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Course Code: 611 & 612 Dr. Subir Sen – Faculty Member, IBS
E-Mail: email@example.com, 9830697368 1) Crafting & Executing Strategy – Thompson & Strickland. 2) Strategic Management – Pearce & Robinson. 3) Strategic Management – Fred. R. David. 4) Exploring Corporate Strategy – Johnson & Scholes. 5) Competitive Advantage – Michael E. Porter. 6) HBR – Articles & Case Studies.
STRATEGY - DEFINITION
Strategy is all about making trade-offs between what to do and more importantly what not to do; consciously choosing to differentiate. It reflects a congruence between external opportunities and internal capabilities. Types of strategies – Corporate Strategies – It is all about making choices across various businesses and allocating resources among them. Business Strategies – It is all about developing leveraging and sustaining competitive advantage. Functional Strategies – It is all about finding newer ways to perform existing processes, or 3 better still adopting new processes altogether.
STRATEGIC MANAGEMENT DEFINITION
Strategic management attempts to integrate the traditional management functions and align the organization as a whole with the broader environment to make resource allocations in a way to achieve the strategic intent of the organization. This alignment is called strategic fit. It serves as a road-map for the organization in its growth trajectory. It provides the direction – extent – pace – timing. It depends on the turbulence of the environment and the aggressiveness of the organization. It distinguishes the winners from the losers.
PILLARS OF STRATEGIC MANAGEMENT
Differentiation – Differentiation of key inputs and technologies helps a firm to consciously move away from homogeneous to heterogeneous markets enabling them to earn super-normal profits from normal profits. Integration – Whenever dealing with a complex task of managing a business (i.e. involving a no. of variables with cross linkages) it is in the interest of simplicity that the task be broken up in smaller components. However, for effective control, integration is essential. Alignment – Since differentiation is prone to replication, it is in the interest of the firm to differentiate continuously by aligning the resources with environmental opportunities.
STRATEGIC MANAGEMENT FRAMEWORK
Economic al Strategic Finance Fit Political Strategic Intent Fit Political Marketin g Manageme nt Social & Cultural
It is all about creativity and innovation. It is long-term in nature. It provides broad guidelines.FEATURES It forms the core activity of the top management. It is about adaptation and response to the same. It involves substantial resource outlay. It is irreversible. 7 . It requires full commitment of the top management. It is a holistic and integrated approach.STRATEGIC MANAGEMENT .
It is fool-proof in nature. It is rocket science. It about mere data and facts. It involves only the top management.STRATEGIC MANAGEMENT – MYTHS It involves short-cuts. It attempts to minimize risk. It a bundle of techniques or even tricks. It is about forecasting. It is about a definite formula. It involves nitty-gritty's. It brings instant success. 8 .
9 To develop core–competencies. again and again ……. To innovate. scale and scope. To leverage size. To generate large resource pool. To be proactive. To be insulated against environmental threats. To tap markets across boundaries. To be future oriented. To assimilate change faster. rather than reactive. To gain expertise in technologies.STRATEGIC MANAGEMENT IMPERATIVES To be continuously alert. .
whose origin can be traced to some of the greatest battles fought in the ancient days. In the ancient days battles were fought over land. It is an old wine in a new bottle. today's battles are fought over markets. In the ancient days battles were won not by virtue of size of the army or armory.strategies. obsession.STRATEGY . Even in today’s markets. and more importantly . but by virtue of their courage. battles fought on the market front are won by companies by virtue of their obsession & strategies. In contrast. but with a lot a rigour and robustness.ORIGIN The word strategy has its origin from the Greek word strategia meaning Military Commander. 10 .
– Toyota’s entry in the US. – Reliance’s entry into telecom.SOME PARALLELS Japan’s attack on Pearl Harbour – Strategy: Attack where it hurts the most. – Yahoo and Microsoft challenging Google. 11 . US attack of Morocco to capture Germany – Strategy: Pin-hole strategy – Wal-Mart challenging Sears by entering small towns. challenging GM and Ford. Napoleon’s attack on Russia – Strategy: Waiting for the right time. Allied Forces Vs Germany (WW-II) – Strategy: Forging alliances.
A paradigm is a dominant belief about how the business and its environment operates. The things happening around the firm when totally disconnected from the past leads to a paradigm shift.EVOLUTION OF MANAGEMENT As Peter Drucker refers to it. a radical change in the business environment brings about discontinuity. The first major discontinuity in the history of global business environment was the . 12 .Industrial Revolution. – Mass Production Organization Size – Complicated Processes – Complex Structures Evolving of an emerging paradigm – survival of the fittest (Fayol & Taylor. 1910).
– Global market place. – Affluence of the new customer (i. – Homogeneous to heterogeneous products. 13 . The question of outperforming the benchmark became the new buzzword. push to pull). 1960). Survival of the most adaptable becomes a new management paradigm (Ansoff. performance across firms became differentiated.e. – Changes in the technology fore-front. From uniform performance. Efficiency and effectiveness are no longer sufficient.EVOLUTION OF STRATEGIC MANAGEMENT The second major discontinuity in the history of global economic environment – World War II.
ENVIRONMENTAL CHANGE Phase IV: Horizon of Scenarios 2 1 Phase I: Extrapolation of the past 1 3 1990 onwards 1 2 1 3 1A 1B 2A Prior to 1950 Phase II: Discrete Scenarios Phase III: Range of Scenarios 1970 to 1990 2 2B 1950 to 1970 14 .
APPROACHES TO STRATEGY Analytical Approach – Igor H. – It is primarily the top management’s prerogative. – The choice of product-market mix is based on conscious evaluation of risk – return factors. Learning always begin on a clean sheet of paper. 15 . – The choice of strategy is primarily concerned with external ones rather than internal ones. Ansoff (1960) – Strategy can be segregated into certain mutually exclusive and inter-related components aimed at managing the growth of an organization. – Biases and prejudices has a very little role to play in strategic choices pursued by managers.
The organization initially decides which industry to enter. who will be the top managers. – 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. how it will compete. – Organization structure will precede and cause changes in strategy.APPROACHES TO STRATEGY Design Approach – Alfred Chandler (1970) – Structure follows strategy. Successful organizations align authority and responsibility of various departments in way to reach overall objectives. Once the control systems are in place. everything else follows. 16 .
APPROACHES TO STRATEGY Positioning Approach – Michael E. new entrant. – The environmental forces comprises of – supplier. substitutes. – An organization is seldom in a position to influence the larger business environment. Porter (1980) – Choose a consumer segment and position your product accordingly. 17 . competitors. – The organization will outperform the industry where environmental forces are weak and vice-versa. customer. – A firms performance is inversely related with the bargaining power of environmental forces to which it is exposed.
K.APPROACHES TO STRATEGY Core Competence – C. – Core competencies are a set of skills that are unique and can be leveraged. but exploiting the resource differences among them. Prahalad (1990) – The key to superior performance is not doing the same as other organizations. 18 . – Organizations can significantly alter the way an industry functions. They are complex resources and undermines a firms competitive advantage. – It enables a firm to deliver unimaginable value ahead of time. locating in most attractive industries and pursuing the same strategy.
STRATEGIC MANAGEMENT PROCESS Strategic Intent Strategic Planning Strategic Gap – Environmental Scanning – Internal Appraisal of the Firm Strategy Formulation – Corporate Strategy – Business Strategy Strategic Choices – Functional Strategy Strategy Implementation Strategy Performance Strategy Evaluation & Control 19 .
TOP MANAGEMENT PERSPECTIVE 20 .
A substantial gap between its resources and aspirations. It is the cornerstone of an organizations strategic architecture reflecting its desired future state or its aspirations. It’s a philosophy that distinguishes it from its competitors. A gap that consciously manages between stagnation and atrophy. It implies a significant stretch. It provides a sense of direction and destiny. It involves an obsession to be the best or outperform the best. you cannot reach there. 21 . A strategic intent is a statement of purpose of existence.STRATEGIC INTENT If you cannot see the future.
HIERARCHY Integrativ e m Do an in Visio n Mission Dominant Objective s Goal s Plans Lo g ic Single Specifi c Man y 22 t .STRATEGIC INTENT .
when radical changes in the internal and external environment (i. 23 . it can be perceived as a set of working rules (similar to thumb rules) that enables the top management to decide what can be done and more importantly what cannot be done.e. strategic variety) is apparent. To put it more simply.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. It is core to the strategic intent of the firm. Dominant logic changes.
It ensures that the company does not wander off into unrelated zones or fall into an activity trap.VISION It is a dream (not a forecast) about what the company wants to become in the foreseeable future. 24 . – It stands for the unchanging core values of the company. It enables the top management to remain focused. – It represents the company’s audacious. It provides an unity of purpose amidst diversity of personal goals. It is a combination of three basic elements – – An organizations fundamental reason for existence. beyond just making money. but achievable aspirations.
CHARACTERISTICS Reliance – Where growth is a way of life. Clarity – Vividly descriptive image of what the company wants to be known for in the future. Reachable – It should be within a reasonable target in the known future. Brevity – It should be short. clear. Sharing – The company across all hierarchies should have faith in it. Empathy – It should reflect the company’s beliefs to which it is sensitive. 25 . not an utopian dream. In Reliance when a new project becomes operational top managers hand over charge to the SBU heads and move on to a new project.VISION . and memorizable.
It gives a shared platform. To prevent the fall in a activity trap.ADVANTAGES To stay focused on the right track. It facilitates development of skills & capabilities. It lends integrity and genuineness. It fosters risk taking and experimentation. It provides a holistic picture. It gives enlightment.VISION . It makes strategic alignment easier. It gives the impression of a forward-looking organisation. 26 .
its reason for existence. Although the purpose may change over time.MISSION Mission defines the space that a business wants to create for itself in a competitive terrain. It serves as a road map to reach the vision. It is intuitive for managers to conceive their business in terms of the customer needs they are serving – What business are we in? – Which customer needs are we serving? It should be broad based and relevant to all stake-holders. It enables the firm to define its business landscape and identify its competitive forces. 27 . A broad mission statement helps in fending competitors.
– We do not offer insurance. – We do not offer steel. – We do not offer software's. …………………. 28 . We offer security.MISSION – SOME IDEAS Reliance – We are in the business of integration. All the businesses of the company are strongly integrated with their main business. Some other examples – We do not offer shoes. We offer strength. We offer solutions. …………………. We offer comfort. though some may seem unrelated in nature. …………………. ………………….
– It provides a benchmark for evaluation. It is an end result (quantifiable) something a firm aims and tries to reach in a time bound frame. 29 .100K crore company by the year 2005. – It prevents deviation. – It is based on Management by Objectives (MBO). – It helps identifying key success factors. – It adds legitimacy and motivation. – It lends direction – time frame in the medium term. – It keeps the mid management pre-occupied. It provides a quantitative feel to an abstract proposition.GOALS & OBJECTIVES Reliance – We want to become a Rs.
– Compress project times. 30 . – Acquire a market share of indomitable position. It is specific to a particular business. – Leverage economies of size and scale. coordinating appropriate technologies.PLANS Reliance – Desire to invest 25K crore in telecom business by circa 2010. and gaining access to desired markets to achieve the desired goals and objectives. It is the process of garnering necessary inputs. The details of the plan Reliance Telecom adopted were – Backward integrate process technologies. – Use price-elasticity to break market barriers.
This tendency to restore continuity is known as inertia (resistance to change).STRATEGIC DRIFT Due to top management commitment. However. Historical studies have shown that most organizations tend to continue with their existing strategies. equilibrium is maintained. strategies lose touch with the emerging realities. When changes in the environment is incremental. past strategies tend to have a bearing on future strategies. 31 . In such a context. It often leads to an organizational crisis. radical change may lead to disequilibrium. This state of affairs is known as strategic drift.
STRATEGIC DRIFT FRAMEWORK Environmental Change Degree of change Strategic Change Radical Change Incremental Change State of Flux Continuity Stage of Transformation Strategic Drift Stage of Atrophy Time 32 .
ORGANIZATIONAL POLITICS Strategic drift often leads to organizational politics. – Distorting information to gain mileage. – Creating a favourable image. – Developing a platform of support. Organizational politics involves intentional acts of influence to enhance or protect the self-interest of individuals or groups over organizational goals. Some instances of organizational politics – Formation of powerful groups or coteries. 33 . – Using covert tactics to pursue self interests. – Hiding vulnerability. – Creating obligations of reciprocity.
INTENDED & REALISED STRATEGIES An intended strategy is an expression of interest of a desired strategic direction. A realized strategy is what the top management actually translates into practice. . – Persons responsible for strategy conceptualization and implementation are34 divergent. – Influential stake-holders back out. Usually there is wide gap between the two when organizational politics is evident. – The environment context has changed. Other causes – – The plans are unworkable and utopian.
They simply unfold the particulars of the sub-system in stages. 35 . but as a defensible response to the complexities of a large organization that mitigate against publicizing goals. Strategy formulation and implementation are linked together in a continuous improvement cycle. this is not to be treated as “muddling”. but the master scheme of the rational comprehensive scheme is not apparent.LOGICAL INCREMENTALISM According to the incrementalism approach (contrary to integrated approach) practitioners simply do not arrive at goals and announce them in crafted and well defined packages. Learning is an integral part of logical incrementalism. However.
Leveraging Crisis – A sudden crisis or an opportunity should be used as a trigger to facilitate acceptance and implementation of change. Adaptation – As implementation progresses.IMPLEMENTING INCREMENTALISM General Concern – A vaguely felt awareness of an issue or opportunity. 36 . Agent of Change – Formal ratification of a change plan through MBO. The broader objective should serve the overall interest of the organization. Macro Broadcasting – The broad idea is floated without details to invite pros and cons leading to finer refinements.
Dominant logic’s are very rigid and sticky and prone to inertia. Dominant logic’s are the cornerstones of change when strategic transformation is apparent. Tampering with surface level factors often leads to atrophy. . As it brings 37 with it a different dominant logic.STRATEGIC TRANSFORMATION Strategic transformation (a complete overhauling of the strategic architecture) becomes inevitable whenever a strategic drift takes place. It creates blinders. Strategic transformation becomes smooth through a change in top leadership.
A learning organization must continuously focus on unlearning as well. – Informal Networks – Emerging of new ideas. Factors that fosters a learning organization – Pluralistic – An environment where different and even conflicting ideas are welcome. experience. – Experimentation – Fosters a culture of risk taking. – Organisational Slack – Enough free space. 38 .LEARNING ORGANIZATION A learning organization is capable of continual regeneration from knowledge. and skills that fosters experimentation and questioning and challenge around a shared purpose. It helps prevent a strategic drift from occurring at the first place. – Constructive Bargaining – Agree to disagree.
ENVIRONMENTAL CONDITIONS Dynamic Scenario Planning Learning Organization Static Forecasting Decentralization Simple Complex 39 .
ANALYZING BUSINESS ENVIRONMENT 40 .
It is pro-active in nature. It is reactive in nature. It requires a quantum leap (i. gap analysis). Competitive advantage provides the surest way to fulfill the strategic gap. It points to a position of superiority with relation to competition. It is based on the assumption of incremental change.e. It is based on the assumption of radical change. Strategic planning is a function of discounting the future. 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. 41 .
The world is flat. Environmental scanning is very important component of strategic planning. A manager has to continuously scan the environment to ensure alignment of the strategies with the radically changing environment. 42 .ENVIRONMENTAL SCANNING The environment is defined as the aggregate of conditions. and influences that affect an organizations way of doing things. It is exploratory in nature. not guided by any boundaries. The segments of the environment a top manager scans selectively depends upon his dominant logics. events. Environmental factors can be external as well as internal to the organization. resources and ideas move unhindered.
PESTEL PESTEL attempts to provide a broad framework on how the broader environmental forces affects an organization and influences the way it practices strategy. Understanding the composite effect is critical. It is important not only to identify the structural drivers of change. which may be different from the past impact. but also to analyze the complex linkages across them. for which a holistic picture is required. It is not intended to be used as an exhaustive list. 43 . It is particularly important that PESTEL be used to look at the future impact of environmental factors.
PESTEL FRAMEWORK Political – Government Stability. 44 . Government Attitude. Literacy Levels. Language Barriers. Fiscal Deficit. Economic Model. Capital Market & Forex Reserves. Licensing & Quotas. FDI Inflows. Income & Age Distribution. Currency Stability. Economic – GDP. Monsoon & Food Grains Reserves. Infra-Structural Investments. Economic Cycles. Social Values. Religious Sentiments. Inflation & Interest Rates. Subsidies & Protection. Central – State Co-alignment. Social – Population Diversity. Savings & Investment.
ERP. Patents. Research & Development. Product Safety & Health Hazards. Environmental – Global Warming & CSR. Carbon Credits. Direct & Indirect Taxes.PESTEL FRAMEWORK Technological – Innovation. Patent Laws. Technological Convergence. Product Design. Consumer Protection Laws. Waste Disposal & Emissions. 45 . Extended Producer Responsibility. Obsolescence Rate. Environmentally Preferable Purchasing. Employment Laws. Pollution Control Laws. Non-Fossil & Alternative Fuels. Legal – Monopolies Legislation.
ECONOMIC LIBERALISATION New Industrial Policy (NIP) – Liberalizing industrial licensing. MRTP Liberalization. Abolition of import licenses. Dismantling price controls. Exit Policy. Encouraging FDI. FERA Liberalization. PSU Disinvestments. Capital Market Reforms.VRS. Encouraging exports. Economic Reforms – Fiscal & Monetary Reforms. 46 . New Trade Policy (NTP) – Lowering import tariffs. Curtailment of PSU’s. Structural Adjustments – Phasing out subsidies. Banking Sector Reforms. Rupee convertibility.
Survival of the fittest MNC Onslaught – Enhancing stakes – Power Equation – Joint Ventures – Technological Alliances – Take-over threat. Mergers & Acquisitions 47 .DISCONTINUITY Destabilization due to entrepreneurial freedom – Cocoon of protection disappears – Diversification spree – Existing notions of size shaken – Industry structures change radically – Economic Darwinism .
Globalization – Cheap Imports & Dumping – Push to Pull Marketing Buyers exacting demands – Shortage to surplus – Price competition – Life-style changes – Stress on quality.DISCONTINUITY Hyper Competition – MNC’s . Consumerism Challenges on the technology front – Competencies become technology based – Investment in R&D become inescapable 48 .
DISCONTINUITY Compulsion to find export markets – Identifying competitive advantage – Technological gap – Global presence – Depreciating currency – Exports Corporate vulnerability – It is no longer business as usual – Capital inadequacy – Lack of product clout and brand power – One product syndrome – Loss of monopoly 49 .
FIVE FORCES MODEL .PORTER Threat of New Entrants Bargainin g power of Suppliers Competition from Existing Players Bargainin gBargainin power g of power of Suppliers Customer s Threat of Substitutes 50 .
The model should not be used as a snapshot in time. The five forces have strong cross-linkages. profit potential) per se.FIVE FORCES MODEL ASSUMPTIONS The model is to be used at the SBU level and not at the industry level. the forces are subject to changes. incremental or otherwise. 51 . It is even wiser to apply the same at the product – market level. but also used to understand how they can be countered and overcome.e. It should not only be used to understand the forces. It depicts the attractiveness of an industry (i.
Threat of Customers – Buyer concentration and volumes.PORTERS FIVE FORCES ANALYSIS Threat to Entry – Economies of size and scale. Resource profile & fear of retaliation. Low margins & stagnancy. Government policy. Industry stagnation. Scope for backward integration. Low relative importance of the segment. Unimportance of product quality. 52 . Undifferentiated product. Presence of substitutes or unorganized sector. Product differentiation through proprietary technology or brand power. High switching costs. Low customer switching costs. Access to distribution channels. Learning curve advantages. Capital requirements.
Low relative importance of the segment. Diversity of players. Industry stagnancy. High customer switching costs. 53 . Scope for forward integration. Differentiated inputs. Intermittent overcapacity. Produced by industries earning high profits. Low level of differentiation. Lack of substitute inputs. Product perishability. Buyer’s propensity to substitute. Piracy and counterfeits. Unorganised sector. High exit barriers.PORTERS FIVE FORCES ANALYSIS Threat of Suppliers – Supplier monopoly. Jockeying for position – Fragmented market. Threat of Substitutes – Improvement in price -performance trade-off.
Business Scope – The intention whether the firm wants to be in a single. Cohesiveness – Degree of bonding existing across affiliated firms. Tata). dominant or related diversified or unrelated diversified businesses (Infosys.FIRM ENVIRONMENT Size and Scale of Operations – It is a very important component of competitiveness in today's global context (Bharti – MTN. Reliance). Inertia – Excessive commitment to past strategies prevents firms from tapping emerging opportunities. 54 . Resource Profile – It highlights the capabilities (generic) or competencies (business specific) of the firm.
an E-Curve can prove to be futile during discontinuity. Experience curve has strong linkages with performance. With lower costs.EXPERIENCE CURVE The cost of performing an activity declines on per-unit basis as a firm becomes more efficient. However. 55 . it can price its products more competitively. and with lower prices it can increase its sales volume. which further reduces costs. Matured firms will always be positioned advantageously on the ECurve than new entrants. leverage it as a competitive advantage. The E-Curve thus enables organisations to build entry barriers. experience teaches better and more effective way of doing things.
EXPERIENCE CURVE Cost per unit of output Decreases at an increasing rate Point of inflexion Decreases at a constant rate Decreases at a decreasing rate Production / Volume 56 .
TRADITIONAL VIEW Efficiency = Lower Costs 2 3 1 Experience = Efficiency Lower Costs = Higher Sales Entry Barrier = Better Performance 4 6 5 Higher Sales = Lower Costs Lower Costs = Entry Barrier 57 .EXPERIENCE CURVE .
EXPERIENCE CURVE .STRATEGIC VIEW Inertia = Limited Growth Experience = Inertia 2 3 1 Limited Growth = Diversification Strategic Failure = Poor Performance 6 5 4 Diversification = New Experience New Experience ≠ Old Experience 58 .
It helps an organisation to capitalize on the opportunities by maximizing its strengths and neutralizing the threats minimizing the weaknesses. Acronym for Strengths – Weaknesses – Opportunities – Threats. Suppliers. Interviews. A SWOT audit involves – Company Records – Annual Reports. Customers. .VULNERABILITY ANALYSIS . It is one of the earliest models in environmental scanning. Press Clippings & Interviews. Observation. Case Studies – Structured Questionnaires. Websites. 59 Analysts.SWOT The framework was originally conceptualized by Kenneth Andrews in 1970. Business Intelligence – Bankers. Competitors.
FRAMEWORK Opportunities Nullify weaknesses which prevents you from exploiting opportunities Leverage strengths to make use of opportunities Weaknesses Minimize weaknesses which prevents you from countering threats Strengths Threats Utilise strengths to counter threats (?) 60 .SWOT ANALYSIS .
Volkswagen. Reliance. Aditya Birla.SOURCES OF STRENGTH Strong brand identity – Eg. Motivated employees & cordial industrial relations – Eg. Reliance. Infosys. Ranbaxy. Excellent penetration – Eg. Engineering Skills – Eg. Tata. HUL. Strong R&D base – Eg. ITC. Honda. Biocon. Infosys. Toyota. Sony. Tata Steel. High quality products – Eg. Siemens. Large resource pool – Eg. SBI. Caterpillar. Reddy’s. Economies of scale – Eg. 61 . Good credit rating – Eg. Dr. Strong after sales & service network – Eg.
K. Ballarpur Inds. Strategic myopia – Eg. Inertia – Eg. Group . Lacking experimentation culture – Eg. Organizational Politics – Eg. Inefficient top management – Eg. Narrow business scope – Eg.Raymond. Bijoligrill. Excess manpower – Eg. J. CMC (Tata Group) 62 . Tatas. Hindustan Motors. Single product syndrome – Eg. Lack of product / brand clout – Eg. Modi Group. Excessive diversification – Eg.SOURCES OF WEAKNESSES Outdated technology – Eg. SAIL. K. CESC. B. Nirma. Procter & Gamble.
Collaborations & Joint Ventures – Bharti & WalMart. Telecom. Retailing. Market driven Interest rates – Eg. 63 . Life style changes – Eg. Growing population – Eg. ECB’s. Banking. Sugar. Abolishing CCI. Insurance. GDR’s.SOURCES OF OPPORTUNITIES Delicensing of Industries – Eg. Fertilizers. Globalization – Eg. Free pricing – Eg. Exit Policy – Eg. Capital market reforms – Eg. Sugar. Maruti. Market driven Pricing – Eg.Tata Motors. VRS. Abolishing MRTP – Eg. Middle-class buying power. Fertilizer.
Import relaxation – Eg. 64 . Earth Quake. Tata Steel. Satyam.Social activism – Eg. Nationalisation – Eg. Foreign Direct Investment (FDI) – Eg. Tsunami. Natural disaster – Eg. (1985–1990). Hostile take-over – Eg. 11/9. Group disintegration – Eg. Land acquisition . Reliance. Economic recession – Eg. Bajoria – Bombay Dyeing. (2008).SOURCES OF THREATS Political instability – Eg. 26/11. Onida. Lack of Corporate Governance – Eg. Dumping from China. Terrorist attacks – Eg. Singur SEZ.
Forecasting – Predict the future (i. Holistic view – Prepare a complete overall picture. Stages in ETOP analysis – List the aspects of the environment that has a bearing on the organization.ETOP Acronym for Environment – Threat – Opportunity – Profile. scenario analysis). Strategic responses (including adaptation) to opportunities and threats is critical for survival and success. Assess the extent of impact of the factors. Delphi's technique.e. It represents a summary picture of the external environmental factors and their likely impact on the organization. 65 . time series.
Relative attractiveness of the market. selectively. High investment intensity acts as a drag. 66 Vertical integration is a powerful strategy. An organization can draw upon the experience of its peers in similar situations.PROFIT IMPACT OF MARKET STRATEGY PIMS is a database model developed by GE and later extended by HBS to examine the impact of a wide range of strategy variables on business performance. Some key findings on major performance drivers that explains 75% deviations in performance – Product quality and relative market share. . It is also a form of assessing vulnerability through longitudinal analysis.
As every organization is unique in its own way. Authenticity of data is of prime importance – Contexts drawn across one organization may not be applicable to another. – Contexts may vary over time. when radical changes in the economy takes place. therefore 67 validity may be a question. – Contexts may vary across countries. .LIMITATIONS The analysis is based on historical data and it does not take care of future challenges.PIMS . Managers should be particularly cautious while referring to such data during times of discontinuity as it makes past patterns futile.
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. KSF helps organizations spot early opportunities and convert them into value adding business propositions. It enables the top management to draw focus. It involves a three-stage process – Identify KSF – What does it take to be successful in a business? Drawing KSF – What should be the organizations response to the same? Benchmarking KSF – How do we evaluate organization success on this factor? 68 .
IDENTIFYING ALTERNATIVE STRATEGIES 69 .
It indicates the quality of growth an organization is looking for. It determines the locus a firm encounters with internal and external environment. global) of a firm and deals with choices of allocating resources across them. 70 . dominant. national. A corporate strategy identifies and fixes the strategic gap it proposes to fill.GRAND STRATEGY It is concerned with the overall business scope (single. It reflects the customer needs it intends to satisfy. It provides broad direction to the groups vision and mission.CORPORATE . related. unrelated) and geographical scope (local.
CORPORATE STRATEGY MATRIX Corporate Strategy Stability Stability Growth Growth Combination Diversification Divestment Intensification Market Penetration Related Vertical Market Development Product Development Unrelated Horizontal 71 .
Hindustan Motors). Even during adverse times firms need to adopt a strategy to sustain current performance levels. does not relate to do-nothing (Eg. erosion of capabilities. (Eg. – To stop for a while and assess past records. – Why disturb the existing equilibrium set up? – Limited resource position. 72 . – The firm may not be willing to take additional risk associated with new projects. Stability however. Citibank). The scale and scope of present operations remains almost intact.STABILITY It involves maintaining status-quo or growing in a slow and selective manner. The reasons for stability strategy – – Lack of attractive opportunities.
73 .ANSOFF’S MODEL New Product Existing Product Existing Market Market Penetration (+) Product Development (++) New Market Market Development (++) Diversificatio n (+++) Note: (+) indicates degree of growth and risk involved.GROWTH .
convert competitors customers. Market penetration can be achieved by – increasing sales to current customers. within a well defined market segment.MARKET PENETRATION It is a strategy where a firm directs its entire resources to the growth of a single product or a closely knit product set. Britannia). – The company carries a risk of product obsolescence. Nirma. – Elongated product life-cycle. – Suitable for industries where scope for technological breakthrough is limited. 74 . (Eg. – Helps firms which are not comfortable with unfamiliar terrain. Ujjala. direct non-users to users.
fabrics. upholstery. Du Pont – Nylon: parachutes. tyres. – Unconventional and flexible distribution channels. – Moves across geographical boundaries.MARKET DEVELOPMENT It is a strategy where a firm tries to achieve growth by finding new uses of existing products or its close variants and tap a new potential customer base altogether. – Creativity and innovation – thinking out of the box. carpets. 75 . – Immense customer reach & flexible advertising. socks & stockings. (Eg. – Stretches product life cycles.…… or Teflon: aircraft technologies to cutlery to paints or Raytheon Corp – Microwaves: radars to kitchen appliances).
perception.PRODUCT DEVELOPMENT It is a strategy where a firm tries to achieve growth through a radical new product (Eg. – Deliverable through – redesigning or reengineering. – Areas of product improvement – performance.Strolleys). serviceability. – Leveraging through – innovation. durability. aesthetics. features. reliability. Close Up: Fluoride – Gel toothpaste or VIP . conformance. Microsoft: DOS to Windows) or a substantial improved version (incremental) of an existing product to repeatedly enter the same market (Eg. – Leverage on customer and brand loyalty. Refills) 76 . – Substitutes that serve the same needs (Eg.
DIVERSIFICATION It marks the entry of a firm into newer markets with new products. – Risk reduction. industrial embassies). – Permits: quotas. licenses (i.e. From the traditional point of view. – High transaction costs and institutional gaps. 77 . – Conglomerate or market power (i. the new business is distinct from the existing business in terms of – inputs – technologies – markets.e. thereby creating a new business. Why do firms diversify in the Indian context? – Shift the growth trajectory or opportunistic. From the modern point of view they are strategically dissimilar. – Internal capital market. dominance).
ice-cream business would register a return of 10%. in which a given year is either under hot or cold wave. while the coffee business would register a return of 30%. Let us assume that there are two businesses constituting the entire market – coffee and icecream.HOW DIVERSIFICATION REDUCES RISK? Consider a hypothetical planet. cold wave dominates the planet. If on the other hand. What would be your ideal diversification strategy through optimization? 78 . either of which is equally likely to prevail. while the coffee business would register a return of 10%. If the hot wave dominates the planet. the ice-cream business would register a return of 30%.
If we diversified in either of the two businesses, our expected return will be 20%, with a possible risk of 10%. If, we split our investment between the two businesses in equal proportion, half of our investment will earn a return of 30%, while the other half would earn 10%, so our expected return would still be 20%. But in the second instance there is no possibility of deviation of returns (i.e. risk). Diversification results in 20% expected return with zero risk, whereas investing in individual businesses was yielding an expected return of 20% with a risk factor of 10%. The pivotal point is that the two businesses are negatively correlated. 79
It takes place when a company increases the breadth of a firms business or geographical scope by getting into product – market segments which compliments its existing businesses (Eg. Reliance). Alternatively, existing business may recreate new businesses, which are distinct, but supplements its existing business (Eg. Bajaj – scooters to motorcycles, Dove – soaps to shampoo). – It results in increased market power. – Leveraging existing capabilities. – Resources can be shared for mutual benefit. – Reduces economic risk (i.e. business cycles). – Enables brand or product line extension.
It increases the depth of its business scope either in a backward business process or in a forward one. Backward integration occurs when the company starts manufacturing its inputs or catalysts. In forward integration a firm moves into marketing of its products and services. Advantages of backward integration – – Cost competitiveness – entry barrier. – Better operational control – timely supplies, quality control, coordination – JIT, savings in indirect taxes. Disadvantages of backward integration – – It may spark of a chain reaction - contagion effect. – Long gestation & break even - investment in CAPEX.
Oil & Gas exploration Naptha-cracking Acetic Acid Paraxylene (PX)
Purified tetra-pthalic acid
Polyester Filament Polyester Staple Fibre (PSF) Yarn (PFY) Textiles 83
DIVERSIFICATION SUCCESS ?
While diversifying into new businesses, the scope of relatedness or unrelatedness should not be judged from the traditional static view, but from the modern dynamic view which incorporates strategic factors like capabilities and dominant logic. Countermanding reasons – Potential to reap economies of scope across SBU’s that can share the same strategic asset. Potential to use an existing capability to help improve the quality of a strategic asset in another business. Potential to use an existing capability to create a new strategic asset in another business. Potential to expand the existing pool of capabilities. Dominant logic ensures timely & appropriate response.
Usually the firm concentrates on its core activities.A firm gets most of its requirements from one or more outside suppliers that is under its partial control through value chain partnerships (Eg.QUASI & TAPERED INTEGRATION Full Integration . and out-sources the noncore activities (Eg. Ranbaxy. Dr.Where one firm has full ownership and control over all the stages of a value-chain in the manufacturing of a product (Eg.A firm produces part of its own requirements and buys the rest from outside suppliers with a variable degree of ownership and control. 85 . Reliance). Maruti – Sona Steering). Tapered integration . Quasi-integration . Reddy’s).
A CASE OF TAPERED INTEGRATION Partial Ownershi p Transmission Engine Design Electricals Steering 86 Seats & Carpets Windscreen Ordinary Components Zero Ownership Very Critical Component s Full Ownership Critical Component s .
CONGLOMERATE DIVERSIFICATION It relates to entry of firms into businesses which are distinct in terms of – inputs – technologies – markets. Firms usually engage in conglomerate diversification when emerging opportunities are very attractive and offers potential growth opportunities. – Cost of dysynergy (i.e. lack of strategic intent. and are also strategically dissimilar.e. core business). lack of knowledge of competitive forces). myopia).e. Drawbacks of unrelated diversification – – Cost of failure (i. – Cost of neglect (i. synergies pulling in opposite directions). 87 . – Cost of ignorance (i.e.
CONGLOMERATE DIVERSIFICATION Paper & Packaging Edible Oils Tobacco Hotels Food & Confectionary 88 .
reactive) and survival is at stake and the firm does not have resources to fend off competitive forces. where a company simply exits because the business no longer contribute to or fit its dominant logic. ACC) in full to an independent entity. It may also involve a SBU (Eg. Tata Pharma. L&TCement Division to Aditya Birla Group) technically known as divestiture or a product (Eg. Tatas sale of Goodlass Nerolac.e. Tata Press). 89 . It taken into account when performance is disappointing (i. In strategy there is no scope for sentimentality with divestment. Glaxo’s “Glucon-D” to Heinz).DIVESTMENT Divestment is a defensive strategy involving the sale of entire stake (Eg. (Eg. It is may also be a pro-active strategy.
Hive-Off – A hive off is the creation of a new entity followed by transfer of assets. Leveraged Buy-Out (LBO) – Here the company’s shareholders are bought out through a negotiated deal using borrowed funds.ROUTES Outright Sale – Popularly known as the asset route. (Eg. the Companies Act. where the equity is allotted amongst the existing shareholders on a pro-rata basis. (Eg. However.3 billion. Sale of Diamond Beverages to Coca-Cola for US $ 40 million). Tatas buy-out of Corus for US $ 11. where 100% of the assets (including intangibles) are valued and paid for. 90 . 1956 does not permit this mode. involving 608 pence per share).DIVESTMENT .
COMBINATION STRATEGY It is a mixture of stability. because every business has its own unique external and internal environment.e. joint ventures). developing facilities right from the scratch) or through brown-field projects (i. There can be no ideal strategy for every business.e. A combination strategy can be implemented through green-field projects (i. and divestment strategies applied simultaneously or sequentially for a portfolio of businesses. mergers and acquisition. It is usually pursued by a business group with diverse interests across multiple industries. growth. 91 .
STRATEGY CHOICE & PORTFOLIO ANALYSIS 92 .
In most cases the trade-off is between resources and opportunities. Dominant logic enables top managers to selectively scan the environment and make trade-offs.STRATEGIC CHOICE A strategic choice seeks to determine the alternative courses of action available before top managers to achieve its strategic intent. What then is the magical number? 93 . 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.
nor is to a define a problem for others to solve. They must choose problems which will lead to the right kind of opportunities. if addressed. The key task before a top manager is to identify the right problems. For an optimal choice the following four issues need to be resolved – Is the strategy clearly identifiable? Is it consistent with the resources of the firm? Will it be able to exploit the opportunities in full? Is it in tune with the values and beliefs of the firm? 94 . will help the firm achieve its intent.SELECTIVITY IS THE KEY The role of a top manager is not to solve a problem. managers need to ask the right questions. To identify the right problems.
Licenses & Quotas. embassies). Proximity to the corridors of power (i. Their roots can be traced to a single family or clan and share broad similarities. Resource sharing.e. formal and informal ties. chaebols in Korea. BRC).DEFINITION A business group is known by various names in various countries – guanxique in China. Their origins can be traced back to market imperfections existing in an economy (MRTP Laws. keiretsus in Japan. 95 Succession planning is critical to continuity.BUSINESS GROUP . business houses in India. High degree of centralized control (GEO. . Managing Agency).
RESOURCE SHARING ACROSS FIRMS Parent Company Firm 1 Firm 5 Firm 3 Firm 2 Firm 4 96 .
STRATEGIC CHOICE – MACRO TIMING Recession (Stability) Prosperity (Diversificatio n) Depression (Divestmen t) Recovery (Intensification ) 97 .
Divestment Duration (Yrs) Inception Intensification 98 .STRATEGIC CHOICE – MICRO TIMING ReEngineering Growth (%) Maturity Stability Growth Diversification Decline .
Relatedness across resources are difficult to realize. Why? Businesses are not about liquid assets. Redeployment of resources upsets the established power bases of a group. Rules of the game are different. Power and resources often goes hand in hand. there are high costs associated with entry and exit. Investing in emerging businesses may not actually be so simple as it appears to be.PORTFOLIO ANALYSIS Resource allocation across a portfolio of businesses is an important strategic choice. next only to choice of business. sometimes impossible. 99 . therefore.
BCG GROWTH MODEL Relative Market Share (%) Industry Growth (%) Low High High Low Stars Question Mark ? Cash Cow Dogs 100 .
Trent. Stars – They achievers in the near term. These businesses are also net users of resources (Eg. provided the industry growth rate continues and the company is able to maintain its growth (i. TCS. product development). 101 . and their risk profile is high (Eg.e. market development.e.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. diversification). Tata Steel). which remains a big? These businesses are net users of resources. but to larger extent than a question mark. market penetration. Tata Telecom. Tata-AIG).
divest) as achieving a dominant position in these businesses is a difficult task. harvest. Tata Chemicals). Given that the growth potential in the business is low. However. stability). Tata Tea.e. 102 . and they lack on competencies to take on competition and are basically cash traps (Eg. Tata Motors. Indian Hotels. cash cows may also need to invest provided the industry takes an upswing (Eg.BUSINESS ANALYSIS – TATA GROUP Cash Cow – These are matured businesses. Tata Press).e. and the company dominates the industry ahead of competition (i. Nelco. Dogs – They are a drag on the group. they are generators of resources. Groups prefer to dispose off such businesses (i. Tata Pharma.
Cash cows may actually need substantial investments to retain their market position (Eg. The model does not provide specific solutions within a particular category. The terminologies used are somewhat prohibitive. 103 . factors are limited.BCG . neither in high or low.e. Data may be prohibitive.LIMITATIONS It does not address the concerns of a business which is in the average category (usually the majority). niche – Rolex. Cartier. Certain businesses in the low market share category may be the result of a conscious strategy (i. Mercedes Benz. Armani). HUL).
MATRIX Distinctive Capabilities Strong High Medium Weak Stability Industry Attractiveness Diversify (++) Intensify (+) Med Intensify(+) Stability Harvest (-) Low Stability Harvest (-) Divest (.GE .-) 104 .
LITTLE Inception Dominant Strong Favourable Tenable Weak Growth Maturity Decline Improve Selective Niche Abandon Industry Life-Cycle Divest Harvest 105 Competitive Position Invest Consolidate Hold .ARTHUR’ D.
SHELL – DIRECTIONAL POLICY MATRIX Business Sector Prospects Attractive Average Unattractive Generate Cash Phased Withdrawal Distinctive Capabilities Strong Market Leadership Try Harder Double Or Quit Growth Average Custodial Weak Phased Expand Withdrawal Divest 106 .
SBU – A business unit which is strategically different from another and also shares a different SIC code. Disinvestment involves selling in phases. Gap Analysis – It emphasizes what a firm wants to achieve. 107 . Portfolio – An organization is perceived as a portfolio of businesses.TERMINOLOGIES Harvest – It entails minimizing investments while trying to maximize short-run profits and cash flow with the intention to exit the business in the near future. Divest – Selling a part or the entire business at one go. BCG – Boston Consulting Group.
BUSINESS STRATEGY & COMPETITION 108 .
The principal focus is on meeting competition. Such resources or activities should be distinctive and sustainable over time. Competitive advantage refers to a firms resources or activities in which it is way ahead of competition. 109 . building market-share. rent).COMPETITIVE STRATEGY A competitive strategy deals with how a firm competes in a particular business or product-market segment.e. and earning super-normal profits (i. Competitive advantage is the back-bone of strategy. The strength of a firm in a particular business usually stems from its competitive advantage.
leveraging (Prahalad). preventing new entry and/or competition (Hax & Wilde). developing competitive advantage (Porter). involving harmonizing and integrating multiple streams of technologies. identifying critical success factors. 110 .BUSINESS STRATEGY FRAMEWORKS How to be distinctive and yet sustainable – Differentiation – Understanding of the dynamics of competition. Resource Based View – Obsession with competence building. Delta Lock In – Two dominant players co-opt to selfreinforce and create or escalate an entry barrier. Blue Ocean – Consciously moving away from overcrowded industries to uncharted territories and making competition irrelevant (Kim & Mauborgne).
Steep experience curve effects. Sources of cost advantage are varied and depends on the structure of the industry – Economies of size. proprietary technology. Compress project duration through crashing. Ayur. preferential access to raw materials.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. Locational or early entry advantage. Nirma. T-Series). Reliance) or may pass it to customers to increase market-share (Eg. backward integration. 111 . The firm may retain the benefits of cost advantage by enjoying higher margins (Eg.
It selects one or more attributes that buyers perceive as important. Culture of experimentation. 112 . Feeling the pulse of the customer. Intel. and sufficient slack. Means of product differentiation are peculiar to each industry. undeterred attention to quality. Sony. innovation and out of the box thinking. Successful product differentiation is often followed by premium pricing. Rayban). Creativity. avoiding brand dilution. Focus on brand loyalty. (Eg.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.
They are poorly served by mainstream players. 113 . Sub optimization alone may not be a source of superior performance. coupled with fear of structural erosion. Rolex. Maybach.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. A focuser seeks to achieve a competitive advantage in its target segment. The target segment must have unusual needs or the delivery system catering to this segment must be unique. Armani). Cartier. though it may not possess an overall competitive advantage. Mont-Blanc.
COMPETITIVE POSITIONS Competitive Advantage Cost Differentiation Product Differentiation Competitive Scope Broad Cost Leadership (Toyota) Product Differentiation (General Motors) Narrow Cost Focus (Hyundai) Differentiation Focus (Mercedes) 114 .
and usually outperforms a stand alone generic strategy. 115 . jugaad or frugal engineering). in a hyper competitive context the two strategies need not be mutually exclusive. similarly differentiation may not always lead to rising costs (i. Tata Nano).HYBRID STRATEGY A hybrid strategy is the simultaneous pursuit of cost leadership and differentiation. Reducing cost does not always involve a sacrifice in differentiation. Though cost leadership and differentiation are inconsistent.e. Firms focusing on a hybrid strategy typically aim at shifting the productivity frontier and recreating a new product-market segment altogether (Eg.
It is usually the result of a firm not willing to make trade offs.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. It tries to compete through every means. Industry maturity will usually widen the gap. but achieves none. 116 . leading to what is called – straddling.stuck in the middle. The positioning therefore gets – blurred. unless such a player is capable of discovering a profitable segment.
Speech recognition software's. Nano technology. Artificial intelligence). leading to a blurred productivity frontier and steep learning curve. 117 . changing customer needs. 3D imaging. (Eg. Eg. First-time buyers. It is characterized by – High level of technological uncertainty.radical environmental changes. There is a lot of scope to define the rules of competition. Market segmentation not well defined.) Excessive turbulence in the dynamics of the environment. coupled with low penetration levels.EMERGING INDUSTRY Emerging Industry – An evolving industry characterized by . ending in a differential cost economics. technological innovations. Consumer behaviour pattern unstable and evolving.
Government regulations in the form Eg. Diverse customer needs. Eg. Retail and telecom. High exit barriers because of huge investment in CAPEX. 118 . It is characterized by – Low entry barriers. Consumer durables.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). because of lack of economies of size and scale. leading to clear fragmentation. Eg. IT. MRTP may also cause fragmentation. Eg. Paints. Air Conditioning. Scope for players to change the rules of the game.
technological maturity. 119 .MATURED INDUSTRY Matured Industry – An industry characterized by saturation in growth rates. well defined consumer behavioral patterns and imperfect competition leading to near monopoly. collaboration and co-option.technological maturity. Cartel among existing players through collusion. because of economies of size and learning curve effects. Strong entry barriers. early entry and location advantages. Firms are rule takers in the segment as productivity frontier is well defined. Limited scope for innovation . established industry dynamics. distribution networks.
Exit barriers are extremely high because of limited prospective buyers.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. scooters. backed by corporate espionage. (Eg. Typewriters. 120 . Learning abilities have been stunted and firms adverse to investment in R&D and make fresh investments. and costly price wars. Firms facing a declining phase are characterized by inertia and slow to react to environmental changes. with little or no signs of recovery. Nature of competition extremely high. dot-matrix printers).
strike alliances. Fragmented Industry – Identify. increasing scope. focus more on product differentiation or even a hybrid one. reengineer. Locate a defendable position. or else exit the segment. move beyond boundaries. strictly product differentiation and not standardization. recreate new markets. assess and overcome fragmentation. branding and promotion. strictly cost differentiation. 121 . premium pricing. process innovation.COMPETITIVE STRATEGIES Emerging Industry – Set benchmarks. Declining Industry – Redesign. aggressive building of distribution networks. regenerate. Matured Industry – Sophisticated cost analysis. mergers and acquisition.
positions based on resources which are unique and inimitable are far more sustainable even in the long term. and complex learning experiences in integrating and harmonizing technologies (distinctive capabilities) that play an important role in delivering competitive advantage through “causal ambiguity”. However. 122 . brands. Intangible – These refer to goodwill. A firms resources can be classified into – Tangible – These refer to real assets. They are a standard in nature.RESOURCE BASED VIEW Differentiation based on cost or products saturates and ceases to exist beyond the medium term. patents. hence very rarely confer competitive advantage as can be easily acquired or replicated.
they are woven around technologies. There is a high degree of internal and external causal ambiguity involved in it. Therefore firms should concentrate on developing complex resources that forms the very basis of differentiation. They play a very critical role in shaping competitive advantage. Hence. 123 . can be leveraged across businesses) or specific to a particular business. but not necessarily.e.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. Typically.
COMPETITIVE ADVANTAGE 124 .
A portfolio of competitive advantage comprises strategic advantage profile (SAP).COMPETITIVE ADVANTAGE A competitive advantage is a position of superiority relative (i. Success of a strategy critically depends on SAP. It enlarges the scope of an organization.e. It results in a distinct differentiation advantage or a cost advantage or hybrid as well. not absolute) to competition. 125 . and results in well springs of new business development. Strategy drives competitive advantage. competitive advantage subsequently becomes the back bone for a competitive strategy.
126 . Most successful organizations around the world have a well balanced SAP. In most cases SAP is hidden and dormant. SAP changes from time to time. Internal strategic fit between its strategy and dominant logics is essential for the top management to stretch and leverage SAP. Identification of SAP is critical for and stretching and leveraging of resources. In today's world of discontinuity.STRATEGIC ADVANTAGE PROFILE (SAP) Organizations have to systematically and continuously conduct exercises to identify its SAP.
faster product launches. 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. A VC is often compared with a relay team. and enhanced customer tracking – higher market share. Competitive advantage arises not from an individual activity but a stream of inter-related activities. Substantial cost reductions also follow.VALUE CHAIN ANALYSIS A value-chain segregates a firm into strategically relevant activities to understand its composite behaviour.e. kaizen or internal customer). VC pay-offs: better product availability. 127 . Today SCM is integrated with greening the environment as CSR practices.
THE VALUE CHAIN Support Infrastructure n gi ar M Human Resource Management Technology Development Procurement Out Logistics Mktg & Sales In Logistics Operations Primary Service M ar gi n 128 .
– First order fit refers to simple consistency between each activity and the overall strategy. Operational effectiveness is not strategy. 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. – Third order fit refers to optimization of effort. 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. 129 .STRATEGIC FIT – THE PORTER WAY The sustainability of the value chain depends on the degree of fit between the activities.
. It forms the very basis of competitive advantage. – Cannot be easily imitated or substituted. These skills results in distinctive activities and processes. It should satisfy the following conditions – Contributes significantly to customer benefits. – Can be leveraged across businesses. A core competence usually has its roots in technology. but not necessarily. Core competence has a high degree of external and 130 internal causal ambiguity embedded in it.CORE COMPETENCE A core competence represents the collective learning's of an organization around diverse streams of technologies. – Can be sustained even in the long run.
a core competence always implies a competitive advantage. a core competence has its roots in a set of skills. A competitive advantage is sustainable in the shortmedium term.CORE COMPETENCE A competitive advantage does not necessarily imply a core competence. 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. a core competence usually does. A competitive advantage manifests from a function. a core competence is sustainable even in the long-term. 131 .
GAME THEORY The game theory was developed in 1944 by Oscar Morgenstern. In a game (similar to a business) one players win is always another's loss. each of whom wants to win. In fact there are no. the stringent assumptions of game theory and difficulty in ascertaining of pay-offs makes game theory application difficult in business. This is known as a zero-sum game. A game is a contest involving two or more players. 132 . Subsequent work on game theory by John Nash led him to win the Nobel prize in 1994. However. illustrations depicting a win-win situation. Here the magnitude of gain offsets the magnitude of loss equally.
Firm Y’s Strategy Use Radio Use Radio +2 +6 Use Newspaper +7 -4 133 Firm X’s Strategy Use Newspaper Firm X’s Pay-Off Matrix .BIASED AND UNBIASED GAME A game is said to be biased when one of the players have a disproportionate chance of winning. An unbiased game is one where both the players have equal chances of winning.
PURE STRATEGY GAME The strategy each player follows will always be the same regardless of the other players strategy. A saddle point is a situation where both the players are facing pure strategies. Firm Y’s Strategy Use Radio +3 +1 Use Newspaper +7 -2 134 Firm X’s Strategy Saddle Point Use Radio Use Newspaper Firm X’s Pay-Off Matrix .
However.g. 135 . collaboration or cooption. Yahoo Vs Microsoft). 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. iteration) rather than through collusion (E. Repeated Games – In this situation the players interact repeatedly with each other sub-optimizing the outcome possibilities. This is usually through learning by “experience or observation” (i.e. It represents the classical “prisoner’s dilemma”.TYPES OF GAMES Simultaneous Games – This is a situation where the players have an option to choose to cooperate or not through collusion. Coke Vs Pepsi).
but 136 players do not always behave rationally. – Making pricing more transparent. Game theory relies on the principle of rationality. – Building incentives for customer loyalty. It results in a shift in the productivity frontier.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. . 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.
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.
– Development of capabilities & competencies. – Better strategic and operational control. While external strategic fit (strategy – environment) is relevant for strategy formulation. – Changing the rules of the game. – Unlearning & learning of new skill sets. A high strategic fit (co alignment) is useful because it enables – – Appropriate and timely response. – Resource commitment from top management. internal strategic fit (strategy – dominant logic) is critical to strategy implementation. 143 .IMPORTANCE OF STRATEGIC FIT Strategic fit has a central role to play in strategic management.
learning levels are very high. formulation & implementation can occur simultaneously. In such a situation. while control is very effective.FORMULATION Vs IMPLEMENTATION Traditionally. In such a situation. Some of the key strategic learning's exists at the contact point between the organization and its customer. 144 . According to Mintzberg. In fact. strategy formulation and implementation has been perceived to be distinct & independent. effective strategies are better crafted when there is a subtle overlapping between the two (i.e. at the cost of sacrificing a lesser degree of control. learning levels are very low. emergent strategy vis-à-vis intended & realized).
Install a system of shared beliefs and values.ROLE OF TOP MANAGEMENT To bring about change and to implement strategies successfully. In contrast. companies depend more on transformational leaders than transactional leaders. Pragmatism is the ability to make things happen. A transactional leader is usually confined to allocating tasks & responsibilities and extracting performance. 145 . transformational leaders go one step beyond – Design a well crafted and designed strategic intent of the organization. shift from compliance to commitment. He should be an agent of change. bring about transparency.
Zero Based Budget – In this case the budget of a SBU has to be worked out right from the scratch. labour. 146 .RESOURCE ALLOCATION Resources allocation includes tangible resources (Eg. minimum requirement). machines) referred to as threshold resources (i. Intangible resources (Eg. brands. land.e. The various methods of resource allocation includes Historical Budget – The budgets framed by HQ for a particular SBU keeping in mind past trends. Performance Budget – SBU managers need to justify the distinctive resources in terms of the opportunity it is pursuing yields the highest possible pay-offs. skills) also includes complex resources like capabilities and competencies. patents.
Moreover. convergence of multiple streams of technologies at the product – market level is becoming increasingly evident (Eg. Mobiles). Flat Screen Displays. these capabilities are sustainable even in the medium to long term. 147 . though not necessarily in the case of emerging markets.CAPABILITIES & COMPETENCIES Technology and business are slowly becoming in – separable. Due to causal ambiguity (complexity). Distinctive capabilities are complex set of skills woven around technologies. Distinctive capabilities helps in stretching and leveraging resources thereby overcoming two major constraints involved in strategy implementation – times & costs.
A firm in several unrelated businesses usually employs a SBU structure. A single product or a dominant business firm usually employs a functional structure. The level of centralization and decentralization is decisive.STRATEGY & STRUCTURE It is a framework within which individual efforts are coordinated to bring synergy. 148 . processes become people independent. Once the structure is in place. A firm in several related businesses usually employs a divisional structure. An appropriate organization structure & adequate control systems are essential to implement strategies and achieve stated goals.
based on skills and competencies. Team Structure – An informal group formed for a crisis.TYPES OF STRUCTURES Functional Structure – Activities grouped together by a common function (Eg. processes. Project / Matrix Structure – A formal but temporary framework initiated for the completion of a particular project/crisis. Virtual Structure – A boundary less or hollow organization. Inputs . disbanded subsequently. or geographical locations. Divisional Structure – Units grouped together in terms of products. Marketing. Output). Finance). with team members having dual line of control. SBU Structure – Businesses segregated in terms of strategic dissimilarities (Eg.Technology. 149 .
FACTORS INFLUENCING STRUCTURE Size – As an organizations size increases there is more specialization and differentiation leading to the top management moving away from operational issues and control. It includes the desire for independence. facing challenges & crises. Environment & People – Economic and political conditions have a major bearing on structure coupled with the attitude and aspirations of the people in the organization. structures are becoming flatter and more simpler. assuming responsibility. Technology – With more and more convergence of technologies in business. 150 . as span is broader. leading to a tall structure.
co0ntinuity). there is a tendency to continue along the same lines. Top managers resist change. Inertia is a characteristic of a firm that endures status quo (i.e.INERTIA When a firm has been operating in a certain fashion for a long time. Changes in top management and unlearning helps overcome inertia. Most firms undergo periods of strategic continuity rather than strategic discontinuity. Inertia acts as an impediment in strategy implementation. Common sources of 151 inertia – complacency with past successes. irrespective whether it is from worse to good or good to worse. .
certain authors propose misfit as a source of superior 152 performance. To prevent deviation of fit.STRATEGY EVALUATION Strategy evaluation centers around assessment of strategic fit. firms should move beyond financial performance to strategic performance as organization systems are becoming complex. Deviation of fit is detrimental to performance and may lead to strategic failure. . strategies need to be evaluated on an ongoing basis to prevent deviations of fit. However. Since the internal and external environment is in a state of continuous flux.
STRATEGY CONTROL It is concerned with trafficking a strategy as it is being implemented. It attempts to answer the following questions – Is the strategic intent appropriate to the changing context? Are the organizations capabilities still holding good. competitive advantages becoming disadvantages? Has the company acquired any new competency? Has the company been able to overcome the 153 environmental threats. . detecting changes in the external and internal environment and taking corrective action wherever necessary.
checking every premise is costly as well as difficult. It is open-ended as well as . Premise Control – Checking the validity of the assumptions on which a strategy was based. Special Alert Control – It intends to uncover unanticipated information having critical impact 154 on strategies. It involves assessing – strategic thrusts and milestones. However. 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.
Performance measures are defective – What to evaluate against? How to measure the 155 construct? As a saying goes.BARRIERS TO STRATEGY EXECUTION Vision and strategy not actionable – Utopian ideas. Strategy not linked to resource allocation & capabilities – Lacking commitment of top management. “If you cannot . Strategy intent not linked with goals and objectives – Lack of coordination at lower levels leading to negative synergy. low strategic fit due to consultants intervention. difficult to translate into practice.
156 . to be sure of successful implementation of a strategy. Together these factors determine the way in which a corporation operates. Managers should take into account all seven of these factors.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. Today it is considered one of the most powerful tools for strategy implementation determining success or failure. Large or small. the relative importance of each factor may vary over time and context. important or not they're all interdependent. On top of that. this may effect all others as well. so if one fails to pay proper attention to one of them.
The 7-S model was born at a meeting of these four authors in 1982. They had been investigating how Japanese industry had been so successful. It appeared also in "In Search of Excellence" by Peters and Waterman.BACKGROUND & ORIGIN The 7-S Framework was first mentioned in "The Art Of Japanese Management" by Richard Pascale and Anthony Athos in 1981. Since then it is known as their 7-S model and is extensively used by corporations worldwide to implement their strategies. and was taken up as a basic tool by the global management consultancy company McKinsey. At around the same time in the US Tom Peters and Robert Waterman were exploring what made a company excellent. 157 .
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. to reach identified & stated goals. Structure – The way in which the organization's units relate to each other in terms of their commonalities. 158 . Systems – The procedures.THE 7’S Shared Values – It represents what the organization stands for and what the top management believes in. over time. formal & informal . Staff – Human inter-relationships. Skills – An organizations capabilities and competencies. processes and routines that characterize how work should be done.
STRATEGIC FIT Strategy Structure Shared Values Systems Skills Staff Style 1st Order Fit 2nd Order Fit 3rd Order Fit 159 .
160 . shared values) are very malleable and comparatively more difficult to identify & influence. Consider the 4P’s of marketing or 3R’s of SCM. Ineffective in case of a virtual company. because most often they are culturally embedded and often neglected. their Japanese counterparts focus more on the soft S’s for their early success and sustainability. In contrast. the soft S’s (skill. While the American co’s focuses on the hard S’s. staff. structure. A choice of an alphabet often limits the scope and skews the interpretation of a model.A CRITIC OF THE 7S MODEL While the hard S’s (strategy. style. systems) are comparatively easy to identify and influence.
High Organic Growth Strategic Alliance Joint Venture Mergers & Acquisition Strategic Fit .STRATEGY IMPLEMENTATION ROUTES Strategic Fit .Low Take Overs 161 .
Govt. The entire infra-structural facilities are set up afresh having its own gestation and break-even. technologies. Reliance Industries). .ORGANIC GROWTH Here a firm builds up its facilities right from the scratch and continues to do so without any external participation. Long gestation leads to delayed market entry. (Eg. (Eg. i.e.e. 162 Risk of cost and time overruns. green-field projects. It has complete control over inputs. SEZ’s. tax holidays. the entire value chain. i. subsidized power). concessions are available for green-field projects. and markets. soft loans.
Alliances are usually in the areas of technologies or markets (Eg. There is no funding or equity participation from the alliance partner & both the firms continue to operate independently. . It touches upon a limited aspects of a firms value chain. Tata Motors & Fiat). It has limited intervention power and usually lacks holistic commitment from the alliance partner.STRATEGIC ALLIANCE It involves a pro-active collaboration between two or more firms on a particular domain or function for mutual gain. Alliances are usually short-lived and disbanded once the purpose is achieved. 163 It is a form of competitive collaboration.
Honda). (Eg. Dominant logic of both the companies should be complimentary. Selecting the right partner is critical for success. Hero . Degree and extent of management control must be clearly 164 laid down. 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. leaving minimum scope of overlapping. Tata – AIG. . A comprehensive MOU is essential.
Coca Cola – Thums Up). Economies in scale leading to lowering of costs. Integration of assets and other financial resources. Brooke Bond & Lipton). with the individual firms ceasing to exist any more (Eg. Acquisition is an outright purchase of a firm assets by another independent entity (Eg. .MERGERS & ACQUISITION It refers to the fusion of two or more firms into a single entity. Revival of a sick-unit through better management practices is a major motive behind an acquisition 165 strategy. Integrated distribution channel leads to better market penetration and overall synergy. ITC Tribeni Tissues.
Inform SEBI / Stock Exchange after 5% stake is 166 acquired.Corus). Instant access to capacities and markets.TAKE OVERS It refers to the acquisition of significant management control by buying out majority stake in a firm through due diligence or hostility (Eg. Integration of organization structure & cultures is difficult. Most countries have stringent laws that prevents hostile take over. Make a public offer of not less than . Tata Steel . often the new firm is “left alone”. Larger geo-graphical diversity. Consolidation in a fragmented industry.
MANAGEMENT TOOLS IN STRATEGY 167 .
or better still create next practices Reengineering – Redesigning work processes right from the scratch. Balanced Scorecard – Tracking strategy 3600. every time. Change provides enormous opportunities. Some tools to ensure that – Benchmarking – Adopt certain best practices. TQM – Doing the right thing the first time. 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. 168 . Radical change is superseding incremental change. Companies therefore need to ensure competitive advantages doesn’t become competitive disadvantages.
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
but it cannot be used as a strategic decision making tool. clustering).BENCHMARKING . Benchmarking merely reorients profits in the hands of few to profits in the hands in the hands of many (i. .LIMITATIONS More and more companies benchmark. the more similar they end up looking. Strategy is more of creating best practices rather than copying them. It does not shifts the growth 175 trajectory of the industry as a whole. While strategy is all about differentiation and not looking alike. It can at best complement it. Benchmarking is useful for bringing about operational efficiency.e.
RE-ENGINEERING Redesigning leads to identification of superfluous activities or product features (i. . for achieving performance improvement (E. DOS to Windows). process mapping) and eliminating or improving them (E.g.e. The task demands a total change in organisational 176 culture and mindset.g. Re-engineering involves complete reconstruction and overhauling of job descriptions from the scratch (i. Windows 95 to 97). clean sheet). Re-engineering attempts to radically change an organizational products or process by challenging the basic assumptions surrounding it.e.
than people driven Innovative Vs Traditional Customer centric Vs Organisational centric 177 .REENGINEERING – KEY TENETS Ambition Focus Attitude Enabler Performance Large scale improvement by questioning basic assumptions about how work is done Micro Vs Macro Business Processes Vs Organisational Processes Starting right from the scratch Not historical More IT driven.
customers and suppliers and protects the organization from the future (i. 178 . structures. . resource allocation and prepares the organization for the future through a reorientation of the entire strategic architecture. BPR).e. Strategic – It looks into the process of strategic planning. processes. etc) and supports the organization for the present. Business – It looks into markets.LEVELS Reengineering can be successfully leveraged at all levels of an organization with varying degree of results.REENGINEERING . products. It can be of the following types – Functional – It looks into the flow of operations (i.e.
Cheaper versions of Intel chips and mother-boards manufactured in Taiwan. – Early entry advantages. learning curve advantage. Indonesia). However. protection can be had in the following ways – – Patenting. – Causal Ambiguity. While traditional manufacturing is a bottom-up approach. 179 . reverse engineering is a top-bottom approach. – High cost and time acts as a deterrent. It generally acts as a threat to innovation.REVERSE ENGINEERING It is a process by which a product is dismantled and analyzed in order to understand how the product was designed and manufactured. with an intention to copy it (Eg.
Introduction – Launching the product in the market.STAGES IN REVERSE ENGINEERING Awareness – Recognizing whether the product is found to be worth the time. nano-technology). cost and effort necessary for the purpose of reverse engineering. Actualization – Obtaining and dismantling of the product to assess how it functions. machine tools to convert ideas into a marketable product (i. Inaccurate assessment at this stage may lead to a failure of the entire project.e. 180 . designing facilities. Implementation – Developing of a prototype. Usually in such cases segmentation and pricing is different from the original innovator.
More and more companies are moving towards meeting implied rather than stated needs. Air bags. – Reliability – Consistency in mileage. It has eight dimensions (Eg. – Durability – 1980 manufactured cars still on road. – Conformance – Emission standards . of service stations. – Serviceability – Large no.WHAT IS QUALITY? It involves the totality of a product or service in meeting certain stated or implied needs. – Aesthetics – Appeal in design.Euro IV. Car) – – Performance – Mileage of 14 kms to a litre of fuel. – Features – Anti-lock braking systems. – Perception – Customer notions. 181 .
It had little impact on improving overall productivity. It is deeply embedded as an aspect of 182 organisational life & culture.fix it in nature. which ensures good market standing. . touching upon a limited aspect of a value chain. Management of quality was traditionally inspect it . zero defects. TQM is a way of creating an organization culture committed to the continuous improvement of work processes – Deming.TOTAL QUALITY MANAGEMENT Objective – Management of quality ensures conformance to certain pre-set standards.
Be customer centric – Generate the concept of internal customer (Ishikawa). Kaizen – Make continuous improvement a way of life. Empowerment – It takes place when employees are properly trained. Looking at quality as an endless journey. fully involved in decision-making and fairly rewarded for results. not a final destination. 183 .TQM – KEY TENETS Do it right. the first time – From reactively fixing error in products to proactively preventing errors from occurring at the first place (Juran). provided with all relevant information and best possible tools.
TQM . 6-Sigma). 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.e.STRATEGIES Outsourcing – It is the process of self-contracting services and operations which are routine and mundane. equal participation). 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. 184 . of units meet preset standards (Eg. It is based on the principles of MBO (i. saving precious top management time.
.. it’s bad execution.BALANCED SCORE CARD Some interesting comments .... – Less than 10% of strategies effectively formulated are effectively executed.. Source: Fortune Magazine Why CEO’s fail? 185 ... – In the majority of failures – we estimate 70% – the real problem isn’t (bad strategy) . strategy implementation has never been more important. – Efficiency and effectiveness is passé.....
Focus more on causes. rather than effects. Organizations need to move from financial to strategic performance. These measures worked well when organizational systems were simple and unidirectional and more importantly the environment was static. 186 .BSC .CONCEPTUALISATION A company’s performance depends on how it measures performance. In today’s context when organizational systems have become complex and multi-directional we need to have a holistic view of performance to cut the lag effects. Most managers tend to rely on traditional measures of performance having its origin in finance as they are well tried and tested.
because they have too many. and distinguish strategic problems from operational ones. The most critical element of a BSC is to measure these four dimensions. 187 .BSC – KAPLAN & NORTON (1992) A BSC helps a manager to track and communicate the different elements of company’s strategy. It has four dimensions – – How do customers see us? – What must we excel at? – Can we continue to improve and create value? – How do we look to shareholders? Firms more often have problems.
of visits or calls made % of NPA’s 188 .CUSTOMER PERSPECTIVE GOALS Products Supply Preference Relationship MEASURES Relative market share (%) % of sales from new Vs proprietary products Timely deliveries and service Customer credit analysis (i.e. ageing schedule) % of key customer transactions Ranking of key customer accounts No.
of new product launches Vs competition Product pricing Vs competition 189 . of times covered in media No.BUSINESS PERSPECTIVE GOALS Skills Excellence Exposure Introduction MEASURES New capabilities and competencies Implementation & gestation period Bank and supplier credit limits & PLR Unit Costs / Conversion Ratio / Defect Ratio No.
of new patents registered Time to develop next generation products Average and spread in operating cycle % of products that equal 2/3 sales No.LEARNING PERSPECTIVE GOALS Technology Manufacturing Focus Timing MEASURES No. of product innovations 190 .
Return on Investment Market Capitalization / PE ratio 191 .FINANCIAL PERSPECTIVE GOALS Survival Success Prosper Divestment MEASURES Cash flows Growth in Sales and Profits EPS.
STRATEGY MAPPING 192 .
BSC .IMPLEMENTATION 2 Translate strategy into operational terms 1 Mobilize change through effective leadership 5 STRATEGY Make strategy a continual process 3 Align the organization to the strategy 4 Make strategy everyone’s job 193 .
Seek excellence. 194 performance will automatically follow. they don’t know . Shift from control to strategy (i.what they don’t know. It helps translating strategy into practice (i.ADVANTAGES Most often top managers face information overload. Focus on cause not effects. doing right things instead of doing things right). As a result. Modern managers should be poised to ask the right questions. sharing of vision). The BSC brings together the different elements of a company’s strategy at a glance.BSC .e. .e.
EFFICIENCY Vs EFFECTIVENESS Ineffective Effective Inefficient Goes out of Business quickly Survives Efficient Dies Slowly Thrives 195 .
EFFECTIVENESS + STRATEGY A company which is effective as well as strategic.Michael E. . but also sustains it. not only thrives. Porter 196 .
CORPORATE RESTRUCTURING 197 .
. “every organization must be prepared to abandon everything it does... Radical change brings about strategic variety. Tata Group). to survival of the most adaptable.. from survival of the fittest . Restructuring involves consciously driving significant changes in the way an organizations thinks and looks (Eg.CORPORATE RESTRUCTURING The only thing constant in today's business environment is change.. As Peter Drucker pointed out.. Strategic variety may be caused by changes in the as external well as internal environment. Strategic variety brings paradigm shift. To adapt to the changing environment.” 198 . firms use restructuring strategies.
Internal customers should also not be neglected.e. they should strive to provide unimaginable value ahead of its time (Eg. Company’s should go beyond just asking what he expects.e. Instead. Core Business – Company’s should introspect – What business are we in? Business evolved out of opportunism or myopia should be divested.RESTRUCTURING – BASIC TENETS Customer Focus – Restructuring ideally begins and ends with the customer. etc). Structural Changes – Conventional hierarchical structures should be disbanded in favour of more 199 flexible ones (i. and dividing the core businesses into SBU’s (i. downsizing or rightsizing). Fax. Walkman. . downscoping). ATM.
) Reliance dismantled their industrial embassies . Ratan Tata now drives the point the group means business. 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....) The Aditya Birla group typically relied on the “marwari” community for key management positions .. 200 ... the Tatas were considered a benevolent and charitable organization. Kumar Birla today is more dependent on professionals.. Restructuring also requires cultural reorientation. During the times of JRD. started focusing on their capabilities.. ..
Getting feedback & addressing customer complaints. Publicizing welfare projects to demonstrate CSR. Carry out PR campaigns. Honda’s ad says. “ … one reason our customers are satisfied is that we aren’t. Organizing customer and supplier meets. they tend to move away from the customer.MOVING CLOSER TO THE CUSTOMER As companies evolve. Communicating to the media about organization efforts to deliver quality products. Use the reach of networking technologies. Restructuring provides a platform to close this gap.” 201 .
where the difference in valuation is settled off through cash or equity (Eg. Asset Swaps – It entails divesting and acquisition simultaneously by two companies. including its intangibles – Mergers – It may be vertical. It can have two forms. spin-off and equity carve. 202 . horizontal.ASSET RESTRUCTURING Asset Restructuring – The asset composition of a firm undergoes a major change. it may be smooth (Eg. Glaxo – Heinz). Hive Off – It involves siphoning of assets under control. It may include brands as well. Further spin-off can be classified as split-off and split-up. Further. Tata – Corus) or hostile (Eg. Mittal – Arcelor) and can take various forms. or conglo-merate.
– Split-Off – In a split-off. the entire parent company loses its identity after being split into a number of subsidiaries. Most of these practices are not in consonance with Indian laws. 203 .HIVE OFF Spin-Off – A spin off is the creation of a new entity. Equity Carve – It involves selling a minority stake to a third party while retaining control (Eg. – Split-Up – In a split-up. Reliance Ent). in which the equity is allotted amongst the existing shareholders on a pro-rata basis (Eg. the existing shareholders receive equity in the subsidiary in exchange for the stocks of the parent company. Tata Industries selling 20% stake to Jardine Matheson).
In 2005. but retained its engineering division.DIVESTITURE It involves the sale of a brand or a division of a company to a third party. for a specified market or in general with full management control. Selling out in phases is called disinvestment (IPCL). Generic motives include – – Raise working capital. A complete sell-out is known as divestment (TOMCO). 204 . L&T sold its cements division to Aditya Birla group. – Poor performance. strategic misfit. repay long-term debts. In 1995. Parle sold its Thums Up brand to Coke for $40 million apprehending fierce competition.
Share Buyback – It is a process of cancellation of shares out of free reserves to the extent of 25% of paid-up capital (Eg. Wipro). It provides greater leverage as well as management control.The internal & external liability composition undergoes a major change – LBO – Acquiring control over a substantially larger company through borrowed funds (Eg. 205 . Tatas take-over of Corus for US $11.3 billion. involving 608 pence per share). Conversion – Replacing debt with equity or vice-versa or costlier with cheaper debt or cross currency debt.CAPITAL RESTRUCTURING Capital Restructuring .
230 cr Diversifications Tata Motors – Rs. 1700 cr Trent – Rs. 42 cr Voltas . 150 cr VSNL – Rs.Rs. 1890 cr CMC – Rs. 120 cr Tata AIG – Rs. 950 cr Merind . 256 cr ACC – Rs. 1170 cr Goodlass Nerolac – Rs. 250 cr Tata Tetley – Rs.BUSINESS RESTRUCTURING – TATAS Divestments Lakme – Rs. 1860 cr . 1439 cr 206 Tata Timken – Rs 120 cr Tata Telecom – Rs.Rs. 99 cr Tata Power – Rs.
keeping the composition of business intact (Jet Airways). usually as a result external turbulence. of operating units.ORGANIZATIONAL RESTRUCTURING Organizational structure and systems calls for a change when strategic variety is apparent. Turnaround is the primary motive. Rightsizing – It is phasing of excess and redundant employees resulted out of faulty internal planning (SAIL). 207 . of a firm’s employees and sometimes in the no. 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. Downscoping – It involves reducing the business and/or geographical scope of a firm (Aditya Birla group).
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. 208 . The longer the period. the more difficult it becomes to uproot the paradigm (i. Dominant logic becomes deep-rooted in organizational contexts depending on the period it is in place (tenure of the CEO). thumb rules) of the top management. The dominant logic represents the perceptions and biases (i. as strategies are based on such beliefs and biases.e.e. Strategy change is unviable without a preceding change in its dominant logics. inertia).
e. Successful transformation requires – incorporating employees fully into the process – leading from a different place so as to maintain employee involvement – instill mental disciplines that will enable employees to behave differently. the factor that stifled change & performance was – culture. 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). In most organizations. 209 .FORCES AGAINST STRATEGIC CHANGE The problem with strategic change is that the whole burden typically rests on few people (i.
Promote inventive accountability. never take no for an answer. Create relentless discomfort with the status quo. 210 . Questioning every basic action of the organization. The best way is to alter the institutional point of view. process ownership. Understand and deliver the quid pro quo. Manage from the future.SUCCESSFUL TRANSFORMATION Build an intricate understanding of the business model at all levels of the organization. Encourage uncompromising straight talk. it is not about winning but about learning. Harness setbacks.
211 . It involves diagnosing a change situation – systems & structures. that can be both enablers and blockages to change and restructuring. Identify and implement facilitators of cultural change. It involves identifying – Aspects of current culture which needs to be reinforced. by identifying forces for and against change. Culture and style of management are two main impediments in force-field analysis. Aspects of current culture which needs to be overcome.FORCE-FIELD ANALYSIS A force-field analysis provides an initial overview of change problems that needs to tackled. also known as cultural-web.
RESTRUCTURING .Term Loss of human capital Lower performance Higher performance Capital .OUTCOMES Alternatives Organizational Short .Term Reduced labour costs Reduced debt costs Emphasis on strategic control Business High debt costs Higher risk 212 Long .
213 . Numerator – It assumes that turnover is not a barrier or constraint. focuses on reengineering. hence go in for downsizing. the second one is a more viable strategy and sustainable option in the long run. down-scoping or asset stripping. reverse engineering and regenerating. While the first strategy produces results instantaneously.NUMERATOR & DENOMINATOR MGT Most firms across emerging markets undergo strategic discontinuity and as a result are forced to restructure their businesses. In order to put back the company on the right track they are resort to – Denominator – It assumes that turnover cannot be increased.
TURNAROUND MANAGEMENT 214 .
– Only seven of the first fifty Indian business groups in 1947 were even in business by the turn of this century. 215 (Govindarajan and Trimble.WHY TURN AROUND MANAGEMENT? Some interesting insights .. – Less than 10% of the Fortune 500 companies as first published in 1955.. still exist as on 2005. January 1997). and that the thirty-two of the country’s largest business groups in 1969 are no longer among the top fifty today.. Source: Why do firms atrophy? (Business Today.. ...
As a sequence of events describing how things change and why they change (i. A category of underlying principles and concepts. and achieves sustainable performance recovery. skills.e. ends the threat with a combination of strategies.TURN AROUND MANAGEMENT A turnaround is said to occur when a firm perseveres through an existence threatening performance decline. systems. Both content (what) and process (how) are equally important for a successful turnaround. Stage Theory). While content focuses on endogenous and exogenous variables. and capabilities. process focuses on – A logic to explain a causal relationship between intervening variables. 216 .
Low stakeholder confidence. unavailability or radical lowering of substitute costs or technological obsolescence. leading to lack of acceptability from distributors and customers. especially in key positions. Low employee morale leading to high employee attrition at all levels. Substantial shifts in consumer preferences. suppliers and bankers. Uncompetitive products or services.TURNAROUND INDICATORS Most firms atrophy simply because they fail to diagnose the indicators that acts as threat to organizational existence. 217 . Some indicators Continuous cash flow crises as a result of dwindling market-share and profits. Rising input costs.
Extending work hours. be more customer centric. prune work-force. Product redesigning or reengineering. which most top managers fail to appreciate. Common approaches adopted Change in key positions. Recalibrate prices.TURNAROUND ILLUSION The first step to a successful turnaround is the basic acceptance of the fact that …. consider extension. “all is not well”. Hence. Revamp product portfolio.. based on elasticity. 218 . focus on power brands. liquidating dead assets. they adopt surface level measures (disprin popping) which most often fail. Emphasis on advertising and market penetration.
TURNAROUND STAGE THEORY Stage 1 Decline Stage 2 Stage 3 Stage 4 Outcome Response Transition Performance Equilibrium Line Success Failure Indeterminate Nadir Time 219 .
DECLINE Decline is the first stage in the turnaround process. R-Extinction – It suggests that organization factors. It has its origin in “environment led fit” that subscribes to the view that a firm has little control over external factors. 220 . It has its origin in “resource led stretch” and subscribes to the view that a firm has substantial power to override the context. It involves the identification of the theoretical perspectives that explains performance decline – K-Extinction – It suggests that macro economic and industry wide factors are responsible for decline. Identification of the stimulus leads to the arrest of the downfall. primarily dwindling resources and capabilities are responsible for decline.
If the decline stems from structural shifts. Strategic responses focus on changing or adjusting the business the firm is engaged in through long term moves such as – integration.RESPONSE INITIATION Turnaround responses are typically categorized as operating or strategic. diversification. If the underlying cause is internal efficiency. the response should be operational. 221 . Operating responses typically focuses on the way the firm conducts business and involves tactics geared towards – cost cutting and process redesigning (BPR). The response must match the cause of the decline. the response should be strategic. asset reduction. new market initiatives.
when decline deepens shifts in strategic position becomes essential. Similarly new market initiatives is feasible only for multi-product firms.RESPONSE DICHOTOMY The response initiation is somewhat dichotomous and cannot be universally applicable. which may be unavailable to a focused firm. Scope – A diversified conglomerate may acquire a distressed business to turn it around and gain valuable synergies. 222 . 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.
e. However. role model. Sustenance is the key factor in this stage. Effective levers of transition. The top management has a key role to play through empowerment. many a times early signs of recovery fades out. lead – lag). transparency. Support from all the stake holders through resource commitment.e. Empirical studies show that average time is 7. confidence building measures. consensus).TRANSITION Transition usually reflects the first signs of recovery.7 years with a range of (4-16) years. substantial amount of time usually passes before results begin to show (i. 223 . However. participative management (i.
Supplier and banker confidence. it should adopt a holistic approach. Regaining lost market share and distributor confidence. Failure is an indication that initial momentum was not sustainable characterized by irreversibility. Commanding a premium in the market. Instead of focusing on financial parameters alone. Share price indications and media coverage. 224 . Revival of key customers and new product launches.OUTCOME Outcome is said to be successful when a firm breaches the equilibrium performance level. Cut off points must be unequivocal.
COOPERATIVE STRATEGIES & ALLIANCES 225 .
strategic alliance. licensing.COOPERATIVE STRATEGIES Cooperative strategies are a logical and timely response to changes in business dynamics. supply-chain partnership. 226 . More and more companies worldwide are moving away from competition to co-option to leverage their resources and enhance bargaining power. or joint venture. and globalization . technology. Any cooperative strategy maybe between firms within the same country or cross border as well. consortia. In the cooperative strategy continuum as firms move up the value order. the commitment and the involvement between the firms increases manifold. It can assume any of the following forms – franchising.
Titan Inds. Switz Foods. Branding is critical to franchising. 227 .FRANCHISING Franchising – It is a contractual agreement between two legally independent firms whereby the franchiser grants the right to the franchisee to sell the franchisor’s product or service or do business under its brand-name in a given location for a specified period of time for a consideration. 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. It is an effective strategy to penetrate markets in a shortest possible time at a minimum cost.
Become a systems integrator (CKD).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. HM manufacturing GM range of cars in India with a buy-back arrangement is a perfect example of CBU. Develop a product through its crude stage. 228 . Different levels of licensing Manufacturing without embracing any technology (CBU). refine processes and adopt necessary technologies (SKD). as in Tata Indica.
Hyundai).CONSORTIA Consortia – They are defined as large inter-locking relationships & cross holdings between businesses in a similar industry. 229 . 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. enabling them to increase prices (Eg. leverage upon size to preempt competition by escalating entry barriers (Eg. Tata. Collusion – Few firms in a matured industry collude to reduce industry output below the equilibrium level. Airbus – Boeing). Coke – Pepsi).
SUPPLY CHAIN PARTNERSHIP It is a pro-active & collaborative arrangement between supplier and customer aimed at achieving better control over the value chain (Eg. . Tata Motors – IDEA). Companies in different industries with different but complimentary skills. otherwise it 230 becomes routine outsourcing. link their capabilities to create value for end users. 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.
231 . Firm’s should undertake a long courtship with potential partners. design next generation products. to gain knowledge and to obtain access to new markets (Eg. enhance credibility. Partner selection is one of the critical success factors. Despite their popularity (50-60)% of the alliances fail to accomplish their stated objectives. effective R&D management.STRATEGIC ALLIANCE It is an short to medium term understanding between two or more firms to share knowledge and risk. Generic motives involved are . Tata Motors – Fiat. preempt competition.learning organization. enter newer markets. Reliance – Du Pont). instead of hurrying into a relationship.
Bajaj – Castrol).STRATEGIC ALLIANCE . Coke – Pepsi). Backward – An alliance (quasi or tapered) with a supplier of critical components seeking commitment (Eg.TYPES Collusion – Tacit top management understanding to neutralize price wars (Eg. Complementary Equals – Two firms mutually promoting each others complimentary products (Eg. Airbus – Boeing). Bootstrap – An alliance between a weak and a strong company with an intention to acquire it. Maruti). Alliances of the Weak – An alliance is entered into to preempt competition (Eg. Whirlpool – Tide. 232 .
– Japan Vs US). Firms from developed markets seek access to markets and firms from emerging markets seeking access to technology. Cultural orientation has been found to have a profound effect on top management’s strategic orientation (Eg. Too much stress on financials & structure be avoided. 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. 233 .
Willingness to share knowledge and skills.PARTNER CHARACTERISTICS Complimentarity of Capabilities – The degree to which partners resources can be used in conjunction. Dominant Logic’s – Similarity in beliefs & biases. Managerial capabilities. 234 . Experience related to previous alliances. Partner’s ability to acquire fresh skills. Intangible Assets – Move beyond the financials of the firm. Unique Resources – Abilities or skills which cannot be easily duplicated. including ability to provide quality products and services.
vows to include commitment to expand the relationship. Selection & Courtship – It involves self analyzing. the value chain. 235 . Setting up the housekeeping. operational & cultural integration. Learning to collaborate – strategic.MANAGING ALLIANCES Alliances are more than just a deal. understanding the chemistry. degree of compatibility. differences not anticipated earlier. incorporating clear signs of continuing independence for all partners. partners should nurture it. Changing within. instead of focusing controlling the relationship. Getting Engaged – It should incorporate a specific joint activity.
whilst the partners continue to operate independently. a joint venture is a selection among modes by which two or more firms can transact. combining parts).e. There are substantial linkages in the value-chain.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. synergy) rather than mere exchange (i. . Conceptually. separation is very 236 bitter. It lasts till the vision is reached. It aims at creating new value (i.e.
in addition to a high degree of asset specificity. 237 . The market fails as sellers are unwilling to reveal their technology and buyers are unwilling to purchase in the absence of inspection.JOINT VENTURE – GENERIC MOTIVES Transaction Cost – The situational characteristics best suited for a JV are high performance uncertainty. It may also be linked to deterring entry or eroding competitors position. though more profitable alternative to other choices. Organizational Learning – It is a means through which a firm learns or seeks to retain their capabilities. Strategic Behaviour – Firms may override transaction costs.
Endorsement from government authorities. Sharing of resources. Daimler – Chrysler (Premium Cars) 238 . TVS – Suzuki (4-Stroke Engines) Fill gaps in existing product lines. – Eg. Renault – Nissan (Minivans – Cars). Define future industry standards. Essar – Hutch (Vodafone). – Eg. Maruti – Suzuki. – Eg. – Eg. Eli Lily – Ranbaxy.OTHER MOTIVES Entry into newer markets. – Eg. Learning new technologies. – Eg. Yamaha – Escorts.
PAL – Fiat If the cost of continuing exceeds the exit costs? – Eg. Risk of over dependence.RISKS INVOLVED Incompatibility – Differences in cultural background. – Eg. Century . – Godrej – Procter & Gamble. Tata – Aditya Birla in Idea Cellular 239 . Risk of brain (i. – Eg.Enka. Modi – Telstra What after exit (parenting disadvantage)? – Eg. LML – Piaggio Differences in size and resource base. – Maruti – Suzuki.e. technology) drain.
240 . Incompatibility – Performance expectations. Agreement – Clarity on operational control. Costs – Other modes of transaction becomes cheaper. Focus – Avoid strategic myopia. Flexibility – Sufficient space to breathe and adjust. time sharing. Equality – Lack of dominance.PRE-REQUISITES FOR SUCCESS Commitment – Mutual trust. Objectives – Shared vision. respect. Inertia – Differences in age and evolution patterns. Culture – Reconcile gaps. Partner – Avoid duplication of skills and capabilities.
MERGERS & ACQUISITION 241 .
The larger objective is to leverage on size. Brooke Bond – Lipton).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. An acquisition is said be smooth if it is with the consent of the management (Eg. 2002). however. SEBI Takeover Code. Most countries have stringent laws that prevents hostile takeovers (Eg. Ranbaxy . 242 . HLL – Tomco). Mittal Arcelor).Daichi) and hostile if it is without the consent of the management (Eg. reverses are also taking place through LBO) with a view to acquire conglomerate power and induce synergy (Eg. An acquisition is the purchase of a firm by a firm (of larger size.
. 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). Acquirer – Someone (individual or firm) who picks up an atleast 5% stake without mandatory disclosure having an intention to wrest management control (i. Hike – An acquirer who has already picked up a 5% has to make a mandatory disclosure for every additional 1% stake that it acquires.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.e.
244 .e. whichever is higher as an exit route (Eg. credentials or track record is at stake. 2002 Pricing – Acquirers will have to offer minority shareholders (at least 20%) the past 26 weeks or past 2 weeks average price. and/or does not enjoy the confidence of the different stake holders. Disclosure – All acquirers have to inform the respective stock exchanges where it is listed and SEBI upon acquiring the basic limit and upon every incremental limit thereon. SEBI – In case of a hostile take over. the SEBI can intervene and block share transfers if: the acquirer has ulterior motives (i.SEBI TAKEOVER CODE. Gujarat Ambuja – ACC). asset stripping). Grasim – L&T Cement.
ITC). Electrolux . Vertical – It involves complimentarily (partially related) in terms of supply of inputs or marketing activities (Eg. usually opportunistic (Eg. Horizontal – It involves integration of two highly related businesses (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. Godrej. Reliance). Conglomerate – It involves integration of two distinctly unrelated businesses. 245 .Kelvinator). The type of merger is depends on the degree of relatedness (strategic) between the two businesses.
Mittal – Arcelor). Ulterior motives – (Eg.MOTIVES Increased market / conglomerate power. Coinsurance effect – Higher debt raising capability. Asset Stripping – Shaw Wallace).e. quick access). Access to newer segments (Eg. Reduced gestation (i.MERGERS & ACQUISITION . Economies of size. Tax benefits (Eg. Avoiding risk of new product development. Overcoming entry barriers (Eg. Global image (Eg. ICICI –ITC Classic). Tata Steel – Corus). Acquiring assets or capabilities (Eg. Reduction in risk. 246 . ITC Bhadrachalam). scale and scope. Ranbaxy – Crosslands).
MERGERS & ACQUISITIONS PITFALLS Cultural differences (Eg. Top management overtly focused on due diligence exercise and negotiations. Overvaluation is often as a result of an ego drive and substantially affects future returns. Managing over-diversification. their initial offer was around 420 pence/share. neglecting core business. 247 . Merging of organisational structures. while the ultimate acquisition was made at 607 pence/share). When Tata Steel started negotiations with Corus. Tata – Corus). Managing size. Overvaluation of buying firms (Eg. Inability to achieve synergy.
Growth – This stage may witness parallel merger of two firms of similar size. Kingfisher – Air Deccan). with an objective to reinforce its growth trajectory or to take on the might of a comparatively larger player (Eg. Brooke Bond – Lipton).MERGER TYPE & PLC Introduction – A larger firm may acquire a newly formed entity with an objective to preempt new competition or acquire its license (Eg. Tata Steel – Corus). 248 . Decline – Horizontal mergers are undertaken to ensure survival. vertical to save transactions costs. Maturity – A larger firm acquires a smaller firm with an objective to achieve economies of scale and experience curve effects (Eg.
FRAMEWORK Positive contribution to the acquired company. Left alone syndrome. Strong differences may stifle plans and its execution. A common shared vision. A concern of respect and trust for the business of the acquired company. Immediate attempts to super impose structure and culture may cause bottle necks. 249 .INTERNATIONAL M&A . An acquisition just for the sake of it or reputation yields very little value in the long term. Blanket promotions across entities and confidence building exercises needs to be practiced. active top management intervention in phases.
INTEGRATION . Decide on the new hierarchy. .BLUEPRINT Take the media into confidence. Shift attention from business portfolio to people and processes. Determine business strategy. It will enable focus on customers and key people. Integrating work processes. They can carry the message to the various stake holders. promptly. Decide upon management control systems. Redefine responsibilities and authority. 250 Do not ignore the “people factor”.
251 . – Market for corporate control. Valuation decisions are arrived through a due diligence process when the prospective acquirer gets access to the books of accounts of acquiring company. While under valuation may be a significant opportunity. – Unstated reasons – Personal self interest and hubris. The process takes (6-12) months.e.VALUATION The process of valuation is central to M&A. over valuation can become a curse. operational & financial). – Synergy – Potential value gain from combining operations (i. Financial motives – Undervaluation relative to true value.M&A .
– Vertical Synergy – Gains come from controlling the supplychain and savings in transaction costs. Synergy can be negative as well. Innovative product – Good distribution network).VALUING OPERATIONAL SYNERGY Synergy – It refers to the potential value gain where the whole is greater than the sum of the parts. or from increased market power which increases sales and margins. – Conglomerate Synergy – Gains come when one firm complements the resources or capabilities of another (Eg. 252 . when the “fit” between the two entities is very poor. Sources of operational synergy – Horizontal Synergy – Gains come from economies of scale which reduces costs.
and without paying take-over premiums. but availed after being merged with a profitable firm (Eg. shareholders can accomplish the same at a much lesser cost. Hotmail). However. Tax Benefits – Tax benefits may accrue from tax entitlements and depreciation benefits unutilized by a loss making firm. Synergy comes from projects which would not have been undertaken if the two firms stayed apart (Eg. 253 .VALUING FINANCIAL SYNERGY Diversification – Reduce variability in earnings by diversifying into unrelated industries. ITC – Bhadrachalam Paper). Cash Slack – It reduces asymmetry between cash starved firms with deserving projects and cash cows with no investment opportunities.
hence better performance. the cash flow the merged firm will be less variable than the individual firms. – Coupon rates may also be negotiated at lower rates. higher leverage. as risky debt is spread across the new firm's operations. – Default risk comes down and credit rating improves. This will induce higher debt capacity. It relates to the concept of diversification.VALUING FINANCIAL SYNERGY Co-Insurance Effect – If the cash flows of the two firms are less than perfectly correlated. 254 . The likelihood of default decreases when two firms' assets and liabilities are combined through a M&A compared to the likelihood of default in the individual companies.
The value of control can be substantial for firms that are operating well below optimal value. – – Value of Control = Value of firm after restructuring Value of firm before restructuring. 255 . since a restructuring can lead to significant increase in value. Assessment of perceived quality is critical. While value of corporate control is negligible for firms that are operating close to their optimal value. The value of wrestling control is inversely proportional to the perceived quality of that management.VALUING CORPORATE CONTROL Premium of M&A are often justified to control the management of the firm.
e. sometimes in combination with the assets of the acquiring company. Confidence of investment bankers and the international financial community is essential. debt component) at the time of buyout and rapid changes in capital structure over time. It is a very costly and risky proposition. The assets of the acquired company are used as collateral for the borrowed capital. 256 .LEVERAGE BUYOUT (LBO) The basic difference between a take-over and a LBO is the high inherent leverage (i. LBO facilitates a relatively smaller firm to bid for a comparatively larger firm in the bid for management control.
– Separation of ownership from management.access to financial markets.TO GO PUBLIC OR NOT? However. the advantages of going public includes . – The need to satisfy analysts and shareholders. on-going valuation. 257 . The increased benefit showed in the following way – reduced costs and increased revenue. – Increased information needs. A research study showed that 30% of the publicly listed firms reported above average returns after going private. liquidity. However. off-late many publicly traded firms have gone private keeping in mind the following – – The fear of LBO.
– It is a temporary phenomenon. which disappears once assets are liquidated and significant portion of debt is paid off. – Cash trapped company unable to utilize opportunities. 258 . – Cost of debt coming down (i.RATIONALE FOR HIGH LEVERAGE The high leverage in a LBO can be justified by – – If the target firm has too little debt (relative to its optimal capital structure). co-insurance effect).e. – Debts repaid off from increased value after successful restructuring and wresting management control. – Managers cannot be trusted to invest free cash flows wisely.
Any discounting has to reflect these changing cost of capital. – Increase equity valuation. 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. Therefore. 259 . As the firm liquidates / pledges assets and pays off debt.EFFECT OF HIGH LEVERAGE Increases the riskiness of dividend flows to shareholders by increasing the interest cost to debt holders. leverage is expected to decrease over time. initial rise in leverage is anticipated.
e. time-barred. – Facilitates better valuation and forthcoming offerings. – Tax shelter. allowing the private company to bypass the usually lengthy and complex process of going public. or costly. shell company) by a private company. – Prevents dilution of equity. 260 . which has discontinued its operations (i. – Automatic listing in major exchanges. Objectives – – Traditional route of filing prospectus and undergoing an IPO is costly.REVERSE MERGER Reverse Merger – The acquisition of a public company. small in size but having a promising business.
During bearish periods excess returns were 19%.EFFECT OF TAKE-OVER ANNOUNCEMENT The shareholders of target firms are the clear winners. – Takeover announcements reported 30% excess returns. and 35% during bullish periods. Excess returns also vary across time periods. takeover failures have only initial negative effects on stock prices. 261 . Most target firms are taken over within (6090) days. However. Initial anomaly in stock prices usually normalizes over a period of time (6-12) months. – Merger announcements reported 20% excess returns.
– Most studies reported insignificant excess returns around take-over offers or merger announcements. Desai. Brickley. in the event of take-over failure negative returns to the extent of 5% on bidder firm stock prices is reflected. and Kim. – However.EFFECT OF TAKE-OVER ANNOUNCEMENT The effect of take-over announcement on bidder firm’s stock prices are not clear cut. 1988 . as stock markets become more and more perfect such anomalies would reduce Source: Jensen and Ruback. and Netter. 1983. 262 Jarrel. 1983. Bradley. – However. over time.
so that nothing is left for the raider to strip off. Poison Pill – An offer to existing shareholders to buy shares at a substantial discount to increase their voting rights (Eg. Poison Put – Premature retirement of bonds at attractive rates to pour surplus cash and make target investment unattractive.DEFENSIVE STRATEGIES Golden Parachute – An employment contract that compensates top managers for loss of jobs as a result of change in management control. 263 . Asset Stripping – The targeted company hives off its key assets to another subsidiary. Rights).
East India Hotels – Reliance Industries – ITC).DEFENSIVE STRATEGIES White Knight – It is the placing of stocks to a cash rich investor and bargaining for protection in return. Green Mail – The targeted company buys large blocks from holders either through premium or through pressure tactics (Eg. 264 . thus thwarting the raider company’s attention. 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). But often the White Knight turns a betrayer himself (Eg.
COMPETING FOR THE FUTURE 265 .
Honda overpowering GM. British Air overpowering Pan Am. Most companies were too preoccupied with the present than the future? 99% of the companies overpowered. Honda overpowering Volkswagen. The reverse was true for the companies overpowering.GETTING OFF THE TREADMILL Canon overpowering Xerox. Wal-Mart overpowering Sears. Hitachi overpowering Westinghouse. Compaq overpowering IBM. Nokia overpowering Motorola. What went wrong???? What were they doing with the present? What were they pre-occupied with? 266 . were spending 99% of their precious time dealing with present.
These denominator based managers stuck to their restructuring strategies (like building pyramids) and didn't know what to do next? Thus they became history? (like the pharaohs) 267 . downsizing).THE PAST OF COMPETITION Beyond Restructuring – When a competitiveness become inescapable problem (stagnant growth. Thus efficiency was grievously hurt. declining margins. most often they ended up cutting corporate muscle as well and became anorexic. Not knowing when to stop. CEO’s brutally pick up the knife and ruthlessly carve away layers of corporate flab (delayering. falling market share). decluttering.
The future is not about catching up with competition. 268 .THE PRESENT OF COMPETITION Beyond Reengineering – Numerator based managers (innovation) at least offers some hope. ensuring only survival of the present. However. 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.S. A poll in circa 2000 revealed that 80% of the U. top managers believed that quality will be a source of competitive advantage of the future. but forging ahead in competition. but not of the future.
Transform the industry. aspirations and resources. faster. It is based on deep insights into trends in technology. and regenerate its strategies (breaking its – managerial frames). Creating the future requires industry foresight. not the other way. 269 . not just the organization. Companies need to fundamentally reconcieve itself. better. reinvent its industry. It involves Dream about the company’s future. demographics and lifestyles. they are not enough to get a company to the future. don’t predict. Create a potential gap.THE FUTURE OF COMPETITION Regenerating – Leaner. Empower from bottom to top. as important as these may be.
ABOUT THE DREAM Which customers will you be serving? What will the potential customer look like? Who will be your future competitors? What will be the basis of your competitive advantage? Where would your margins come from? What will be your future competencies? Which end product markets would you cater? 270 .
Successful companies have a complete grip over the industry. Change in at least one fundamental way the rules of engagement in an industry. It is about deliberately creating a strategic misfit. hence do not fall sick in the first place. Therefore. by converging technologies complex. they do not need to restructure. blue oceans). Create entirely new industries (i. It drives a hunger and a passion to transform. 271 .ABOUT THE TRANSFORMATION The future does not belong to those who take the industry for granted.e. Redraw the boundaries between industries.
ABOUT THE EMPOWERMENT Bring about a revolution (a paradigm shift) in the organization. A revolution that is thrust upon from the top seldom sustains. The middle management plays a strong moderating role. Transformational leaders merely lead the way. Such a process is called institutionalization (from people centric to organisational centric). 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. 272 . More importantly.
A process for finding and gaining insight into tomorrows opportunities (Eg. without taking undue risk. Companies need to strategize (think ahead of times). An ability to energize the company. Apply the 40 – 30 – 20 principle. Toshiba – LCD. What does it take to get to the future first? Understanding how competition for the future is different. South West Airlines – LCC. Apple – iphone).THE FUTURE OF STRATEGY A company must get to the future not only first but also for less. 273 . It requires a lot of common sense and a little bit of out of the box thinking. Get to the future first.
as on their aspirations. 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. As there is no one future. but hundreds. The farther one can see in this endless space. greatness from mediocrity. the farther it will be away from competition. is the ability to imagine in a different way what the future could be. Companies of the future will be not based so much on the strength of their resources. 274 . We are in the midst of a 3600 vacuum.
THE EMERGING STRATEGY PARADIGM Not Only Reengineering Processes But Also Regenerating Strategy The Competitive Challenge Organizational Transformation Industry Transformation Competing for Market Share Competing for Opportunity Share Finding the Future Strategy as Learning Strategy as Positioning Strategy as Engineering Strategy as Unlearning Strategy as Dream Strategy as Architecture 275 .
THE EMERGING STRATEGY PARADIGM Not Only But Also Mobilising for the Future Strategic Fit Resource Allocation Strategic Misfit Resource Stretch & Leverage Getting to the Future First Existing Industry Structure Product Leadership Single Entity Product Hits & Timing Future Industry Structure Competency Leadership Dominant Coalitions / Co-option Market Learning & Preemption 276 .
Learning Curve t1 t2 t3 Time t4 t5 277 . 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 represents the collective learning's of an organization centering around diverse streams of technologies. It cannot be matched even by its closest competitors. Inimitable & Insubstitutable – A high degree causal ambiguity between these skills yield sustainable competitive advantage.CORE COMPETENCE A core competence relates to a bundle of skills (not an asset or a business) that revolves around activities or processes and critically underpins a firm’s competitive advantage. It is characterized by the following – Unique – It provides unimaginable customer value ahead of its times. 278 . Leverage – They are the gateways to future markets.
Toyota – lean manufacturing. Although a core competence may lose value over time. it is deeply embedded in the heart of the organization. it gets more refined and valuable through use.MORE ABOUT CORE COMPETENCE Sony – miniaturization. Wal-Mart – logistics. leaders have one. Most companies around the world do not possess one. Canon – imaging. at the most three to four. Intel – nano-electronics. SKF – antifriction and precision. Core competencies are the roots of the organization. Honda – engines. Coca Cola – brand. Toshiba – flat screen displays. Nike – designing. A core competency cannot be outsourced. 279 .
ROOTS OF COMPETITIVENESS End Products 1 2 3 4 5 6 7 8 9 10 Core Businesses Core Business 1 Core Business 2 Core Business 3 Core Business 4 Core Product 2 Core Products Core Competencies Core Product 1 Competence 1 Competence 2 Competence 3 Competence 4 280 .
RESOURCE STRETCH & LEVERAGE
Initial resource position is a very poor indicator of future performance. It leads to atrophy and stagnation. Successful companies consciously create a potential gap between aspirations and resources. Resource crunch is a common factor among firms that faces a wealthy rival, and outperforms them. Leveraging what a company already has, rather than allocating it is a more creative response to scarcity. – By concentrating existing resources. – By accumulating existing resources. – By complementing existing resources. – By conserving existing resources. – By recovering existing resources.
Concentrating – It involves effectively directing portfolio of resources on key strategic goals in which individual efforts converge over time. It is a balance between individual mediocrity and collective brilliance. It is achieved through – Converging – Redirecting multiple diverging (i.e. fragmented) short term goals into one long term goal. It is then resources can be stretched over time. Focusing – Making trade-offs and preventing dilution of resources at a particular point of time. Targeting – Focusing on the right innovations that are likely to have the biggest impact on customer value.
Accumulating – Using existing reservoir of resources to build new resources. Each and every individual is a rich & potential source of learning, discover better ways of doing things. It is achieved through Mining – Extracting learning experiences from existing body of each additional experience (i.e. success or failure). It is an attitude that can be acquired, but never learnt. It leads to a substantial jump in the experience curve. Borrowing – Utilizing resources outside the firm through licensing, alliances, joint ventures. A firms absorptive capacity is as important as its inventive capacity.
Complementing – Using resources of one type with another that aligns smoothly to create higher order value. In a way it produces an accelerating effect on each individual resource. It is achieved through – Blending – Interweaving discrete capabilities to create world class technologies (GM – Honda) through integration and imagination. Different functional skills can also be blended to create a world class end products (Yamaha – Keyboard). Balancing – An ability to exploit excellence in one area is never imperiled by mediocrity in another (GE acquiring the CT scanning rights from EMI because of its inadequate market reach).
Conserving – Sustaining competencies over time through frequent usage. Resources are never abandoned; they are always preserved for future use. Recycling – Increasing the velocity of use of a competencies over time. As a result core competencies can be leveraged across an array of products (Sony - Betamax). It includes brand extensions as well. Co-Opting – Enticing resources of potential competitors to exercise influence in an industry (Fujitsu – IBM). Shielding – It involves identifying competitors blind spots and then attacking without having the fear of retaliation.
Recovering - It is the process of reducing the elapsed time between investing in resources and the recovery of those resources in the form of revenues via the market. Speeding – Prior to the 1980’s Detroit’s majors took an average of 8 years to develop an entirely new model; the Japanese reduced it to less than 4.5 years, with major new variants in 2 years. This envisaged Japanese players in giving customers more opportunities to switch allegiance and loyalty (Toyota). Protecting – It uses competitors strength to one’s own advantage, by deflecting it, rather than absorbing it as practiced in Judo.
INTERNATIONAL BUSINESS ENVIRONMENT 287 .
and high transaction costs. Therefore. Emerging markets are characterised by infrastructural bottlenecks. Therefore focused strategies based on core competence may not be suitable for emerging markets (Khanna & Palepu. high levels of market imperfection). Diversified groups in operating in emerging markets therefore benefit from unrelated diversification. 288 .e. Korea.EMERGING MARKETS Emerging markets (India. China. institutional gaps. strategies suited for the developed markets may not be appropriate for emerging markets. Chile) provide a different context (i. 1997).
Experience Strategic Fit Diversity Palich. Synergy. Concentric.PERFORMANCE (I) Diversity attempts to measure the degree and extent of diversification (Herfindahl. subsequently negatively related across developed markets. Entropy). Optimum level of diversification Performance Diversity is initially positively related with performance. et al. Size & Scale.DIVERSITY . (2000) 289 .
conglomerate power Threshold level of diversification Performance Diversity (Khanna & Palepu. 2001) 290 .DIVERSITY . brand building Risk diversification.PERFORMANCE (II) Diversity is initially negatively related with performance. Huge initial investment. subsequently positively related across emerging markets.
It should have a spread of manufacturing facilities. It should think globally.INTERNATIONAL IDENTITY MNC’s consciously engage in FDI in different parts of the globe to forge resource diversity as a distinct competitive advantage. act locally (Eg. It should have a spread of assets. It should have a spread of interest groups / stake holders. Characteristics – It should have a spread of affiliates or subsidiaries. 291 . revenues and profits. HSBC).
low risk profile in developed markets and vice versa for emerging markets). low power distance in developed markets and vice versa for emerging markets). Feminity Index . high feminity index in developed markets and vice versa for emerging markets). Group Scale . low group scale in developed markets and vice versa for emerging markets). 292 .It reflects the disparities in women in workforce (Eg.It reflects the relative role of team building (Eg. 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.
customs. low country risk in developed markets and vice versa for emerging markets).GLOBAL BUSINESS ENVIRONMENT Cultural Adaptability – It reflects the adaptive ability to a changing environment . FOREX reserves. terrorism (9/11). flexibility (Eg. high cultural adaptability in developed markets and vice versa for emerging markets). dress sense. code of conduct. credit rating.culture. inflation. attitude. time value. 293 . Country Risk – It reflects the political and economic risk (Eg. interest rates. currency. judiciary) of doing business in a particular country (Eg. way of life. corruption. political stability.
and vice-versa. in most emerging markets meetings are delayed and lasts unusually long.GLOBAL BUSINESS ENVIRONMENT Time Sensitiveness – Developed country managers regard time as precious. 294 . Ethnocentrism – Developed country managers tend to regard their own culture as superior. in most emerging markets use of an interpreter may be a standard protocol. however. Language Barriers – Developed country managers expect foreign partners to communicate in their languages. time-zones. Other factors – local celebrations. High levels of ethnocentrism usually has a negative effect on business.
The 1999 (Seattle Round) saw a lot of protest amidst bringing agriculture under the purview of TRIPS. It also highlighted the nexus between US & WTO. copyrights. In 1995 (Uruguay Round) GATT was renamed to WTO. It a multi-lateral treaty with 143 (as on 2002) member countries to reduce tariff and non-tariff (quota) barriers. 295 . trademarks). It focused largely on TRIPS (patents. The 2001 (Doha Round) focused on power blocks (NAFTA.GATT GATT was a bi-lateral treaty initiated between US and some member countries in 1947 to promote free trade. BRIC). It also initiated provisions on anti-dumping. ASEAN.
primarily the OPEC countries. However with current recession in the US 2002 onwards. However. Euro). three countries joined in 2002 increasing it to fifteen members as of 2008.e. Sterling .EURO – SINGLE CURRENCY In 1999 twelve member countries in Europe joined hands to move over to a single currency (i. The Euro was significantly devalued against the Dollar till 2002. 296 . The notable exception was Great Britain which still continues with its local currency (i. the Euro slowly started outperforming the Dollar. the Dollar still remains the most preferred currency globally.Pound).e.
Transparency – A single currency is transparent and competitive. a multiple currency is preferable where the business cycles of member nations are different. However.SINGLE Vs MULTIPLE CURRENCY Transaction Costs – Though the initial cost of introduction of a single currency is very complicated and costly. Trade Block – It will strengthen the EU identity which would not have been possible otherwise. 297 . it helps avoiding transaction costs associated with a multiple currency. Rate Uncertainty – A single currency eliminates the risk of competitive devaluations. but it may have spill-over effects.
e. hot money).FII Vs FDI INVESTMENT Classical economists believed that foreign investment (in any form) is basically a zero sum game (i. – FII (transfer of intangible resources) is fast but may have strong repercussions (i. It is long term with high levels of commitment.e. 298 . Neo classical economists believe that foreign investment may in fact be a win-win game. the gain of one country is loss of another). – FDI (transfer of tangible resources) is slow but steady for the purpose of economic growth. It is short-medium term with comparatively low levels of commitment.
promotion (surrogate advertising). buying patterns (spread). customer awareness (microwaves).INTERNATION MARKETING Product – The various attributes of a product may receive different degrees of emphasis depending on differences in . Distribution – It depends on the market characteristics (fragmented – concentrated). lifestyle (petroleum 299 outlets – departmental stores). usage (talk time). economic (middle class buying power). .culture (food habits). technology (microchip). Pricing – It depends on the competitive structure (PLC – Kellogg's).
. Leverage – The leverage may vary across countries depending upon money and capital market conditions (Eg. equity is cheap in India). Cost Structure – Companies in India need to investment in fixed costs due to poor infra-structure 300 compared to developed markets.INTERNATION FINANCE Currency Risk – Many Indian IT companies (Rs) having business in US (Dollar) are asking for quotes in (Euro) or are shifting bases out of US to avoid risk of devaluation of Dollar.India) may be different from that another trading country (US – GAAP or IRS). Accounting Norms – The accounting norms of one country (AS . debt is cheap in US.
however. Recruitment – In local recruitment. double taxation. technology (convergence. Compensation – Differential pay packages exists because of differences in purchasing power. 301 . skills are more important that cultural fit and vice-versa. labour laws. in most cases it is not desirable nor practiced. Training – It is a pre-requisite for international business to reduce language.INTERNATIONAL HR An uniform HR policy is idealistic to enable parity in performance appraisal. and cultural barriers (language) vis-à-vis emerging markets. social security. shortened life cycles).
INTERNATIONAL OPERATIONS Location Incentives – FDI in emerging markets should explore options for SEZ’s to explore benefits (tax holidays. Outsourcing – A company having a core competence may be the source of global outsourcing (Eg. Bosch spark plugs are used by car manufacturers worldwide). Technology – The cost to be evaluated in terms of latest technology (Euro VI) vis-à-vis effective cost of appropriate technology (Euro II). SCM – Use of ERP to network the extended enterprise 302 across the globe. reduce power costs) vis-à-vis infrastructural bottlenecks. .
CONTEMPORARY TOPICS 303 .
304 . Innovation is all about staying ahead of competition. innovation is the first attempt to carry it out in practice. but has inherent risks involved as well. Innovations typically paves the way for more secured and improved lifestyle for consumers in general. it has destructive effects as well. While innovation typically adds value for organizations. Innovation is the most preferred strategy today to maintain competitive advantage in the present turbulent business environment.INNOVATION An invention is the first occurrence of an idea for a new product or process.
Tangible impact of product innovation on performance is significantly higher than process innovation.TYPES OF INNOVATION A key challenge is maintaining a balance between process and product innovations. However. Strategic innovation has the potential to change the rules of the game. process innovations are organizational driven. 305 . While product innovations are typically customer driven. Process innovation usually follows product innovation. process innovation is necessary to sustain the competitive advantage of product innovation.
Disruptive business models brings in a new frame of reference (i. 306 . Data Storage (Pen Drives). Telecom (CDMA Technology). It leads to a shift in the price – performance envelope. Processors (Pentium). putting an idea into practice).e. Drug Development (Bio Chemicals). Medical Surgery (Lasik). a paradigm shift). Innovations are the back-bone of successful business models .BUSINESS MODEL It is a simplified description and representation of a complex real world. about how an organization makes money (i.e.
The channels to reach out to the clients. The key partners involved in the activities. 307 . The key activities / processes necessary for execution. The key resources and capabilities required. The cost structure resulting from the business model. The revenue streams generated by the activities. The segment(s) of clients to be addressed. The proposed relationships established with clients.NINE BUILDING BLOCKS Value proposition offered to the market.
BUSINESS MODEL FRAMEWORK 308 .
With the rapid erosion of certain industries (IT. Investment Banking. innovative companies to carve out unique business models to fend off competition. It is just one piece of the puzzle. The revenue model described here are the means to generate revenues. 309 . It involves – Product Visualization – Product Prototype – Product Test – Capacity – Pricing – Distribution.REVENUE MODEL Positioning is just not sufficient. Real Estate) companies need to untangle and understand the intricacies of their business model.
310 . Promote the grape-vine. Provide reasonable incentives (not necessarily monetary). Promote the culture of experimentation. A favourable intellectual property (IP) climate. Allow the management sufficient slack to be future oriented.HOW TO MAKE INNOVATIVE CO’S Innovative company’s are a matter of culture and aspirations rather than tangible resources. Allow the workforce idiosyncrasies for their errors. Have a lean and a flat organization structure.
Collusion with the judiciary is also another distinct possibility in emerging markets. companies are increasingly relying on internal protection to sustain innovation effects.HOW TO PROTECT INNOVATION? Without adequate protection (external or otherwise) the effects of innovation does not translate to performance. 311 311 . In most emerging markets where the IP climate is not so favorable. The most preferred strategy of internal protection includes imbibing “causal ambiguity” in the production process to make reverse engineering difficult. however that possibility is slowly atrophying.
CORPORATE GOVERNANCE The basic theme of corporate governance is to ensure that professional managers are identified and made accountable in terms of clear business processes or activities and held responsible through adequate mechanisms & control systems for channelizing their decisions for the benefit of stakeholders at large. In fact the principles of corporate governance implies that managers go beyond in satisfying the stated and unstated needs of the multiple stakeholders. Corporate governance aims to reduce the principal-agent problem present in most professional managed organizations through appropriate forms of accountability and control mechanisms. 312 312 .
However. 313 . shareholders can diversify their portfolio at a much lesser risk and cost. From the strategic point of view managers tend to diversify into unrelated businesses as it provides higher returns hence a more favourable appraisal. This exposes the shareholders to additional risks and higher costs. According to the agency theory top managers and shareholders interests are usually conflicting in nature and tend to pull in opposite directions.AGENCY THEORY The root of Corporate Governance goes back to the Agency Theory. also known as the principal-agent problem or agency dilemma. not present in portfolio diversifications.
2002 to restore public confidence in corporate governance. SEBI Report – 2005. the US government passed the Sarbanes – Oxley Act. 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. After the Enron downfall. various laws were enacted to ensure proper usage of these funds. .
including the society at large. Role and responsibilities of the board: It deals with issues about an appropriate mix of executive and nonexecutive directors. 315 .GOVERNANCE PRINCIPLES Rights and equitable treatment of shareholders: Help shareholders exercise their rights by effectively communicating information in transparent ways that is understandable and accessible and encouraging shareholders to participate in general meetings. Interests of other stakeholders: Recognize the legal and other obligations of all legitimate stakeholders. The key roles of chairperson and CEO should not be held by the same person and their offices be clearly separated.
316 316 . Independence of the entity's auditors: Identification.. Disclosure and transparency: Disclosure of information should be timely and balanced to ensure that investors have clear access to data and facts. They should also implement systems to independently verify and safeguard the integrity of the company's financial reporting.GOVERNANCE PRINCIPLES Integrity and ethical behaviour: Organizations should develop a code of conduct for their top management that promotes ethical and responsible decision making. assessment and mitigation of risks and retirement by rotation over a fixed period of time.
safeguards invested capital. However. Remuneration: Performance-based remuneration is designed to relate some proportion of salary to individual performance. Regular board meetings allow potential problems to be identified. a person benefitting from a decision should abstain from it. with its legal authority to hire. they should provide no mechanism or scope for opportunistic behaviour. Balance of power: The simplest balance of power is very common. 317 .GOVERNANCE STRATEGIES Monitoring by the board of directors: The board of directors. fire and compensate top management. discussed and resolved.
undertook formal evaluation of its directors.GOVERNANCE & PERFORMANCE In its “Global Investor Opinion Survey” of over 200 institutional investors in 2002. and was responsive to investors' requests for information on governance issues. McKinsey found that 80% of the respondents would pay a premium for wellgoverned companies. 318 . The size of the premium varied by market. from 10% for companies where the regulatory backdrop was least certain (those in Morocco. They defined a well-governed company as one that had mostly out-side directors. who had no management ties. Egypt and Russia) to around 40% for Canadian & European companies.
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. 319 . However. corporate philanthropy should be a part of every corporate mission. today economic institutions are considered as a major drivers of improvement in quality of life in general and therefore needs to include multiple stakeholders. Therefore. Over a period of time. the short-term view of profit maximisation gave way to a more broader and mediumterm view wealth maximisation of the shareholders. The basic premise is that firms cannot exist in vacuum.
giving a very important message that one cannot exist without the other. economic and social responsibilities cannot be mutually exclusive. CSR can be defined as. “a healthy business cannot exist in a sick and impoverished society”.CORPORATE SOCIAL RESPONSIBILITY As Peter Drucker rightly pointed out that. However. in fact a large part of it is significantly overlapping. the debate on CRS still continues whether firms should detract its focus from its business? 320 . “an enterprises decisions and actions being taken for reasons at least partially beyond its immediate economic interests”. Therefore. Therefore.
Public image: Entrepreneurs are increasingly relying on public image as a source of competitive advantage and a higher financial discounting. MRTP). people are becoming increasingly aware of their right to a decent and healthy life. 321 . Fear of government interference: Excessive quench for profits may lead to build up of adverse public opinion compelling the government to intervene (Eg. The role of media: The media and various consumer organizations have come up in protecting consumer rights and exposing mal-practices.GROWING CONCERN FOR CSR Awareness due to education: With growing literacy.
Cement . Exide – Product take back). and extended producer responsibility (Eg. Education. Aditya Birla Research Centre – LBS). Health & Hygiene – Attending the health hazards due to wastes and by-products to employees and society in proximity (Eg. designing eco-friendly products.Paper packaging. Literacy & Training Programs – (Eg. 322 . eco efficiency.CSR STRATEGIES Green Supply Chain Management: It includes environmentally preferable purchasing. Tata Steel – Life Line Express). Refrigerators – CFC.
Prahalad notes that future markets exist collectively. across the world's billions of poor people having immense untapped buying power.BOTTOM OF THE PYRAMID With the market across most developed markets including the US getting saturated. 323 . C. they're helping millions of the world's poorest people to escape poverty. Strategic innovations leading to disruptive business models can show the way out. They represent an enormous opportunity for companies who learn how to serve them. K. In turn companies by serving these markets.
BLUE OCEAN STRATEGY 324 .
MARKETSPACE .TWO WORLDS 325 .
WHAT IS RED OCEAN? Companies have long engaged in head-to-head competition in search of sustained. battled over market-share. They have fought for profits. . and struggled for differentiation (cost or product). competing head on results in nothing but a bloody red ocean of rivals fighting over a shrinking profit pool. profitable growth. where most industries are saturated. In today’s red oceans. Yet in today’s overcrowded industries. one companies gain is always at the 326 cost of another companies loss.
rendering rivals obsolete and unleashing new demand. It helps in creating powerful leaps in value for both the firm and its buyers.WHAT IS BLUE OCEAN? Tomorrow’s leading companies will succeed not by battling in red oceans. Blue Ocean’s have existed in the past. Such strategic moves are possible through the pursuit of product differentiation and low cost simultaneously. but by creating blue oceans of uncontested market space ripe for growth . it will exist 327 in the future as well. It is only the frames of the .
RED OCEAN Vs BLUE OCEAN Compete in existing markets Compete in uncontested markets Beat the competition Exploit existing demand Make the competition irrelevant Create and capture demand Make the value-cost trade off Break the value-cost trade off Demand is the limiting factor Supply is the limiting factor 328 .
As trade barriers between nations & regions fall. Technological advances have substantially 329 improved industrial productivity. Population shrinkage across a no. of European nations. . Demand across developed markets reaching a plateau. information imperfections atrophy instantly. Niche markets & monopoly havens are continuing to disappear.BLUE OCEAN STRATEGY IMPERATIVES Prospects in most established market spaces – red oceans – are shrinking steadily.
CONCEPTUAL UNDERPINNINGS Blue oceans have existed in the past and will exist in the future as well. Incumbents often create blue oceans within the ambit of their core business. Company & industry are the wrong units of 330 strategic analysis. the underlying technology was often already in existence. History indicates that blue oceans exist in three basic industries – automobiles (how people get to work) – computers (what people use at work) – entertainment (what people do after work). They are not necessarily about technology. managerial moves are. .
BLUE OCEAN .IMPLEMENTATION Reduce Which factors to be reduced below the industry standard Eliminate Which of the industry factors that the industry takes for granted should be eliminated Create VI Which factors should be created that the industry has not offered Raise Which of the factors should be raised above the industry’s standard 331 .
IMPLEMENTATION SEQUENCE Buyer Utility (1) Is there exceptional buyer utility in your business idea? Price (2) Is your price easily accessible to the mass of buyers? Blue Ocean Strategy Adoption (4) What are the adoption hurdles in actualizing your business idea? Are you addressing them up front? Cost (3) Can you attain your cost target to profit at your strategic price? 332 .
Citibank – Automated teller machines & credit 333 cards. Southwest Airlines: Pioneering the concept of LCC.SOME GLARING EXAMPLES In the last century authors Kim and Mauborgne have documented the creation of more than 150 blue ocean creations across 30 industries – Virgin Atlantic: Fractional jet ownership or travel to space. Sony Play Station: Redefining machine-human interface in entertainment and targeting an altogether new user base. .
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. greater than themselves. companies & managers are largely at the mercy of economic forces. According to this view managers need not be constrained to act within the confines of their industry. Off late emerging views in strategy having its origin in (Organization Theory) led to a paradigm shift to what is called the – reconstructionist view. All they need to do is change their managerial frames. 334 .
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