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Course Code: 611 & 612 Dr. Subir Sen – Faculty Member, IBS
E-Mail: firstname.lastname@example.org, 9830697368 1) Crafting & Executing Strategy – Thompson & Strickland. 2) Strategic Management – Pearce & Robinson. 3) Strategic Management – Fred. R. David. 4) Exploring Corporate Strategy – Johnson & Scholes. 5) Competitive Advantage – Michael E. Porter. 6) HBR – Articles & Case Studies.
STRATEGY - DEFINITION
Strategy is all about making trade-offs between what to do and more importantly what not to do; consciously choosing to differentiate. It reflects a congruence between external opportunities and internal capabilities. Types of strategies – Corporate Strategies – It is all about making choices across various businesses and allocating resources among them. Business Strategies – It is all about developing leveraging and sustaining competitive advantage. Functional Strategies – It is all about finding newer ways to perform existing processes, or 3 better still adopting new processes altogether.
STRATEGIC MANAGEMENT DEFINITION
Strategic management attempts to integrate the traditional management functions and align the organization as a whole with the broader environment to make resource allocations in a way to achieve the strategic intent of the organization. This alignment is called strategic fit. It serves as a road-map for the organization in its growth trajectory. It provides the direction – extent – pace – timing. It depends on the turbulence of the environment and the aggressiveness of the organization. It distinguishes the winners from the losers.
PILLARS OF STRATEGIC MANAGEMENT
Differentiation – Differentiation of key inputs and technologies helps a firm to consciously move away from homogeneous to heterogeneous markets enabling them to earn super-normal profits from normal profits. Integration – Whenever dealing with a complex task of managing a business (i.e. involving a no. of variables with cross linkages) it is in the interest of simplicity that the task be broken up in smaller components. However, for effective control, integration is essential. Alignment – Since differentiation is prone to replication, it is in the interest of the firm to differentiate continuously by aligning the resources with environmental opportunities.
STRATEGIC MANAGEMENT FRAMEWORK
Economic al Strategic Finance Fit Political Strategic Intent Fit Political Marketin g Manageme nt Social & Cultural
It is about adaptation and response to the same.FEATURES It forms the core activity of the top management. It involves substantial resource outlay. It is all about creativity and innovation. It provides broad guidelines. It is a holistic and integrated approach. It requires full commitment of the top management. 7 .STRATEGIC MANAGEMENT . It is irreversible. It is long-term in nature.
It is about a definite formula. It is about forecasting. It involves only the top management. 8 . It attempts to minimize risk. It is fool-proof in nature. It involves nitty-gritty's. It about mere data and facts. It is rocket science.STRATEGIC MANAGEMENT – MYTHS It involves short-cuts. It a bundle of techniques or even tricks. It brings instant success.
To tap markets across boundaries. To generate large resource pool. again and again ……. 9 To develop core–competencies.STRATEGIC MANAGEMENT IMPERATIVES To be continuously alert. To leverage size. To innovate. To be insulated against environmental threats. rather than reactive. To gain expertise in technologies. To be proactive. To assimilate change faster. scale and scope. . To be future oriented.
whose origin can be traced to some of the greatest battles fought in the ancient days. In the ancient days battles were won not by virtue of size of the army or armory. but by virtue of their courage. It is an old wine in a new bottle.strategies. battles fought on the market front are won by companies by virtue of their obsession & strategies. obsession.STRATEGY . and more importantly . In contrast. today's battles are fought over markets. 10 .ORIGIN The word strategy has its origin from the Greek word strategia meaning Military Commander. but with a lot a rigour and robustness. In the ancient days battles were fought over land. Even in today’s markets.
challenging GM and Ford. – Reliance’s entry into telecom.SOME PARALLELS Japan’s attack on Pearl Harbour – Strategy: Attack where it hurts the most. Allied Forces Vs Germany (WW-II) – Strategy: Forging alliances. US attack of Morocco to capture Germany – Strategy: Pin-hole strategy – Wal-Mart challenging Sears by entering small towns. 11 . – Toyota’s entry in the US. Napoleon’s attack on Russia – Strategy: Waiting for the right time. – Yahoo and Microsoft challenging Google.
12 . – Mass Production Organization Size – Complicated Processes – Complex Structures Evolving of an emerging paradigm – survival of the fittest (Fayol & Taylor.EVOLUTION OF MANAGEMENT As Peter Drucker refers to it. 1910). The things happening around the firm when totally disconnected from the past leads to a paradigm shift. The first major discontinuity in the history of global business environment was the .Industrial Revolution. a radical change in the business environment brings about discontinuity. A paradigm is a dominant belief about how the business and its environment operates.
Survival of the most adaptable becomes a new management paradigm (Ansoff. performance across firms became differentiated. – Global market place. From uniform performance. – Affluence of the new customer (i. – Changes in the technology fore-front.e. – Homogeneous to heterogeneous products. 13 . 1960). The question of outperforming the benchmark became the new buzzword. push to pull). 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 .
15 . – It is primarily the top management’s prerogative. Ansoff (1960) – Strategy can be segregated into certain mutually exclusive and inter-related components aimed at managing the growth of an organization. Learning always begin on a clean sheet of paper.APPROACHES TO STRATEGY Analytical Approach – Igor H. – The choice of strategy is primarily concerned with external ones rather than internal ones. – The choice of product-market mix is based on conscious evaluation of risk – return factors. – Biases and prejudices has a very little role to play in strategic choices pursued by managers.
– The top managers then decide on the type of organization structure & systems to be in place. Once the control systems are in place. – Management control systems has a dominating role in influencing firm performance. who will be the top managers.APPROACHES TO STRATEGY Design Approach – Alfred Chandler (1970) – Structure follows strategy. The organization initially decides which industry to enter. Successful organizations align authority and responsibility of various departments in way to reach overall objectives. – Organization structure will precede and cause changes in strategy. how it will compete. everything else follows. 16 .
new entrant. – The organization will outperform the industry where environmental forces are weak and vice-versa. – An organization is seldom in a position to influence the larger business environment. customer. substitutes. – A firms performance is inversely related with the bargaining power of environmental forces to which it is exposed. competitors. – The environmental forces comprises of – supplier.APPROACHES TO STRATEGY Positioning Approach – Michael E. 17 . Porter (1980) – Choose a consumer segment and position your product accordingly.
APPROACHES TO STRATEGY Core Competence – C. locating in most attractive industries and pursuing the same strategy. – It enables a firm to deliver unimaginable value ahead of time. 18 . K. They are complex resources and undermines a firms competitive advantage. – Organizations can significantly alter the way an industry functions. Prahalad (1990) – The key to superior performance is not doing the same as other organizations. – Core competencies are a set of skills that are unique and can be leveraged. but exploiting the resource differences among them.
STRATEGIC MANAGEMENT PROCESS Strategic Intent Strategic Planning Strategic Gap – Environmental Scanning – Internal Appraisal of the Firm Strategy Formulation – Corporate Strategy – Business Strategy Strategic Choices – Functional Strategy Strategy Implementation Strategy Performance Strategy Evaluation & Control 19 .
TOP MANAGEMENT PERSPECTIVE 20 .
STRATEGIC INTENT If you cannot see the future. It implies a significant stretch. It’s a philosophy that distinguishes it from its competitors. It is the cornerstone of an organizations strategic architecture reflecting its desired future state or its aspirations. It involves an obsession to be the best or outperform the best. you cannot reach there. It provides a sense of direction and destiny. A strategic intent is a statement of purpose of existence. 21 . A gap that consciously manages between stagnation and atrophy. A substantial gap between its resources and aspirations.
STRATEGIC INTENT .HIERARCHY Integrativ e m Do an in Visio n Mission Dominant Objective s Goal s Plans Lo g ic Single Specifi c Man y 22 t .
23 . strategic variety) is apparent. Dominant logic changes. when radical changes in the internal and external environment (i. It is core to the strategic intent of the firm.e.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 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. To put it more simply.
It is a combination of three basic elements – – An organizations fundamental reason for existence. It provides an unity of purpose amidst diversity of personal goals. It enables the top management to remain focused. beyond just making money.VISION It is a dream (not a forecast) about what the company wants to become in the foreseeable future. – It stands for the unchanging core values of the company. 24 . It ensures that the company does not wander off into unrelated zones or fall into an activity trap. but achievable aspirations. – It represents the company’s audacious.
Sharing – The company across all hierarchies should have faith in it. Brevity – It should be short. Clarity – Vividly descriptive image of what the company wants to be known for in the future. Empathy – It should reflect the company’s beliefs to which it is sensitive.VISION . Reachable – It should be within a reasonable target in the known future. and memorizable. 25 . In Reliance when a new project becomes operational top managers hand over charge to the SBU heads and move on to a new project.CHARACTERISTICS Reliance – Where growth is a way of life. not an utopian dream. clear.
It gives the impression of a forward-looking organisation. It makes strategic alignment easier. It gives a shared platform. It facilitates development of skills & capabilities. It provides a holistic picture.VISION . It gives enlightment. To prevent the fall in a activity trap.ADVANTAGES To stay focused on the right track. It fosters risk taking and experimentation. 26 . It lends integrity and genuineness.
Although the purpose may change over time. It enables the firm to define its business landscape and identify its competitive forces. It is intuitive for managers to conceive their business in terms of the customer needs they are serving – What business are we in? – Which customer needs are we serving? It should be broad based and relevant to all stake-holders. It serves as a road map to reach the vision. its reason for existence. A broad mission statement helps in fending competitors. 27 .MISSION Mission defines the space that a business wants to create for itself in a competitive terrain.
…………………. 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 comfort. though some may seem unrelated in nature.MISSION – SOME IDEAS Reliance – We are in the business of integration. – We do not offer steel. We offer solutions. 28 . – We do not offer software's. …………………. We offer security. – We do not offer insurance.
– It lends direction – time frame in the medium term. 29 . – It is based on Management by Objectives (MBO). – It prevents deviation. – It adds legitimacy and motivation. – It provides a benchmark for evaluation. – It keeps the mid management pre-occupied.GOALS & OBJECTIVES Reliance – We want to become a Rs. It provides a quantitative feel to an abstract proposition. – It helps identifying key success factors.100K crore company by the year 2005. It is an end result (quantifiable) something a firm aims and tries to reach in a time bound frame.
– Leverage economies of size and scale. and gaining access to desired markets to achieve the desired goals and objectives. coordinating appropriate technologies. It is specific to a particular business.PLANS Reliance – Desire to invest 25K crore in telecom business by circa 2010. – Compress project times. It is the process of garnering necessary inputs. The details of the plan Reliance Telecom adopted were – Backward integrate process technologies. 30 . – Use price-elasticity to break market barriers. – Acquire a market share of indomitable position.
strategies lose touch with the emerging realities. This state of affairs is known as strategic drift. This tendency to restore continuity is known as inertia (resistance to change). When changes in the environment is incremental. 31 . However. Historical studies have shown that most organizations tend to continue with their existing strategies. radical change may lead to disequilibrium. past strategies tend to have a bearing on future strategies.STRATEGIC DRIFT Due to top management commitment. In such a context. equilibrium is maintained. It often leads to an organizational crisis.
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 involves intentional acts of influence to enhance or protect the self-interest of individuals or groups over organizational goals. – Creating obligations of reciprocity. – Hiding vulnerability. 33 . – Creating a favourable image.ORGANIZATIONAL POLITICS Strategic drift often leads to organizational politics. Some instances of organizational politics – Formation of powerful groups or coteries. – Developing a platform of support. – Using covert tactics to pursue self interests. – Distorting information to gain mileage.
INTENDED & REALISED STRATEGIES An intended strategy is an expression of interest of a desired strategic direction. Other causes – – The plans are unworkable and utopian. . – Persons responsible for strategy conceptualization and implementation are34 divergent. Usually there is wide gap between the two when organizational politics is evident. – The environment context has changed. – Influential stake-holders back out. A realized strategy is what the top management actually translates into practice.
35 . They simply unfold the particulars of the sub-system in stages. but the master scheme of the rational comprehensive scheme is not apparent. However. but as a defensible response to the complexities of a large organization that mitigate against publicizing goals. this is not to be treated as “muddling”. Strategy formulation and implementation are linked together in a continuous improvement cycle. Learning is an integral part of logical incrementalism.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.
36 . The broader objective should serve the overall interest of the organization. Adaptation – As implementation progresses.IMPLEMENTING INCREMENTALISM General Concern – A vaguely felt awareness of an issue or opportunity. Leveraging Crisis – A sudden crisis or an opportunity should be used as a trigger to facilitate acceptance and implementation of change. Macro Broadcasting – The broad idea is floated without details to invite pros and cons leading to finer refinements. Agent of Change – Formal ratification of a change plan through MBO.
As it brings 37 with it a different dominant logic. . Dominant logic’s are the cornerstones of change when strategic transformation is apparent.STRATEGIC TRANSFORMATION Strategic transformation (a complete overhauling of the strategic architecture) becomes inevitable whenever a strategic drift takes place. It creates blinders. Dominant logic’s are very rigid and sticky and prone to inertia. Tampering with surface level factors often leads to atrophy. Strategic transformation becomes smooth through a change in top leadership.
experience.LEARNING ORGANIZATION A learning organization is capable of continual regeneration from knowledge. A learning organization must continuously focus on unlearning as well. – Informal Networks – Emerging of new ideas. It helps prevent a strategic drift from occurring at the first place. Factors that fosters a learning organization – Pluralistic – An environment where different and even conflicting ideas are welcome. – Experimentation – Fosters a culture of risk taking. – Constructive Bargaining – Agree to disagree. – Organisational Slack – Enough free space. 38 . and skills that fosters experimentation and questioning and challenge around a shared purpose.
ENVIRONMENTAL CONDITIONS Dynamic Scenario Planning Learning Organization Static Forecasting Decentralization Simple Complex 39 .
ANALYZING BUSINESS ENVIRONMENT 40 .
gap analysis). It is pro-active in nature. Strategic planning is a function of discounting the future. It requires a quantum leap (i. It is based on the assumption of radical change. Strategic gap basically points towards a vacuum of where the organisation wants to be and where it is. It is based on the assumption of incremental change. 41 . It is reactive in nature.PLANNING & STRATEGIC PLANNING Formal planning is a function of extrapolating the past. Competitive advantage provides the surest way to fulfill the strategic gap. It points to a position of superiority with relation to competition.e.
A manager has to continuously scan the environment to ensure alignment of the strategies with the radically changing environment. The world is flat. The segments of the environment a top manager scans selectively depends upon his dominant logics. 42 . It is exploratory in nature.ENVIRONMENTAL SCANNING The environment is defined as the aggregate of conditions. and influences that affect an organizations way of doing things. Environmental factors can be external as well as internal to the organization. Environmental scanning is very important component of strategic planning. resources and ideas move unhindered. events. not guided by any boundaries.
PESTEL PESTEL attempts to provide a broad framework on how the broader environmental forces affects an organization and influences the way it practices strategy. which may be different from the past impact. It is important not only to identify the structural drivers of change. It is not intended to be used as an exhaustive list. It is particularly important that PESTEL be used to look at the future impact of environmental factors. but also to analyze the complex linkages across them. for which a holistic picture is required. 43 . Understanding the composite effect is critical.
Licensing & Quotas. Government Attitude. Income & Age Distribution. Language Barriers. Economic Cycles. Social Values. Monsoon & Food Grains Reserves. FDI Inflows. Savings & Investment. Capital Market & Forex Reserves. Subsidies & Protection. Social – Population Diversity. Economic – GDP. Religious Sentiments. 44 . Currency Stability. Literacy Levels.PESTEL FRAMEWORK Political – Government Stability. Infra-Structural Investments. Economic Model. Inflation & Interest Rates. Fiscal Deficit. Central – State Co-alignment.
Research & Development. Pollution Control Laws. Waste Disposal & Emissions.PESTEL FRAMEWORK Technological – Innovation. Extended Producer Responsibility. Non-Fossil & Alternative Fuels. Product Design. Obsolescence Rate. Employment Laws. Patents. ERP. Consumer Protection Laws. Environmental – Global Warming & CSR. Environmentally Preferable Purchasing. Carbon Credits. Product Safety & Health Hazards. Patent Laws. Legal – Monopolies Legislation. 45 . Direct & Indirect Taxes. Technological Convergence.
Abolition of import licenses. 46 . Encouraging exports. Structural Adjustments – Phasing out subsidies. Curtailment of PSU’s. Exit Policy. Economic Reforms – Fiscal & Monetary Reforms. FERA Liberalization.ECONOMIC LIBERALISATION New Industrial Policy (NIP) – Liberalizing industrial licensing. PSU Disinvestments. MRTP Liberalization. Banking Sector Reforms. Capital Market Reforms. Rupee convertibility. New Trade Policy (NTP) – Lowering import tariffs. Dismantling price controls. Encouraging FDI.VRS.
DISCONTINUITY Destabilization due to entrepreneurial freedom – Cocoon of protection disappears – Diversification spree – Existing notions of size shaken – Industry structures change radically – Economic Darwinism .Survival of the fittest MNC Onslaught – Enhancing stakes – Power Equation – Joint Ventures – Technological Alliances – Take-over threat. Mergers & Acquisitions 47 .
Consumerism Challenges on the technology front – Competencies become technology based – Investment in R&D become inescapable 48 .DISCONTINUITY Hyper Competition – MNC’s .Globalization – Cheap Imports & Dumping – Push to Pull Marketing Buyers exacting demands – Shortage to surplus – Price competition – Life-style changes – Stress on quality.
DISCONTINUITY Compulsion to find export markets – Identifying competitive advantage – Technological gap – Global presence – Depreciating currency – Exports Corporate vulnerability – It is no longer business as usual – Capital inadequacy – Lack of product clout and brand power – One product syndrome – Loss of monopoly 49 .
PORTER Threat of New Entrants Bargainin g power of Suppliers Competition from Existing Players Bargainin gBargainin power g of power of Suppliers Customer s Threat of Substitutes 50 .FIVE FORCES MODEL .
It should not only be used to understand the forces. the forces are subject to changes. 51 . It is even wiser to apply the same at the product – market level. profit potential) per se. The five forces have strong cross-linkages. incremental or otherwise. It depicts the attractiveness of an industry (i. but also used to understand how they can be countered and overcome.FIVE FORCES MODEL ASSUMPTIONS The model is to be used at the SBU level and not at the industry level.e. The model should not be used as a snapshot in time.
Undifferentiated product. Low margins & stagnancy. Threat of Customers – Buyer concentration and volumes. Government policy. High switching costs. Low customer switching costs. Presence of substitutes or unorganized sector. Low relative importance of the segment. Scope for backward integration.PORTERS FIVE FORCES ANALYSIS Threat to Entry – Economies of size and scale. 52 . Access to distribution channels. Capital requirements. Product differentiation through proprietary technology or brand power. Industry stagnation. Unimportance of product quality. Resource profile & fear of retaliation. Learning curve advantages.
Lack of substitute inputs. Produced by industries earning high profits. Buyer’s propensity to substitute. 53 . High customer switching costs. Piracy and counterfeits. Intermittent overcapacity. Low level of differentiation. Industry stagnancy. Unorganised sector. Differentiated inputs. Jockeying for position – Fragmented market. Diversity of players. High exit barriers. Scope for forward integration. Low relative importance of the segment.PORTERS FIVE FORCES ANALYSIS Threat of Suppliers – Supplier monopoly. Product perishability. Threat of Substitutes – Improvement in price -performance trade-off.
Business Scope – The intention whether the firm wants to be in a single. Reliance). Resource Profile – It highlights the capabilities (generic) or competencies (business specific) of the firm. Cohesiveness – Degree of bonding existing across affiliated firms. dominant or related diversified or unrelated diversified businesses (Infosys. Inertia – Excessive commitment to past strategies prevents firms from tapping emerging opportunities. 54 .FIRM ENVIRONMENT Size and Scale of Operations – It is a very important component of competitiveness in today's global context (Bharti – MTN. Tata).
However. which further reduces costs. Matured firms will always be positioned advantageously on the ECurve than new entrants. experience teaches better and more effective way of doing things. it can price its products more competitively. leverage it as a competitive advantage. Experience curve has strong linkages with performance. and with lower prices it can increase its sales volume. The E-Curve thus enables organisations to build entry barriers.EXPERIENCE CURVE The cost of performing an activity declines on per-unit basis as a firm becomes more efficient. With lower costs. an E-Curve can prove to be futile during discontinuity. 55 .
EXPERIENCE CURVE Cost per unit of output Decreases at an increasing rate Point of inflexion Decreases at a constant rate Decreases at a decreasing rate Production / Volume 56 .
EXPERIENCE CURVE .TRADITIONAL VIEW Efficiency = Lower Costs 2 3 1 Experience = Efficiency Lower Costs = Higher Sales Entry Barrier = Better Performance 4 6 5 Higher Sales = Lower Costs Lower Costs = Entry Barrier 57 .
STRATEGIC VIEW Inertia = Limited Growth Experience = Inertia 2 3 1 Limited Growth = Diversification Strategic Failure = Poor Performance 6 5 4 Diversification = New Experience New Experience ≠ Old Experience 58 .EXPERIENCE CURVE .
A SWOT audit involves – Company Records – Annual Reports. Press Clippings & Interviews. Observation. Customers.VULNERABILITY ANALYSIS . Competitors.SWOT The framework was originally conceptualized by Kenneth Andrews in 1970. Interviews. Case Studies – Structured Questionnaires. 59 Analysts. It helps an organisation to capitalize on the opportunities by maximizing its strengths and neutralizing the threats minimizing the weaknesses. It is one of the earliest models in environmental scanning. Suppliers. Websites. . Business Intelligence – Bankers. Acronym for Strengths – Weaknesses – Opportunities – Threats.
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 .
Tata. Engineering Skills – Eg. Dr. Infosys. Strong after sales & service network – Eg. Sony. Tata Steel. SBI. Honda. High quality products – Eg. Reddy’s. Volkswagen. Reliance. 61 . Aditya Birla. ITC. Economies of scale – Eg. Ranbaxy. Biocon. Good credit rating – Eg. Siemens. Motivated employees & cordial industrial relations – Eg. Reliance. Excellent penetration – Eg.SOURCES OF STRENGTH Strong brand identity – Eg. Infosys. Toyota. Strong R&D base – Eg. HUL. Large resource pool – Eg. Caterpillar.
SOURCES OF WEAKNESSES Outdated technology – Eg. Group . Excessive diversification – Eg. Strategic myopia – Eg. J. CESC. Modi Group. Organizational Politics – Eg. B. Procter & Gamble. Narrow business scope – Eg. Inertia – Eg. Nirma. Hindustan Motors. Tatas. Single product syndrome – Eg. Lacking experimentation culture – Eg. Ballarpur Inds. K. Excess manpower – Eg. K. SAIL. CMC (Tata Group) 62 . Lack of product / brand clout – Eg. Bijoligrill. Inefficient top management – Eg.Raymond.
Growing population – Eg.SOURCES OF OPPORTUNITIES Delicensing of Industries – Eg. Retailing. Collaborations & Joint Ventures – Bharti & WalMart. Fertilizers. Maruti. GDR’s. Abolishing CCI. Capital market reforms – Eg. Banking. Fertilizer. Free pricing – Eg. Market driven Interest rates – Eg. Abolishing MRTP – Eg. Life style changes – Eg. Exit Policy – Eg. Sugar. Sugar. ECB’s.Tata Motors. VRS. Market driven Pricing – Eg. Telecom. Globalization – Eg. Insurance. Middle-class buying power. 63 .
Economic recession – Eg. 64 . Satyam. Nationalisation – Eg. Lack of Corporate Governance – Eg. Natural disaster – Eg. (1985–1990). Reliance. Singur SEZ. Land acquisition . Import relaxation – Eg. Foreign Direct Investment (FDI) – Eg. 26/11.SOURCES OF THREATS Political instability – Eg. Dumping from China. 11/9. Earth Quake. Tsunami. (2008).Social activism – Eg. Bajoria – Bombay Dyeing. Hostile take-over – Eg. Tata Steel. Terrorist attacks – Eg. Onida. Group disintegration – Eg.
Assess the extent of impact of the factors. scenario analysis). Stages in ETOP analysis – List the aspects of the environment that has a bearing on the organization. Delphi's technique. 65 . Holistic view – Prepare a complete overall picture. Forecasting – Predict the future (i. time series.e. Strategic responses (including adaptation) to opportunities and threats is critical for survival and success.ETOP Acronym for Environment – Threat – Opportunity – Profile. It represents a summary picture of the external environmental factors and their likely impact on the organization.
High investment intensity acts as a drag. selectively. 66 Vertical integration is a powerful strategy.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. Relative attractiveness of the market. An organization can draw upon the experience of its peers in similar situations. It is also a form of assessing vulnerability through longitudinal analysis. . Some key findings on major performance drivers that explains 75% deviations in performance – Product quality and relative market share.
when radical changes in the economy takes place. Authenticity of data is of prime importance – Contexts drawn across one organization may not be applicable to another. As every organization is unique in its own way. therefore 67 validity may be a question. – Contexts may vary across countries. – Contexts may vary over time.PIMS .LIMITATIONS The analysis is based on historical data and it does not take care of future challenges. Managers should be particularly cautious while referring to such data during times of discontinuity as it makes past patterns futile. .
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 .KEY SUCCESS FACTORS (KSF) KSF relates to identification and putting concentrated effort on a particular activity or process which forms the very basis of competitive advantage.
IDENTIFYING ALTERNATIVE STRATEGIES 69 .
national. dominant. unrelated) and geographical scope (local. global) of a firm and deals with choices of allocating resources across them. related. 70 . It provides broad direction to the groups vision and mission. A corporate strategy identifies and fixes the strategic gap it proposes to fill. It reflects the customer needs it intends to satisfy. It indicates the quality of growth an organization is looking for.CORPORATE .GRAND STRATEGY It is concerned with the overall business scope (single. It determines the locus a firm encounters with internal and external environment.
CORPORATE STRATEGY MATRIX Corporate Strategy Stability Stability Growth Growth Combination Diversification Divestment Intensification Market Penetration Related Vertical Market Development Product Development Unrelated Horizontal 71 .
– The firm may not be willing to take additional risk associated with new projects. The reasons for stability strategy – – Lack of attractive opportunities. (Eg. Stability however. does not relate to do-nothing (Eg. Even during adverse times firms need to adopt a strategy to sustain current performance levels. – Why disturb the existing equilibrium set up? – Limited resource position. The scale and scope of present operations remains almost intact. Hindustan Motors). – To stop for a while and assess past records. 72 . Citibank).STABILITY It involves maintaining status-quo or growing in a slow and selective manner. erosion of capabilities.
GROWTH . 73 .ANSOFF’S MODEL New Product Existing Product Existing Market Market Penetration (+) Product Development (++) New Market Market Development (++) Diversificatio n (+++) Note: (+) indicates degree of growth and risk involved.
within a well defined market segment. 74 . Market penetration can be achieved by – increasing sales to current customers. – Elongated product life-cycle. convert competitors customers. direct non-users to users. – The company carries a risk of product obsolescence. Nirma. (Eg. – Helps firms which are not comfortable with unfamiliar terrain.MARKET PENETRATION It is a strategy where a firm directs its entire resources to the growth of a single product or a closely knit product set. Ujjala. – Suitable for industries where scope for technological breakthrough is limited. Britannia).
fabrics.…… or Teflon: aircraft technologies to cutlery to paints or Raytheon Corp – Microwaves: radars to kitchen appliances). – Immense customer reach & flexible advertising. – Moves across geographical boundaries. upholstery. (Eg. – Creativity and innovation – thinking out of the box. Du Pont – Nylon: parachutes. socks & stockings. 75 . – Stretches product life cycles.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. carpets. – Unconventional and flexible distribution channels. tyres.
reliability. – Substitutes that serve the same needs (Eg. – Leverage on customer and brand loyalty.PRODUCT DEVELOPMENT It is a strategy where a firm tries to achieve growth through a radical new product (Eg. durability. – Deliverable through – redesigning or reengineering. Microsoft: DOS to Windows) or a substantial improved version (incremental) of an existing product to repeatedly enter the same market (Eg. – Areas of product improvement – performance. – Leveraging through – innovation. features.Strolleys). serviceability. perception. aesthetics. conformance. Refills) 76 . Close Up: Fluoride – Gel toothpaste or VIP .
– Internal capital market. – Risk reduction. – High transaction costs and institutional gaps. – Permits: quotas. – Conglomerate or market power (i. thereby creating a new business. Why do firms diversify in the Indian context? – Shift the growth trajectory or opportunistic.e. From the traditional point of view. dominance). From the modern point of view they are strategically dissimilar. licenses (i. the new business is distinct from the existing business in terms of – inputs – technologies – markets. industrial embassies). 77 .DIVERSIFICATION It marks the entry of a firm into newer markets with new products.e.
while the coffee business would register a return of 10%. in which a given year is either under hot or cold wave. the ice-cream business would register a return of 30%. Let us assume that there are two businesses constituting the entire market – coffee and icecream. If on the other hand. What would be your ideal diversification strategy through optimization? 78 . while the coffee business would register a return of 30%. either of which is equally likely to prevail. ice-cream business would register a return of 10%. If the hot wave dominates the planet.HOW DIVERSIFICATION REDUCES RISK? Consider a hypothetical planet. cold wave dominates the planet.
If we diversified in either of the two businesses, our expected return will be 20%, with a possible risk of 10%. If, we split our investment between the two businesses in equal proportion, half of our investment will earn a return of 30%, while the other half would earn 10%, so our expected return would still be 20%. But in the second instance there is no possibility of deviation of returns (i.e. risk). Diversification results in 20% expected return with zero risk, whereas investing in individual businesses was yielding an expected return of 20% with a risk factor of 10%. The pivotal point is that the two businesses are negatively correlated. 79
It takes place when a company increases the breadth of a firms business or geographical scope by getting into product – market segments which compliments its existing businesses (Eg. Reliance). Alternatively, existing business may recreate new businesses, which are distinct, but supplements its existing business (Eg. Bajaj – scooters to motorcycles, Dove – soaps to shampoo). – It results in increased market power. – Leveraging existing capabilities. – Resources can be shared for mutual benefit. – Reduces economic risk (i.e. business cycles). – Enables brand or product line extension.
It increases the depth of its business scope either in a backward business process or in a forward one. Backward integration occurs when the company starts manufacturing its inputs or catalysts. In forward integration a firm moves into marketing of its products and services. Advantages of backward integration – – Cost competitiveness – entry barrier. – Better operational control – timely supplies, quality control, coordination – JIT, savings in indirect taxes. Disadvantages of backward integration – – It may spark of a chain reaction - contagion effect. – Long gestation & break even - investment in CAPEX.
Oil & Gas exploration Naptha-cracking Acetic Acid Paraxylene (PX)
Purified tetra-pthalic acid
Polyester Filament Polyester Staple Fibre (PSF) Yarn (PFY) Textiles 83
DIVERSIFICATION SUCCESS ?
While diversifying into new businesses, the scope of relatedness or unrelatedness should not be judged from the traditional static view, but from the modern dynamic view which incorporates strategic factors like capabilities and dominant logic. Countermanding reasons – Potential to reap economies of scope across SBU’s that can share the same strategic asset. Potential to use an existing capability to help improve the quality of a strategic asset in another business. Potential to use an existing capability to create a new strategic asset in another business. Potential to expand the existing pool of capabilities. Dominant logic ensures timely & appropriate response.
Ranbaxy.A firm gets most of its requirements from one or more outside suppliers that is under its partial control through value chain partnerships (Eg. Reddy’s). Maruti – Sona Steering). Reliance). Dr. 85 .Where one firm has full ownership and control over all the stages of a value-chain in the manufacturing of a product (Eg. Usually the firm concentrates on its core activities. Quasi-integration . and out-sources the noncore activities (Eg.A firm produces part of its own requirements and buys the rest from outside suppliers with a variable degree of ownership and control.QUASI & TAPERED INTEGRATION Full Integration . Tapered integration .
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 .
core business). lack of knowledge of competitive forces).e. Drawbacks of unrelated diversification – – Cost of failure (i. myopia). lack of strategic intent. Firms usually engage in conglomerate diversification when emerging opportunities are very attractive and offers potential growth opportunities.CONGLOMERATE DIVERSIFICATION It relates to entry of firms into businesses which are distinct in terms of – inputs – technologies – markets. – Cost of neglect (i. – Cost of ignorance (i.e.e. and are also strategically dissimilar.e. 87 . synergies pulling in opposite directions). – Cost of dysynergy (i.
CONGLOMERATE DIVERSIFICATION Paper & Packaging Edible Oils Tobacco Hotels Food & Confectionary 88 .
(Eg. In strategy there is no scope for sentimentality with divestment. Glaxo’s “Glucon-D” to Heinz). reactive) and survival is at stake and the firm does not have resources to fend off competitive forces. 89 . Tatas sale of Goodlass Nerolac.DIVESTMENT Divestment is a defensive strategy involving the sale of entire stake (Eg. It is may also be a pro-active strategy. L&TCement Division to Aditya Birla Group) technically known as divestiture or a product (Eg. Tata Press). It taken into account when performance is disappointing (i. Tata Pharma. ACC) in full to an independent entity. It may also involve a SBU (Eg. where a company simply exits because the business no longer contribute to or fit its dominant logic.e.
where 100% of the assets (including intangibles) are valued and paid for. Tatas buy-out of Corus for US $ 11.ROUTES Outright Sale – Popularly known as the asset route. 1956 does not permit this mode. the Companies Act. Hive-Off – A hive off is the creation of a new entity followed by transfer of assets.3 billion. (Eg. However. Sale of Diamond Beverages to Coca-Cola for US $ 40 million). (Eg. Leveraged Buy-Out (LBO) – Here the company’s shareholders are bought out through a negotiated deal using borrowed funds. involving 608 pence per share). 90 . where the equity is allotted amongst the existing shareholders on a pro-rata basis.DIVESTMENT .
e. growth. It is usually pursued by a business group with diverse interests across multiple industries. 91 . joint ventures). There can be no ideal strategy for every business.e. and divestment strategies applied simultaneously or sequentially for a portfolio of businesses. A combination strategy can be implemented through green-field projects (i.COMBINATION STRATEGY It is a mixture of stability. mergers and acquisition. developing facilities right from the scratch) or through brown-field projects (i. because every business has its own unique external and internal environment.
STRATEGY CHOICE & PORTFOLIO ANALYSIS 92 .
What then is the magical number? 93 . In most cases the trade-off is between resources and opportunities. It attempts to answer the following questions – How effective has the existing strategy been? How effective will that strategy be in the future? What will be the effectiveness of alternative strategies? It is impossible for a manager to assess all the alternatives. 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.
They must choose problems which will lead to the right kind of opportunities. 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. if addressed. The key task before a top manager is to identify the right problems. nor is to a define a problem for others to solve. managers need to ask the right questions.
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. Managing Agency). Proximity to the corridors of power (i. formal and informal ties. Their roots can be traced to a single family or clan and share broad similarities. Licenses & Quotas.BUSINESS GROUP .e. business houses in India. High degree of centralized control (GEO. embassies). 95 Succession planning is critical to continuity. Resource sharing. keiretsus in Japan. . chaebols in Korea. BRC).
RESOURCE SHARING ACROSS FIRMS Parent Company Firm 1 Firm 5 Firm 3 Firm 2 Firm 4 96 .
STRATEGIC CHOICE – MACRO TIMING Recession (Stability) Prosperity (Diversificatio n) Depression (Divestmen t) Recovery (Intensification ) 97 .
STRATEGIC CHOICE – MICRO TIMING ReEngineering Growth (%) Maturity Stability Growth Diversification Decline .Divestment Duration (Yrs) Inception Intensification 98 .
Investing in emerging businesses may not actually be so simple as it appears to be. Rules of the game are different. therefore. Redeployment of resources upsets the established power bases of a group. sometimes impossible. next only to choice of business. Why? Businesses are not about liquid assets. 99 . Relatedness across resources are difficult to realize. Power and resources often goes hand in hand.PORTFOLIO ANALYSIS Resource allocation across a portfolio of businesses is an important strategic choice. there are high costs associated with entry and exit.
BCG GROWTH MODEL Relative Market Share (%) Industry Growth (%) Low High High Low Stars Question Mark ? Cash Cow Dogs 100 .
These businesses are also net users of resources (Eg. Stars – They achievers in the near term. product development). diversification). which remains a big? These businesses are net users of resources.e.BUSINESS ANALYSIS – TATA GROUP Question Marks – They have potentials in the long term. but to larger extent than a question mark. Tata Steel). provided the company is able to build up on its market-share (i. Tata Telecom. TCS. and their risk profile is high (Eg. market development. Trent. 101 . Tata-AIG). provided the industry growth rate continues and the company is able to maintain its growth (i. market penetration.e.
102 . Groups prefer to dispose off such businesses (i. divest) as achieving a dominant position in these businesses is a difficult task.e. Dogs – They are a drag on the group. and the company dominates the industry ahead of competition (i. Tata Pharma. Nelco. Indian Hotels. they are generators of resources. and they lack on competencies to take on competition and are basically cash traps (Eg.BUSINESS ANALYSIS – TATA GROUP Cash Cow – These are matured businesses. harvest. However. Tata Chemicals). cash cows may also need to invest provided the industry takes an upswing (Eg. Tata Motors. Given that the growth potential in the business is low. Tata Tea. stability). Tata Press).e.
The model does not provide specific solutions within a particular category.BCG . 103 . factors are limited. HUL). neither in high or low. Armani). Certain businesses in the low market share category may be the result of a conscious strategy (i. Data may be prohibitive. niche – Rolex. Cartier. Mercedes Benz.LIMITATIONS It does not address the concerns of a business which is in the average category (usually the majority). The terminologies used are somewhat prohibitive. Cash cows may actually need substantial investments to retain their market position (Eg.e.
GE .-) 104 .MATRIX Distinctive Capabilities Strong High Medium Weak Stability Industry Attractiveness Diversify (++) Intensify (+) Med Intensify(+) Stability Harvest (-) Low Stability Harvest (-) Divest (.
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 .
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. BCG – Boston Consulting Group. Divest – Selling a part or the entire business at one go. 107 . Disinvestment involves selling in phases. Portfolio – An organization is perceived as a portfolio of businesses. SBU – A business unit which is strategically different from another and also shares a different SIC code. Gap Analysis – It emphasizes what a firm wants to achieve.
BUSINESS STRATEGY & COMPETITION 108 .
Competitive advantage is the back-bone of strategy. rent). The principal focus is on meeting competition.e. Competitive advantage refers to a firms resources or activities in which it is way ahead of competition. and earning super-normal profits (i. building market-share.COMPETITIVE STRATEGY A competitive strategy deals with how a firm competes in a particular business or product-market segment. Such resources or activities should be distinctive and sustainable over time. The strength of a firm in a particular business usually stems from its competitive advantage. 109 .
BUSINESS STRATEGY FRAMEWORKS How to be distinctive and yet sustainable – Differentiation – Understanding of the dynamics of competition. Delta Lock In – Two dominant players co-opt to selfreinforce and create or escalate an entry barrier. involving harmonizing and integrating multiple streams of technologies. preventing new entry and/or competition (Hax & Wilde). Resource Based View – Obsession with competence building. developing competitive advantage (Porter). 110 . leveraging (Prahalad). Blue Ocean – Consciously moving away from overcrowded industries to uncharted territories and making competition irrelevant (Kim & Mauborgne). identifying critical success factors.
The firm may retain the benefits of cost advantage by enjoying higher margins (Eg. Reliance) or may pass it to customers to increase market-share (Eg. Sources of cost advantage are varied and depends on the structure of the industry – Economies of size. preferential access to raw materials. Ayur. Compress project duration through crashing. Steep experience curve effects. proprietary technology.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. 111 . T-Series). Nirma. backward integration. Locational or early entry advantage.
Rayban). Culture of experimentation. Sony. avoiding brand dilution. undeterred attention to quality. Feeling the pulse of the customer. Focus on brand loyalty. and sufficient slack. 112 . Creativity. It selects one or more attributes that buyers perceive as important. innovation and out of the box thinking. (Eg. Successful product differentiation is often followed by premium pricing. Means of product differentiation are peculiar to each industry.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. Intel.
The target segment must have unusual needs or the delivery system catering to this segment must be unique. Armani). coupled with fear of structural erosion. though it may not possess an overall competitive advantage. Sub optimization alone may not be a source of superior performance.PORTERS NICHE OR FOCUS Focus / Niche – It is a variant strategy of cost leadership or product differentiation targeting a specific market or buyer sub-segment with the exclusion of others (Eg. Mont-Blanc. Rolex. A focuser seeks to achieve a competitive advantage in its target segment. They are poorly served by mainstream players. Maybach. 113 . Cartier.
COMPETITIVE POSITIONS Competitive Advantage Cost Differentiation Product Differentiation Competitive Scope Broad Cost Leadership (Toyota) Product Differentiation (General Motors) Narrow Cost Focus (Hyundai) Differentiation Focus (Mercedes) 114 .
115 . in a hyper competitive context the two strategies need not be mutually exclusive. Though cost leadership and differentiation are inconsistent. Reducing cost does not always involve a sacrifice in differentiation. jugaad or frugal engineering). Tata Nano).HYBRID STRATEGY A hybrid strategy is the simultaneous pursuit of cost leadership and differentiation. and usually outperforms a stand alone generic strategy. similarly differentiation may not always lead to rising costs (i. Firms focusing on a hybrid strategy typically aim at shifting the productivity frontier and recreating a new product-market segment altogether (Eg.e.
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 . unless such a player is capable of discovering a profitable segment. Industry maturity will usually widen the gap. It is usually the result of a firm not willing to make trade offs.stuck in the middle. but achieves none. It will have a competitive disadvantage vis-à-vis a clearly positioned generic player. 116 . The positioning therefore gets – blurred. leading to what is called – straddling. It tries to compete through every means.
There is a lot of scope to define the rules of competition.EMERGING INDUSTRY Emerging Industry – An evolving industry characterized by . leading to a blurred productivity frontier and steep learning curve.radical environmental changes. 3D imaging. coupled with low penetration levels. Speech recognition software's. (Eg. Consumer behaviour pattern unstable and evolving. Market segmentation not well defined. First-time buyers. technological innovations. ending in a differential cost economics. Artificial intelligence). Nano technology. It is characterized by – High level of technological uncertainty. 117 . Eg.) Excessive turbulence in the dynamics of the environment. changing customer needs.
MRTP may also cause fragmentation. Government regulations in the form Eg. High exit barriers because of huge investment in CAPEX. Eg. Paints. leading to clear fragmentation.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). IT. 118 . Air Conditioning. Retail and telecom. Eg. Scope for players to change the rules of the game. because of lack of economies of size and scale. Diverse customer needs. Consumer durables. It is characterized by – Low entry barriers. Eg.
technological maturity. 119 . distribution networks. well defined consumer behavioral patterns and imperfect competition leading to near monopoly. Limited scope for innovation . early entry and location advantages. Firms are rule takers in the segment as productivity frontier is well defined. because of economies of size and learning curve effects.MATURED INDUSTRY Matured Industry – An industry characterized by saturation in growth rates. collaboration and co-option. Cartel among existing players through collusion. established industry dynamics. technological maturity. Strong entry barriers.
Learning abilities have been stunted and firms adverse to investment in R&D and make fresh investments. and costly price wars.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. Exit barriers are extremely high because of limited prospective buyers. (Eg. 120 . Nature of competition extremely high. Firms facing a declining phase are characterized by inertia and slow to react to environmental changes. dot-matrix printers). scooters. Typewriters. with little or no signs of recovery. backed by corporate espionage.
strictly cost differentiation. recreate new markets. process innovation. move beyond boundaries. mergers and acquisition. strictly product differentiation and not standardization. strike alliances. Fragmented Industry – Identify. focus more on product differentiation or even a hybrid one. Matured Industry – Sophisticated cost analysis. reengineer. or else exit the segment. 121 . aggressive building of distribution networks. premium pricing. branding and promotion.COMPETITIVE STRATEGIES Emerging Industry – Set benchmarks. assess and overcome fragmentation. regenerate. Locate a defendable position. Declining Industry – Redesign. increasing scope.
RESOURCE BASED VIEW Differentiation based on cost or products saturates and ceases to exist beyond the medium term. Intangible – These refer to goodwill. patents. However. 122 . A firms resources can be classified into – Tangible – These refer to real assets. 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”. brands. They are a standard in nature. hence very rarely confer competitive advantage as can be easily acquired or replicated.
123 . Capabilities can be generic (i.e. but not necessarily. Typically. Hence. They play a very critical role in shaping competitive advantage. There is a high degree of internal and external causal ambiguity involved in it. can be leveraged across businesses) or specific to a particular business.CAPABILITIES & COPMPETENCIES These include a complex combinations of tangible and intangible resources that organizations use to convert inputs to outputs. Therefore firms should concentrate on developing complex resources that forms the very basis of differentiation. they are woven around technologies. differentiation based on capabilities can be sustained even in the long run.
COMPETITIVE ADVANTAGE 124 .
competitive advantage subsequently becomes the back bone for a competitive strategy. 125 . It enlarges the scope of an organization.e.COMPETITIVE ADVANTAGE A competitive advantage is a position of superiority relative (i. Strategy drives competitive advantage. Success of a strategy critically depends on SAP. not absolute) to competition. It results in a distinct differentiation advantage or a cost advantage or hybrid as well. A portfolio of competitive advantage comprises strategic advantage profile (SAP). and results in well springs of new business development.
Internal strategic fit between its strategy and dominant logics is essential for the top management to stretch and leverage SAP. In today's world of discontinuity. Most successful organizations around the world have a well balanced SAP. Identification of SAP is critical for and stretching and leveraging of resources. In most cases SAP is hidden and dormant. SAP changes from time to time. 126 .STRATEGIC ADVANTAGE PROFILE (SAP) Organizations have to systematically and continuously conduct exercises to identify its SAP.
127 . and enhanced customer tracking – higher market share. Inventory Mgt to Logistics Mgt to Supply Chain Mgt (SCM).e. Today SCM is integrated with greening the environment as CSR practices. A VC is often compared with a relay team. Substantial cost reductions also follow. each of the players need to be efficient backed by sufficient coordination at the contact points (i. Competitive advantage arises not from an individual activity but a stream of inter-related activities.VALUE CHAIN ANALYSIS A value-chain segregates a firm into strategically relevant activities to understand its composite behaviour. VC pay-offs: better product availability. kaizen or internal customer). faster product launches.
THE VALUE CHAIN Support Infrastructure n gi ar M Human Resource Management Technology Development Procurement Out Logistics Mktg & Sales In Logistics Operations Primary Service M ar gi n 128 .
A learning organization helps create strategic fit.STRATEGIC FIT – THE PORTER WAY The sustainability of the value chain depends on the degree of fit between the activities. Fit is important because discrete activities result in negative synergy and can also be easily copied by competitors. 129 . – First order fit refers to simple consistency between each activity and the overall strategy. – Second order fit occurs when activities are reinforcing amongst them. A high fit involving a complex chain of activities drives both competitive advantage and its sustainability. – Third order fit refers to optimization of effort. Operational effectiveness is not strategy.
It forms the very basis of competitive advantage. Core competence has a high degree of external and 130 internal causal ambiguity embedded in it. – Can be sustained even in the long run. – Cannot be easily imitated or substituted. – Can be leveraged across businesses. It should satisfy the following conditions – Contributes significantly to customer benefits. but not necessarily.CORE COMPETENCE A core competence represents the collective learning's of an organization around diverse streams of technologies. These skills results in distinctive activities and processes. A core competence usually has its roots in technology. .
A competitive advantage is sustainable in the shortmedium term. 131 .CORE COMPETENCE A competitive advantage does not necessarily imply a core competence. only global leaders possess a core competence. Majority of the firms have competitive advantage. A competitive advantage manifests from a function. A competitive advantage may or may not lead to superior performance. a core competence is sustainable even in the long-term. a core competence usually does. a core competence has its roots in a set of skills. a core competence always implies a competitive advantage.
However. the stringent assumptions of game theory and difficulty in ascertaining of pay-offs makes game theory application difficult in business. Subsequent work on game theory by John Nash led him to win the Nobel prize in 1994. In a game (similar to a business) one players win is always another's loss. illustrations depicting a win-win situation. In fact there are no. Here the magnitude of gain offsets the magnitude of loss equally.GAME THEORY The game theory was developed in 1944 by Oscar Morgenstern. 132 . A game is a contest involving two or more players. each of whom wants to win. This is known as a zero-sum game.
BIASED AND UNBIASED GAME A game is said to be biased when one of the players have a disproportionate chance of winning. Firm Y’s Strategy Use Radio Use Radio +2 +6 Use Newspaper +7 -4 133 Firm X’s Strategy Use Newspaper Firm X’s Pay-Off Matrix . An unbiased game is one where both the players have equal chances of winning.
Firm Y’s Strategy Use Radio +3 +1 Use Newspaper +7 -2 134 Firm X’s Strategy Saddle Point Use Radio Use Newspaper Firm X’s Pay-Off Matrix . A saddle point is a situation where both the players are facing pure strategies.PURE STRATEGY GAME The strategy each player follows will always be the same regardless of the other players strategy.
Repeated Games – In this situation the players interact repeatedly with each other sub-optimizing the outcome possibilities. It represents the classical “prisoner’s dilemma”. Coke Vs Pepsi). However. there is likely to be temptation by any of the players to try to steal the advantage over the other by breaking the rules of the game (Eg. collaboration or cooption.TYPES OF GAMES Simultaneous Games – This is a situation where the players have an option to choose to cooperate or not through collusion.g. This is usually through learning by “experience or observation” (i. Yahoo Vs Microsoft).e. iteration) rather than through collusion (E. 135 .
.CHANGING THE RULES OF THE GAME In a situation where a player is unable to compete with the existing rules of the game may attempt to change the rules of the game altogether. – Making pricing more transparent. – Building incentives for customer loyalty. It results in a shift in the productivity frontier. but 136 players do not always behave rationally. Game theory relies on the principle of rationality. 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.
143 . – Development of capabilities & competencies. – Changing the rules of the game. While external strategic fit (strategy – environment) is relevant for strategy formulation.IMPORTANCE OF STRATEGIC FIT Strategic fit has a central role to play in strategic management. – Resource commitment from top management. – Unlearning & learning of new skill sets. A high strategic fit (co alignment) is useful because it enables – – Appropriate and timely response. internal strategic fit (strategy – dominant logic) is critical to strategy implementation. – Better strategic and operational control.
while control is very effective. at the cost of sacrificing a lesser degree of control. emergent strategy vis-à-vis intended & realized). 144 . In such a situation. In fact. strategy formulation and implementation has been perceived to be distinct & independent. learning levels are very low. Some of the key strategic learning's exists at the contact point between the organization and its customer. learning levels are very high.FORMULATION Vs IMPLEMENTATION Traditionally.e. formulation & implementation can occur simultaneously. effective strategies are better crafted when there is a subtle overlapping between the two (i. In such a situation. According to Mintzberg.
shift from compliance to commitment. Install a system of shared beliefs and values. 145 . In contrast. transformational leaders go one step beyond – Design a well crafted and designed strategic intent of the organization. A transactional leader is usually confined to allocating tasks & responsibilities and extracting performance.ROLE OF TOP MANAGEMENT To bring about change and to implement strategies successfully. bring about transparency. Pragmatism is the ability to make things happen. He should be an agent of change. companies depend more on transformational leaders than transactional leaders.
minimum requirement). patents. Intangible resources (Eg. skills) also includes complex resources like capabilities and competencies. Zero Based Budget – In this case the budget of a SBU has to be worked out right from the scratch. Performance Budget – SBU managers need to justify the distinctive resources in terms of the opportunity it is pursuing yields the highest possible pay-offs. 146 . labour. brands. machines) referred to as threshold resources (i. The various methods of resource allocation includes Historical Budget – The budgets framed by HQ for a particular SBU keeping in mind past trends.RESOURCE ALLOCATION Resources allocation includes tangible resources (Eg.e. land.
CAPABILITIES & COMPETENCIES Technology and business are slowly becoming in – separable. Distinctive capabilities helps in stretching and leveraging resources thereby overcoming two major constraints involved in strategy implementation – times & costs. these capabilities are sustainable even in the medium to long term. convergence of multiple streams of technologies at the product – market level is becoming increasingly evident (Eg. Distinctive capabilities are complex set of skills woven around technologies. Moreover. Due to causal ambiguity (complexity). Mobiles). though not necessarily in the case of emerging markets. Flat Screen Displays. 147 .
Once the structure is in place. 148 . processes become people independent. A single product or a dominant business firm usually employs a functional structure. An appropriate organization structure & adequate control systems are essential to implement strategies and achieve stated goals. A firm in several related businesses usually employs a divisional structure. A firm in several unrelated businesses usually employs a SBU structure.STRATEGY & STRUCTURE It is a framework within which individual efforts are coordinated to bring synergy. The level of centralization and decentralization is decisive.
Marketing. disbanded subsequently. with team members having dual line of control. Team Structure – An informal group formed for a crisis. Output). 149 . Virtual Structure – A boundary less or hollow organization. based on skills and competencies.TYPES OF STRUCTURES Functional Structure – Activities grouped together by a common function (Eg. Inputs . SBU Structure – Businesses segregated in terms of strategic dissimilarities (Eg. Divisional Structure – Units grouped together in terms of products. Finance). Project / Matrix Structure – A formal but temporary framework initiated for the completion of a particular project/crisis. or geographical locations. processes.Technology.
structures are becoming flatter and more simpler. as span is broader. facing challenges & crises. leading to a tall structure. Environment & People – Economic and political conditions have a major bearing on structure coupled with the attitude and aspirations of the people in the organization. It includes the desire for independence. assuming responsibility. Technology – With more and more convergence of technologies in business.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. 150 .
co0ntinuity). irrespective whether it is from worse to good or good to worse.e.INERTIA When a firm has been operating in a certain fashion for a long time. Top managers resist change. Most firms undergo periods of strategic continuity rather than strategic discontinuity. Inertia acts as an impediment in strategy implementation. there is a tendency to continue along the same lines. Inertia is a characteristic of a firm that endures status quo (i. Common sources of 151 inertia – complacency with past successes. Changes in top management and unlearning helps overcome inertia. .
To prevent deviation of fit. Since the internal and external environment is in a state of continuous flux. firms should move beyond financial performance to strategic performance as organization systems are becoming complex.STRATEGY EVALUATION Strategy evaluation centers around assessment of strategic fit. certain authors propose misfit as a source of superior 152 performance. . strategies need to be evaluated on an ongoing basis to prevent deviations of fit. However. Deviation of fit is detrimental to performance and may lead to strategic failure.
. competitive advantages becoming disadvantages? Has the company acquired any new competency? Has the company been able to overcome the 153 environmental threats.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. detecting changes in the external and internal environment and taking corrective action wherever necessary.
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. It involves assessing – strategic thrusts and milestones. checking every premise is costly as well as difficult. However. 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 is open-ended as well as .
Strategy not linked to resource allocation & capabilities – Lacking commitment of top management. 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. “If you cannot . low strategic fit due to consultants intervention. Strategy intent not linked with goals and objectives – Lack of coordination at lower levels leading to negative synergy. difficult to translate into practice.
this may effect all others as well. to be sure of successful implementation of a strategy. important or not they're all interdependent. so if one fails to pay proper attention to one of them. Large or small. Managers should take into account all seven of these factors. Today it is considered one of the most powerful tools for strategy implementation determining success or failure. Together these factors determine the way in which a corporation operates.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. the relative importance of each factor may vary over time and context. On top of that. 156 .
The 7-S model was born at a meeting of these four authors in 1982. It appeared also in "In Search of Excellence" by Peters and Waterman. They had been investigating how Japanese industry had been so successful. Since then it is known as their 7-S model and is extensively used by corporations worldwide to implement their strategies. 157 . and was taken up as a basic tool by the global management consultancy company McKinsey. At around the same time in the US Tom Peters and Robert Waterman were exploring what made a company excellent.BACKGROUND & ORIGIN The 7-S Framework was first mentioned in "The Art Of Japanese Management" by Richard Pascale and Anthony Athos in 1981.
Staff – Human inter-relationships. over time. formal & informal . Structure – The way in which the organization's units relate to each other in terms of their commonalities. Skills – An organizations capabilities and competencies.THE 7’S Shared Values – It represents what the organization stands for and what the top management believes in. Strategy – Trade-offs for the allocation of a firms scarce resources. 158 . processes and routines that characterize how work should be done. Style – The way in which the top management influences the functioning of an organization. Systems – The procedures. to reach identified & stated goals.
STRATEGIC FIT Strategy Structure Shared Values Systems Skills Staff Style 1st Order Fit 2nd Order Fit 3rd Order Fit 159 .
Ineffective in case of a virtual company. In contrast. shared values) are very malleable and comparatively more difficult to identify & influence. because most often they are culturally embedded and often neglected. While the American co’s focuses on the hard S’s. 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. staff. 160 . their Japanese counterparts focus more on the soft S’s for their early success and sustainability. style. structure. Consider the 4P’s of marketing or 3R’s of SCM. systems) are comparatively easy to identify and influence. the soft S’s (skill.
STRATEGY IMPLEMENTATION ROUTES Strategic Fit .High Organic Growth Strategic Alliance Joint Venture Mergers & Acquisition Strategic Fit .Low Take Overs 161 .
i. (Eg. SEZ’s. It has complete control over inputs. Reliance Industries).ORGANIC GROWTH Here a firm builds up its facilities right from the scratch and continues to do so without any external participation. Govt. The entire infra-structural facilities are set up afresh having its own gestation and break-even.e. the entire value chain. technologies. i. (Eg. tax holidays. subsidized power). Long gestation leads to delayed market entry. green-field projects.e. . and markets. 162 Risk of cost and time overruns. concessions are available for green-field projects. soft loans.
163 It is a form of competitive collaboration. .STRATEGIC ALLIANCE It involves a pro-active collaboration between two or more firms on a particular domain or function for mutual gain. Tata Motors & Fiat). There is no funding or equity participation from the alliance partner & both the firms continue to operate independently. Alliances are usually in the areas of technologies or markets (Eg. Alliances are usually short-lived and disbanded once the purpose is achieved. It has limited intervention power and usually lacks holistic commitment from the alliance partner. It touches upon a limited aspects of a firms value chain.
Degree and extent of management control must be clearly 164 laid down.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.Honda). Hero . It is a win-win situation for both the companies. leaving minimum scope of overlapping. . (Eg. Tata – AIG. Dominant logic of both the companies should be complimentary. A comprehensive MOU is essential. Selecting the right partner is critical for success.
Integrated distribution channel leads to better market penetration and overall synergy. Economies in scale leading to lowering of costs. Integration of assets and other financial resources. ITC Tribeni Tissues. Revival of a sick-unit through better management practices is a major motive behind an acquisition 165 strategy. with the individual firms ceasing to exist any more (Eg. Coca Cola – Thums Up).MERGERS & ACQUISITION It refers to the fusion of two or more firms into a single entity. Brooke Bond & Lipton). . Acquisition is an outright purchase of a firm assets by another independent entity (Eg.
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. Consolidation in a fragmented industry.Corus). Most countries have stringent laws that prevents hostile take over. Larger geo-graphical diversity. Integration of organization structure & cultures is difficult. Inform SEBI / Stock Exchange after 5% stake is 166 acquired. often the new firm is “left alone”. Tata Steel . Instant access to capacities and markets. Make a public offer of not less than .
MANAGEMENT TOOLS IN STRATEGY 167 .
or better still create next practices Reengineering – Redesigning work processes right from the scratch. it is also a source of potential threat.WHY MANAGEMENT TOOLS? Change is becoming pertinent in the business environment. Radical change is superseding incremental change. The past is ceasing to be an indication of the future. Some tools to ensure that – Benchmarking – Adopt certain best practices. Balanced Scorecard – Tracking strategy 3600. Companies therefore need to ensure competitive advantages doesn’t become competitive disadvantages. Change provides enormous opportunities. TQM – Doing the right thing the first time. every time. 168 .
A best practice is defined as an activity performed by a company in a particular domain or function which distinguishes it from others and making them world-class. These exemplary practices involves the stakeholders of the company and helps achieve its strategic intent. Best practices centers around looking at a different way to satisfy various stakeholders. Benchmarking involves the identification, understanding and adapting of certain best practices and implementing them to enhance performance. Firms are moving towards next practices as best practices make firms look more and more homogeneous.
SOME BEST PRACTICES
Dell: Customized configuration of computers. Caterpillar: 48 hours delivery anywhere in the world. Citi Bank : Priority banking services. Maruti: Certified “true value” pre-owned cars. Microsoft: ESOP to employees. Infosys: Customized work-stations. TCS: Referencing potential new recruits. ITC: Shareholders factory visit. AmEx: Outsourcing data warehousing mining. MARG: Set-top box to study viewing patterns. Honda: CEO’s visit to dealers.
TYPES OF BENCHMARKING
Functional – Used by companies to improve a particular management activity. Eg. Motorola learnt delivery scheduling from Domino’s. Process – Improving specific key processes and operations from experiences in similar businesses. Eg. Ford adopting assembly lay-out plan of Toyota. Competitive – It involves assessing the sources of competitive advantage and imitating them. Eg. Samsung leveraging miniaturization skills of Sony. Strategic – It involves assessing business models and replicating them in a different market. Eg. Reliance replicating AT&T business model.
HOW TO BENCHMARK?
Phase 1: Planning – What to benchmark? Whom to benchmark? – Identify key performance indicators & Data source. Phase 2: Analysis – Assessment of performance gaps. – Predict future performance levels. Phase 3: Integration – Communicate findings and gain acceptance. – Establish functional goals and its implementation. Phase 4: Action – Implement and monitor progress. – Measure results against stakeholder wants and needs. – Recalibrate or outperform benchmarks.
WHOM TO BENCHMARK?
Selecting the benchmarking partner is critical to solving the problem. Firms should generally avoid selecting the industry leader, because it may not always adopt the best practices for every process or activity. Benchmarking partners may also be from different industries. Types – – Internal – It involves benchmarking against its own branches, divisions, SBU’s. Proximity to data and cooperation is taken care of automatically. – External – It involves benchmarking against firms that succeeded on account of their best practices. It may also involve benchmarking against world-class firms. Friction may arise due to presence in competing industries.
BENCHMARKING - ADVANTAGES
Finding better ways of meeting stakeholder needs. Organizational learning comes from internal as well as external sources. Establishing goals based on formal assessment of external conditions. Defining effective measure of indicators, facilitate comparison, adopt from other organizations. Ensuring a continuous learning organization. Reducing competitive disadvantage. Organizational turnaround, especially effective in case of a wide strategic drift when differentiation strategies fail to work. 174
e. the more similar they end up looking. Benchmarking merely reorients profits in the hands of few to profits in the hands in the hands of many (i. While strategy is all about differentiation and not looking alike. but it cannot be used as a strategic decision making tool. It can at best complement it.LIMITATIONS More and more companies benchmark. . 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. Benchmarking is useful for bringing about operational efficiency.BENCHMARKING . clustering).
Re-engineering involves complete reconstruction and overhauling of job descriptions from the scratch (i. The task demands a total change in organisational 176 culture and mindset.RE-ENGINEERING Redesigning leads to identification of superfluous activities or product features (i. process mapping) and eliminating or improving them (E.g.e.g. DOS to Windows).e. Windows 95 to 97). Re-engineering attempts to radically change an organizational products or process by challenging the basic assumptions surrounding it. clean sheet). for achieving performance improvement (E. .
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. than people driven Innovative Vs Traditional Customer centric Vs Organisational centric 177 .
BPR).LEVELS Reengineering can be successfully leveraged at all levels of an organization with varying degree of results. Strategic – It looks into the process of strategic planning. processes. products. 178 . etc) and supports the organization for the present.e.e. .REENGINEERING . customers and suppliers and protects the organization from the future (i. It can be of the following types – Functional – It looks into the flow of operations (i. resource allocation and prepares the organization for the future through a reorientation of the entire strategic architecture. structures. Business – It looks into markets.
reverse engineering is a top-bottom approach. Indonesia). While traditional manufacturing is a bottom-up approach. However.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. Cheaper versions of Intel chips and mother-boards manufactured in Taiwan. 179 . – High cost and time acts as a deterrent. protection can be had in the following ways – – Patenting. with an intention to copy it (Eg. – Causal Ambiguity. It generally acts as a threat to innovation. learning curve advantage. – Early entry advantages.
Usually in such cases segmentation and pricing is different from the original innovator. nano-technology).e. Actualization – Obtaining and dismantling of the product to assess how it functions. Implementation – Developing of a prototype. Introduction – Launching the product in the market. machine tools to convert ideas into a marketable product (i. Inaccurate assessment at this stage may lead to a failure of the entire project.STAGES IN REVERSE ENGINEERING Awareness – Recognizing whether the product is found to be worth the time. cost and effort necessary for the purpose of reverse engineering. designing facilities. 180 .
Car) – – Performance – Mileage of 14 kms to a litre of fuel. More and more companies are moving towards meeting implied rather than stated needs. It has eight dimensions (Eg. – Conformance – Emission standards . – Serviceability – Large no. – Durability – 1980 manufactured cars still on road. – Perception – Customer notions. – Aesthetics – Appeal in design. – Reliability – Consistency in mileage. Air bags.Euro IV. of service stations. – Features – Anti-lock braking systems. 181 .WHAT IS QUALITY? It involves the totality of a product or service in meeting certain stated or implied needs.
TQM is a way of creating an organization culture committed to the continuous improvement of work processes – Deming. . Management of quality was traditionally inspect it . which ensures good market standing.TOTAL QUALITY MANAGEMENT Objective – Management of quality ensures conformance to certain pre-set standards. It had little impact on improving overall productivity.fix it in nature. touching upon a limited aspect of a value chain. It is deeply embedded as an aspect of 182 organisational life & culture. zero defects.
provided with all relevant information and best possible tools. fully involved in decision-making and fairly rewarded for results.TQM – KEY TENETS Do it right. Kaizen – Make continuous improvement a way of life. Empowerment – It takes place when employees are properly trained. 183 . the first time – From reactively fixing error in products to proactively preventing errors from occurring at the first place (Juran). Be customer centric – Generate the concept of internal customer (Ishikawa). Looking at quality as an endless journey. not a final destination.
saving precious top management time.TQM . of units meet preset standards (Eg. SQC – It is a process used to determine how many units of a product should be inspected to calculate a probability that the total no. 184 . 6-Sigma). It is based on the principles of MBO (i.e. 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.STRATEGIES Outsourcing – It is the process of self-contracting services and operations which are routine and mundane. equal participation).
it’s bad execution. strategy implementation has never been more important... – In the majority of failures – we estimate 70% – the real problem isn’t (bad strategy) ..BALANCED SCORE CARD Some interesting comments ...... – Less than 10% of strategies effectively formulated are effectively executed. Source: Fortune Magazine Why CEO’s fail? 185 ..... – Efficiency and effectiveness is passé.
These measures worked well when organizational systems were simple and unidirectional and more importantly the environment was static. rather than effects. Organizations need to move from financial to strategic 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. Focus more on causes. 186 .CONCEPTUALISATION A company’s performance depends on how it measures performance.BSC . Most managers tend to rely on traditional measures of performance having its origin in finance as they are well tried and tested.
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. and distinguish strategic problems from operational ones. 187 . because they have too many.BSC – KAPLAN & NORTON (1992) A BSC helps a manager to track and communicate the different elements of company’s strategy. The most critical element of a BSC is to measure these four dimensions.
e. 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. ageing schedule) % of key customer transactions Ranking of key customer accounts No.
of times covered in media No. of new product launches Vs competition Product pricing Vs competition 189 .BUSINESS PERSPECTIVE GOALS Skills Excellence Exposure Introduction MEASURES New capabilities and competencies Implementation & gestation period Bank and supplier credit limits & PLR Unit Costs / Conversion Ratio / Defect Ratio No.
of new patents registered Time to develop next generation products Average and spread in operating cycle % of products that equal 2/3 sales No. of product innovations 190 .LEARNING PERSPECTIVE GOALS Technology Manufacturing Focus Timing MEASURES No.
FINANCIAL PERSPECTIVE GOALS Survival Success Prosper Divestment MEASURES Cash flows Growth in Sales and Profits EPS. Return on Investment Market Capitalization / PE ratio 191 .
STRATEGY MAPPING 192 .
BSC .IMPLEMENTATION 2 Translate strategy into operational terms 1 Mobilize change through effective leadership 5 STRATEGY Make strategy a continual process 3 Align the organization to the strategy 4 Make strategy everyone’s job 193 .
Modern managers should be poised to ask the right questions. Shift from control to strategy (i. sharing of vision).BSC . Focus on cause not effects.e.what they don’t know. they don’t know . It helps translating strategy into practice (i. As a result. doing right things instead of doing things right). The BSC brings together the different elements of a company’s strategy at a glance. .e. Seek excellence. 194 performance will automatically follow.ADVANTAGES Most often top managers face information overload.
EFFICIENCY Vs EFFECTIVENESS Ineffective Effective Inefficient Goes out of Business quickly Survives Efficient Dies Slowly Thrives 195 .
not only thrives.Michael E. Porter 196 .EFFECTIVENESS + STRATEGY A company which is effective as well as strategic. . but also sustains it.
CORPORATE RESTRUCTURING 197 .
Tata Group). “every organization must be prepared to abandon everything it does.CORPORATE RESTRUCTURING The only thing constant in today's business environment is change. As Peter Drucker pointed out. To adapt to the changing environment.... Restructuring involves consciously driving significant changes in the way an organizations thinks and looks (Eg. Strategic variety brings paradigm shift.... Radical change brings about strategic variety. Strategic variety may be caused by changes in the as external well as internal environment. firms use restructuring strategies. to survival of the most adaptable.” 198 . from survival of the fittest .
e. Walkman.RESTRUCTURING – BASIC TENETS Customer Focus – Restructuring ideally begins and ends with the customer. Core Business – Company’s should introspect – What business are we in? Business evolved out of opportunism or myopia should be divested. they should strive to provide unimaginable value ahead of its time (Eg. Company’s should go beyond just asking what he expects. and dividing the core businesses into SBU’s (i. Structural Changes – Conventional hierarchical structures should be disbanded in favour of more 199 flexible ones (i. downsizing or rightsizing). downscoping). Instead. .e. etc). Fax. ATM. Internal customers should also not be neglected.
.) Reliance dismantled their industrial embassies .. It is created and institutionalized by the top management. .. Kumar Birla today is more dependent on professionals. During the times of JRD....) The Aditya Birla group typically relied on the “marwari” community for key management positions .RESTRUCTURING – BASIC TENETS Cultural Changes – A culture represents the values and beliefs of the people about the organization... the Tatas were considered a benevolent and charitable organization... 200 . started focusing on their capabilities... Restructuring also requires cultural reorientation. Ratan Tata now drives the point the group means business.
they tend to move away from the customer. Use the reach of networking technologies. Getting feedback & addressing customer complaints.” 201 . Publicizing welfare projects to demonstrate CSR. Organizing customer and supplier meets. Communicating to the media about organization efforts to deliver quality products.MOVING CLOSER TO THE CUSTOMER As companies evolve. Carry out PR campaigns. Restructuring provides a platform to close this gap. Honda’s ad says. “ … one reason our customers are satisfied is that we aren’t.
horizontal. spin-off and equity carve. or conglo-merate. It may include brands as well. 202 . where the difference in valuation is settled off through cash or equity (Eg. Further. Asset Swaps – It entails divesting and acquisition simultaneously by two companies. Tata – Corus) or hostile (Eg. Hive Off – It involves siphoning of assets under control. including its intangibles – Mergers – It may be vertical. It can have two forms. Further spin-off can be classified as split-off and split-up. it may be smooth (Eg.ASSET RESTRUCTURING Asset Restructuring – The asset composition of a firm undergoes a major change. Glaxo – Heinz). Mittal – Arcelor) and can take various forms.
Equity Carve – It involves selling a minority stake to a third party while retaining control (Eg. Reliance Ent). Tata Industries selling 20% stake to Jardine Matheson). – Split-Up – In a split-up. 203 . in which the equity is allotted amongst the existing shareholders on a pro-rata basis (Eg.HIVE OFF Spin-Off – A spin off is the creation of a new entity. Most of these practices are not in consonance with Indian laws. – Split-Off – In a split-off. the existing shareholders receive equity in the subsidiary in exchange for the stocks of the parent company. the entire parent company loses its identity after being split into a number of subsidiaries.
strategic misfit. repay long-term debts. Parle sold its Thums Up brand to Coke for $40 million apprehending fierce competition. In 2005.DIVESTITURE It involves the sale of a brand or a division of a company to a third party. A complete sell-out is known as divestment (TOMCO). for a specified market or in general with full management control. – Poor performance. but retained its engineering division. Selling out in phases is called disinvestment (IPCL). L&T sold its cements division to Aditya Birla group. 204 . In 1995. Generic motives include – – Raise working capital.
Conversion – Replacing debt with equity or vice-versa or costlier with cheaper debt or cross currency debt.The internal & external liability composition undergoes a major change – LBO – Acquiring control over a substantially larger company through borrowed funds (Eg.CAPITAL RESTRUCTURING Capital Restructuring . Wipro). It provides greater leverage as well as management control. Share Buyback – It is a process of cancellation of shares out of free reserves to the extent of 25% of paid-up capital (Eg. 205 .3 billion. involving 608 pence per share). Tatas take-over of Corus for US $11.
1700 cr Trent – Rs. 950 cr Merind . 42 cr Voltas . 150 cr VSNL – Rs. 1170 cr Goodlass Nerolac – Rs. 99 cr Tata Power – Rs. 256 cr ACC – Rs. 1860 cr . 230 cr Diversifications Tata Motors – Rs.Rs. 1439 cr 206 Tata Timken – Rs 120 cr Tata Telecom – Rs. 1890 cr CMC – Rs. 250 cr Tata Tetley – Rs. 120 cr Tata AIG – Rs.BUSINESS RESTRUCTURING – TATAS Divestments Lakme – Rs.Rs.
Rightsizing – It is phasing of excess and redundant employees resulted out of faulty internal planning (SAIL). Downscoping – It involves reducing the business and/or geographical scope of a firm (Aditya Birla group). of operating units. usually as a result external turbulence.ORGANIZATIONAL RESTRUCTURING Organizational structure and systems calls for a change when strategic variety is apparent. 207 . of a firm’s employees and sometimes in the no. Survival is the primary motive. keeping the composition of business intact (Jet Airways). Turnaround is the primary motive. It can be carried out in the following ways – Downsizing – It is a systematic one-time reduction in the no.
The dominant logic represents the perceptions and biases (i.e. as strategies are based on such beliefs and biases.STRATEGIC CHANGE One of the most difficult components of organization restructuring is the mindset of the top management represented through its dominant logic and its shared values reflected in cultural orientation. Dominant logic becomes deep-rooted in organizational contexts depending on the period it is in place (tenure of the CEO). the more difficult it becomes to uproot the paradigm (i.e. Strategy change is unviable without a preceding change in its dominant logics. 208 . thumb rules) of the top management. inertia). The longer the period.
209 . the factor that stifled change & performance was – culture.FORCES AGAINST STRATEGIC CHANGE The problem with strategic change is that the whole burden typically rests on few people (i. In most organizations.e. 20% of the people carry out 80% of the changes). Companies achieve real agility only when people at every level rise above the ordinary to face the challenges – revitalization or transformation. 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 best way is to alter the institutional point of view. Encourage uncompromising straight talk. 210 . Create relentless discomfort with the status quo.SUCCESSFUL TRANSFORMATION Build an intricate understanding of the business model at all levels of the organization. Manage from the future. Promote inventive accountability. process ownership. never take no for an answer. Questioning every basic action of the organization. it is not about winning but about learning. Understand and deliver the quid pro quo. Harness setbacks.
Aspects of current culture which needs to be overcome. It involves identifying – Aspects of current culture which needs to be reinforced. Culture and style of management are two main impediments in force-field analysis. by identifying forces for and against change. that can be both enablers and blockages to change and restructuring. 211 . It involves diagnosing a change situation – systems & structures.FORCE-FIELD ANALYSIS A force-field analysis provides an initial overview of change problems that needs to tackled. also known as cultural-web. Identify and implement facilitators of cultural change.
RESTRUCTURING .OUTCOMES Alternatives Organizational Short .Term Loss of human capital Lower performance Higher performance Capital .Term Reduced labour costs Reduced debt costs Emphasis on strategic control Business High debt costs Higher risk 212 Long .
focuses on reengineering.NUMERATOR & DENOMINATOR MGT Most firms across emerging markets undergo strategic discontinuity and as a result are forced to restructure their businesses. the second one is a more viable strategy and sustainable option in the long run. While the first strategy produces results instantaneously. hence go in for downsizing. In order to put back the company on the right track they are resort to – Denominator – It assumes that turnover cannot be increased. Numerator – It assumes that turnover is not a barrier or constraint. 213 . reverse engineering and regenerating. down-scoping or asset stripping.
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.. January 1997)... and that the thirty-two of the country’s largest business groups in 1969 are no longer among the top fifty today. .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. Source: Why do firms atrophy? (Business Today..
216 . and achieves sustainable performance recovery. As a sequence of events describing how things change and why they change (i. A category of underlying principles and concepts. and capabilities. Stage Theory). systems.TURN AROUND MANAGEMENT A turnaround is said to occur when a firm perseveres through an existence threatening performance decline. ends the threat with a combination of strategies. Both content (what) and process (how) are equally important for a successful turnaround. skills. While content focuses on endogenous and exogenous variables.e. process focuses on – A logic to explain a causal relationship between intervening variables.
Uncompetitive products or services.TURNAROUND INDICATORS Most firms atrophy simply because they fail to diagnose the indicators that acts as threat to organizational existence. especially in key positions. Low employee morale leading to high employee attrition at all levels. suppliers and bankers. Low stakeholder confidence. leading to lack of acceptability from distributors and customers. Substantial shifts in consumer preferences. Some indicators Continuous cash flow crises as a result of dwindling market-share and profits. Rising input costs. unavailability or radical lowering of substitute costs or technological obsolescence. 217 .
prune work-force. they adopt surface level measures (disprin popping) which most often fail. Recalibrate prices. Revamp product portfolio. based on elasticity.. “all is not well”. Extending work hours. consider extension. Common approaches adopted Change in key positions. be more customer centric. which most top managers fail to appreciate. Product redesigning or reengineering. liquidating dead assets.TURNAROUND ILLUSION The first step to a successful turnaround is the basic acceptance of the fact that …. Hence. focus on power brands. Emphasis on advertising and market penetration. 218 .
TURNAROUND STAGE THEORY Stage 1 Decline Stage 2 Stage 3 Stage 4 Outcome Response Transition Performance Equilibrium Line Success Failure Indeterminate Nadir Time 219 .
It has its origin in “environment led fit” that subscribes to the view that a firm has little control over external factors. 220 .DECLINE Decline is the first stage in the turnaround process. R-Extinction – It suggests that organization factors. It involves the identification of the theoretical perspectives that explains performance decline – K-Extinction – It suggests that macro economic and industry wide factors are responsible for decline. It has its origin in “resource led stretch” and subscribes to the view that a firm has substantial power to override the context. Identification of the stimulus leads to the arrest of the downfall. primarily dwindling resources and capabilities are responsible for decline.
RESPONSE INITIATION Turnaround responses are typically categorized as operating or strategic. The response must match the cause of the decline. the response should be operational. If the decline stems from structural shifts. the response should be strategic. new market initiatives. If the underlying cause is internal efficiency. asset reduction. 221 . Operating responses typically focuses on the way the firm conducts business and involves tactics geared towards – cost cutting and process redesigning (BPR). diversification. Strategic responses focus on changing or adjusting the business the firm is engaged in through long term moves such as – integration.
which may be unavailable to a focused firm.RESPONSE DICHOTOMY The response initiation is somewhat dichotomous and cannot be universally applicable. 222 . Similarly new market initiatives is feasible only for multi-product firms. Untangling this question brings into focus three events – Domain – Many of the strategic cures have limited applicability for an affiliated firm. Scope – A diversified conglomerate may acquire a distressed business to turn it around and gain valuable synergies. when decline deepens shifts in strategic position becomes essential. Contour – It is easier to reverse decline in the earlier stages through operational measures.
e. consensus). Support from all the stake holders through resource commitment. Effective levers of transition. lead – lag). participative management (i. Empirical studies show that average time is 7. However. Sustenance is the key factor in this stage. The top management has a key role to play through empowerment. role model. transparency. confidence building measures.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. many a times early signs of recovery fades out. 223 . However.e.
it should adopt a holistic approach. Share price indications and media coverage. Failure is an indication that initial momentum was not sustainable characterized by irreversibility. Cut off points must be unequivocal. Supplier and banker confidence. Instead of focusing on financial parameters alone. Regaining lost market share and distributor confidence.OUTCOME Outcome is said to be successful when a firm breaches the equilibrium performance level. Revival of key customers and new product launches. Commanding a premium in the market. 224 .
COOPERATIVE STRATEGIES & ALLIANCES 225 .
the commitment and the involvement between the firms increases manifold. In the cooperative strategy continuum as firms move up the value order. or joint venture. It can assume any of the following forms – franchising. More and more companies worldwide are moving away from competition to co-option to leverage their resources and enhance bargaining power. consortia. supply-chain partnership. Any cooperative strategy maybe between firms within the same country or cross border as well. licensing. and globalization . technology. 226 . strategic alliance.COOPERATIVE STRATEGIES Cooperative strategies are a logical and timely response to changes in business dynamics.
227 . It is an effective strategy to penetrate markets in a shortest possible time at a minimum cost. Switz Foods.FRANCHISING Franchising – It is a contractual agreement between two legally independent firms whereby the franchiser grants the right to the franchisee to sell the franchisor’s product or service or do business under its brand-name in a given location for a specified period of time for a consideration. Branding is critical to franchising. Titan Inds. owners of the brand Tanishq allows its franchisees to sell its jewellery products. owners of the brand Monginis allows its franchisees to sell its confectionary products.
LICENSING Licensing – It is a contractual agreement between two legally independent firms whereby the licensor grants the right to the licensee to manufacture the licensor’s product and do business under its brand-name in a given location for a specified period of time for a consideration. Different levels of licensing Manufacturing without embracing any technology (CBU). refine processes and adopt necessary technologies (SKD). Become a systems integrator (CKD). as in Tata Indica. Develop a product through its crude stage. HM manufacturing GM range of cars in India with a buy-back arrangement is a perfect example of CBU. 228 .
CONSORTIA Consortia – They are defined as large inter-locking relationships & cross holdings between businesses in a similar industry. Tata. Hyundai). 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. Collusion – Few firms in a matured industry collude to reduce industry output below the equilibrium level. 229 . Airbus – Boeing). enabling them to increase prices (Eg. leverage upon size to preempt competition by escalating entry barriers (Eg. 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. . link their capabilities to create value for end users. Continuous sharing of knowledge is critical to the success of a supply chain partnership. Companies in different industries with different but complimentary skills. It usually provides a platform to sort out differences between conceptualization and implementation to suit local market needs. Tata Motors – IDEA). otherwise it 230 becomes routine outsourcing.
preempt competition. instead of hurrying into a relationship. Generic motives involved are . Despite their popularity (50-60)% of the alliances fail to accomplish their stated objectives. effective R&D management. Tata Motors – Fiat. Partner selection is one of the critical success factors. enhance credibility.STRATEGIC ALLIANCE It is an short to medium term understanding between two or more firms to share knowledge and risk. Reliance – Du Pont).learning organization. design next generation products. to gain knowledge and to obtain access to new markets (Eg. enter newer markets. 231 . Firm’s should undertake a long courtship with potential partners.
Complementary Equals – Two firms mutually promoting each others complimentary products (Eg. Bajaj – Castrol). 232 . Bootstrap – An alliance between a weak and a strong company with an intention to acquire it.TYPES Collusion – Tacit top management understanding to neutralize price wars (Eg. Alliances of the Weak – An alliance is entered into to preempt competition (Eg. Coke – Pepsi). Whirlpool – Tide. Backward – An alliance (quasi or tapered) with a supplier of critical components seeking commitment (Eg. Airbus – Boeing). Maruti).STRATEGIC ALLIANCE .
Differences in level of economic development can produce differences in alliances motives. – Japan Vs US). 233 . Too much stress on financials & structure be avoided. Firms from developed markets seek access to markets and firms from emerging markets seeking access to technology.PARTNER SELECTION CRITERIA It is likely that partners will not have complete consent on alliance objectives because the institutional context in which the alliance embedded varies from country to country. Cultural orientation has been found to have a profound effect on top management’s strategic orientation (Eg.
including ability to provide quality products and services. Experience related to previous alliances. Partner’s ability to acquire fresh skills. Intangible Assets – Move beyond the financials of the firm. Managerial capabilities. Unique Resources – Abilities or skills which cannot be easily duplicated. Willingness to share knowledge and skills. 234 . Dominant Logic’s – Similarity in beliefs & biases.PARTNER CHARACTERISTICS Complimentarity of Capabilities – The degree to which partners resources can be used in conjunction.
incorporating clear signs of continuing independence for all partners. Selection & Courtship – It involves self analyzing. degree of compatibility. Getting Engaged – It should incorporate a specific joint activity. instead of focusing controlling the relationship. Changing within. 235 . partners should nurture it. the value chain. differences not anticipated earlier. vows to include commitment to expand the relationship.MANAGING ALLIANCES Alliances are more than just a deal. operational & cultural integration. Learning to collaborate – strategic. understanding the chemistry. Setting up the housekeeping.
. It lasts till the vision is reached. whilst the partners continue to operate independently.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.e. combining parts). synergy) rather than mere exchange (i. Conceptually. a joint venture is a selection among modes by which two or more firms can transact. There are substantial linkages in the value-chain.e. separation is very 236 bitter. It aims at creating new value (i.
in addition to a high degree of asset specificity. The market fails as sellers are unwilling to reveal their technology and buyers are unwilling to purchase in the absence of inspection. 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. 237 .JOINT VENTURE – GENERIC MOTIVES Transaction Cost – The situational characteristics best suited for a JV are high performance uncertainty.
– Eg. – Eg. TVS – Suzuki (4-Stroke Engines) Fill gaps in existing product lines. – Eg. Sharing of resources. Yamaha – Escorts. Eli Lily – Ranbaxy. Daimler – Chrysler (Premium Cars) 238 . Learning new technologies. Renault – Nissan (Minivans – Cars). – Eg. – Eg. Define future industry standards. Maruti – Suzuki.OTHER MOTIVES Entry into newer markets. Endorsement from government authorities. Essar – Hutch (Vodafone). – Eg.
RISKS INVOLVED Incompatibility – Differences in cultural background. – Godrej – Procter & Gamble. technology) drain. Century . – Maruti – Suzuki. – Eg. Risk of over dependence.e. Tata – Aditya Birla in Idea Cellular 239 . LML – Piaggio Differences in size and resource base. PAL – Fiat If the cost of continuing exceeds the exit costs? – Eg. Risk of brain (i.Enka. – Eg. Modi – Telstra What after exit (parenting disadvantage)? – Eg.
Inertia – Differences in age and evolution patterns. Incompatibility – Performance expectations. Partner – Avoid duplication of skills and capabilities. Objectives – Shared vision. Agreement – Clarity on operational control. Equality – Lack of dominance. Culture – Reconcile gaps.PRE-REQUISITES FOR SUCCESS Commitment – Mutual trust. Flexibility – Sufficient space to breathe and adjust. time sharing. Costs – Other modes of transaction becomes cheaper. respect. Focus – Avoid strategic myopia. 240 .
MERGERS & ACQUISITION 241 .
Mittal Arcelor). Ranbaxy . Brooke Bond – Lipton). however. reverses are also taking place through LBO) with a view to acquire conglomerate power and induce synergy (Eg. The larger objective is to leverage on size. 2002). An acquisition is said be smooth if it is with the consent of the management (Eg. SEBI Takeover Code. Most countries have stringent laws that prevents hostile takeovers (Eg. An acquisition is the purchase of a firm by a firm (of larger size.Daichi) and hostile if it is without the consent of the management (Eg.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. 242 . HLL – Tomco).
SEBI TAKEOVER CODE.e. 2002 Promoter – A person who has a clear control of atleast 51% of the voting rights of the company and confidence of all the major stakeholders. Hike – An acquirer who has already picked up a 5% has to make a mandatory disclosure for every additional 1% stake that it acquires. creeping acquisition). . Control – A special resolution of 75% of the share 243 holders approving the change of guard. Acquirer – Someone (individual or firm) who picks up an atleast 5% stake without mandatory disclosure having an intention to wrest management control (i. Preferential – A preferential allottee ending up acquiring 5% stake also comes under its purview.
the SEBI can intervene and block share transfers if: the acquirer has ulterior motives (i. credentials or track record is at stake. asset stripping). 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.e. Gujarat Ambuja – ACC). 2002 Pricing – Acquirers will have to offer minority shareholders (at least 20%) the past 26 weeks or past 2 weeks average price. whichever is higher as an exit route (Eg. SEBI – In case of a hostile take over.SEBI TAKEOVER CODE. 244 . Grasim – L&T Cement. and/or does not enjoy the confidence of the different stake holders.
Vertical – It involves complimentarily (partially related) in terms of supply of inputs or marketing activities (Eg. Conglomerate – It involves integration of two distinctly unrelated businesses. 245 . Reliance). Electrolux .TYPES OF MERGERS A business is an activity that involves procuring of desired inputs to transform it to an output by using appropriate technologies and thereby creating value for its stake holders in the process. ITC). Horizontal – It involves integration of two highly related businesses (Eg. The type of merger is depends on the degree of relatedness (strategic) between the two businesses.Kelvinator). Godrej. usually opportunistic (Eg.
Tax benefits (Eg. Reduction in risk. Ranbaxy – Crosslands).MOTIVES Increased market / conglomerate power. Tata Steel – Corus). Acquiring assets or capabilities (Eg. ICICI –ITC Classic). Access to newer segments (Eg. Ulterior motives – (Eg. Economies of size.MERGERS & ACQUISITION .e. 246 . Asset Stripping – Shaw Wallace). quick access). Avoiding risk of new product development. Coinsurance effect – Higher debt raising capability. Global image (Eg. scale and scope. ITC Bhadrachalam). Mittal – Arcelor). Reduced gestation (i. Overcoming entry barriers (Eg.
Overvaluation of buying firms (Eg. 247 .MERGERS & ACQUISITIONS PITFALLS Cultural differences (Eg. Managing over-diversification. Inability to achieve synergy. while the ultimate acquisition was made at 607 pence/share). Managing size. their initial offer was around 420 pence/share. Overvaluation is often as a result of an ego drive and substantially affects future returns. Merging of organisational structures. Top management overtly focused on due diligence exercise and negotiations. Tata – Corus). When Tata Steel started negotiations with Corus. neglecting core business.
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. Decline – Horizontal mergers are undertaken to ensure survival. Kingfisher – Air Deccan). Growth – This stage may witness parallel merger of two firms of similar size. 248 . with an objective to reinforce its growth trajectory or to take on the might of a comparatively larger player (Eg. Tata Steel – Corus). vertical to save transactions costs. Brooke Bond – Lipton). Maturity – A larger firm acquires a smaller firm with an objective to achieve economies of scale and experience curve effects (Eg.
Immediate attempts to super impose structure and culture may cause bottle necks. Blanket promotions across entities and confidence building exercises needs to be practiced. A concern of respect and trust for the business of the acquired company. A common shared vision. Strong differences may stifle plans and its execution. 249 . An acquisition just for the sake of it or reputation yields very little value in the long term.FRAMEWORK Positive contribution to the acquired company. active top management intervention in phases. Left alone syndrome.INTERNATIONAL M&A .
Determine business strategy. Integrating work processes.INTEGRATION .BLUEPRINT Take the media into confidence. It will enable focus on customers and key people. Shift attention from business portfolio to people and processes. promptly. They can carry the message to the various stake holders. Decide on the new hierarchy. . Redefine responsibilities and authority. Decide upon management control systems. 250 Do not ignore the “people factor”.
over valuation can become a curse. – Market for corporate control.VALUATION The process of valuation is central to M&A. While under valuation may be a significant opportunity. The process takes (6-12) months. 251 . – Synergy – Potential value gain from combining operations (i. operational & financial).M&A . Financial motives – Undervaluation relative to true value. Valuation decisions are arrived through a due diligence process when the prospective acquirer gets access to the books of accounts of acquiring company. – Unstated reasons – Personal self interest and hubris.e.
252 .VALUING OPERATIONAL SYNERGY Synergy – It refers to the potential value gain where the whole is greater than the sum of the parts. when the “fit” between the two entities is very poor. or from increased market power which increases sales and margins. Sources of operational synergy – Horizontal Synergy – Gains come from economies of scale which reduces costs. – Vertical Synergy – Gains come from controlling the supplychain and savings in transaction costs. – Conglomerate Synergy – Gains come when one firm complements the resources or capabilities of another (Eg. Synergy can be negative as well. Innovative product – Good distribution network).
Synergy comes from projects which would not have been undertaken if the two firms stayed apart (Eg.VALUING FINANCIAL SYNERGY Diversification – Reduce variability in earnings by diversifying into unrelated industries. Hotmail). Tax Benefits – Tax benefits may accrue from tax entitlements and depreciation benefits unutilized by a loss making firm. and without paying take-over premiums. 253 . Cash Slack – It reduces asymmetry between cash starved firms with deserving projects and cash cows with no investment opportunities. However. ITC – Bhadrachalam Paper). shareholders can accomplish the same at a much lesser cost. but availed after being merged with a profitable firm (Eg.
– Coupon rates may also be negotiated at lower rates.VALUING FINANCIAL SYNERGY Co-Insurance Effect – If the cash flows of the two firms are less than perfectly correlated. The likelihood of default decreases when two firms' assets and liabilities are combined through a M&A compared to the likelihood of default in the individual companies. as risky debt is spread across the new firm's operations. hence better performance. the cash flow the merged firm will be less variable than the individual firms. This will induce higher debt capacity. higher leverage. 254 . – Default risk comes down and credit rating improves. It relates to the concept of diversification.
255 . While value of corporate control is negligible for firms that are operating close to their optimal value. since a restructuring can lead to significant increase in value. Assessment of perceived quality is critical. The value of wrestling control is inversely proportional to the perceived quality of that management. – – Value of Control = Value of firm after restructuring Value of firm before restructuring. The value of control can be substantial for firms that are operating well below optimal value.VALUING CORPORATE CONTROL Premium of M&A are often justified to control the management of the firm.
256 .e. The assets of the acquired company are used as collateral for the borrowed capital. LBO facilitates a relatively smaller firm to bid for a comparatively larger firm in the bid for management control. debt component) at the time of buyout and rapid changes in capital structure over time. It is a very costly and risky proposition. Confidence of investment bankers and the international financial community is essential. sometimes in combination with the assets of the acquiring company.LEVERAGE BUYOUT (LBO) The basic difference between a take-over and a LBO is the high inherent leverage (i.
However. – Separation of ownership from management. – The need to satisfy analysts and shareholders. liquidity. the advantages of going public includes . The increased benefit showed in the following way – reduced costs and increased revenue.TO GO PUBLIC OR NOT? However. 257 .access to financial markets. – Increased information needs. A research study showed that 30% of the publicly listed firms reported above average returns after going private. off-late many publicly traded firms have gone private keeping in mind the following – – The fear of LBO. on-going valuation.
– Cash trapped company unable to utilize opportunities.RATIONALE FOR HIGH LEVERAGE The high leverage in a LBO can be justified by – – If the target firm has too little debt (relative to its optimal capital structure). – Managers cannot be trusted to invest free cash flows wisely. co-insurance effect). which disappears once assets are liquidated and significant portion of debt is paid off. – Cost of debt coming down (i. – It is a temporary phenomenon. 258 . – Debts repaid off from increased value after successful restructuring and wresting management control.e.
Lack of sufficient cash flows to repay costly debts resulting in a possible debt trap. As the firm liquidates / pledges assets and pays off debt. – Increase equity valuation. A LBO has to pass two tests to be viable – – Restructuring to pay-off increased debt. initial rise in leverage is anticipated. leverage is expected to decrease over time. Any discounting has to reflect these changing cost of capital. Therefore. 259 .EFFECT OF HIGH LEVERAGE Increases the riskiness of dividend flows to shareholders by increasing the interest cost to debt holders.
e. Objectives – – Traditional route of filing prospectus and undergoing an IPO is costly. allowing the private company to bypass the usually lengthy and complex process of going public. – Tax shelter. time-barred. 260 .REVERSE MERGER Reverse Merger – The acquisition of a public company. which has discontinued its operations (i. – Prevents dilution of equity. or costly. shell company) by a private company. – Facilitates better valuation and forthcoming offerings. – Automatic listing in major exchanges. small in size but having a promising business.
261 . takeover failures have only initial negative effects on stock prices. Initial anomaly in stock prices usually normalizes over a period of time (6-12) months. Excess returns also vary across time periods.EFFECT OF TAKE-OVER ANNOUNCEMENT The shareholders of target firms are the clear winners. – Takeover announcements reported 30% excess returns. – Merger announcements reported 20% excess returns. However. Most target firms are taken over within (6090) days. and 35% during bullish periods. During bearish periods excess returns were 19%.
as stock markets become more and more perfect such anomalies would reduce Source: Jensen and Ruback. and Netter. Brickley. 1983. 1988 . in the event of take-over failure negative returns to the extent of 5% on bidder firm stock prices is reflected. 262 Jarrel. 1983. – Most studies reported insignificant excess returns around take-over offers or merger announcements. – However. Desai. – However.EFFECT OF TAKE-OVER ANNOUNCEMENT The effect of take-over announcement on bidder firm’s stock prices are not clear cut. Bradley. over time. and Kim.
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. Rights). Poison Pill – An offer to existing shareholders to buy shares at a substantial discount to increase their voting rights (Eg. Asset Stripping – The targeted company hives off its key assets to another subsidiary. 263 . so that nothing is left for the raider to strip off.
But often the White Knight turns a betrayer himself (Eg. thus thwarting the raider company’s attention. Green Mail – The targeted company buys large blocks from holders either through premium or through pressure tactics (Eg. East India Hotels – Reliance Industries – ITC). Gray Knight – The target company takes the help of friendly company to buy the shares of the raiding company. Pac Man – The target company makes a counter bid to take over the raider company.DEFENSIVE STRATEGIES White Knight – It is the placing of stocks to a cash rich investor and bargaining for protection in return. Shapoorji Pallonji). 264 .
COMPETING FOR THE FUTURE 265 .
Honda overpowering Volkswagen. Wal-Mart overpowering Sears. Most companies were too preoccupied with the present than the future? 99% of the companies overpowered. Compaq overpowering IBM. British Air overpowering Pan Am. Honda overpowering GM. 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. Hitachi overpowering Westinghouse. The reverse was true for the companies overpowering.GETTING OFF THE TREADMILL Canon overpowering Xerox. Nokia overpowering Motorola.
downsizing). decluttering. declining margins. Thus efficiency was grievously hurt. These denominator based managers stuck to their restructuring strategies (like building pyramids) and didn't know what to do next? Thus they became history? (like the pharaohs) 267 . falling market share).THE PAST OF COMPETITION Beyond Restructuring – When a competitiveness become inescapable problem (stagnant growth. Not knowing when to stop. most often they ended up cutting corporate muscle as well and became anorexic. CEO’s brutally pick up the knife and ruthlessly carve away layers of corporate flab (delayering.
top managers believed that quality will be a source of competitive advantage of the future.THE PRESENT OF COMPETITION Beyond Reengineering – Numerator based managers (innovation) at least offers some hope. ensuring only survival of the present.S. The future is not about catching up with competition. but not of the future. A poll in circa 2000 revealed that 80% of the U. incrementalism or nominal innovation has almost reached a plateau. 268 . but forging ahead in competition. On the contrary only 20% of Japanese managers believed that quality will be a source of competitive advantage of the future. However.
THE FUTURE OF COMPETITION Regenerating – Leaner. It is based on deep insights into trends in technology. Empower from bottom to top. don’t predict. It involves Dream about the company’s future. not just the organization. better. 269 . they are not enough to get a company to the future. and regenerate its strategies (breaking its – managerial frames). demographics and lifestyles. Creating the future requires industry foresight. Companies need to fundamentally reconcieve itself. Transform the industry. not the other way. Create a potential gap. faster. as important as these may be. reinvent its industry. aspirations and resources.
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 .
Create entirely new industries (i. they do not need to restructure. Therefore. Change in at least one fundamental way the rules of engagement in an industry. 271 . by converging technologies complex.ABOUT THE TRANSFORMATION The future does not belong to those who take the industry for granted. hence do not fall sick in the first place.e. Redraw the boundaries between industries. blue oceans). It is about deliberately creating a strategic misfit. It drives a hunger and a passion to transform. Successful companies have a complete grip over the industry.
272 . Transformational leaders merely lead the way.ABOUT THE EMPOWERMENT Bring about a revolution (a paradigm shift) in the organization. Such a process is called institutionalization (from people centric to organisational centric). The middle management plays a strong moderating role. More importantly. Most successful revolutions (Gandhi to Mandela) rose from the dispossessed. A revolution that is thrust upon from the top seldom sustains. the revolution must start at the bottom and spread in all directions of the organization.
273 . South West Airlines – LCC. Get to the future first. Apple – iphone). A process for finding and gaining insight into tomorrows opportunities (Eg. Apply the 40 – 30 – 20 principle. Toshiba – LCD. without taking undue risk. It requires a lot of common sense and a little bit of out of the box thinking.THE FUTURE OF STRATEGY A company must get to the future not only first but also for less. What does it take to get to the future first? Understanding how competition for the future is different. Companies need to strategize (think ahead of times). An ability to energize the company.
is the ability to imagine in a different way what the future could be. greatness from mediocrity. as on their aspirations. 274 . We are in the midst of a 3600 vacuum. What distinguishes a leader from a laggard. but hundreds. The farther one can see in this endless space.HOW DOES THE FUTURE LOOK LIKE? There is no rule which says that for every leader there will be a follower. the farther it will be away from competition. Companies of the future will be not based so much on the strength of their resources. As there is no one future. each point in space represents a unique business opportunity.
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 is characterized by the following – Unique – It provides unimaginable customer value ahead of its times. Leverage – They are the gateways to future markets. It represents the collective learning's of an organization centering around diverse streams of technologies. 278 . Inimitable & Insubstitutable – A high degree causal ambiguity between these skills yield sustainable competitive advantage. It cannot be matched even by its closest competitors.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.
MORE ABOUT CORE COMPETENCE Sony – miniaturization. Although a core competence may lose value over time. Most companies around the world do not possess one. Canon – imaging. Toshiba – flat screen displays. Nike – designing. A core competency cannot be outsourced. leaders have one. Wal-Mart – logistics. it is deeply embedded in the heart of the organization. it gets more refined and valuable through use. Honda – engines. Core competencies are the roots of the organization. Intel – nano-electronics. SKF – antifriction and precision. Coca Cola – brand. 279 . at the most three to four. Toyota – lean manufacturing.
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 .
1997). and high transaction costs.EMERGING MARKETS Emerging markets (India. Diversified groups in operating in emerging markets therefore benefit from unrelated diversification. strategies suited for the developed markets may not be appropriate for emerging markets. Therefore. high levels of market imperfection). China. Korea. Chile) provide a different context (i. Emerging markets are characterised by infrastructural bottlenecks. Therefore focused strategies based on core competence may not be suitable for emerging markets (Khanna & Palepu. institutional gaps.e. 288 .
Entropy). subsequently negatively related across developed markets.DIVERSITY .PERFORMANCE (I) Diversity attempts to measure the degree and extent of diversification (Herfindahl. Concentric. et al. (2000) 289 . Size & Scale. Synergy. Optimum level of diversification Performance Diversity is initially positively related with performance. Experience Strategic Fit Diversity Palich.
2001) 290 . Huge initial investment.DIVERSITY . brand building Risk diversification. conglomerate power Threshold level of diversification Performance Diversity (Khanna & Palepu.PERFORMANCE (II) Diversity is initially negatively related with performance. subsequently positively related across emerging markets.
It should have a spread of interest groups / stake holders. 291 . It should have a spread of assets. act locally (Eg. revenues and profits. It should have a spread of manufacturing facilities. HSBC).INTERNATIONAL IDENTITY MNC’s consciously engage in FDI in different parts of the globe to forge resource diversity as a distinct competitive advantage. It should think globally. Characteristics – It should have a spread of affiliates or subsidiaries.
low risk profile in developed markets and vice versa for emerging markets). low group scale in developed markets and vice versa for emerging markets).It reflects the relative role of team building (Eg.GLOBAL BUSINESS ENVIRONMENT Power Distance – It reflects the disparities in income and intellectual development (Eg. Feminity Index . Group Scale . low power distance in developed markets and vice versa for emerging markets). Risk Profile – It reflects the risk attitude of the top management (Eg. high feminity index in developed markets and vice versa for emerging markets).It reflects the disparities in women in workforce (Eg. 292 .
high cultural adaptability in developed markets and vice versa for emerging markets). code of conduct. customs. political stability. corruption. 293 .GLOBAL BUSINESS ENVIRONMENT Cultural Adaptability – It reflects the adaptive ability to a changing environment . attitude. Country Risk – It reflects the political and economic risk (Eg. way of life. terrorism (9/11). flexibility (Eg. credit rating. dress sense. judiciary) of doing business in a particular country (Eg. time value.culture. FOREX reserves. interest rates. inflation. low country risk in developed markets and vice versa for emerging markets). currency.
time-zones. 294 . Ethnocentrism – Developed country managers tend to regard their own culture as superior. High levels of ethnocentrism usually has a negative effect on business. Other factors – local celebrations. in most emerging markets use of an interpreter may be a standard protocol. in most emerging markets meetings are delayed and lasts unusually long.GLOBAL BUSINESS ENVIRONMENT Time Sensitiveness – Developed country managers regard time as precious. however. and vice-versa. Language Barriers – Developed country managers expect foreign partners to communicate in their languages.
In 1995 (Uruguay Round) GATT was renamed to WTO. The 1999 (Seattle Round) saw a lot of protest amidst bringing agriculture under the purview of TRIPS. trademarks). 295 . copyrights. BRIC). The 2001 (Doha Round) focused on power blocks (NAFTA. It focused largely on TRIPS (patents. It also highlighted the nexus between US & WTO.GATT GATT was a bi-lateral treaty initiated between US and some member countries in 1947 to promote free trade. It a multi-lateral treaty with 143 (as on 2002) member countries to reduce tariff and non-tariff (quota) barriers. It also initiated provisions on anti-dumping. ASEAN.
The notable exception was Great Britain which still continues with its local currency (i. the Dollar still remains the most preferred currency globally.EURO – SINGLE CURRENCY In 1999 twelve member countries in Europe joined hands to move over to a single currency (i.Pound). The Euro was significantly devalued against the Dollar till 2002. primarily the OPEC countries.e.e. 296 . Sterling . Euro). However. However with current recession in the US 2002 onwards. three countries joined in 2002 increasing it to fifteen members as of 2008. the Euro slowly started outperforming the Dollar.
Rate Uncertainty – A single currency eliminates the risk of competitive devaluations.SINGLE Vs MULTIPLE CURRENCY Transaction Costs – Though the initial cost of introduction of a single currency is very complicated and costly. 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. Transparency – A single currency is transparent and competitive. a multiple currency is preferable where the business cycles of member nations are different. However. but it may have spill-over effects.
e. – FDI (transfer of tangible resources) is slow but steady for the purpose of economic growth. the gain of one country is loss of another). It is short-medium term with comparatively low levels of commitment. 298 . – FII (transfer of intangible resources) is fast but may have strong repercussions (i.e. Neo classical economists believe that foreign investment may in fact be a win-win game. hot money). It is long term with high levels of commitment.FII Vs FDI INVESTMENT Classical economists believed that foreign investment (in any form) is basically a zero sum game (i.
INTERNATION MARKETING Product – The various attributes of a product may receive different degrees of emphasis depending on differences in . promotion (surrogate advertising). technology (microchip). Pricing – It depends on the competitive structure (PLC – Kellogg's). lifestyle (petroleum 299 outlets – departmental stores). Distribution – It depends on the market characteristics (fragmented – concentrated). buying patterns (spread). economic (middle class buying power). usage (talk time). . customer awareness (microwaves).culture (food habits).
debt is cheap in US.India) may be different from that another trading country (US – GAAP or IRS). Accounting Norms – The accounting norms of one country (AS . 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.
shortened life cycles). social security. 301 . Training – It is a pre-requisite for international business to reduce language. labour laws. in most cases it is not desirable nor practiced. and cultural barriers (language) vis-à-vis emerging markets.INTERNATIONAL HR An uniform HR policy is idealistic to enable parity in performance appraisal. technology (convergence. skills are more important that cultural fit and vice-versa. Compensation – Differential pay packages exists because of differences in purchasing power. double taxation. Recruitment – In local recruitment. however.
Outsourcing – A company having a core competence may be the source of global outsourcing (Eg. Technology – The cost to be evaluated in terms of latest technology (Euro VI) vis-à-vis effective cost of appropriate technology (Euro II). reduce power costs) vis-à-vis infrastructural bottlenecks. SCM – Use of ERP to network the extended enterprise 302 across the globe. .INTERNATIONAL OPERATIONS Location Incentives – FDI in emerging markets should explore options for SEZ’s to explore benefits (tax holidays. Bosch spark plugs are used by car manufacturers worldwide).
CONTEMPORARY TOPICS 303 .
While innovation typically adds value for organizations. innovation is the first attempt to carry it out in practice. it has destructive effects as well.INNOVATION An invention is the first occurrence of an idea for a new product or process. Innovation is the most preferred strategy today to maintain competitive advantage in the present turbulent business environment. Innovations typically paves the way for more secured and improved lifestyle for consumers in general. 304 . but has inherent risks involved as well. Innovation is all about staying ahead of competition.
305 . process innovation is necessary to sustain the competitive advantage of product innovation. Strategic innovation has the potential to change the rules of the game. While product innovations are typically customer driven. However.TYPES OF INNOVATION A key challenge is maintaining a balance between process and product innovations. process innovations are organizational driven. Process innovation usually follows product innovation. Tangible impact of product innovation on performance is significantly higher than process innovation.
Data Storage (Pen Drives). Medical Surgery (Lasik). It leads to a shift in the price – performance envelope. about how an organization makes money (i. Drug Development (Bio Chemicals). 306 . a paradigm shift). putting an idea into practice).BUSINESS MODEL It is a simplified description and representation of a complex real world. Innovations are the back-bone of successful business models . Disruptive business models brings in a new frame of reference (i.e. Processors (Pentium).e. Telecom (CDMA Technology).
The channels to reach out to the clients. The revenue streams generated by the activities. The segment(s) of clients to be addressed. The key partners involved in the activities. The cost structure resulting from the business model.NINE BUILDING BLOCKS Value proposition offered to the market. The key activities / processes necessary for execution. 307 . The proposed relationships established with clients. The key resources and capabilities required.
BUSINESS MODEL FRAMEWORK 308 .
With the rapid erosion of certain industries (IT. The revenue model described here are the means to generate revenues. It involves – Product Visualization – Product Prototype – Product Test – Capacity – Pricing – Distribution. It is just one piece of the puzzle. Investment Banking.REVENUE MODEL Positioning is just not sufficient. 309 . Real Estate) companies need to untangle and understand the intricacies of their business model. innovative companies to carve out unique business models to fend off competition.
310 . Allow the workforce idiosyncrasies for their errors. Promote the grape-vine. Have a lean and a flat organization structure. A favourable intellectual property (IP) climate. Provide reasonable incentives (not necessarily monetary). 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. Promote the culture of experimentation.
In most emerging markets where the IP climate is not so favorable.HOW TO PROTECT INNOVATION? Without adequate protection (external or otherwise) the effects of innovation does not translate to performance. companies are increasingly relying on internal protection to sustain innovation effects. Collusion with the judiciary is also another distinct possibility in emerging markets. 311 311 . however that possibility is slowly atrophying. The most preferred strategy of internal protection includes imbibing “causal ambiguity” in the production process to make reverse engineering difficult.
CORPORATE GOVERNANCE The basic theme of corporate governance is to ensure that professional managers are identified and made accountable in terms of clear business processes or activities and held responsible through adequate mechanisms & control systems for channelizing their decisions for the benefit of stakeholders at large. In fact the principles of corporate governance implies that managers go beyond in satisfying the stated and unstated needs of the multiple stakeholders. 312 312 . Corporate governance aims to reduce the principal-agent problem present in most professional managed organizations through appropriate forms of accountability and control mechanisms.
not present in portfolio diversifications. 313 . However. also known as the principal-agent problem or agency dilemma. shareholders can diversify their portfolio at a much lesser risk and cost. This exposes the shareholders to additional risks and higher costs. From the strategic point of view managers tend to diversify into unrelated businesses as it provides higher returns hence a more favourable appraisal.AGENCY THEORY The root of Corporate Governance goes back to the Agency Theory. According to the agency theory top managers and shareholders interests are usually conflicting in nature and tend to pull in opposite directions.
2002 to restore public confidence in corporate governance. After the Enron downfall. SEBI Report – 2005. defines corporate governance (headed by Kumar Mangalam Birla) as the acceptance by management of the inalienable rights of shareholders as the true owners of the corporation and of their own role as trustees on behalf of the 314 shareholders. various laws were enacted to ensure proper usage of these funds. .ORIGIN & CONTEXT Since the early 20th century since a large part of public funds were held by publicly traded firms in the US. the US government passed the Sarbanes – Oxley Act.
Interests of other stakeholders: Recognize the legal and other obligations of all legitimate stakeholders.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. 315 . Role and responsibilities of the board: It deals with issues about an appropriate mix of executive and nonexecutive directors. including the society at large. The key roles of chairperson and CEO should not be held by the same person and their offices be clearly separated.
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. assessment and mitigation of risks and retirement by rotation over a fixed period of time. 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. 316 316 ..
safeguards invested capital. Remuneration: Performance-based remuneration is designed to relate some proportion of salary to individual performance. However. Balance of power: The simplest balance of power is very common.GOVERNANCE STRATEGIES Monitoring by the board of directors: The board of directors. they should provide no mechanism or scope for opportunistic behaviour. 317 . discussed and resolved. a person benefitting from a decision should abstain from it. fire and compensate top management. Regular board meetings allow potential problems to be identified. with its legal authority to hire.
who had no management ties. McKinsey found that 80% of the respondents would pay a premium for wellgoverned companies. 318 . and was responsive to investors' requests for information on governance issues. from 10% for companies where the regulatory backdrop was least certain (those in Morocco.GOVERNANCE & PERFORMANCE In its “Global Investor Opinion Survey” of over 200 institutional investors in 2002. They defined a well-governed company as one that had mostly out-side directors. undertook formal evaluation of its directors. The size of the premium varied by market. Egypt and Russia) to around 40% for Canadian & European companies.
Over a period of time. Therefore. However.SHAREHODER – STAKE HOLDER THEORY Till the early part of the 20th the basic objective of modern organizations was to provide goods and services for public consumption for profit maximisation. The basic premise is that firms cannot exist in vacuum. 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. the short-term view of profit maximisation gave way to a more broader and mediumterm view wealth maximisation of the shareholders. 319 .
the debate on CRS still continues whether firms should detract its focus from its business? 320 . However. Therefore. giving a very important message that one cannot exist without the other. “a healthy business cannot exist in a sick and impoverished society”. economic and social responsibilities cannot be mutually exclusive. Therefore.CORPORATE SOCIAL RESPONSIBILITY As Peter Drucker rightly pointed out that. CSR can be defined as. in fact a large part of it is significantly overlapping. “an enterprises decisions and actions being taken for reasons at least partially beyond its immediate economic interests”.
321 . Public image: Entrepreneurs are increasingly relying on public image as a source of competitive advantage and a higher financial discounting. MRTP). The role of media: The media and various consumer organizations have come up in protecting consumer rights and exposing mal-practices. people are becoming increasingly aware of their right to a decent and healthy life.GROWING CONCERN FOR CSR Awareness due to education: With growing literacy. Fear of government interference: Excessive quench for profits may lead to build up of adverse public opinion compelling the government to intervene (Eg.
Paper packaging. designing eco-friendly products. Refrigerators – CFC. eco efficiency. Cement . and extended producer responsibility (Eg. Tata Steel – Life Line Express).CSR STRATEGIES Green Supply Chain Management: It includes environmentally preferable purchasing. Education. Exide – Product take back). Health & Hygiene – Attending the health hazards due to wastes and by-products to employees and society in proximity (Eg. Literacy & Training Programs – (Eg. 322 . Aditya Birla Research Centre – LBS).
they're helping millions of the world's poorest people to escape poverty. C.BOTTOM OF THE PYRAMID With the market across most developed markets including the US getting saturated. They represent an enormous opportunity for companies who learn how to serve them. 323 . Strategic innovations leading to disruptive business models can show the way out. K. across the world's billions of poor people having immense untapped buying power. Prahalad notes that future markets exist collectively. In turn companies by serving these markets.
BLUE OCEAN STRATEGY 324 .
MARKETSPACE .TWO WORLDS 325 .
battled over market-share. profitable growth. and struggled for differentiation (cost or product). one companies gain is always at the 326 cost of another companies loss. competing head on results in nothing but a bloody red ocean of rivals fighting over a shrinking profit pool. where most industries are saturated.WHAT IS RED OCEAN? Companies have long engaged in head-to-head competition in search of sustained. In today’s red oceans. Yet in today’s overcrowded industries. They have fought for profits. .
rendering rivals obsolete and unleashing new demand.WHAT IS BLUE OCEAN? Tomorrow’s leading companies will succeed not by battling in red oceans. It helps in creating powerful leaps in value for both the firm and its buyers. It is only the frames of the . but by creating blue oceans of uncontested market space ripe for growth . it will exist 327 in the future as well. Such strategic moves are possible through the pursuit of product differentiation and low cost simultaneously. Blue Ocean’s have existed in the past.
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 .
. Demand across developed markets reaching a plateau. Technological advances have substantially 329 improved industrial productivity. As trade barriers between nations & regions fall. of European nations. Niche markets & monopoly havens are continuing to disappear. Population shrinkage across a no.BLUE OCEAN STRATEGY IMPERATIVES Prospects in most established market spaces – red oceans – are shrinking steadily. information imperfections atrophy instantly.
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).CONCEPTUAL UNDERPINNINGS Blue oceans have existed in the past and will exist in the future as well. They are not necessarily about technology. Incumbents often create blue oceans within the ambit of their core business. . managerial moves are. the underlying technology was often already in existence. Company & industry are the wrong units of 330 strategic analysis.
BLUE OCEAN .IMPLEMENTATION Reduce Which factors to be reduced below the industry standard Eliminate Which of the industry factors that the industry takes for granted should be eliminated Create VI Which factors should be created that the industry has not offered Raise Which of the factors should be raised above the industry’s standard 331 .
IMPLEMENTATION SEQUENCE Buyer Utility (1) Is there exceptional buyer utility in your business idea? Price (2) Is your price easily accessible to the mass of buyers? Blue Ocean Strategy Adoption (4) What are the adoption hurdles in actualizing your business idea? Are you addressing them up front? Cost (3) Can you attain your cost target to profit at your strategic price? 332 .
Southwest Airlines: Pioneering the concept of LCC. . Citibank – Automated teller machines & credit 333 cards. Sony Play Station: Redefining machine-human interface in entertainment and targeting an altogether new user base.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.
Off late emerging views in strategy having its origin in (Organization Theory) led to a paradigm shift to what is called the – reconstructionist view. According to this view managers need not be constrained to act within the confines of their industry. According to this view. companies & managers are largely at the mercy of economic forces.WHAT THEN IS THE HANDICAP? Most of the traditional views in strategy having its origin in (Economic Theory) led to what is called the – structuralist paradigm. greater than themselves. 334 . All they need to do is change their managerial frames.
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