Course Code: 611 & 612 Dr. Subir Sen – Faculty Member, IBS
E-Mail: firstname.lastname@example.org, 9830697368 1) Crafting & Executing Strategy – Thompson & Strickland. 2) Strategic Management – Pearce & Robinson. 3) Strategic Management – Fred. R. David. 4) Exploring Corporate Strategy – Johnson & Scholes. 5) Competitive Advantage – Michael E. Porter. 6) HBR – Articles & Case Studies.
STRATEGY - DEFINITION
Strategy is all about making trade-offs between what to do and more importantly what not to do; consciously choosing to differentiate. It reflects a congruence between external opportunities and internal capabilities. Types of strategies – Corporate Strategies – It is all about making choices across various businesses and allocating resources among them. Business Strategies – It is all about developing leveraging and sustaining competitive advantage. Functional Strategies – It is all about finding newer ways to perform existing processes, or 3 better still adopting new processes altogether.
STRATEGIC MANAGEMENT DEFINITION
Strategic management attempts to integrate the traditional management functions and align the organization as a whole with the broader environment to make resource allocations in a way to achieve the strategic intent of the organization. This alignment is called strategic fit. It serves as a road-map for the organization in its growth trajectory. It provides the direction – extent – pace – timing. It depends on the turbulence of the environment and the aggressiveness of the organization. It distinguishes the winners from the losers.
PILLARS OF STRATEGIC MANAGEMENT
Differentiation – Differentiation of key inputs and technologies helps a firm to consciously move away from homogeneous to heterogeneous markets enabling them to earn super-normal profits from normal profits. Integration – Whenever dealing with a complex task of managing a business (i.e. involving a no. of variables with cross linkages) it is in the interest of simplicity that the task be broken up in smaller components. However, for effective control, integration is essential. Alignment – Since differentiation is prone to replication, it is in the interest of the firm to differentiate continuously by aligning the resources with environmental opportunities.
STRATEGIC MANAGEMENT FRAMEWORK
Economic al Strategic Finance Fit Political Strategic Intent Fit Political Marketin g Manageme nt Social & Cultural
It provides broad guidelines. It is all about creativity and innovation. It involves substantial resource outlay. It is a holistic and integrated approach. It requires full commitment of the top management.
. It is about adaptation and response to the same.STRATEGIC MANAGEMENT .FEATURES
It forms the core activity of the top management. It is long-term in nature. It is irreversible.
It brings instant success. It attempts to minimize risk. It involves nitty-gritty's. It is about forecasting.STRATEGIC MANAGEMENT – MYTHS
It involves short-cuts. It involves only the top management. It is rocket science. It is fool-proof in nature.
. It is about a definite formula. It about mere data and facts. It a bundle of techniques or even tricks.
To innovate. 9 To develop core–competencies. scale and scope. To be future oriented. again and again ……. To assimilate change faster. To tap markets across boundaries. To leverage size.
. To gain expertise in technologies. To be proactive. rather than reactive.STRATEGIC MANAGEMENT IMPERATIVES
To be continuously alert. To generate large resource pool. To be insulated against environmental threats.
In the ancient days battles were fought over land. battles fought on the market front are won by companies by virtue of their obsession & strategies. In contrast. It is an old wine in a new bottle.STRATEGY . but with a lot a rigour and robustness.
. Even in today’s markets.strategies. today's battles are fought over markets. In the ancient days battles were won not by virtue of size of the army or armory. whose origin can be traced to some of the greatest battles fought in the ancient days. and more importantly . obsession. but by virtue of their courage.ORIGIN
The word strategy has its origin from the Greek word strategia meaning Military Commander.
Napoleon’s attack on Russia – Strategy: Waiting for the right time. – Yahoo and Microsoft challenging Google.SOME PARALLELS
Japan’s attack on Pearl Harbour – Strategy: Attack where it hurts the most.
. Allied Forces Vs Germany (WW-II) – Strategy: Forging alliances. challenging GM and Ford. – Toyota’s entry in the US. US attack of Morocco to capture Germany – Strategy: Pin-hole strategy – Wal-Mart challenging Sears by entering small towns. – Reliance’s entry into telecom.
– Mass Production Organization Size – Complicated Processes – Complex Structures Evolving of an emerging paradigm – survival of the fittest (Fayol & Taylor. 1910).Industrial Revolution. a radical change in the business environment brings about discontinuity. The first major discontinuity in the history of global business environment was the . The things happening around the firm when totally disconnected from the past leads to a paradigm shift.
. A paradigm is a dominant belief about how the business and its environment operates.EVOLUTION OF MANAGEMENT
As Peter Drucker refers to it.
push to pull). performance across firms became differentiated.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. – Changes in the technology fore-front. – Homogeneous to heterogeneous products.
. Survival of the most adaptable becomes a new management paradigm (Ansoff. From uniform performance. The question of outperforming the benchmark became the new buzzword. Efficiency and effectiveness are no longer sufficient.e. 1960).
Phase IV: Horizon of Scenarios 2
Phase I: Extrapolation of the past
1 2 1 3 1A 1B 2A
Prior to 1950 Phase II: Discrete Scenarios
Phase III: Range of Scenarios
1970 to 1990
1950 to 1970
APPROACHES TO STRATEGY
Analytical Approach – Igor H.
. – It is primarily the top management’s prerogative. – 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. – The choice of strategy is primarily concerned with external ones rather than internal ones. – The choice of product-market mix is based on conscious evaluation of risk – return factors. Ansoff (1960) – Strategy can be segregated into certain mutually exclusive and inter-related components aimed at managing the growth of an organization.
– The top managers then decide on the type of organization structure & systems to be in place. – Management control systems has a dominating role in influencing firm performance. Successful organizations align authority and responsibility of various departments in way to reach overall objectives.
. who will be the top managers. how it will compete. everything else follows. – Organization structure will precede and cause changes in strategy. The organization initially decides which industry to enter.APPROACHES TO STRATEGY
Design Approach – Alfred Chandler (1970) – Structure follows strategy. Once the control systems are in place.
new entrant. – A firms performance is inversely related with the bargaining power of environmental forces to which it is exposed. Porter (1980) – Choose a consumer segment and position your product accordingly. – An organization is seldom in a position to influence the larger business environment. substitutes. – The organization will outperform the industry where environmental forces are weak and vice-versa.APPROACHES TO STRATEGY
Positioning Approach – Michael E. competitors. – The environmental forces comprises of – supplier. customer.
locating in most attractive industries and pursuing the same strategy. K.APPROACHES TO STRATEGY
Core Competence – C. – Core competencies are a set of skills that are unique and can be leveraged. – It enables a firm to deliver unimaginable value ahead of time. – Organizations can significantly alter the way an industry functions. They are complex resources and undermines a firms competitive advantage. Prahalad (1990) – The key to superior performance is not doing the same as other organizations.
. but exploiting the resource differences among them.
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
If you cannot see the future.
. It is the cornerstone of an organizations strategic architecture reflecting its desired future state or its aspirations. A strategic intent is a statement of purpose of existence. It’s a philosophy that distinguishes it from its competitors. you cannot reach there. It implies a significant stretch. It involves an obsession to be the best or outperform the best. A substantial gap between its resources and aspirations. A gap that consciously manages between stagnation and atrophy. It provides a sense of direction and destiny.
m Do an in
Visio n Mission Dominant Objective s Goal s Plans
Lo g ic
.STRATEGIC INTENT .
strategic variety) is apparent. when radical changes in the internal and external environment (i. it can be perceived as a set of working rules (similar to thumb rules) that enables the top management to decide what can be done and more importantly what cannot be done.DOMINANT LOGIC
A dominant logic can be defined as the way in which the top management team conceptualizes its various businesses and make critical resource allocation decisions.
.e. It is core to the strategic intent of the firm. Dominant logic changes. To put it more simply.
It is a combination of three basic elements – – An organizations fundamental reason for existence. beyond just making money. It enables the top management to remain focused.VISION
It is a dream (not a forecast) about what the company wants to become in the foreseeable future. It ensures that the company does not wander off into unrelated zones or fall into an activity trap.
. but achievable aspirations. – It stands for the unchanging core values of the company. It provides an unity of purpose amidst diversity of personal goals. – It represents the company’s audacious.
VISION . Empathy – It should reflect the company’s beliefs to which it is sensitive. clear.CHARACTERISTICS
Reliance – Where growth is a way of life. Reachable – It should be within a reasonable target in the known future. In Reliance when a new project becomes operational top managers hand over charge to the SBU heads and move on to a new project.
. not an utopian dream. Clarity – Vividly descriptive image of what the company wants to be known for in the future. and memorizable. Brevity – It should be short. Sharing – The company across all hierarchies should have faith in it.
It gives the impression of a forward-looking organisation.ADVANTAGES
To stay focused on the right track. It gives enlightment. It provides a holistic picture. It fosters risk taking and experimentation. It makes strategic alignment easier. To prevent the fall in a activity trap. It facilitates development of skills & capabilities.
.VISION . It gives a shared platform. It lends integrity and genuineness.
Mission defines the space that a business wants to create for itself in a competitive terrain. A broad mission statement helps in fending competitors. its reason for existence. It is intuitive for managers to conceive their business in terms of the customer needs they are serving – What business are we in? – Which customer needs are we serving? It should be broad based and relevant to all stake-holders. Although the purpose may change over time. It serves as a road map to reach the vision. It enables the firm to define its business landscape and identify its competitive forces.
We offer comfort. Some other examples – We do not offer shoes. ………………….MISSION – SOME IDEAS
Reliance – We are in the business of integration. We offer strength. …………………. We offer solutions. – We do not offer insurance. All the businesses of the company are strongly integrated with their main business. We offer security. – We do not offer software's.
. …………………. though some may seem unrelated in nature. – We do not offer steel. ………………….
It provides a quantitative feel to an abstract proposition. – It helps identifying key success factors.
.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 benchmark for evaluation.GOALS & OBJECTIVES
Reliance – We want to become a Rs. – It is based on Management by Objectives (MBO). – It keeps the mid management pre-occupied. – It prevents deviation. – It adds legitimacy and motivation. – It lends direction – time frame in the medium term.
– Compress project times. and gaining access to desired markets to achieve the desired goals and objectives.PLANS
Reliance – Desire to invest 25K crore in telecom business by circa 2010. It is specific to a particular business. It is the process of garnering necessary inputs.
. – Acquire a market share of indomitable position. – Use price-elasticity to break market barriers. – Leverage economies of size and scale. coordinating appropriate technologies. The details of the plan Reliance Telecom adopted were – Backward integrate process technologies.
Due to top management commitment. strategies lose touch with the emerging realities.
. Historical studies have shown that most organizations tend to continue with their existing strategies. past strategies tend to have a bearing on future strategies. equilibrium is maintained. When changes in the environment is incremental. However. It often leads to an organizational crisis. In such a context. radical change may lead to disequilibrium. This state of affairs is known as strategic drift. This tendency to restore continuity is known as inertia (resistance to change).
STRATEGIC DRIFT FRAMEWORK
Degree of change
Incremental Change State of Flux Continuity
Stage of Transformation Strategic Drift Stage of Atrophy
Some instances of organizational politics – Formation of powerful groups or coteries. – Developing a platform of support.ORGANIZATIONAL POLITICS
Strategic drift often leads to organizational politics. – Using covert tactics to pursue self interests. Organizational politics involves intentional acts of influence to enhance or protect the self-interest of individuals or groups over organizational goals. – Hiding vulnerability. – Creating obligations of reciprocity. – Creating a favourable image.
. – Distorting information to gain mileage.
– Influential stake-holders back out.
. A realized strategy is what the top management actually translates into practice. – Persons responsible for strategy conceptualization and implementation are34 divergent.INTENDED & REALISED STRATEGIES
An intended strategy is an expression of interest of a desired strategic direction. Other causes – – The plans are unworkable and utopian. – The environment context has changed. Usually there is wide gap between the two when organizational politics is evident.
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. Learning is an integral part of logical incrementalism. but as a defensible response to the complexities of a large organization that mitigate against publicizing goals. but the master scheme of the rational comprehensive scheme is not apparent.
. Strategy formulation and implementation are linked together in a continuous improvement cycle. this is not to be treated as “muddling”. However. They simply unfold the particulars of the sub-system in stages.
Adaptation – As implementation progresses. Leveraging Crisis – A sudden crisis or an opportunity should be used as a trigger to facilitate acceptance and implementation of change. Macro Broadcasting – The broad idea is floated without details to invite pros and cons leading to finer refinements.IMPLEMENTING INCREMENTALISM
General Concern – A vaguely felt awareness of an issue or opportunity. Agent of Change – Formal ratification of a change plan through MBO.
. The broader objective should serve the overall interest of the organization.
As it brings 37 with it a different dominant logic.STRATEGIC TRANSFORMATION
Strategic transformation (a complete overhauling of the strategic architecture) becomes inevitable whenever a strategic drift takes place. Dominant logic’s are the cornerstones of change when strategic transformation is apparent.
. Strategic transformation becomes smooth through a change in top leadership. It creates blinders. Dominant logic’s are very rigid and sticky and prone to inertia. Tampering with surface level factors often leads to atrophy.
It helps prevent a strategic drift from occurring at the first place. – Informal Networks – Emerging of new ideas. – Organisational Slack – Enough free space. – Constructive Bargaining – Agree to disagree.LEARNING ORGANIZATION
A learning organization is capable of continual regeneration from knowledge. Factors that fosters a learning organization – Pluralistic – An environment where different and even conflicting ideas are welcome.
. A learning organization must continuously focus on unlearning as well. – Experimentation – Fosters a culture of risk taking. experience. and skills that fosters experimentation and questioning and challenge around a shared purpose.
ANALYZING BUSINESS ENVIRONMENT
. Strategic gap basically points towards a vacuum of where the organisation wants to be and where it is.PLANNING & STRATEGIC PLANNING
Formal planning is a function of extrapolating the past. Strategic planning is a function of discounting the future. It is based on the assumption of radical change. Competitive advantage provides the surest way to fulfill the strategic gap.e. It is reactive in nature. It is based on the assumption of incremental change. It requires a quantum leap (i. It points to a position of superiority with relation to competition. It is pro-active in nature.
It is exploratory in nature.ENVIRONMENTAL SCANNING
The environment is defined as the aggregate of conditions. resources and ideas move unhindered. events. Environmental scanning is very important component of strategic planning. The world is flat.
. A manager has to continuously scan the environment to ensure alignment of the strategies with the radically changing environment. and influences that affect an organizations way of doing things. not guided by any boundaries. Environmental factors can be external as well as internal to the organization. The segments of the environment a top manager scans selectively depends upon his dominant logics.
Understanding the composite effect is critical. It is particularly important that PESTEL be used to look at the future impact of environmental factors. for which a holistic picture is required. but also to analyze the complex linkages across them. It is important not only to identify the structural drivers of change. It is not intended to be used as an exhaustive list. which may be different from the past impact.
PESTEL attempts to provide a broad framework on how the broader environmental forces affects an organization and influences the way it practices strategy.
Religious Sentiments. Central – State Co-alignment. Economic Cycles. Inflation & Interest Rates. Economic – GDP. Literacy Levels. Language Barriers.PESTEL FRAMEWORK
Political – Government Stability. Economic Model. Social Values. Income & Age Distribution.
. FDI Inflows. Fiscal Deficit. Social – Population Diversity. Monsoon & Food Grains Reserves. Subsidies & Protection. Savings & Investment. Capital Market & Forex Reserves. Government Attitude. Licensing & Quotas. Infra-Structural Investments. Currency Stability.
Research & Development. Pollution Control Laws. Extended Producer Responsibility. Technological Convergence. Legal – Monopolies Legislation. Environmental – Global Warming & CSR. Carbon Credits.
. Environmentally Preferable Purchasing. Product Safety & Health Hazards. ERP. Direct & Indirect Taxes. Patents. Patent Laws. Non-Fossil & Alternative Fuels. Employment Laws. Product Design. Waste Disposal & Emissions. Obsolescence Rate.PESTEL FRAMEWORK
Technological – Innovation. Consumer Protection Laws.
Abolition of import licenses. Encouraging FDI. Structural Adjustments – Phasing out subsidies. PSU Disinvestments. Curtailment of PSU’s. Exit Policy. Economic Reforms – Fiscal & Monetary Reforms.
. Capital Market Reforms. Banking Sector Reforms. New Trade Policy (NTP) – Lowering import tariffs. Dismantling price controls. FERA Liberalization.VRS. Encouraging exports. Rupee convertibility. MRTP Liberalization.ECONOMIC LIBERALISATION
New Industrial Policy (NIP) – Liberalizing industrial licensing.
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
Consumerism Challenges on the technology front – Competencies become technology based – Investment in R&D become inescapable
.Globalization – Cheap Imports & Dumping – Push to Pull Marketing Buyers exacting demands – Shortage to surplus – Price competition – Life-style changes – Stress on quality.DISCONTINUITY
Hyper Competition – MNC’s .
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
FIVE FORCES MODEL .PORTER
Threat of New Entrants
Bargainin g power of Suppliers
Competition from Existing Players
Bargainin gBargainin power g of power of Suppliers Customer s
Threat of Substitutes
It should not only be used to understand the forces.
. The five forces have strong cross-linkages.e. but also used to understand how they can be countered and overcome. incremental or otherwise.FIVE FORCES MODEL ASSUMPTIONS
The model is to be used at the SBU level and not at the industry level. It is even wiser to apply the same at the product – market level. It depicts the attractiveness of an industry (i. profit potential) per se. The model should not be used as a snapshot in time. the forces are subject to changes.
Industry stagnation. High switching costs. Product differentiation through proprietary technology or brand power.
. Access to distribution channels. Scope for backward integration. Low margins & stagnancy. Presence of substitutes or unorganized sector. Low customer switching costs. Low relative importance of the segment. Capital requirements. Resource profile & fear of retaliation.PORTERS FIVE FORCES ANALYSIS
Threat to Entry – Economies of size and scale. Threat of Customers – Buyer concentration and volumes. Government policy. Undifferentiated product. Unimportance of product quality. Learning curve advantages.
Low relative importance of the segment. Low level of differentiation. Differentiated inputs.PORTERS FIVE FORCES ANALYSIS
Threat of Suppliers – Supplier monopoly. Industry stagnancy. Threat of Substitutes – Improvement in price -performance trade-off. Buyer’s propensity to substitute. High exit barriers. Scope for forward integration. High customer switching costs.
. Intermittent overcapacity. Unorganised sector. Diversity of players. Piracy and counterfeits. Produced by industries earning high profits. Product perishability. Jockeying for position – Fragmented market. Lack of substitute inputs.
dominant or related diversified or unrelated diversified businesses (Infosys. Business Scope – The intention whether the firm wants to be in a single. Resource Profile – It highlights the capabilities (generic) or competencies (business specific) of the firm.
. Inertia – Excessive commitment to past strategies prevents firms from tapping emerging opportunities. Reliance). Cohesiveness – Degree of bonding existing across affiliated firms. Tata).FIRM ENVIRONMENT
Size and Scale of Operations – It is a very important component of competitiveness in today's global context (Bharti – MTN.
However. which further reduces costs. an E-Curve can prove to be futile during discontinuity. and with lower prices it can increase its sales volume. experience teaches better and more effective way of doing things.EXPERIENCE CURVE
The cost of performing an activity declines on per-unit basis as a firm becomes more efficient. leverage it as a competitive advantage.
. it can price its products more competitively. Matured firms will always be positioned advantageously on the ECurve than new entrants. The E-Curve thus enables organisations to build entry barriers. With lower costs. Experience curve has strong linkages with performance.
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
Efficiency = Lower Costs
Experience = Efficiency
Lower Costs = Higher Sales
Entry Barrier = Better Performance
Higher Sales = Lower Costs Lower Costs = Entry Barrier
.EXPERIENCE CURVE .
EXPERIENCE CURVE .STRATEGIC VIEW
Inertia = Limited Growth Experience = Inertia
Limited Growth = Diversification
Strategic Failure = Poor Performance
Diversification = New Experience
≠ Old Experience
Case Studies – Structured Questionnaires.VULNERABILITY ANALYSIS . It is one of the earliest models in environmental scanning. A SWOT audit involves – Company Records – Annual Reports.SWOT
The framework was originally conceptualized by Kenneth Andrews in 1970. Websites. Suppliers. Customers. Interviews. 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. 59 Analysts. Press Clippings & Interviews. Competitors.
. Observation. Business Intelligence – Bankers.
SWOT ANALYSIS .FRAMEWORK
Nullify weaknesses which prevents you from exploiting opportunities
Leverage strengths to make use of opportunities
Weaknesses Minimize weaknesses which prevents you from countering threats
Utilise strengths to counter threats (?)
Siemens. Biocon. Reddy’s. Ranbaxy. Caterpillar. Dr. Aditya Birla. Economies of scale – Eg. Excellent penetration – Eg. Reliance. Infosys. Tata Steel.
. High quality products – Eg. Honda. Motivated employees & cordial industrial relations – Eg. Reliance. SBI. Good credit rating – Eg. HUL. Engineering Skills – Eg. Infosys. Strong R&D base – Eg. Tata. Strong after sales & service network – Eg. Large resource pool – Eg. Volkswagen. Toyota. ITC. Sony.SOURCES OF STRENGTH
Strong brand identity – Eg.
B. Excess manpower – Eg. Inefficient top management – Eg. Bijoligrill.Raymond. Lack of product / brand clout – Eg. J. Nirma. Organizational Politics – Eg. Tatas. Procter & Gamble. CESC. Hindustan Motors. Strategic myopia – Eg. K. CMC (Tata Group)
. Ballarpur Inds. Modi Group. SAIL. Inertia – Eg. K. Excessive diversification – Eg. Lacking experimentation culture – Eg. Narrow business scope – Eg. Group . Single product syndrome – Eg.SOURCES OF WEAKNESSES
Outdated technology – Eg.
VRS. Life style changes – Eg. ECB’s. Collaborations & Joint Ventures – Bharti & WalMart. Sugar.SOURCES OF OPPORTUNITIES
Delicensing of Industries – Eg. Insurance. GDR’s.Tata Motors. Middle-class buying power. Telecom. Exit Policy – Eg. Market driven Pricing – Eg. Free pricing – Eg. Growing population – Eg. Maruti. Abolishing CCI. Fertilizers. Sugar. Fertilizer. Abolishing MRTP – Eg. Capital market reforms – Eg.
. Globalization – Eg. Retailing. Market driven Interest rates – Eg. Banking.
Social activism – Eg. Tata Steel. 11/9. Import relaxation – Eg. Satyam. Economic recession – Eg. Onida. Foreign Direct Investment (FDI) – Eg. Terrorist attacks – Eg.
. Hostile take-over – Eg. Dumping from China. Land acquisition . Lack of Corporate Governance – Eg. Nationalisation – Eg. Reliance. Bajoria – Bombay Dyeing. Natural disaster – Eg.SOURCES OF THREATS
Political instability – Eg. (2008). Group disintegration – Eg. Tsunami. Singur SEZ. Earth Quake. (1985–1990). 26/11.
Forecasting – Predict the future (i. time series.e. It represents a summary picture of the external environmental factors and their likely impact on the organization. Assess the extent of impact of the factors. scenario analysis). Stages in ETOP analysis – List the aspects of the environment that has a bearing on the organization. Strategic responses (including adaptation) to opportunities and threats is critical for survival and success. Delphi's technique.
. Holistic view – Prepare a complete overall picture.ETOP
Acronym for Environment – Threat – Opportunity – Profile.
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. 66 Vertical integration is a powerful strategy. Relative attractiveness of the market. An organization can draw upon the experience of its peers in similar situations. selectively.
. High investment intensity acts as a drag. It is also a form of assessing vulnerability through longitudinal analysis. Some key findings on major performance drivers that explains 75% deviations in performance – Product quality and relative market share.
The analysis is based on historical data and it does not take care of future challenges. – Contexts may vary across countries. Authenticity of data is of prime importance – Contexts drawn across one organization may not be applicable to another. – Contexts may vary over time. Managers should be particularly cautious while referring to such data during times of discontinuity as it makes past patterns futile.PIMS . when radical changes in the economy takes place. therefore 67 validity may be a question.
. As every organization is unique in its own way.
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
.KEY SUCCESS FACTORS (KSF)
KSF relates to identification and putting concentrated effort on a particular activity or process which forms the very basis of competitive advantage.
IDENTIFYING ALTERNATIVE STRATEGIES
.CORPORATE . related.GRAND STRATEGY
It is concerned with the overall business scope (single. A corporate strategy identifies and fixes the strategic gap it proposes to fill. dominant. It reflects the customer needs it intends to satisfy. global) of a firm and deals with choices of allocating resources across them. unrelated) and geographical scope (local. It indicates the quality of growth an organization is looking for. national. It provides broad direction to the groups vision and mission. It determines the locus a firm encounters with internal and external environment.
CORPORATE STRATEGY MATRIX
Corporate Strategy Stability Stability Growth Growth Combination Diversification Divestment
Intensification Market Penetration Related Vertical
Market Development Product Development Unrelated Horizontal
It involves maintaining status-quo or growing in a slow and selective manner. The scale and scope of present operations remains almost intact. (Eg.
. – Why disturb the existing equilibrium set up? – Limited resource position. The reasons for stability strategy – – Lack of attractive opportunities. Citibank). does not relate to do-nothing (Eg. Even during adverse times firms need to adopt a strategy to sustain current performance levels. erosion of capabilities. – The firm may not be willing to take additional risk associated with new projects. Stability however. Hindustan Motors). – To stop for a while and assess past records.
New Product Existing Product
Existing Market Market Penetration (+) Product Development (++) New Market Market Development (++)
Diversificatio n (+++)
Note: (+) indicates degree of growth and risk involved.GROWTH .
Britannia). direct non-users to users. within a well defined market segment. – Suitable for industries where scope for technological breakthrough is limited.
. – The company carries a risk of product obsolescence.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. Nirma. (Eg. – Helps firms which are not comfortable with unfamiliar terrain. convert competitors customers. Ujjala. Market penetration can be achieved by – increasing sales to current customers. – Elongated product life-cycle.
– Creativity and innovation – thinking out of the box.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. upholstery. – Unconventional and flexible distribution channels. – Immense customer reach & flexible advertising. – Stretches product life cycles. fabrics. tyres.
. Du Pont – Nylon: parachutes. – Moves across geographical boundaries. socks & stockings. carpets. (Eg.…… or Teflon: aircraft technologies to cutlery to paints or Raytheon Corp – Microwaves: radars to kitchen appliances).
Strolleys). – Leveraging through – innovation. – Leverage on customer and brand loyalty. durability. serviceability. aesthetics. reliability. features. – Substitutes that serve the same needs (Eg. perception. – Areas of product improvement – performance. – Deliverable through – redesigning or reengineering. Refills)
. Microsoft: DOS to Windows) or a substantial improved version (incremental) of an existing product to repeatedly enter the same market (Eg. conformance. Close Up: Fluoride – Gel toothpaste or VIP .PRODUCT DEVELOPMENT
It is a strategy where a firm tries to achieve growth through a radical new product (Eg.
. dominance). the new business is distinct from the existing business in terms of – inputs – technologies – markets.e. – High transaction costs and institutional gaps. – Permits: quotas. thereby creating a new business. – Internal capital market.DIVERSIFICATION
It marks the entry of a firm into newer markets with new products.e. – Risk reduction. licenses (i. industrial embassies). – Conglomerate or market power (i. Why do firms diversify in the Indian context? – Shift the growth trajectory or opportunistic. From the traditional point of view. From the modern point of view they are strategically dissimilar.
ice-cream business would register a return of 10%. while the coffee business would register a return of 30%. If the hot wave dominates the planet. while the coffee business would register a return of 10%. in which a given year is either under hot or cold wave. What would be your ideal diversification strategy through optimization?
. the ice-cream business would register a return of 30%. If on the other hand. either of which is equally likely to prevail.HOW DIVERSIFICATION REDUCES RISK?
Consider a hypothetical planet. Let us assume that there are two businesses constituting the entire market – coffee and icecream. cold wave dominates the planet.
If we diversified in either of the two businesses, our expected return will be 20%, with a possible risk of 10%. If, we split our investment between the two businesses in equal proportion, half of our investment will earn a return of 30%, while the other half would earn 10%, so our expected return would still be 20%. But in the second instance there is no possibility of deviation of returns (i.e. risk). Diversification results in 20% expected return with zero risk, whereas investing in individual businesses was yielding an expected return of 20% with a risk factor of 10%. The pivotal point is that the two businesses are negatively correlated. 79
It takes place when a company increases the breadth of a firms business or geographical scope by getting into product – market segments which compliments its existing businesses (Eg. Reliance). Alternatively, existing business may recreate new businesses, which are distinct, but supplements its existing business (Eg. Bajaj – scooters to motorcycles, Dove – soaps to shampoo). – It results in increased market power. – Leveraging existing capabilities. – Resources can be shared for mutual benefit. – Reduces economic risk (i.e. business cycles). – Enables brand or product line extension.
It increases the depth of its business scope either in a backward business process or in a forward one. Backward integration occurs when the company starts manufacturing its inputs or catalysts. In forward integration a firm moves into marketing of its products and services. Advantages of backward integration – – Cost competitiveness – entry barrier. – Better operational control – timely supplies, quality control, coordination – JIT, savings in indirect taxes. Disadvantages of backward integration – – It may spark of a chain reaction - contagion effect. – Long gestation & break even - investment in CAPEX.
Oil & Gas exploration Naptha-cracking Acetic Acid Paraxylene (PX)
Purified tetra-pthalic acid
Polyester Filament Polyester Staple Fibre (PSF) Yarn (PFY) Textiles 83
DIVERSIFICATION SUCCESS ?
While diversifying into new businesses, the scope of relatedness or unrelatedness should not be judged from the traditional static view, but from the modern dynamic view which incorporates strategic factors like capabilities and dominant logic. Countermanding reasons – Potential to reap economies of scope across SBU’s that can share the same strategic asset. Potential to use an existing capability to help improve the quality of a strategic asset in another business. Potential to use an existing capability to create a new strategic asset in another business. Potential to expand the existing pool of capabilities. Dominant logic ensures timely & appropriate response.
and out-sources the noncore activities (Eg.Where one firm has full ownership and control over all the stages of a value-chain in the manufacturing of a product (Eg. Tapered integration . Reddy’s). Quasi-integration . Reliance).A firm gets most of its requirements from one or more outside suppliers that is under its partial control through value chain partnerships (Eg.A firm produces part of its own requirements and buys the rest from outside suppliers with a variable degree of ownership and control. Dr. Usually the firm concentrates on its core activities. Ranbaxy.QUASI & TAPERED INTEGRATION
Full Integration .
. Maruti – Sona Steering).
A CASE OF TAPERED INTEGRATION
Partial Ownershi p
Transmission Engine Design Electricals
Steering 86 Seats & Carpets Windscreen
Ordinary Components Zero Ownership
Very Critical Component s Full Ownership
Critical Component s
. synergies pulling in opposite directions).e. lack of knowledge of competitive forces). – Cost of dysynergy (i. core business). Firms usually engage in conglomerate diversification when emerging opportunities are very attractive and offers potential growth opportunities. myopia). – Cost of ignorance (i.e. – Cost of neglect (i. Drawbacks of unrelated diversification – – Cost of failure (i.e.e.CONGLOMERATE DIVERSIFICATION
It relates to entry of firms into businesses which are distinct in terms of – inputs – technologies – markets. lack of strategic intent. and are also strategically dissimilar.
Paper & Packaging
Food & Confectionary
(Eg. In strategy there is no scope for sentimentality with divestment. Glaxo’s “Glucon-D” to Heinz). It may also involve a SBU (Eg.e. ACC) in full to an independent entity. Tata Pharma. Tatas sale of Goodlass Nerolac. reactive) and survival is at stake and the firm does not have resources to fend off competitive forces.
. It taken into account when performance is disappointing (i. Tata Press). It is may also be a pro-active strategy. L&TCement Division to Aditya Birla Group) technically known as divestiture or a product (Eg. where a company simply exits because the business no longer contribute to or fit its dominant logic.DIVESTMENT
Divestment is a defensive strategy involving the sale of entire stake (Eg.
Outright Sale – Popularly known as the asset route. where the equity is allotted amongst the existing shareholders on a pro-rata basis. Tatas buy-out of Corus for US $ 11. However.DIVESTMENT . where 100% of the assets (including intangibles) are valued and paid for. the Companies Act. involving 608 pence per share). Leveraged Buy-Out (LBO) – Here the company’s shareholders are bought out through a negotiated deal using borrowed funds. Sale of Diamond Beverages to Coca-Cola for US $ 40 million).3 billion. Hive-Off – A hive off is the creation of a new entity followed by transfer of assets. 1956 does not permit this mode.
and divestment strategies applied simultaneously or sequentially for a portfolio of businesses. joint ventures). growth.e.COMBINATION STRATEGY
It is a mixture of stability. 91
. A combination strategy can be implemented through green-field projects (i. developing facilities right from the scratch) or through brown-field projects (i. There can be no ideal strategy for every business.e. mergers and acquisition. because every business has its own unique external and internal environment. It is usually pursued by a business group with diverse interests across multiple industries.
STRATEGY CHOICE & PORTFOLIO ANALYSIS
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?
. 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.STRATEGIC CHOICE
A strategic choice seeks to determine the alternative courses of action available before top managers to achieve its strategic intent.
The key task before a top manager is to identify the right problems. To identify the right problems.SELECTIVITY IS THE KEY
The role of a top manager is not to solve a problem. if addressed. They must choose problems which will lead to the right kind of opportunities. managers need to ask the right questions. nor is to a define a problem for others to solve. 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?
. will help the firm achieve its intent.
business houses in India.BUSINESS GROUP . chaebols in Korea.
. Their origins can be traced back to market imperfections existing in an economy (MRTP Laws.e. formal and informal ties. Managing Agency). Licenses & Quotas. Resource sharing.DEFINITION
A business group is known by various names in various countries – guanxique in China. BRC). High degree of centralized control (GEO. Proximity to the corridors of power (i. 95 Succession planning is critical to continuity. keiretsus in Japan. Their roots can be traced to a single family or clan and share broad similarities. embassies).
RESOURCE SHARING ACROSS FIRMS
Firm 5 Firm 3
STRATEGIC CHOICE – MACRO TIMING
Recession (Stability) Prosperity (Diversificatio n) Depression (Divestmen t)
Recovery (Intensification )
STRATEGIC CHOICE – MICRO TIMING
Maturity Stability Growth Diversification
Duration (Yrs) Inception Intensification
Resource allocation across a portfolio of businesses is an important strategic choice. Redeployment of resources upsets the established power bases of a group. there are high costs associated with entry and exit. Rules of the game are different. sometimes impossible. Power and resources often goes hand in hand. therefore.
. next only to choice of business. Relatedness across resources are difficult to realize. Why? Businesses are not about liquid assets. Investing in emerging businesses may not actually be so simple as it appears to be.
BCG GROWTH MODEL
Relative Market Share (%)
Industry Growth (%) Low High
but to larger extent than a question mark.e. TCS. Tata Telecom. market penetration. which remains a big? These businesses are net users of resources. Tata Steel). diversification). and their risk profile is high (Eg. provided the industry growth rate continues and the company is able to maintain its growth (i. market development. product development). These businesses are also net users of resources (Eg. Stars – They achievers in the near term. Trent.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.
stability). However.e. divest) as achieving a dominant position in these businesses is a difficult task. cash cows may also need to invest provided the industry takes an upswing (Eg. Tata Chemicals).BUSINESS ANALYSIS – TATA GROUP
Cash Cow – These are matured businesses. Tata Tea. and the company dominates the industry ahead of competition (i.
. harvest. Tata Motors. Given that the growth potential in the business is low. Nelco. and they lack on competencies to take on competition and are basically cash traps (Eg.e. Groups prefer to dispose off such businesses (i. Tata Pharma. Tata Press). they are generators of resources. Indian Hotels. Dogs – They are a drag on the group.
. Data may be prohibitive. niche – Rolex.e. Certain businesses in the low market share category may be the result of a conscious strategy (i. factors are limited. neither in high or low. HUL). Cartier.LIMITATIONS
It does not address the concerns of a business which is in the average category (usually the majority). The terminologies used are somewhat prohibitive. The model does not provide specific solutions within a particular category. Mercedes Benz. Cash cows may actually need substantial investments to retain their market position (Eg. Armani).
Diversify (++) Intensify (+)
ARTHUR’ D. LITTLE
Inception Dominant Strong Favourable Tenable Weak Growth Maturity Decline
Improve Selective Niche Abandon Industry Life-Cycle Divest Harvest
SHELL – DIRECTIONAL POLICY MATRIX
Business Sector Prospects
Attractive Average Unattractive Generate Cash Phased Withdrawal
Market Leadership Try Harder Double Or Quit
Phased Expand Withdrawal
Harvest – It entails minimizing investments while trying to maximize short-run profits and cash flow with the intention to exit the business in the near future. SBU – A business unit which is strategically different from another and also shares a different SIC code. Disinvestment involves selling in phases. Portfolio – An organization is perceived as a portfolio of businesses. BCG – Boston Consulting Group.
. Divest – Selling a part or the entire business at one go. Gap Analysis – It emphasizes what a firm wants to achieve.
BUSINESS STRATEGY & COMPETITION
The strength of a firm in a particular business usually stems from its competitive advantage.e. and earning super-normal profits (i. The principal focus is on meeting competition. Competitive advantage is the back-bone of strategy. 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. rent). building market-share.COMPETITIVE STRATEGY
A competitive strategy deals with how a firm competes in a particular business or product-market segment.
developing competitive advantage (Porter).
. identifying critical success factors. preventing new entry and/or competition (Hax & Wilde). leveraging (Prahalad). Delta Lock In – Two dominant players co-opt to selfreinforce and create or escalate an entry barrier. involving harmonizing and integrating multiple streams of technologies. Resource Based View – Obsession with competence building.BUSINESS STRATEGY FRAMEWORKS
How to be distinctive and yet sustainable – Differentiation – Understanding of the dynamics of competition. Blue Ocean – Consciously moving away from overcrowded industries to uncharted territories and making competition irrelevant (Kim & Mauborgne).
Locational or early entry advantage. Reliance) or may pass it to customers to increase market-share (Eg. T-Series).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. backward integration. Nirma. preferential access to raw materials. Compress project duration through crashing. Steep experience curve effects. Ayur.
. proprietary technology. The firm may retain the benefits of cost advantage by enjoying higher margins (Eg. Sources of cost advantage are varied and depends on the structure of the industry – Economies of size.
Means of product differentiation are peculiar to each industry. innovation and out of the box thinking. Feeling the pulse of the customer. Rayban). avoiding brand dilution.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. Culture of experimentation. Creativity. and sufficient slack. Focus on brand loyalty. Sony. undeterred attention to quality.
. It selects one or more attributes that buyers perceive as important. Successful product differentiation is often followed by premium pricing. (Eg. Intel.
though it may not possess an overall competitive advantage.
. They are poorly served by mainstream players. Rolex. The target segment must have unusual needs or the delivery system catering to this segment must be unique.PORTERS NICHE OR FOCUS
Focus / Niche – It is a variant strategy of cost leadership or product differentiation targeting a specific market or buyer sub-segment with the exclusion of others (Eg. Cartier. Mont-Blanc. coupled with fear of structural erosion. A focuser seeks to achieve a competitive advantage in its target segment. Sub optimization alone may not be a source of superior performance. Armani). Maybach.
Cost Differentiation Product Differentiation
Cost Leadership (Toyota)
Product Differentiation (General Motors)
Cost Focus (Hyundai)
Differentiation Focus (Mercedes)
. Though cost leadership and differentiation are inconsistent. similarly differentiation may not always lead to rising costs (i. Firms focusing on a hybrid strategy typically aim at shifting the productivity frontier and recreating a new product-market segment altogether (Eg. jugaad or frugal engineering). and usually outperforms a stand alone generic strategy.e. in a hyper competitive context the two strategies need not be mutually exclusive.HYBRID STRATEGY
A hybrid strategy is the simultaneous pursuit of cost leadership and differentiation. Reducing cost does not always involve a sacrifice in differentiation. Tata Nano).
leading to what is called – straddling. It tries to compete through every means. Industry maturity will usually widen the gap.STUCK IN THE MIDDLE
A firm that engages in a hybrid strategy and fails to achieve a competitive advantage because it was ill conceived will be . It will have a competitive disadvantage vis-à-vis a clearly positioned generic player. but achieves none. The positioning therefore gets – blurred. It is usually the result of a firm not willing to make trade offs.stuck in the middle.
. unless such a player is capable of discovering a profitable segment.
. First-time buyers. Consumer behaviour pattern unstable and evolving. Artificial intelligence). Nano technology. It is characterized by – High level of technological uncertainty. Eg. technological innovations. leading to a blurred productivity frontier and steep learning curve. There is a lot of scope to define the rules of competition. 3D imaging.) Excessive turbulence in the dynamics of the environment. changing customer needs. (Eg. Speech recognition software's. ending in a differential cost economics.EMERGING INDUSTRY
Emerging Industry – An evolving industry characterized by . Market segmentation not well defined.radical environmental changes. coupled with low penetration levels.
Eg. Retail and telecom. Eg. Diverse customer needs. leading to clear fragmentation. because of lack of economies of size and scale. MRTP may also cause fragmentation. Eg. High exit barriers because of huge investment in CAPEX.GROWTH / FRAGMENTED INDUSTRY
Growth Industry – An industry characterized by high growth potential in the long run and where no firm has a significant market share (an edge over another). Government regulations in the form Eg. Consumer durables. Paints. Air Conditioning. Scope for players to change the rules of the game. It is characterized by – Low entry barriers. IT.
technological maturity. established industry dynamics.MATURED INDUSTRY
Matured Industry – An industry characterized by saturation in growth rates. Cartel among existing players through collusion. distribution networks. technological maturity. early entry and location advantages. well defined consumer behavioral patterns and imperfect competition leading to near monopoly. Firms are rule takers in the segment as productivity frontier is well defined. 119
. collaboration and co-option. Limited scope for innovation . because of economies of size and learning curve effects. Strong entry barriers.
Exit barriers are extremely high because of limited prospective buyers. dot-matrix printers). scooters. Nature of competition extremely high. (Eg.
. Firms facing a declining phase are characterized by inertia and slow to react to environmental changes.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. backed by corporate espionage. and costly price wars. Learning abilities have been stunted and firms adverse to investment in R&D and make fresh investments. Typewriters. with little or no signs of recovery.
strike alliances. strictly product differentiation and not standardization. recreate new markets. or else exit the segment. process innovation. branding and promotion.
. assess and overcome fragmentation. increasing scope. Declining Industry – Redesign. Fragmented Industry – Identify. focus more on product differentiation or even a hybrid one. Matured Industry – Sophisticated cost analysis.COMPETITIVE STRATEGIES
Emerging Industry – Set benchmarks. aggressive building of distribution networks. mergers and acquisition. strictly cost differentiation. regenerate. reengineer. Locate a defendable position. move beyond boundaries. premium pricing.
However. patents. hence very rarely confer competitive advantage as can be easily acquired or replicated.
. and complex learning experiences in integrating and harmonizing technologies (distinctive capabilities) that play an important role in delivering competitive advantage through “causal ambiguity”. A firms resources can be classified into – Tangible – These refer to real assets. They are a standard in nature. brands.RESOURCE BASED VIEW
Differentiation based on cost or products saturates and ceases to exist beyond the medium term. positions based on resources which are unique and inimitable are far more sustainable even in the long term. Intangible – These refer to goodwill.
CAPABILITIES & COPMPETENCIES
These include a complex combinations of tangible and intangible resources that organizations use to convert inputs to outputs. differentiation based on capabilities can be sustained even in the long run. Capabilities can be generic (i.e. Typically. but not necessarily.
. Therefore firms should concentrate on developing complex resources that forms the very basis of differentiation. Hence. can be leveraged across businesses) or specific to a particular business. There is a high degree of internal and external causal ambiguity involved in it. they are woven around technologies. They play a very critical role in shaping competitive advantage.
It enlarges the scope of an organization.e.
. not absolute) to competition. It results in a distinct differentiation advantage or a cost advantage or hybrid as well. Success of a strategy critically depends on SAP.COMPETITIVE ADVANTAGE
A competitive advantage is a position of superiority relative (i. A portfolio of competitive advantage comprises strategic advantage profile (SAP). Strategy drives competitive advantage. competitive advantage subsequently becomes the back bone for a competitive strategy. and results in well springs of new business development.
STRATEGIC ADVANTAGE PROFILE (SAP)
Organizations have to systematically and continuously conduct exercises to identify its SAP. SAP changes from time to time. In most cases SAP is hidden and dormant.
. In today's world of discontinuity. Most successful organizations around the world have a well balanced SAP. Identification of SAP is critical for and stretching and leveraging of resources. Internal strategic fit between its strategy and dominant logics is essential for the top management to stretch and leverage SAP.
VC pay-offs: better product availability. A VC is often compared with a relay team.
. Competitive advantage arises not from an individual activity but a stream of inter-related activities. Substantial cost reductions also follow. kaizen or internal customer). faster product launches.VALUE CHAIN ANALYSIS
A value-chain segregates a firm into strategically relevant activities to understand its composite behaviour. Today SCM is integrated with greening the environment as CSR practices.e. and enhanced customer tracking – higher market share. Inventory Mgt to Logistics Mgt to Supply Chain Mgt (SCM). each of the players need to be efficient backed by sufficient coordination at the contact points (i.
THE VALUE CHAIN
n gi ar M
Human Resource Management Technology Development Procurement
Mktg & Sales
ar gi n
– Third order fit refers to optimization of effort. A high fit involving a complex chain of activities drives both competitive advantage and its sustainability.
. – Second order fit occurs when activities are reinforcing amongst them.STRATEGIC FIT – THE PORTER WAY
The sustainability of the value chain depends on the degree of fit between the activities. Operational effectiveness is not strategy. – First order fit refers to simple consistency between each activity and the overall strategy. Fit is important because discrete activities result in negative synergy and can also be easily copied by competitors. A learning organization helps create strategic fit.
Core competence has a high degree of external and 130 internal causal ambiguity embedded in it. but not necessarily. – Cannot be easily imitated or substituted. These skills results in distinctive activities and processes. It forms the very basis of competitive advantage. It should satisfy the following conditions – Contributes significantly to customer benefits. – Can be sustained even in the long run. A core competence usually has its roots in technology.
A core competence represents the collective learning's of an organization around diverse streams of technologies. – Can be leveraged across businesses.
A competitive advantage is sustainable in the shortmedium term. A competitive advantage may or may not lead to superior performance. Majority of the firms have competitive advantage. only global leaders possess a core competence.CORE COMPETENCE
A competitive advantage does not necessarily imply a core competence. a core competence is sustainable even in the long-term.
. a core competence has its roots in a set of skills. A competitive advantage manifests from a function. a core competence always implies a competitive advantage. a core competence usually does.
In a game (similar to a business) one players win is always another's loss. Here the magnitude of gain offsets the magnitude of loss equally. illustrations depicting a win-win situation. However. In fact there are no. each of whom wants to win. A game is a contest involving two or more players. the stringent assumptions of game theory and difficulty in ascertaining of pay-offs makes game theory application difficult in business.GAME THEORY
The game theory was developed in 1944 by Oscar Morgenstern. This is known as a zero-sum game. Subsequent work on game theory by John Nash led him to win the Nobel prize in 1994.
Firm Y’s Strategy Use Radio Use Radio +2 +6 Use Newspaper +7 -4
Firm X’s Strategy
Firm X’s Pay-Off Matrix
. An unbiased game is one where both the players have equal chances of winning.BIASED AND UNBIASED GAME
A game is said to be biased when one of the players have a disproportionate chance of winning.
Firm Y’s Strategy Use Radio +3 +1 Use Newspaper +7 -2
Firm X’s Strategy
Use Radio Use Newspaper
Firm X’s Pay-Off Matrix
.PURE STRATEGY GAME
The strategy each player follows will always be the same regardless of the other players strategy. A saddle point is a situation where both the players are facing pure strategies.
It represents the classical “prisoner’s dilemma”. iteration) rather than through collusion (E. collaboration or cooption. Yahoo Vs Microsoft).e. Repeated Games – In this situation the players interact repeatedly with each other sub-optimizing the outcome possibilities. However. This is usually through learning by “experience or observation” (i.g. there is likely to be temptation by any of the players to try to steal the advantage over the other by breaking the rules of the game (Eg. Coke Vs Pepsi).TYPES OF GAMES
Simultaneous Games – This is a situation where the players have an option to choose to cooperate or not through collusion.
– Making pricing more transparent. In a market dominated by price-based differentiation one may attempt to change the rules of the game by/when – – Bases of differentiation dependent on clear identification of what customer wants or value. Game theory relies on the principle of rationality.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. – Building incentives for customer loyalty. It results in a shift in the productivity frontier. 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).
THE THREE STRATEGIC POSITIONS
System Economics Market Dominance Complementary Share
Enabled through effective use of technology
Total Customer Solutions
Customer Economics Cooperation Customer Share
Product Economics Rivalry Product Share 138
Bill Gates is the richest man in the world not necessarily because he has developed the world’s best software's or excels at customer satisfaction; but he has got an army of people working for him who are not on his payroll – all the application software providers who are writing programs based on “Windows” compatible operating platform. Once you create the lock-in it is sustainable because of the “network effects”; which creates the proverbial “virtuous cycle” – customers want to buy the computer with largest set of applications and software developers want to write programs for the computers with the largest installed base.
The proponents (Hax & Wilde) believe that every organization has the ability to create and sustain a “lock-in” positioning (though in varying degree). This “system lock-in” is referred to as “delta” – delta being the Greek letter that stands for transformation and change amongst the players. The lock-in once created becomes very difficult for a firm to penetrate, and becomes a distinct entry barrier. The model is based on the belief that it compliments Porter’s differentiation model and RBV framework instead of contradicting them. In a lock-in strategy the performance outcomes are dependent on the success of another.
It relates to translating strategy formulations into practice. Performance realization of a strategy depends on the implementation effort. Successful implementation also depends on the appropriateness of the strategy. Since strategy implementation is a time bound process, alignment (i.e. strategic fit) is a key variable during times of radical change. Some of the other levers of successful strategy implementation are – Transformational leadership and motivating power. Resource allocation; its stretching and leveraging. Compatible organization structure & control systems. Inertia & resistance to change.
A high strategic fit (co alignment) is useful because it enables – – Appropriate and timely response.
.IMPORTANCE OF STRATEGIC FIT
Strategic fit has a central role to play in strategic management. – Better strategic and operational control. While external strategic fit (strategy – environment) is relevant for strategy formulation. – Unlearning & learning of new skill sets. – Resource commitment from top management. – Development of capabilities & competencies. internal strategic fit (strategy – dominant logic) is critical to strategy implementation. – Changing the rules of the game.
formulation & implementation can occur simultaneously. According to Mintzberg. emergent strategy vis-à-vis intended & realized). learning levels are very high. learning levels are very low. while control is very effective.e.
. at the cost of sacrificing a lesser degree of control. In such a situation. strategy formulation and implementation has been perceived to be distinct & independent. In such a situation. Some of the key strategic learning's exists at the contact point between the organization and its customer. effective strategies are better crafted when there is a subtle overlapping between the two (i. In fact.FORMULATION Vs IMPLEMENTATION
He should be an agent of change. Pragmatism is the ability to make things happen.
. shift from compliance to commitment. bring about transparency. Install a system of shared beliefs and values.ROLE OF TOP MANAGEMENT
To bring about change and to implement strategies successfully. A transactional leader is usually confined to allocating tasks & responsibilities and extracting performance. transformational leaders go one step beyond – Design a well crafted and designed strategic intent of the organization. companies depend more on transformational leaders than transactional leaders. In contrast.
. machines) referred to as threshold resources (i.RESOURCE ALLOCATION
Resources allocation includes tangible resources (Eg.e. Intangible resources (Eg. labour. Zero Based Budget – In this case the budget of a SBU has to be worked out right from the scratch. The various methods of resource allocation includes Historical Budget – The budgets framed by HQ for a particular SBU keeping in mind past trends. minimum requirement). brands. patents. land. skills) also includes complex resources like capabilities and competencies. Performance Budget – SBU managers need to justify the distinctive resources in terms of the opportunity it is pursuing yields the highest possible pay-offs.
. Distinctive capabilities helps in stretching and leveraging resources thereby overcoming two major constraints involved in strategy implementation – times & costs. convergence of multiple streams of technologies at the product – market level is becoming increasingly evident (Eg. Flat Screen Displays. Distinctive capabilities are complex set of skills woven around technologies. these capabilities are sustainable even in the medium to long term.CAPABILITIES & COMPETENCIES
Technology and business are slowly becoming in – separable. though not necessarily in the case of emerging markets. Mobiles). Due to causal ambiguity (complexity).
processes become people independent.STRATEGY & STRUCTURE
It is a framework within which individual efforts are coordinated to bring synergy. An appropriate organization structure & adequate control systems are essential to implement strategies and achieve stated goals. A firm in several related businesses usually employs a divisional structure.
. Once the structure is in place. A single product or a dominant business firm usually employs a functional structure. A firm in several unrelated businesses usually employs a SBU structure. The level of centralization and decentralization is decisive.
. Output). processes. Team Structure – An informal group formed for a crisis. Marketing. 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. or geographical locations. disbanded subsequently. Finance). SBU Structure – Businesses segregated in terms of strategic dissimilarities (Eg. Virtual Structure – A boundary less or hollow organization.Technology. based on skills and competencies. Divisional Structure – Units grouped together in terms of products. Inputs .TYPES OF STRUCTURES
Functional Structure – Activities grouped together by a common function (Eg.
Environment & People – Economic and political conditions have a major bearing on structure coupled with the attitude and aspirations of the people in the organization. as span is broader. facing challenges & crises.
. leading to a tall structure.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. It includes the desire for independence. Technology – With more and more convergence of technologies in business. structures are becoming flatter and more simpler. assuming responsibility.
When a firm has been operating in a certain fashion for a long time. Inertia is a characteristic of a firm that endures status quo (i. Inertia acts as an impediment in strategy implementation.e. Common sources of 151 inertia – complacency with past successes. irrespective whether it is from worse to good or good to worse. Most firms undergo periods of strategic continuity rather than strategic discontinuity. Top managers resist change. Changes in top management and unlearning helps overcome inertia. there is a tendency to continue along the same lines.
Since the internal and external environment is in a state of continuous flux. certain authors propose misfit as a source of superior 152 performance.
. strategies need to be evaluated on an ongoing basis to prevent deviations of fit. However.STRATEGY EVALUATION
Strategy evaluation centers around assessment of strategic fit. To prevent deviation of fit. Deviation of fit is detrimental to performance and may lead to strategic failure. firms should move beyond financial performance to strategic performance as organization systems are becoming complex.
detecting changes in the external and internal environment and taking corrective action wherever necessary. It attempts to answer the following questions – Is the strategic intent appropriate to the changing context? Are the organizations capabilities still holding good.STRATEGY CONTROL
It is concerned with trafficking a strategy as it is being implemented. competitive advantages becoming disadvantages? Has the company acquired any new competency? Has the company been able to overcome the 153 environmental threats.
checking every premise is costly as well as difficult. It is open-ended as well as
. However. Premise Control – Checking the validity of the assumptions on which a strategy was based. It involves assessing – strategic thrusts and milestones. Special Alert Control – It intends to uncover unanticipated information having critical impact 154 on strategies. Implementation Control – It aims at assessing whether key activities are proceeding as per schedule.STRATEGY CONTROL IMPLEMENTATION
It involves steering the company towards its original growth trajectory & stated goals.
“If you cannot
. Performance measures are defective – What to evaluate against? How to measure the 155 construct? As a saying goes. 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. difficult to translate into practice.BARRIERS TO STRATEGY EXECUTION
Vision and strategy not actionable – Utopian ideas.
Today it is considered one of the most powerful tools for strategy implementation determining success or failure. Managers should take into account all seven of these factors. important or not they're all interdependent. Large or small. this may effect all others as well. the relative importance of each factor may vary over time and context.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. to be sure of successful implementation of a strategy. On top of that. so if one fails to pay proper attention to one of them.
. Together these factors determine the way in which a corporation operates.
They had been investigating how Japanese industry had been so successful.BACKGROUND & ORIGIN
The 7-S Framework was first mentioned in "The Art Of Japanese Management" by Richard Pascale and Anthony Athos in 1981. 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.
over time. Skills – An organizations capabilities and competencies. processes and routines that characterize how work should be done. Structure – The way in which the organization's units relate to each other in terms of their commonalities.
. formal & informal . to reach identified & stated goals. Staff – Human inter-relationships. Style – The way in which the top management influences the functioning of an organization. Strategy – Trade-offs for the allocation of a firms scarce resources.THE 7’S
Shared Values – It represents what the organization stands for and what the top management believes in. Systems – The procedures.
Strategy Structure Shared Values Systems
1st Order Fit 2nd Order Fit 3rd Order Fit
their Japanese counterparts focus more on the soft S’s for their early success and sustainability. style. Ineffective in case of a virtual company. shared values) are very malleable and comparatively more difficult to identify & influence. In contrast. systems) are comparatively easy to identify and influence.
. structure. Consider the 4P’s of marketing or 3R’s of SCM. staff. because most often they are culturally embedded and often neglected. A choice of an alphabet often limits the scope and skews the interpretation of a model. While the American co’s focuses on the hard S’s.A CRITIC OF THE 7S MODEL
While the hard S’s (strategy. the soft S’s (skill.
High Organic Growth Strategic Alliance Joint Venture Mergers & Acquisition Strategic Fit .Low Take Overs
.STRATEGY IMPLEMENTATION ROUTES
Strategic Fit .
tax holidays. 162 Risk of cost and time overruns. (Eg. Govt. i. technologies. i.e.e. SEZ’s.
. Long gestation leads to delayed market entry. subsidized power). It has complete control over inputs. and markets. (Eg. soft loans. green-field projects. the entire value chain. Reliance Industries). concessions are available for green-field projects. The entire infra-structural facilities are set up afresh having its own gestation and break-even.ORGANIC GROWTH
Here a firm builds up its facilities right from the scratch and continues to do so without any external participation.
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. Alliances are usually in the areas of technologies or markets (Eg. 163 It is a form of competitive collaboration.
. It touches upon a limited aspects of a firms value chain. Tata Motors & Fiat).STRATEGIC ALLIANCE
It involves a pro-active collaboration between two or more firms on a particular domain or function for mutual gain. It has limited intervention power and usually lacks holistic commitment from the alliance partner.
Honda). leaving minimum scope of overlapping. Tata – AIG. It is a win-win situation for both the companies.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. Dominant logic of both the companies should be complimentary. Selecting the right partner is critical for success. A comprehensive MOU is essential. (Eg. Degree and extent of management control must be clearly 164 laid down.
. Hero .
Integrated distribution channel leads to better market penetration and overall synergy. Integration of assets and other financial resources.MERGERS & ACQUISITION
It refers to the fusion of two or more firms into a single entity. Coca Cola – Thums Up). Acquisition is an outright purchase of a firm assets by another independent entity (Eg. ITC Tribeni Tissues. Brooke Bond & Lipton). Revival of a sick-unit through better management practices is a major motive behind an acquisition 165 strategy.
. Economies in scale leading to lowering of costs. with the individual firms ceasing to exist any more (Eg.
It refers to the acquisition of significant management control by buying out majority stake in a firm through due diligence or hostility (Eg.Corus). Tata Steel . Most countries have stringent laws that prevents hostile take over. Inform SEBI / Stock Exchange after 5% stake is 166 acquired. Integration of organization structure & cultures is difficult. often the new firm is “left alone”. Make a public offer of not less than
. Instant access to capacities and markets. Consolidation in a fragmented industry. Larger geo-graphical diversity.
MANAGEMENT TOOLS IN STRATEGY
every time. or better still create next practices Reengineering – Redesigning work processes right from the scratch. Radical change is superseding incremental change. Companies therefore need to ensure competitive advantages doesn’t become competitive disadvantages. Balanced Scorecard – Tracking strategy 3600.
. TQM – Doing the right thing the first time. Change provides enormous opportunities. Some tools to ensure that – Benchmarking – Adopt certain best practices. The past is ceasing to be an indication of the future. it is also a source of potential threat.WHY MANAGEMENT TOOLS?
Change is becoming pertinent in the business environment.
A best practice is defined as an activity performed by a company in a particular domain or function which distinguishes it from others and making them world-class. These exemplary practices involves the stakeholders of the company and helps achieve its strategic intent. Best practices centers around looking at a different way to satisfy various stakeholders. Benchmarking involves the identification, understanding and adapting of certain best practices and implementing them to enhance performance. Firms are moving towards next practices as best practices make firms look more and more homogeneous.
SOME BEST PRACTICES
Dell: Customized configuration of computers. Caterpillar: 48 hours delivery anywhere in the world. Citi Bank : Priority banking services. Maruti: Certified “true value” pre-owned cars. Microsoft: ESOP to employees. Infosys: Customized work-stations. TCS: Referencing potential new recruits. ITC: Shareholders factory visit. AmEx: Outsourcing data warehousing mining. MARG: Set-top box to study viewing patterns. Honda: CEO’s visit to dealers.
TYPES OF BENCHMARKING
Functional – Used by companies to improve a particular management activity. Eg. Motorola learnt delivery scheduling from Domino’s. Process – Improving specific key processes and operations from experiences in similar businesses. Eg. Ford adopting assembly lay-out plan of Toyota. Competitive – It involves assessing the sources of competitive advantage and imitating them. Eg. Samsung leveraging miniaturization skills of Sony. Strategic – It involves assessing business models and replicating them in a different market. Eg. Reliance replicating AT&T business model.
HOW TO BENCHMARK?
Phase 1: Planning – What to benchmark? Whom to benchmark? – Identify key performance indicators & Data source. Phase 2: Analysis – Assessment of performance gaps. – Predict future performance levels. Phase 3: Integration – Communicate findings and gain acceptance. – Establish functional goals and its implementation. Phase 4: Action – Implement and monitor progress. – Measure results against stakeholder wants and needs. – Recalibrate or outperform benchmarks.
WHOM TO BENCHMARK?
Selecting the benchmarking partner is critical to solving the problem. Firms should generally avoid selecting the industry leader, because it may not always adopt the best practices for every process or activity. Benchmarking partners may also be from different industries. Types – – Internal – It involves benchmarking against its own branches, divisions, SBU’s. Proximity to data and cooperation is taken care of automatically. – External – It involves benchmarking against firms that succeeded on account of their best practices. It may also involve benchmarking against world-class firms. Friction may arise due to presence in competing industries.
BENCHMARKING - ADVANTAGES
Finding better ways of meeting stakeholder needs. Organizational learning comes from internal as well as external sources. Establishing goals based on formal assessment of external conditions. Defining effective measure of indicators, facilitate comparison, adopt from other organizations. Ensuring a continuous learning organization. Reducing competitive disadvantage. Organizational turnaround, especially effective in case of a wide strategic drift when differentiation strategies fail to work. 174
e. Benchmarking is useful for bringing about operational efficiency. While strategy is all about differentiation and not looking alike. the more similar they end up looking. clustering).
More and more companies benchmark. Benchmarking merely reorients profits in the hands of few to profits in the hands in the hands of many (i. but it cannot be used as a strategic decision making tool. Strategy is more of creating best practices rather than copying them. It can at best complement it.BENCHMARKING . It does not shifts the growth 175 trajectory of the industry as a whole.
Redesigning leads to identification of superfluous activities or product features (i.g. for achieving performance improvement (E.e. Re-engineering attempts to radically change an organizational products or process by challenging the basic assumptions surrounding it. Re-engineering involves complete reconstruction and overhauling of job descriptions from the scratch (i. DOS to Windows).
. The task demands a total change in organisational 176 culture and mindset.g. clean sheet). Windows 95 to 97). process mapping) and eliminating or improving them (E.e.
than people driven Innovative Vs Traditional Customer centric Vs Organisational centric
.REENGINEERING – KEY TENETS
Ambition Focus Attitude Enabler Performance
Large scale improvement by questioning basic assumptions about how work is done Micro Vs Macro Business Processes Vs Organisational Processes Starting right from the scratch Not historical More IT driven.
Reengineering can be successfully leveraged at all levels of an organization with varying degree of results.
. Business – It looks into markets. resource allocation and prepares the organization for the future through a reorientation of the entire strategic architecture. structures. It can be of the following types – Functional – It looks into the flow of operations (i.e.REENGINEERING . Strategic – It looks into the process of strategic planning. processes. customers and suppliers and protects the organization from the future (i. . products. BPR). etc) and supports the organization for the present.e.
– Causal Ambiguity. learning curve advantage. Cheaper versions of Intel chips and mother-boards manufactured in Taiwan. protection can be had in the following ways – – Patenting. It generally acts as a threat to innovation. While traditional manufacturing is a bottom-up approach.
It is a process by which a product is dismantled and analyzed in order to understand how the product was designed and manufactured. – Early entry advantages. However. Indonesia). with an intention to copy it (Eg. reverse engineering is a top-bottom approach. – High cost and time acts as a deterrent.
cost and effort necessary for the purpose of reverse engineering. Inaccurate assessment at this stage may lead to a failure of the entire project. Implementation – Developing of a prototype. nano-technology). Actualization – Obtaining and dismantling of the product to assess how it functions. designing facilities. Introduction – Launching the product in the market.STAGES IN REVERSE ENGINEERING
Awareness – Recognizing whether the product is found to be worth the time.e.
. machine tools to convert ideas into a marketable product (i. Usually in such cases segmentation and pricing is different from the original innovator.
– Durability – 1980 manufactured cars still on road. of service stations. – Serviceability – Large no. – Features – Anti-lock braking systems. It has eight dimensions (Eg.Euro IV. Air bags. – Conformance – Emission standards . More and more companies are moving towards meeting implied rather than stated needs. – Perception – Customer notions.WHAT IS QUALITY?
It involves the totality of a product or service in meeting certain stated or implied needs.
. – Reliability – Consistency in mileage. Car) – – Performance – Mileage of 14 kms to a litre of fuel. – Aesthetics – Appeal in design.
touching upon a limited aspect of a value chain.fix it in nature. which ensures good market standing. It is deeply embedded as an aspect of 182 organisational life & culture.TOTAL QUALITY MANAGEMENT
Objective – Management of quality ensures conformance to certain pre-set standards. zero defects. Management of quality was traditionally inspect it . TQM is a way of creating an organization culture committed to the continuous improvement of work processes – Deming.
. It had little impact on improving overall productivity.
TQM – KEY TENETS
Do it right. Be customer centric – Generate the concept of internal customer (Ishikawa). Kaizen – Make continuous improvement a way of life. fully involved in decision-making and fairly rewarded for results. not a final destination. 183
. the first time – From reactively fixing error in products to proactively preventing errors from occurring at the first place (Juran). Empowerment – It takes place when employees are properly trained. provided with all relevant information and best possible tools. Looking at quality as an endless journey.
TQM . It is based on the principles of MBO (i. of units meet preset standards (Eg. equal participation). SQC – It is a process used to determine how many units of a product should be inspected to calculate a probability that the total no.STRATEGIES
Outsourcing – It is the process of self-contracting services and operations which are routine and mundane.
. Quality Circles – It a small group of shop-floor employees who meet periodically to take decisions regarding operational problems and crises. enabling the firm to concentrate on core activities essential to customer satisfaction. saving precious top management time. 6-Sigma).e.
. – Less than 10% of strategies effectively formulated are effectively executed.... strategy implementation has never been more important.
Source: Fortune Magazine Why CEO’s fail?
.....BALANCED SCORE CARD
Some interesting comments ... it’s bad execution.. – In the majority of failures – we estimate 70% – the real problem isn’t (bad strategy) .. – Efficiency and effectiveness is passé.
. 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.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. Focus more on causes. These measures worked well when organizational systems were simple and unidirectional and more importantly the environment was static. Organizations need to move from financial to strategic performance. rather than effects.
and distinguish strategic problems from operational ones. It has four dimensions – – How do customers see us? – What must we excel at? – Can we continue to improve and create value? – How do we look to shareholders? Firms more often have problems. The most critical element of a BSC is to measure these four dimensions.
.BSC – KAPLAN & NORTON (1992)
A BSC helps a manager to track and communicate the different elements of company’s strategy. because they have too many.
of visits or calls made % of NPA’s
GOALS Products Supply Preference Relationship
MEASURES Relative market share (%) % of sales from new Vs proprietary products Timely deliveries and service Customer credit analysis (i. ageing schedule) % of key customer transactions Ranking of key customer accounts No.
of times covered in media No. of new product launches Vs competition Product pricing Vs competition
GOALS Skills Excellence Exposure Introduction
MEASURES New capabilities and competencies Implementation & gestation period Bank and supplier credit limits & PLR Unit Costs / Conversion Ratio / Defect Ratio No.
GOALS Technology Manufacturing Focus Timing
MEASURES No. of new patents registered Time to develop next generation products Average and spread in operating cycle % of products that equal 2/3 sales No. of product innovations
Return on Investment Market Capitalization / PE ratio
GOALS Survival Success Prosper Divestment
MEASURES Cash flows Growth in Sales and Profits EPS.
2 Translate strategy into operational terms 1 Mobilize change through effective leadership
Make strategy a continual process
3 Align the organization to the strategy
4 Make strategy everyone’s job
194 performance will automatically follow. sharing of vision). doing right things instead of doing things right).BSC . The BSC brings together the different elements of a company’s strategy at a glance.ADVANTAGES
Most often top managers face information overload.what they don’t know. they don’t know .e.e. As a result. Focus on cause not effects. Modern managers should be poised to ask the right questions. It helps translating strategy into practice (i. Seek excellence.
. Shift from control to strategy (i.
EFFICIENCY Vs EFFECTIVENESS
Goes out of Business quickly
but also sustains it.Michael E. . not only thrives.EFFECTIVENESS + STRATEGY
A company which is effective as well as strategic. Porter
To adapt to the changing environment. from survival of the fittest ..CORPORATE RESTRUCTURING
The only thing constant in today's business environment is change. Radical change brings about strategic variety. Restructuring involves consciously driving significant changes in the way an organizations thinks and looks (Eg.”
... As Peter Drucker pointed out. “every organization must be prepared to abandon everything it does. Strategic variety brings paradigm shift. Tata Group).. to survival of the most adaptable... Strategic variety may be caused by changes in the as external well as internal environment. firms use restructuring strategies.
Fax. Structural Changes – Conventional hierarchical structures should be disbanded in favour of more 199 flexible ones (i. Company’s should go beyond just asking what he expects. Walkman. and dividing the core businesses into SBU’s (i. downsizing or rightsizing). Internal customers should also not be neglected. Instead.RESTRUCTURING – BASIC TENETS
Customer Focus – Restructuring ideally begins and ends with the customer. downscoping).
. they should strive to provide unimaginable value ahead of its time (Eg.e. etc). Core Business – Company’s should introspect – What business are we in? Business evolved out of opportunism or myopia should be divested.e. ATM.
... It is created and institutionalized by the top management.RESTRUCTURING – BASIC TENETS
Cultural Changes – A culture represents the values and beliefs of the people about the organization...
. started focusing on their capabilities. During the times of JRD.) The Aditya Birla group typically relied on the “marwari” community for key management positions ...... the Tatas were considered a benevolent and charitable organization.. Kumar Birla today is more dependent on professionals. . Restructuring also requires cultural reorientation.) Reliance dismantled their industrial embassies .. Ratan Tata now drives the point the group means business.
Organizing customer and supplier meets. Use the reach of networking technologies. Honda’s ad says.MOVING CLOSER TO THE CUSTOMER
As companies evolve. they tend to move away from the customer. “ … one reason our customers are satisfied is that we aren’t. Communicating to the media about organization efforts to deliver quality products.”
. Getting feedback & addressing customer complaints. Publicizing welfare projects to demonstrate CSR. Carry out PR campaigns. Restructuring provides a platform to close this gap.
It may include brands as well. Glaxo – Heinz). or conglo-merate. spin-off and equity carve.
. Further spin-off can be classified as split-off and split-up. Tata – Corus) or hostile (Eg.ASSET RESTRUCTURING
Asset Restructuring – The asset composition of a firm undergoes a major change. it may be smooth (Eg. Mittal – Arcelor) and can take various forms. It can have two forms. including its intangibles – Mergers – It may be vertical. Hive Off – It involves siphoning of assets under control. horizontal. Asset Swaps – It entails divesting and acquisition simultaneously by two companies. Further. where the difference in valuation is settled off through cash or equity (Eg.
the existing shareholders receive equity in the subsidiary in exchange for the stocks of the parent company. in which the equity is allotted amongst the existing shareholders on a pro-rata basis (Eg. the entire parent company loses its identity after being split into a number of subsidiaries. – Split-Up – In a split-up. – Split-Off – In a split-off. Reliance Ent). Most of these practices are not in consonance with Indian laws.HIVE OFF
Spin-Off – A spin off is the creation of a new entity. Tata Industries selling 20% stake to Jardine Matheson). Equity Carve – It involves selling a minority stake to a third party while retaining control (Eg.
– Poor performance. for a specified market or in general with full management control. repay long-term debts. L&T sold its cements division to Aditya Birla group. Generic motives include – – Raise working capital. A complete sell-out is known as divestment (TOMCO).
. Selling out in phases is called disinvestment (IPCL).DIVESTITURE
It involves the sale of a brand or a division of a company to a third party. but retained its engineering division. strategic misfit. In 2005. In 1995. Parle sold its Thums Up brand to Coke for $40 million apprehending fierce competition.
Conversion – Replacing debt with equity or vice-versa or costlier with cheaper debt or cross currency debt. Tatas take-over of Corus for US $11. 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).The internal & external liability composition undergoes a major change – LBO – Acquiring control over a substantially larger company through borrowed funds (Eg. involving 608 pence per share).
.3 billion.CAPITAL RESTRUCTURING
Capital Restructuring . It provides greater leverage as well as management control.
150 cr VSNL – Rs.Rs. 42 cr Voltas .Rs. 1170 cr Goodlass Nerolac – Rs.BUSINESS RESTRUCTURING – TATAS
Divestments Lakme – Rs. 230 cr Diversifications Tata Motors – Rs. 120 cr Tata AIG – Rs. 950 cr Merind . 1700 cr Trent – Rs. 1890 cr CMC – Rs. 1860 cr
. 1439 cr
Tata Timken – Rs 120 cr Tata Telecom – Rs. 99 cr Tata Power – Rs. 256 cr ACC – Rs. 250 cr Tata Tetley – Rs.
of operating units. usually as a result external turbulence. It can be carried out in the following ways – Downsizing – It is a systematic one-time reduction in the no. Survival is the primary motive. of a firm’s employees and sometimes in the no. keeping the composition of business intact (Jet Airways).
. Downscoping – It involves reducing the business and/or geographical scope of a firm (Aditya Birla group).ORGANIZATIONAL RESTRUCTURING
Organizational structure and systems calls for a change when strategic variety is apparent. Rightsizing – It is phasing of excess and redundant employees resulted out of faulty internal planning (SAIL). Turnaround is the primary motive.
The dominant logic represents the perceptions and biases (i. 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).e. as strategies are based on such beliefs and biases.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 longer the period. inertia). the more difficult it becomes to uproot the paradigm (i.e. Strategy change is unviable without a preceding change in its dominant logics.
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.FORCES AGAINST STRATEGIC CHANGE
The problem with strategic change is that the whole burden typically rests on few people (i.e. In most organizations. Companies achieve real agility only when people at every level rise above the ordinary to face the challenges – revitalization or transformation. 20% of the people carry out 80% of the changes).
Understand and deliver the quid pro quo.
. Encourage uncompromising straight talk. never take no for an answer. process ownership. Create relentless discomfort with the status quo. The best way is to alter the institutional point of view. Manage from the future.SUCCESSFUL TRANSFORMATION
Build an intricate understanding of the business model at all levels of the organization. Harness setbacks. Questioning every basic action of the organization. it is not about winning but about learning. Promote inventive accountability.
Culture and style of management are two main impediments in force-field analysis. that can be both enablers and blockages to change and restructuring. It involves diagnosing a change situation – systems & structures. by identifying forces for and against change.
. Aspects of current culture which needs to be overcome. It involves identifying – Aspects of current culture which needs to be reinforced.FORCE-FIELD ANALYSIS
A force-field analysis provides an initial overview of change problems that needs to tackled. Identify and implement facilitators of cultural change. also known as cultural-web.
Term Loss of human capital Lower performance Higher performance
Alternatives Organizational Short .Term Reduced labour costs Reduced debt costs Emphasis on strategic control Business High debt costs Higher risk
Long .RESTRUCTURING .
the second one is a more viable strategy and sustainable option in the long run. down-scoping or asset stripping. focuses on reengineering.NUMERATOR & DENOMINATOR MGT
Most firms across emerging markets undergo strategic discontinuity and as a result are forced to restructure their businesses.
. hence go in for downsizing. Numerator – It assumes that turnover is not a barrier or constraint. While the first strategy produces results instantaneously. reverse engineering and regenerating. In order to put back the company on the right track they are resort to – Denominator – It assumes that turnover cannot be increased.
. – Less than 10% of the Fortune 500 companies as first published in 1955.. 215 (Govindarajan and Trimble....WHY TURN AROUND MANAGEMENT?
Some interesting insights . still exist as on 2005. – Only seven of the first fifty Indian business groups in 1947 were even in business by the turn of this century.. Source: Why do firms atrophy? (Business Today. January
1997). and that the thirty-two of the country’s largest business groups in 1969 are no longer among the top fifty today.
and capabilities. systems. A category of underlying principles and concepts. Both content (what) and process (how) are equally important for a successful turnaround.TURN AROUND MANAGEMENT
A turnaround is said to occur when a firm perseveres through an existence threatening performance decline. and achieves sustainable performance recovery. As a sequence of events describing how things change and why they change (i. skills.e.
. Stage Theory). While content focuses on endogenous and exogenous variables. process focuses on – A logic to explain a causal relationship between intervening variables. ends the threat with a combination of strategies.
Some indicators Continuous cash flow crises as a result of dwindling market-share and profits. unavailability or radical lowering of substitute costs or technological obsolescence. Low employee morale leading to high employee attrition at all levels. suppliers and bankers. Rising input costs. Uncompetitive products or services. 217
. leading to lack of acceptability from distributors and customers. Low stakeholder confidence. especially in key positions. Substantial shifts in consumer preferences.TURNAROUND INDICATORS
Most firms atrophy simply because they fail to diagnose the indicators that acts as threat to organizational existence.
“all is not well”. Recalibrate prices. Hence. which most top managers fail to appreciate.
. Extending work hours. focus on power brands. consider extension.. prune work-force. liquidating dead assets. Common approaches adopted Change in key positions. Emphasis on advertising and market penetration. be more customer centric. Revamp product portfolio. Product redesigning or reengineering.TURNAROUND ILLUSION
The first step to a successful turnaround is the basic acceptance of the fact that …. they adopt surface level measures (disprin popping) which most often fail. based on elasticity.
TURNAROUND STAGE THEORY
Stage 1 Decline Stage 2 Stage 3 Stage 4 Outcome
Success Failure Indeterminate
. R-Extinction – It suggests that organization factors.DECLINE
Decline is the first stage in the turnaround process. It has its origin in “environment led fit” that subscribes to the view that a firm has little control over external factors. primarily dwindling resources and capabilities are responsible for decline. 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. 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.
the response should be strategic. The response must match the cause of the decline.RESPONSE INITIATION
Turnaround responses are typically categorized as operating or strategic. diversification. Strategic responses focus on changing or adjusting the business the firm is engaged in through long term moves such as – integration. If the decline stems from structural shifts. the response should be operational. Operating responses typically focuses on the way the firm conducts business and involves tactics geared towards – cost cutting and process redesigning (BPR). If the underlying cause is internal efficiency.
. new market initiatives. asset reduction.
when decline deepens shifts in strategic position becomes essential.RESPONSE DICHOTOMY
The response initiation is somewhat dichotomous and cannot be universally applicable. Scope – A diversified conglomerate may acquire a distressed business to turn it around and gain valuable synergies. Contour – It is easier to reverse decline in the earlier stages through operational measures.
. Untangling this question brings into focus three events – Domain – Many of the strategic cures have limited applicability for an affiliated firm. which may be unavailable to a focused firm. Similarly new market initiatives is feasible only for multi-product firms.
The top management has a key role to play through empowerment. However. consensus). However. lead – lag).e. Effective levers of transition.e. Sustenance is the key factor in this stage. participative management (i. role model. transparency. Support from all the stake holders through resource commitment. many a times early signs of recovery fades out. confidence building measures.TRANSITION
Transition usually reflects the first signs of recovery. Empirical studies show that average time is 7.
. substantial amount of time usually passes before results begin to show (i.7 years with a range of (4-16) years.
it should adopt a holistic approach. Share price indications and media coverage. Cut off points must be unequivocal. Failure is an indication that initial momentum was not sustainable characterized by irreversibility. Regaining lost market share and distributor confidence. Instead of focusing on financial parameters alone.
Outcome is said to be successful when a firm breaches the equilibrium performance level. Commanding a premium in the market. Supplier and banker confidence. Revival of key customers and new product launches.
COOPERATIVE STRATEGIES & ALLIANCES
and globalization . In the cooperative strategy continuum as firms move up the value order. supply-chain partnership. or joint venture. More and more companies worldwide are moving away from competition to co-option to leverage their resources and enhance bargaining power. the commitment and the involvement between the firms increases manifold. Any cooperative strategy maybe between firms within the same country or cross border as well. strategic alliance. It can assume any of the following forms – franchising.
. technology.COOPERATIVE STRATEGIES
Cooperative strategies are a logical and timely response to changes in business dynamics. licensing. consortia.
It is an effective strategy to penetrate markets in a shortest possible time at a minimum cost. owners of the brand Monginis allows its franchisees to sell its confectionary products. owners of the brand Tanishq allows its franchisees to sell its jewellery products. Branding is critical to franchising. Switz Foods.FRANCHISING
Franchising – It is a contractual agreement between two legally independent firms whereby the franchiser grants the right to the franchisee to sell the franchisor’s product or service or do business under its brand-name in a given location for a specified period of time for a consideration. Titan Inds.
as in Tata Indica. Develop a product through its crude stage. HM manufacturing GM range of cars in India with a buy-back arrangement is a perfect example of CBU.LICENSING
Licensing – It is a contractual agreement between two legally independent firms whereby the licensor grants the right to the licensee to manufacture the licensor’s product and do business under its brand-name in a given location for a specified period of time for a consideration. refine processes and adopt necessary technologies (SKD).
. Different levels of licensing Manufacturing without embracing any technology (CBU). Become a systems integrator (CKD).
It can be of the following types – Multipartner – Intends to share an underlying technology or asset. Cross Holdings – A maze of equity holdings through centralised control to ensure earnings stability & threshold resources for critical mass (Eg.CONSORTIA
Consortia – They are defined as large inter-locking relationships & cross holdings between businesses in a similar industry. enabling them to increase prices (Eg. Airbus – Boeing). Hyundai). Collusion – Few firms in a matured industry collude to reduce industry output below the equilibrium level. leverage upon size to preempt competition by escalating entry barriers (Eg.
. Tata. Coke – Pepsi).
Companies in different industries with different but complimentary skills. Continuous sharing of knowledge is critical to the success of a supply chain partnership. It usually provides a platform to sort out differences between conceptualization and implementation to suit local market needs.SUPPLY CHAIN PARTNERSHIP
It is a pro-active & collaborative arrangement between supplier and customer aimed at achieving better control over the value chain (Eg. otherwise it 230 becomes routine outsourcing.
. Tata Motors – IDEA). link their capabilities to create value for end users.
design next generation products. to gain knowledge and to obtain access to new markets (Eg. Tata Motors – Fiat. effective R&D management. enter newer markets. Partner selection is one of the critical success factors. enhance credibility. Generic motives involved are . Despite their popularity (50-60)% of the alliances fail to accomplish their stated objectives.learning organization. instead of hurrying into a relationship. preempt competition.STRATEGIC ALLIANCE
It is an short to medium term understanding between two or more firms to share knowledge and risk.
. Firm’s should undertake a long courtship with potential partners. Reliance – Du Pont).
Airbus – Boeing). Bajaj – Castrol).
. Bootstrap – An alliance between a weak and a strong company with an intention to acquire it. Complementary Equals – Two firms mutually promoting each others complimentary products (Eg.TYPES
Collusion – Tacit top management understanding to neutralize price wars (Eg. Backward – An alliance (quasi or tapered) with a supplier of critical components seeking commitment (Eg. Maruti). Alliances of the Weak – An alliance is entered into to preempt competition (Eg. Whirlpool – Tide.STRATEGIC ALLIANCE . Coke – Pepsi).
– Japan Vs US). Firms from developed markets seek access to markets and firms from emerging markets seeking access to technology. Differences in level of economic development can produce differences in alliances motives.PARTNER SELECTION CRITERIA
It is likely that partners will not have complete consent on alliance objectives because the institutional context in which the alliance embedded varies from country to country.
. Cultural orientation has been found to have a profound effect on top management’s strategic orientation (Eg. Too much stress on financials & structure be avoided.
Complimentarity of Capabilities – The degree to which partners resources can be used in conjunction. Managerial capabilities. Unique Resources – Abilities or skills which cannot be easily duplicated.
. Willingness to share knowledge and skills. Dominant Logic’s – Similarity in beliefs & biases. including ability to provide quality products and services. Partner’s ability to acquire fresh skills. Experience related to previous alliances. Intangible Assets – Move beyond the financials of the firm.
Setting up the housekeeping. partners should nurture it.
. understanding the chemistry. degree of compatibility. incorporating clear signs of continuing independence for all partners. operational & cultural integration. vows to include commitment to expand the relationship. Changing within.MANAGING ALLIANCES
Alliances are more than just a deal. instead of focusing controlling the relationship. Getting Engaged – It should incorporate a specific joint activity. Learning to collaborate – strategic. Selection & Courtship – It involves self analyzing. the value chain. differences not anticipated earlier.
separation is very 236 bitter. a joint venture is a selection among modes by which two or more firms can transact.JOINT VENTURE
A joint venture is a long term association between two equal partners to create an independent firm (SPV) by complementing their resources and capabilities to explore newer businesses or markets for achieving a shared vision. It aims at creating new value (i.e. Conceptually.e.
. It lasts till the vision is reached. whilst the partners continue to operate independently. There are substantial linkages in the value-chain. combining parts). synergy) rather than mere exchange (i.
Strategic Behaviour – Firms may override transaction costs. in addition to a high degree of asset specificity.
. though more profitable alternative to other choices. It may also be linked to deterring entry or eroding competitors position. The market fails as sellers are unwilling to reveal their technology and buyers are unwilling to purchase in the absence of inspection.JOINT VENTURE – GENERIC MOTIVES
Transaction Cost – The situational characteristics best suited for a JV are high performance uncertainty. Organizational Learning – It is a means through which a firm learns or seeks to retain their capabilities.
Entry into newer markets. – Eg. Yamaha – Escorts. Essar – Hutch (Vodafone). – Eg. Sharing of resources. TVS – Suzuki (4-Stroke Engines) Fill gaps in existing product lines. Define future industry standards. Maruti – Suzuki. Endorsement from government authorities. Renault – Nissan (Minivans – Cars). – Eg. – Eg. Daimler – Chrysler (Premium Cars)
. – Eg. – Eg. Eli Lily – Ranbaxy. Learning new technologies.
LML – Piaggio Differences in size and resource base. – Godrej – Procter & Gamble.e. Risk of brain (i. Century . Risk of over dependence. PAL – Fiat If the cost of continuing exceeds the exit costs? – Eg. Tata – Aditya Birla in Idea Cellular
. – Eg.Enka. – Maruti – Suzuki.RISKS INVOLVED
Incompatibility – Differences in cultural background. Modi – Telstra What after exit (parenting disadvantage)? – Eg. technology) drain. – Eg.
PRE-REQUISITES FOR SUCCESS
Commitment – Mutual trust. time sharing. Objectives – Shared vision. Equality – Lack of dominance. Partner – Avoid duplication of skills and capabilities. Costs – Other modes of transaction becomes cheaper. Flexibility – Sufficient space to breathe and adjust. respect. Inertia – Differences in age and evolution patterns. Agreement – Clarity on operational control. Focus – Avoid strategic myopia. Incompatibility – Performance expectations. Culture – Reconcile gaps.
MERGERS & ACQUISITION
HLL – Tomco).
. SEBI Takeover Code. reverses are also taking place through LBO) with a view to acquire conglomerate power and induce synergy (Eg. Mittal Arcelor).MERGERS & ACQUISITION
A merger is a mutually beneficial consent between two or more firms (usually of similar size) to form a newly evolved entity by absolving their individual entities to preempt competition (Eg. Brooke Bond – Lipton). An acquisition is said be smooth if it is with the consent of the management (Eg. An acquisition is the purchase of a firm by a firm (of larger size. The larger objective is to leverage on size. Most countries have stringent laws that prevents hostile takeovers (Eg. 2002). however.Daichi) and hostile if it is without the consent of the management (Eg. Ranbaxy .
e. Control – A special resolution of 75% of the share 243 holders approving the change of guard. Preferential – A preferential allottee ending up acquiring 5% stake also comes under its purview. creeping acquisition).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. Hike – An acquirer who has already picked up a 5% has to make a mandatory disclosure for every additional 1% stake that it acquires. Acquirer – Someone (individual or firm) who picks up an atleast 5% stake without mandatory disclosure having an intention to wrest management control (i.
the SEBI can intervene and block share transfers if: the acquirer has ulterior motives (i. 2002
Pricing – Acquirers will have to offer minority shareholders (at least 20%) the past 26 weeks or past 2 weeks average price. Gujarat Ambuja – ACC). and/or does not enjoy the confidence of the different stake holders. asset stripping). SEBI – In case of a hostile take over.e.SEBI TAKEOVER CODE. Grasim – L&T Cement.
. credentials or track record is at stake. Disclosure – All acquirers have to inform the respective stock exchanges where it is listed and SEBI upon acquiring the basic limit and upon every incremental limit thereon. whichever is higher as an exit route (Eg.
Conglomerate – It involves integration of two distinctly unrelated businesses. Reliance). Vertical – It involves complimentarily (partially related) in terms of supply of inputs or marketing activities (Eg. ITC).
. The type of merger is depends on the degree of relatedness (strategic) between the two businesses. Godrej. Electrolux . usually opportunistic (Eg.TYPES OF MERGERS
A business is an activity that involves procuring of desired inputs to transform it to an output by using appropriate technologies and thereby creating value for its stake holders in the process. Horizontal – It involves integration of two highly related businesses (Eg.Kelvinator).
Reduction in risk.MERGERS & ACQUISITION . Tata Steel – Corus). Ranbaxy – Crosslands). Acquiring assets or capabilities (Eg.MOTIVES
Increased market / conglomerate power. Coinsurance effect – Higher debt raising capability. Global image (Eg. Asset Stripping – Shaw Wallace). Avoiding risk of new product development. ICICI –ITC Classic). Overcoming entry barriers (Eg. quick access).
. Mittal – Arcelor). Reduced gestation (i. Ulterior motives – (Eg. Access to newer segments (Eg. Tax benefits (Eg. Economies of size. scale and scope.e. ITC Bhadrachalam).
Overvaluation of buying firms (Eg. When Tata Steel started negotiations with Corus. Inability to achieve synergy. Overvaluation is often as a result of an ego drive and substantially affects future returns. Managing size. Managing over-diversification.
. neglecting core business. Merging of organisational structures. Top management overtly focused on due diligence exercise and negotiations. their initial offer was around 420 pence/share. Tata – Corus). while the ultimate acquisition was made at 607 pence/share).MERGERS & ACQUISITIONS PITFALLS
Cultural differences (Eg.
vertical to save transactions costs. Kingfisher – Air Deccan). Growth – This stage may witness parallel merger of two firms of similar size. Brooke Bond – Lipton). with an objective to reinforce its growth trajectory or to take on the might of a comparatively larger player (Eg. Tata Steel – Corus). Decline – Horizontal mergers are undertaken to ensure survival. Maturity – A larger firm acquires a smaller firm with an objective to achieve economies of scale and experience curve effects (Eg.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.
Immediate attempts to super impose structure and culture may cause bottle necks. A common shared vision. A concern of respect and trust for the business of the acquired company. Strong differences may stifle plans and its execution.FRAMEWORK
Positive contribution to the acquired company.INTERNATIONAL M&A . active top management intervention in phases. Blanket promotions across entities and confidence building exercises needs to be practiced. An acquisition just for the sake of it or reputation yields very little value in the long term. Left alone syndrome.
It will enable focus on customers and key people. Decide upon management control systems. Shift attention from business portfolio to people and processes. They can carry the message to the various stake holders. Decide on the new hierarchy.INTEGRATION . Redefine responsibilities and authority. promptly. Integrating work processes. Determine business strategy. 250 Do not ignore the “people factor”.BLUEPRINT
Take the media into confidence.
The process takes (6-12) months. Financial motives – Undervaluation relative to true value. – Unstated reasons – Personal self interest and hubris.VALUATION
The process of valuation is central to M&A.M&A .e. operational & financial). While under valuation may be a significant opportunity. – Market for corporate control. over valuation can become a curse. – Synergy – Potential value gain from combining operations (i.
. Valuation decisions are arrived through a due diligence process when the prospective acquirer gets access to the books of accounts of acquiring company.
Sources of operational synergy – Horizontal Synergy – Gains come from economies of scale which reduces costs. – Vertical Synergy – Gains come from controlling the supplychain and savings in transaction costs. Synergy can be negative as well.VALUING OPERATIONAL SYNERGY
Synergy – It refers to the potential value gain where the whole is greater than the sum of the parts. when the “fit” between the two entities is very poor. or from increased market power which increases sales and margins. Innovative product – Good distribution network). – Conglomerate Synergy – Gains come when one firm complements the resources or capabilities of another (Eg.
and without paying take-over premiums. ITC – Bhadrachalam Paper).
. Synergy comes from projects which would not have been undertaken if the two firms stayed apart (Eg. Cash Slack – It reduces asymmetry between cash starved firms with deserving projects and cash cows with no investment opportunities. shareholders can accomplish the same at a much lesser cost. However. Hotmail). Tax Benefits – Tax benefits may accrue from tax entitlements and depreciation benefits unutilized by a loss making firm.VALUING FINANCIAL SYNERGY
Diversification – Reduce variability in earnings by diversifying into unrelated industries. but availed after being merged with a profitable firm (Eg.
– Default risk comes down and credit rating improves. It relates to the concept of diversification. 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. as risky debt is spread across the new firm's operations. the cash flow the merged firm will be less variable than the individual firms.VALUING FINANCIAL SYNERGY
Co-Insurance Effect – If the cash flows of the two firms are less than perfectly correlated. This will induce higher debt capacity. – Coupon rates may also be negotiated at lower rates.
. higher leverage.
. The value of wrestling control is inversely proportional to the perceived quality of that management. While value of corporate control is negligible for firms that are operating close to their optimal value. Assessment of perceived quality is critical. – – Value of Control = Value of firm after restructuring Value of firm before restructuring.VALUING CORPORATE CONTROL
Premium of M&A are often justified to control the management of the firm. since a restructuring can lead to significant increase in value. The value of control can be substantial for firms that are operating well below optimal value.
The assets of the acquired company are used as collateral for the borrowed capital. Confidence of investment bankers and the international financial community is essential.e. debt component) at the time of buyout and rapid changes in capital structure over time. It is a very costly and risky proposition.
. sometimes in combination with the assets of the acquiring company. LBO facilitates a relatively smaller firm to bid for a comparatively larger firm in the bid for management control.LEVERAGE BUYOUT (LBO)
The basic difference between a take-over and a LBO is the high inherent leverage (i.
TO GO PUBLIC OR NOT?
However. A research study showed that 30% of the publicly listed firms reported above average returns after going private. liquidity. However. – The need to satisfy analysts and shareholders. the advantages of going public includes . off-late many publicly traded firms have gone private keeping in mind the following – – The fear of LBO. – Increased information needs. on-going valuation.
. The increased benefit showed in the following way – reduced costs and increased revenue. – Separation of ownership from management.access to financial markets.
co-insurance effect). 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.
.e.RATIONALE FOR HIGH LEVERAGE
The high leverage in a LBO can be justified by – – If the target firm has too little debt (relative to its optimal capital structure). – It is a temporary phenomenon. – Cost of debt coming down (i. – Managers cannot be trusted to invest free cash flows wisely. – Cash trapped company unable to utilize opportunities.
Any discounting has to reflect these changing cost of capital. Therefore. 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. initial rise in leverage is anticipated.
.EFFECT OF HIGH LEVERAGE
Increases the riskiness of dividend flows to shareholders by increasing the interest cost to debt holders. – Increase equity valuation. As the firm liquidates / pledges assets and pays off debt. leverage is expected to decrease over time.
or costly. which has discontinued its operations (i. Objectives – – Traditional route of filing prospectus and undergoing an IPO is costly. allowing the private company to bypass the usually lengthy and complex process of going public. time-barred. – Facilitates better valuation and forthcoming offerings. – Tax shelter.
.e. small in size but having a promising business. – Automatic listing in major exchanges. – Prevents dilution of equity. shell company) by a private company.REVERSE MERGER
Reverse Merger – The acquisition of a public company.
– Merger announcements reported 20% excess returns. and 35% during bullish periods. Excess returns also vary across time periods. – Takeover announcements reported 30% excess returns.EFFECT OF TAKE-OVER ANNOUNCEMENT
The shareholders of target firms are the clear winners. Most target firms are taken over within (6090) days. takeover failures have only initial negative effects on stock prices. Initial anomaly in stock prices usually normalizes over a period of time (6-12) months.
. However. During bearish periods excess returns were 19%.
Brickley. as stock markets become more and more perfect such anomalies would reduce Source: Jensen and Ruback. and Kim.EFFECT OF TAKE-OVER ANNOUNCEMENT
The effect of take-over announcement on bidder firm’s stock prices are not clear cut. – However. and Netter. 1983. 1983. – However. 1988
. Desai. Bradley. – Most studies reported insignificant excess returns around take-over offers or merger announcements. over time.
Jarrel. in the event of take-over failure negative returns to the extent of 5% on bidder firm stock prices is reflected.
. Asset Stripping – The targeted company hives off its key assets to another subsidiary. Poison Pill – An offer to existing shareholders to buy shares at a substantial discount to increase their voting rights (Eg. Rights).DEFENSIVE STRATEGIES
Golden Parachute – An employment contract that compensates top managers for loss of jobs as a result of change in management control. Poison Put – Premature retirement of bonds at attractive rates to pour surplus cash and make target investment unattractive. so that nothing is left for the raider to strip off.
Pac Man – The target company makes a counter bid to take over the raider company. Gray Knight – The target company takes the help of friendly company to buy the shares of the raiding company. Shapoorji Pallonji). East India Hotels – Reliance Industries – ITC). thus thwarting the raider company’s attention.
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. Green Mail – The targeted company buys large blocks from holders either through premium or through pressure tactics (Eg.
COMPETING FOR THE FUTURE
GETTING OFF THE TREADMILL
Canon overpowering Xerox. Nokia overpowering Motorola. Wal-Mart overpowering Sears. British Air overpowering Pan Am. The reverse was true for the companies overpowering. Most companies were too preoccupied with the present than the future? 99% of the companies overpowered. Honda overpowering GM. Hitachi overpowering Westinghouse. Compaq overpowering IBM. Honda overpowering Volkswagen. were spending 99% of their precious time dealing with present. What went wrong???? What were they doing with the present? What were they pre-occupied with?
Thus efficiency was grievously hurt. Not knowing when to stop. downsizing).THE PAST OF COMPETITION
Beyond Restructuring – When a competitiveness become inescapable problem (stagnant growth. CEO’s brutally pick up the knife and ruthlessly carve away layers of corporate flab (delayering. declining margins. falling market share). most often they ended up cutting corporate muscle as well and became anorexic. 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)
On the contrary only 20% of Japanese managers believed that quality will be a source of competitive advantage of the future. incrementalism or nominal innovation has almost reached a plateau. The future is not about catching up with competition. top managers believed that quality will be a source of competitive advantage of the future. A poll in circa 2000 revealed that 80% of the U. but not of the future. ensuring only survival of the present.
. but forging ahead in competition.S. However.THE PRESENT OF COMPETITION
Beyond Reengineering – Numerator based managers (innovation) at least offers some hope.
not the other way. reinvent its industry. and regenerate its strategies (breaking its – managerial frames). Companies need to fundamentally reconcieve itself. as important as these may be. Creating the future requires industry foresight. Empower from bottom to top. demographics and lifestyles. they are not enough to get a company to the future.THE FUTURE OF COMPETITION
Regenerating – Leaner. Create a potential gap.
. It is based on deep insights into trends in technology. better. It involves Dream about the company’s future. aspirations and resources. don’t predict. not just the organization. Transform the industry. faster.
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?
It is about deliberately creating a strategic misfit. blue oceans). Create entirely new industries (i. hence do not fall sick in the first place. by converging technologies complex. It drives a hunger and a passion to transform. they do not need to restructure.
. Therefore. Successful companies have a complete grip over the industry.ABOUT THE TRANSFORMATION
The future does not belong to those who take the industry for granted. Change in at least one fundamental way the rules of engagement in an industry.e. Redraw the boundaries between industries.
Such a process is called institutionalization (from people centric to organisational centric). A revolution that is thrust upon from the top seldom sustains. Transformational leaders merely lead the way.ABOUT THE EMPOWERMENT
Bring about a revolution (a paradigm shift) in the organization. the revolution must start at the bottom and spread in all directions of the organization. Most successful revolutions (Gandhi to Mandela) rose from the dispossessed. More importantly. 272
. The middle management plays a strong moderating role.
. An ability to energize the company. What does it take to get to the future first? Understanding how competition for the future is different. without taking undue risk. It requires a lot of common sense and a little bit of out of the box thinking. A process for finding and gaining insight into tomorrows opportunities (Eg. South West Airlines – LCC. Companies need to strategize (think ahead of times). Get to the future first. Toshiba – LCD. Apple – iphone).THE FUTURE OF STRATEGY
A company must get to the future not only first but also for less. Apply the 40 – 30 – 20 principle.
but hundreds. What distinguishes a leader from a laggard.HOW DOES THE FUTURE LOOK LIKE?
There is no rule which says that for every leader there will be a follower. each point in space represents a unique business opportunity. Companies of the future will be not based so much on the strength of their resources. as on their aspirations. As there is no one future. the farther it will be away from competition.
. We are in the midst of a 3600 vacuum. The farther one can see in this endless space. is the ability to imagine in a different way what the future could be. greatness from mediocrity.
THE EMERGING STRATEGY PARADIGM
The Competitive Challenge
Organizational Transformation Industry Transformation Competing for Market Share Competing for Opportunity Share
Finding the Future
Strategy as Learning Strategy as Positioning Strategy as Engineering Strategy as Unlearning Strategy as Dream Strategy as Architecture 275
THE EMERGING STRATEGY PARADIGM
Not Only But Also Mobilising for the Future
Strategic Fit Resource Allocation Strategic Misfit Resource Stretch & Leverage
Getting to the Future First
Existing Industry Structure Product Leadership Single Entity Product Hits & Timing Future Industry Structure Competency Leadership Dominant Coalitions / Co-option Market Learning & Preemption 276
Learning Curve t1 t2 t3 Time t4 t5
Degree of Learning
Unlearning Curve P2: Unlearning in previous period does not necessarily ensure learning in the current period.LEARNING TO FORGET
P1: The degree of learning in current period is directly proportional to the degree of unlearning in the previous period.
It cannot be matched even by its closest competitors. Inimitable & Insubstitutable – A high degree causal ambiguity between these skills yield sustainable competitive advantage.
. It is characterized by the following – Unique – It provides unimaginable customer value ahead of its times. Leverage – They are the gateways to future markets. It represents the collective learning's of an organization centering around diverse streams of technologies.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.
A core competency cannot be outsourced. Toshiba – flat screen displays. Toyota – lean manufacturing. Intel – nano-electronics.MORE ABOUT CORE COMPETENCE
Sony – miniaturization. Coca Cola – brand. it is deeply embedded in the heart of the organization. at the most three to four. Although a core competence may lose value over time.
. Nike – designing. leaders have one. Wal-Mart – logistics. Most companies around the world do not possess one. Canon – imaging. it gets more refined and valuable through use. Core competencies are the roots of the organization. SKF – antifriction and precision. Honda – engines.
ROOTS OF COMPETITIVENESS
Core Business 1
Core Business 2
Core Business 3
Core Business 4
Core Product 2 Core Products Core Competencies Core Product 1
Competence 1 Competence 2 Competence 3 Competence 4 280
RESOURCE STRETCH & LEVERAGE
Initial resource position is a very poor indicator of future performance. It leads to atrophy and stagnation. Successful companies consciously create a potential gap between aspirations and resources. Resource crunch is a common factor among firms that faces a wealthy rival, and outperforms them. Leveraging what a company already has, rather than allocating it is a more creative response to scarcity. – By concentrating existing resources. – By accumulating existing resources. – By complementing existing resources. – By conserving existing resources. – By recovering existing resources.
Concentrating – It involves effectively directing portfolio of resources on key strategic goals in which individual efforts converge over time. It is a balance between individual mediocrity and collective brilliance. It is achieved through – Converging – Redirecting multiple diverging (i.e. fragmented) short term goals into one long term goal. It is then resources can be stretched over time. Focusing – Making trade-offs and preventing dilution of resources at a particular point of time. Targeting – Focusing on the right innovations that are likely to have the biggest impact on customer value.
Accumulating – Using existing reservoir of resources to build new resources. Each and every individual is a rich & potential source of learning, discover better ways of doing things. It is achieved through Mining – Extracting learning experiences from existing body of each additional experience (i.e. success or failure). It is an attitude that can be acquired, but never learnt. It leads to a substantial jump in the experience curve. Borrowing – Utilizing resources outside the firm through licensing, alliances, joint ventures. A firms absorptive capacity is as important as its inventive capacity.
Complementing – Using resources of one type with another that aligns smoothly to create higher order value. In a way it produces an accelerating effect on each individual resource. It is achieved through – Blending – Interweaving discrete capabilities to create world class technologies (GM – Honda) through integration and imagination. Different functional skills can also be blended to create a world class end products (Yamaha – Keyboard). Balancing – An ability to exploit excellence in one area is never imperiled by mediocrity in another (GE acquiring the CT scanning rights from EMI because of its inadequate market reach).
Conserving – Sustaining competencies over time through frequent usage. Resources are never abandoned; they are always preserved for future use. Recycling – Increasing the velocity of use of a competencies over time. As a result core competencies can be leveraged across an array of products (Sony - Betamax). It includes brand extensions as well. Co-Opting – Enticing resources of potential competitors to exercise influence in an industry (Fujitsu – IBM). Shielding – It involves identifying competitors blind spots and then attacking without having the fear of retaliation.
Recovering - It is the process of reducing the elapsed time between investing in resources and the recovery of those resources in the form of revenues via the market. Speeding – Prior to the 1980’s Detroit’s majors took an average of 8 years to develop an entirely new model; the Japanese reduced it to less than 4.5 years, with major new variants in 2 years. This envisaged Japanese players in giving customers more opportunities to switch allegiance and loyalty (Toyota). Protecting – It uses competitors strength to one’s own advantage, by deflecting it, rather than absorbing it as practiced in Judo.
INTERNATIONAL BUSINESS ENVIRONMENT
Chile) provide a different context (i.
. Therefore. Emerging markets are characterised by infrastructural bottlenecks.EMERGING MARKETS
Emerging markets (India. Therefore focused strategies based on core competence may not be suitable for emerging markets (Khanna & Palepu. Diversified groups in operating in emerging markets therefore benefit from unrelated diversification. 1997). China. high levels of market imperfection). institutional gaps.e. and high transaction costs. strategies suited for the developed markets may not be appropriate for emerging markets. Korea.
Synergy. subsequently negatively related across developed markets. Optimum level of diversification
Diversity is initially positively related with performance.DIVERSITY . Experience Strategic Fit
Palich. et al. Size & Scale. (2000)
. Concentric. Entropy).PERFORMANCE (I)
Diversity attempts to measure the degree and extent of diversification (Herfindahl.
subsequently positively related across emerging markets. Huge initial investment. 2001)
.DIVERSITY . conglomerate power Threshold level of diversification
(Khanna & Palepu. brand building Risk diversification.PERFORMANCE (II)
Diversity is initially negatively related with performance.
act locally (Eg. It should have a spread of interest groups / stake holders.
. HSBC).INTERNATIONAL IDENTITY
MNC’s consciously engage in FDI in different parts of the globe to forge resource diversity as a distinct competitive advantage. It should think globally. revenues and profits. It should have a spread of assets. Characteristics – It should have a spread of affiliates or subsidiaries. It should have a spread of manufacturing facilities.
low risk profile in developed markets and vice versa for emerging markets). high feminity index in developed markets and vice versa for emerging markets).It reflects the relative role of team building (Eg.
. Group Scale . low group scale in developed markets and vice versa for emerging markets). low power distance in developed markets and vice versa for emerging markets).It reflects the disparities in women in workforce (Eg. Feminity Index . Risk Profile – It reflects the risk attitude of the top management (Eg.GLOBAL BUSINESS ENVIRONMENT
Power Distance – It reflects the disparities in income and intellectual development (Eg.
GLOBAL BUSINESS ENVIRONMENT
Cultural Adaptability – It reflects the adaptive ability to a changing environment . political stability. dress sense.culture. flexibility (Eg. low country risk in developed markets and vice versa for emerging markets). judiciary) of doing business in a particular country (Eg. interest rates. credit rating. customs. Country Risk – It reflects the political and economic risk (Eg. inflation.
. corruption. way of life. currency. terrorism (9/11). high cultural adaptability in developed markets and vice versa for emerging markets). attitude. time value. code of conduct. FOREX reserves.
however. Other factors – local celebrations. High levels of ethnocentrism usually has a negative effect on business. Ethnocentrism – Developed country managers tend to regard their own culture as superior.GLOBAL BUSINESS ENVIRONMENT
Time Sensitiveness – Developed country managers regard time as precious. and vice-versa. Language Barriers – Developed country managers expect foreign partners to communicate in their languages. in most emerging markets meetings are delayed and lasts unusually long. time-zones. in most emerging markets use of an interpreter may be a standard protocol.
It also highlighted the nexus between US & WTO. It focused largely on TRIPS (patents. The 2001 (Doha Round) focused on power blocks (NAFTA. trademarks). The 1999 (Seattle Round) saw a lot of protest amidst bringing agriculture under the purview of TRIPS. copyrights.GATT
GATT was a bi-lateral treaty initiated between US and some member countries in 1947 to promote free trade. It also initiated provisions on anti-dumping. In 1995 (Uruguay Round) GATT was renamed to WTO. BRIC). ASEAN. It a multi-lateral treaty with 143 (as on 2002) member countries to reduce tariff and non-tariff (quota) barriers.
. three countries joined in 2002 increasing it to fifteen members as of 2008.e.e. the Dollar still remains the most preferred currency globally. However with current recession in the US 2002 onwards. Sterling . The Euro was significantly devalued against the Dollar till 2002. Euro). the Euro slowly started outperforming the Dollar. The notable exception was Great Britain which still continues with its local currency (i. However. primarily the OPEC countries.EURO – SINGLE CURRENCY
In 1999 twelve member countries in Europe joined hands to move over to a single currency (i.Pound).
but it may have spill-over effects. Transparency – A single currency is transparent and competitive. Trade Block – It will strengthen the EU identity which would not have been possible otherwise. a multiple currency is preferable where the business cycles of member nations are different. it helps avoiding transaction costs associated with a multiple currency. However. Rate Uncertainty – A single currency eliminates the risk of competitive devaluations.SINGLE Vs MULTIPLE CURRENCY
Transaction Costs – Though the initial cost of introduction of a single currency is very complicated and costly.
It is long term with high levels of commitment. the gain of one country is loss of another). It is short-medium term with comparatively low levels of commitment. – FII (transfer of intangible resources) is fast but may have strong repercussions (i.e.FII Vs FDI INVESTMENT
Classical economists believed that foreign investment (in any form) is basically a zero sum game (i.
. Neo classical economists believe that foreign investment may in fact be a win-win game. hot money).e. – FDI (transfer of tangible resources) is slow but steady for the purpose of economic growth.
culture (food habits). Distribution – It depends on the market characteristics (fragmented – concentrated). Pricing – It depends on the competitive structure (PLC – Kellogg's). economic (middle class buying power).
Product – The various attributes of a product may receive different degrees of emphasis depending on differences in . usage (talk time). promotion (surrogate advertising). lifestyle (petroleum 299 outlets – departmental stores). buying patterns (spread). technology (microchip). customer awareness (microwaves).
Accounting Norms – The accounting norms of one country (AS . Cost Structure – Companies in India need to investment in fixed costs due to poor infra-structure 300 compared to developed markets. Leverage – The leverage may vary across countries depending upon money and capital market conditions (Eg.India) may be different from that another trading country (US – GAAP or IRS). equity is cheap in India). debt is cheap in US.INTERNATION FINANCE
Currency Risk – Many Indian IT companies (Rs) having business in US (Dollar) are asking for quotes in (Euro) or are shifting bases out of US to avoid risk of devaluation of Dollar.
double taxation. skills are more important that cultural fit and vice-versa. shortened life cycles). in most cases it is not desirable nor practiced. Training – It is a pre-requisite for international business to reduce language. however. social security.
. and cultural barriers (language) vis-à-vis emerging markets. technology (convergence. Compensation – Differential pay packages exists because of differences in purchasing power.INTERNATIONAL HR
An uniform HR policy is idealistic to enable parity in performance appraisal. Recruitment – In local recruitment. labour laws.
SCM – Use of ERP to network the extended enterprise 302 across the globe. Technology – The cost to be evaluated in terms of latest technology (Euro VI) vis-à-vis effective cost of appropriate technology (Euro II).
. Outsourcing – A company having a core competence may be the source of global outsourcing (Eg. Bosch spark plugs are used by car manufacturers worldwide).INTERNATIONAL OPERATIONS
Location Incentives – FDI in emerging markets should explore options for SEZ’s to explore benefits (tax holidays. reduce power costs) vis-à-vis infrastructural bottlenecks.
innovation is the first attempt to carry it out in practice.INNOVATION
An invention is the first occurrence of an idea for a new product or process. it has destructive effects as well. While innovation typically adds value for organizations. but has inherent risks involved as well. Innovation is the most preferred strategy today to maintain competitive advantage in the present turbulent business environment.
. Innovation is all about staying ahead of competition. Innovations typically paves the way for more secured and improved lifestyle for consumers in general.
. process innovation is necessary to sustain the competitive advantage of product innovation. While product innovations are typically customer driven. Tangible impact of product innovation on performance is significantly higher than process innovation. Process innovation usually follows product innovation.TYPES OF INNOVATION
A key challenge is maintaining a balance between process and product innovations. process innovations are organizational driven. However. Strategic innovation has the potential to change the rules of the game.
Data Storage (Pen Drives). Medical Surgery (Lasik). about how an organization makes money (i.e.
. It leads to a shift in the price – performance envelope. Disruptive business models brings in a new frame of reference (i. Processors (Pentium). Innovations are the back-bone of successful business models . a paradigm shift). Telecom (CDMA Technology).e.BUSINESS MODEL
It is a simplified description and representation of a complex real world. putting an idea into practice). Drug Development (Bio Chemicals).
The key resources and capabilities required. The proposed relationships established with clients. The key activities / processes necessary for execution.
. The revenue streams generated by the activities. The key partners involved in the activities. The segment(s) of clients to be addressed. The channels to reach out to the clients. The cost structure resulting from the business model.NINE BUILDING BLOCKS
Value proposition offered to the market.
BUSINESS MODEL FRAMEWORK
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. With the rapid erosion of certain industries (IT. innovative companies to carve out unique business models to fend off competition. Investment Banking. It is just one piece of the puzzle. It involves – Product Visualization – Product Prototype – Product Test – Capacity – Pricing – Distribution.REVENUE MODEL
Positioning is just not sufficient.
Allow the workforce idiosyncrasies for their errors. A favourable intellectual property (IP) climate.HOW TO MAKE INNOVATIVE CO’S
Innovative company’s are a matter of culture and aspirations rather than tangible resources. Promote the culture of experimentation. Provide reasonable incentives (not necessarily monetary).
. Allow the management sufficient slack to be future oriented. Have a lean and a flat organization structure. Promote the grape-vine.
The most preferred strategy of internal protection includes imbibing “causal ambiguity” in the production process to make reverse engineering difficult.HOW TO PROTECT INNOVATION?
Without adequate protection (external or otherwise) the effects of innovation does not translate to performance. Collusion with the judiciary is also another distinct possibility in emerging markets. companies are increasingly relying on internal protection to sustain innovation effects. In most emerging markets where the IP climate is not so favorable.
. however that possibility is slowly atrophying.
Corporate governance aims to reduce the principal-agent problem present in most professional managed organizations through appropriate forms of accountability and control mechanisms. In fact the principles of corporate governance implies that managers go beyond in satisfying the stated and unstated needs of the multiple stakeholders.CORPORATE GOVERNANCE
The basic theme of corporate governance is to ensure that professional managers are identified and made accountable in terms of clear business processes or activities and held responsible through adequate mechanisms & control systems for channelizing their decisions for the benefit of stakeholders at large.
From the strategic point of view managers tend to diversify into unrelated businesses as it provides higher returns hence a more favourable appraisal. also known as the principal-agent problem or agency dilemma. However. According to the agency theory top managers and shareholders interests are usually conflicting in nature and tend to pull in opposite directions. shareholders can diversify their portfolio at a much lesser risk and cost. This exposes the shareholders to additional risks and higher costs.AGENCY THEORY
The root of Corporate Governance goes back to the Agency Theory. not present in portfolio diversifications.
After the Enron downfall. various laws were enacted to ensure proper usage of these funds. 2002 to restore public confidence in corporate governance. defines corporate governance (headed by Kumar Mangalam Birla) as the acceptance by management of the inalienable rights of shareholders as the true owners of the corporation and of their own role as trustees on behalf of the 314 shareholders.ORIGIN & CONTEXT
Since the early 20th century since a large part of public funds were held by publicly traded firms in the US. the US government passed the Sarbanes – Oxley Act. SEBI Report – 2005.
including the society at large. The key roles of chairperson and CEO should not be held by the same person and their offices be clearly separated. Interests of other stakeholders: Recognize the legal and other obligations of all legitimate stakeholders.
. Role and responsibilities of the board: It deals with issues about an appropriate mix of executive and nonexecutive directors.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.
Independence of the entity's auditors: Identification. assessment and mitigation of risks and retirement by rotation over a fixed period of time.GOVERNANCE PRINCIPLES
Integrity and ethical behaviour: Organizations should develop a code of conduct for their top management that promotes ethical and responsible decision making.
. They should also implement systems to independently verify and safeguard the integrity of the company's financial reporting.. Disclosure and transparency: Disclosure of information should be timely and balanced to ensure that investors have clear access to data and facts.
However. Remuneration: Performance-based remuneration is designed to relate some proportion of salary to individual performance. Balance of power: The simplest balance of power is very common.GOVERNANCE STRATEGIES
Monitoring by the board of directors: The board of directors. a person benefitting from a decision should abstain from it. with its legal authority to hire. Regular board meetings allow potential problems to be identified. they should provide no mechanism or scope for opportunistic behaviour. safeguards invested capital. fire and compensate top management. discussed and resolved.
who had no management ties. and was responsive to investors' requests for information on governance issues. Egypt and Russia) to around 40% for Canadian & European companies. undertook formal evaluation of its directors.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 wellgoverned companies. They defined a well-governed company as one that had mostly out-side directors. from 10% for companies where the regulatory backdrop was least certain (those in Morocco. The size of the premium varied by market.
the short-term view of profit maximisation gave way to a more broader and mediumterm view wealth maximisation of the shareholders. However.SHAREHODER – STAKE HOLDER THEORY
Till the early part of the 20th the basic objective of modern organizations was to provide goods and services for public consumption for profit maximisation. The basic premise is that firms cannot exist in vacuum. Therefore. today economic institutions are considered as a major drivers of improvement in quality of life in general and therefore needs to include multiple stakeholders. corporate philanthropy should be a part of every corporate mission. Over a period of time.
Therefore. the debate on CRS still continues whether firms should detract its focus from its business?
. CSR can be defined as. economic and social responsibilities cannot be mutually exclusive. in fact a large part of it is significantly overlapping.CORPORATE SOCIAL RESPONSIBILITY
As Peter Drucker rightly pointed out that. However. “a healthy business cannot exist in a sick and impoverished society”. giving a very important message that one cannot exist without the other. “an enterprises decisions and actions being taken for reasons at least partially beyond its immediate economic interests”. Therefore.
MRTP).GROWING CONCERN FOR CSR
Awareness due to education: With growing literacy. Public image: Entrepreneurs are increasingly relying on public image as a source of competitive advantage and a higher financial discounting. 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.
. eco efficiency. and extended producer responsibility (Eg. Exide – Product take back). Cement .Paper packaging. designing eco-friendly products. Aditya Birla Research Centre – LBS). Tata Steel – Life Line Express).CSR STRATEGIES
Green Supply Chain Management: It includes environmentally preferable purchasing. Health & Hygiene – Attending the health hazards due to wastes and by-products to employees and society in proximity (Eg. Refrigerators – CFC. Education. Literacy & Training Programs – (Eg.
Strategic innovations leading to disruptive business models can show the way out. K.
. C. they're helping millions of the world's poorest people to escape poverty. They represent an enormous opportunity for companies who learn how to serve them. Prahalad notes that future markets exist collectively. In turn companies by serving these markets.BOTTOM OF THE PYRAMID
With the market across most developed markets including the US getting saturated. across the world's billions of poor people having immense untapped buying power.
BLUE OCEAN STRATEGY
profitable growth. In today’s red oceans. where most industries are saturated. and struggled for differentiation (cost or product). They have fought for profits.
. competing head on results in nothing but a bloody red ocean of rivals fighting over a shrinking profit pool. battled over market-share. one companies gain is always at the 326 cost of another companies loss.WHAT IS RED OCEAN?
Companies have long engaged in head-to-head competition in search of sustained. Yet in today’s overcrowded industries.
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 is only the frames of the
.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 . it will exist 327 in the future as well. Such strategic moves are possible through the pursuit of product differentiation and low cost simultaneously.
RED OCEAN Vs BLUE OCEAN
Compete in existing markets Compete in uncontested markets Beat the competition Exploit existing demand Make the competition irrelevant Create and capture demand
Make the value-cost trade off Break the value-cost trade off Demand is the limiting factor Supply is the limiting factor
. Demand across developed markets reaching a plateau. Niche markets & monopoly havens are continuing to disappear.BLUE OCEAN STRATEGY IMPERATIVES
Prospects in most established market spaces – red oceans – are shrinking steadily. As trade barriers between nations & regions fall. of European nations. Technological advances have substantially 329 improved industrial productivity. Population shrinkage across a no. information imperfections atrophy instantly.
the underlying technology was often already in existence. They are not necessarily about technology. managerial moves are. Incumbents often create blue oceans within the ambit of their core business.CONCEPTUAL UNDERPINNINGS
Blue oceans have existed in the past and will exist in the future as well. Company & industry are the wrong units of 330 strategic analysis. 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).
BLUE OCEAN .IMPLEMENTATION
Which factors to be reduced below the industry standard
Which of the industry factors that the industry takes for granted should be eliminated
Which factors should be created that the industry has not offered
Which of the factors should be raised above the industry’s standard
Buyer Utility (1)
Is there exceptional buyer utility in your business idea?
Is your price easily accessible to the mass of buyers?
Blue Ocean Strategy
What are the adoption hurdles in actualizing your business idea? Are you addressing them up front?
Can you attain your cost target to profit at your strategic price?
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. Citibank – Automated teller machines & credit 333 cards.
. Sony Play Station: Redefining machine-human interface in entertainment and targeting an altogether new user base. Southwest Airlines: Pioneering the concept of LCC.
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 managers need not be constrained to act within the confines of their industry. companies & managers are largely at the mercy of economic forces. According to this view. Off late emerging views in strategy having its origin in (Organization Theory) led to a paradigm shift to what is called the – reconstructionist view. greater than themselves. All they need to do is change their managerial frames.