 As trade barriers between nations & regions fall,
information imperfections atrophy instantly.
 Niche markets & monopoly havens are
continuing to disappear.
 Demand across developed markets reaching a
plateau.
 Technological advances have substantially
improved industrial productivity. 329
CONCEPTUAL UNDERPINNINGS

 Blue oceans have existed in the past and will


exist in the future as well.
 History indicates that blue oceans exist in three
basic industries – automobiles (how people get to
work) – computers (what people use at work) –
entertainment (what people do after work).
 They are not necessarily about technology; the
underlying technology was often already in
existence.
 Incumbents often create blue oceans within the
ambit of their core business.
 Company & industry are the wrong units of
strategic analysis; managerial moves are. 330


BLUE OCEAN - IMPLEMENTATION

Reduce
Which factors
to be reduced
below the industry
standard

Eliminate Create
Which of the industry
factors that the industry VI Which factors should be
created that the
takes for granted industry has not
should be eliminated offered

Raise
Which of the factors
should be raised above
the industry’s standard 331
IMPLEMENTATION SEQUENCE

Buyer Utility Price (2)


(1)
Is there exceptional buyer Is your price easily accessible
utility in your business idea? to the mass of buyers?

Blue Ocean Strategy

Adoption (4) Cost (3)


What are the adoption hurdles in
actualizing your business idea? Can you attain your cost
Are you addressing them up target to profit at your
front? strategic price? 332
SOME GLARING EXAMPLES

 In the last century authors Kim and Mauborgne


have documented the creation of more than 150
blue ocean creations across 30 industries –
 Virgin Atlantic: Fractional jet ownership or travel
to space.
 Sony Play Station: Redefining machine-human
interface in entertainment and targeting an
altogether new user base.
 Southwest Airlines: Pioneering the concept of
LCC.
 Citibank – Automated teller machines & credit
cards.
333
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.
 According to this view, companies & managers are
largely at the mercy of economic forces, greater than
themselves.
 Off late emerging views in strategy having its origin in
(Organization Theory) led to a paradigm shift to what is
called the – reconstructionist view.
 According to this view managers need not be constrained
to act within the confines of their industry. All they need
to do is change their managerial frames.

334