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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. It provides broad guidelines.STRATEGIC MANAGEMENT . It is long-term in nature. It requires full commitment of the top management. It involves substantial resource outlay. It is a holistic and integrated approach.FEATURES It forms the core activity of the top management. 7 . It is all about creativity and innovation. It is irreversible.
It a bundle of techniques or even tricks. It involves only the top management. It is fool-proof in nature. It is about a definite formula. It about mere data and facts.STRATEGIC MANAGEMENT – MYTHS It involves short-cuts. It involves nitty-gritty's. It attempts to minimize risk. It brings instant success. It is about forecasting. 8 . It is rocket science.
To innovate. To be insulated against environmental threats. rather than reactive. To be proactive. To gain expertise in technologies. scale and scope. . To generate large resource pool.STRATEGIC MANAGEMENT IMPERATIVES To be continuously alert. To tap markets across boundaries. To leverage size. 9 To develop core–competencies. To be future oriented. again and again ……. To assimilate change faster.
but with a lot a rigour and robustness. today's battles are fought over markets. It is an old wine in a new bottle. obsession. battles fought on the market front are won by companies by virtue of their obsession & strategies. and more importantly . 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.ORIGIN The word strategy has its origin from the Greek word strategia meaning Military Commander.STRATEGY . 10 . Even in today’s markets.strategies. In contrast. In the ancient days battles were fought over land.
SOME PARALLELS Japan’s attack on Pearl Harbour – Strategy: Attack where it hurts the most. – Reliance’s entry into telecom. Allied Forces Vs Germany (WW-II) – Strategy: Forging alliances. 11 . – Toyota’s entry in the US. challenging GM and Ford. Napoleon’s attack on Russia – Strategy: Waiting for the right time. – Yahoo and Microsoft challenging Google. US attack of Morocco to capture Germany – Strategy: Pin-hole strategy – Wal-Mart challenging Sears by entering small towns.
1910).Industrial Revolution.EVOLUTION OF MANAGEMENT As Peter Drucker refers to it. The things happening around the firm when totally disconnected from the past leads to a paradigm shift. 12 . A paradigm is a dominant belief about how the business and its environment operates. – Mass Production Organization Size – Complicated Processes – Complex Structures Evolving of an emerging paradigm – survival of the fittest (Fayol & Taylor. a radical change in the business environment brings about discontinuity. The first major discontinuity in the history of global business environment was the .
– Global market place. 1960). push to pull).e. From uniform performance. – Changes in the technology fore-front. The question of outperforming the benchmark became the new buzzword. 13 . Survival of the most adaptable becomes a new management paradigm (Ansoff. – Affluence of the new customer (i. Efficiency and effectiveness are no longer sufficient. performance across firms became differentiated.EVOLUTION OF STRATEGIC MANAGEMENT The second major discontinuity in the history of global economic environment – World War II. – Homogeneous to heterogeneous products.
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 .
– Biases and prejudices has a very little role to play in strategic choices pursued by managers. Learning always begin on a clean sheet of paper.APPROACHES TO STRATEGY Analytical Approach – Igor H. – The choice of product-market mix is based on conscious evaluation of risk – return factors. – The choice of strategy is primarily concerned with external ones rather than internal ones. – 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. 15 .
– Management control systems has a dominating role in influencing firm performance. The organization initially decides which industry to enter.APPROACHES TO STRATEGY Design Approach – Alfred Chandler (1970) – Structure follows strategy. Successful organizations align authority and responsibility of various departments in way to reach overall objectives. Once the control systems are in place. who will be the top managers. – The top managers then decide on the type of organization structure & systems to be in place. how it will compete. 16 . everything else follows. – Organization structure will precede and cause changes in strategy.
APPROACHES TO STRATEGY Positioning Approach – Michael E. substitutes. – The environmental forces comprises of – supplier. new entrant. 17 . Porter (1980) – Choose a consumer segment and position your product accordingly. – An organization is seldom in a position to influence the larger business environment. – The organization will outperform the industry where environmental forces are weak and vice-versa. competitors. customer. – A firms performance is inversely related with the bargaining power of environmental forces to which it is exposed.
They are complex resources and undermines a firms competitive advantage. but exploiting the resource differences among them. 18 . – Organizations can significantly alter the way an industry functions. K. – It enables a firm to deliver unimaginable value ahead of time. – Core competencies are a set of skills that are unique and can be leveraged.APPROACHES TO STRATEGY Core Competence – C. Prahalad (1990) – The key to superior performance is not doing the same as other organizations. locating in most attractive industries and pursuing the same strategy.
STRATEGIC MANAGEMENT PROCESS Strategic Intent Strategic Planning Strategic Gap – Environmental Scanning – Internal Appraisal of the Firm Strategy Formulation – Corporate Strategy – Business Strategy Strategic Choices – Functional Strategy Strategy Implementation Strategy Performance Strategy Evaluation & Control 19 .
TOP MANAGEMENT PERSPECTIVE 20 .
A gap that consciously manages between stagnation and atrophy. 21 . 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. A strategic intent is a statement of purpose of existence. A substantial gap between its resources and aspirations.STRATEGIC INTENT If you cannot see the future. you cannot reach there. It provides a sense of direction and destiny. It implies a significant stretch. It’s a philosophy that distinguishes it from its competitors.
HIERARCHY Integrativ e m Do an in Visio n Mission Dominant Objective s Goal s Plans Lo g ic Single Specifi c Man y 22 t .STRATEGIC INTENT .
To put it more simply. It is core to the strategic intent of the firm. it can be perceived as a set of working rules (similar to thumb rules) that enables the top management to decide what can be done and more importantly what cannot be done. Dominant logic changes.e. strategic variety) is apparent.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. 23 . when radical changes in the internal and external environment (i.
It enables the top management to remain focused. – It stands for the unchanging core values of the company. but achievable aspirations. – It represents the company’s audacious. It is a combination of three basic elements – – An organizations fundamental reason for existence.VISION It is a dream (not a forecast) about what the company wants to become in the foreseeable future. 24 . It ensures that the company does not wander off into unrelated zones or fall into an activity trap. beyond just making money. It provides an unity of purpose amidst diversity of personal goals.
Brevity – It should be short.VISION . and memorizable. Empathy – It should reflect the company’s beliefs to which it is sensitive.CHARACTERISTICS Reliance – Where growth is a way of life. Clarity – Vividly descriptive image of what the company wants to be known for in the future. clear. Sharing – The company across all hierarchies should have faith in it. In Reliance when a new project becomes operational top managers hand over charge to the SBU heads and move on to a new project. 25 . Reachable – It should be within a reasonable target in the known future. not an utopian dream.
It makes strategic alignment easier. It fosters risk taking and experimentation. It gives enlightment. It facilitates development of skills & capabilities. It gives the impression of a forward-looking organisation. It provides a holistic picture. 26 .VISION .ADVANTAGES To stay focused on the right track. It gives a shared platform. To prevent the fall in a activity trap. It lends integrity and genuineness.
A broad mission statement helps in fending competitors. It enables the firm to define its business landscape and identify its competitive forces.MISSION Mission defines the space that a business wants to create for itself in a competitive terrain. 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. 27 . Although the purpose may change over time. It serves as a road map to reach the vision. its reason for existence.
…………………. All the businesses of the company are strongly integrated with their main business.MISSION – SOME IDEAS Reliance – We are in the business of integration. – We do not offer software's. though some may seem unrelated in nature. 28 . …………………. …………………. We offer solutions. Some other examples – We do not offer shoes. – We do not offer steel. We offer comfort. …………………. – We do not offer insurance. We offer strength. We offer security.
It provides a quantitative feel to an abstract proposition.100K crore company by the year 2005. – It prevents deviation. – It lends direction – time frame in the medium term. – It adds legitimacy and motivation. – It helps identifying key success factors. – It keeps the mid management pre-occupied. It is an end result (quantifiable) something a firm aims and tries to reach in a time bound frame. 29 .GOALS & OBJECTIVES Reliance – We want to become a Rs. – It is based on Management by Objectives (MBO). – It provides a benchmark for evaluation.
– Acquire a market share of indomitable position. 30 .PLANS Reliance – Desire to invest 25K crore in telecom business by circa 2010. It is the process of garnering necessary inputs. – Compress project times. – Leverage economies of size and scale. coordinating appropriate technologies. – Use price-elasticity to break market barriers. The details of the plan Reliance Telecom adopted were – Backward integrate process technologies. and gaining access to desired markets to achieve the desired goals and objectives. It is specific to a particular business.
past strategies tend to have a bearing on future strategies. radical change may lead to disequilibrium. equilibrium is maintained. It often leads to an organizational crisis. This tendency to restore continuity is known as inertia (resistance to change). Historical studies have shown that most organizations tend to continue with their existing strategies. This state of affairs is known as strategic drift. When changes in the environment is incremental. strategies lose touch with the emerging realities. However.STRATEGIC DRIFT Due to top management commitment. In such a context. 31 .
STRATEGIC DRIFT FRAMEWORK Environmental Change Degree of change Strategic Change Radical Change Incremental Change State of Flux Continuity Stage of Transformation Strategic Drift Stage of Atrophy Time 32 .
– Creating a favourable image. – Creating obligations of reciprocity. Some instances of organizational politics – Formation of powerful groups or coteries.ORGANIZATIONAL POLITICS Strategic drift often leads to organizational politics. – Developing a platform of support. – Using covert tactics to pursue self interests. – Hiding vulnerability. Organizational politics involves intentional acts of influence to enhance or protect the self-interest of individuals or groups over organizational goals. – Distorting information to gain mileage. 33 .
– The environment context has changed. – Persons responsible for strategy conceptualization and implementation are34 divergent. . – Influential stake-holders back out. Usually there is wide gap between the two when organizational politics is evident. A realized strategy is what the top management actually translates into practice.INTENDED & REALISED STRATEGIES An intended strategy is an expression of interest of a desired strategic direction. Other causes – – The plans are unworkable and utopian.
However. but the master scheme of the rational comprehensive scheme is not apparent. this is not to be treated as “muddling”. Learning is an integral part of logical incrementalism. 35 . They simply unfold the particulars of the sub-system in stages. but as a defensible response to the complexities of a large organization that mitigate against publicizing goals. Strategy formulation and implementation are linked together in a continuous improvement cycle.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.
Agent of Change – Formal ratification of a change plan through MBO. 36 .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. The broader objective should serve the overall interest of the organization. Adaptation – As implementation progresses.
Dominant logic’s are the cornerstones of change when strategic transformation is apparent. As it brings 37 with it a different dominant logic. Strategic transformation becomes smooth through a change in top leadership. . It creates blinders. Tampering with surface level factors often leads to atrophy. Dominant logic’s are very rigid and sticky and prone to inertia.STRATEGIC TRANSFORMATION Strategic transformation (a complete overhauling of the strategic architecture) becomes inevitable whenever a strategic drift takes place.
LEARNING ORGANIZATION A learning organization is capable of continual regeneration from knowledge. experience. – Informal Networks – Emerging of new ideas. – Experimentation – Fosters a culture of risk taking. It helps prevent a strategic drift from occurring at the first place. – Organisational Slack – Enough free space. – Constructive Bargaining – Agree to disagree. Factors that fosters a learning organization – Pluralistic – An environment where different and even conflicting ideas are welcome. 38 . A learning organization must continuously focus on unlearning as well. 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 .
PLANNING & STRATEGIC PLANNING Formal planning is a function of extrapolating the past. It is based on the assumption of radical change. It is reactive in nature. Strategic planning is a function of discounting the future. 41 . It is pro-active in nature. Strategic gap basically points towards a vacuum of where the organisation wants to be and where it is. It is based on the assumption of incremental change. gap analysis). It requires a quantum leap (i. Competitive advantage provides the surest way to fulfill the strategic gap.e. It points to a position of superiority with relation to competition.
It is exploratory in nature. Environmental factors can be external as well as internal to the organization. 42 . and influences that affect an organizations way of doing things. Environmental scanning is very important component of strategic planning. The segments of the environment a top manager scans selectively depends upon his dominant logics. A manager has to continuously scan the environment to ensure alignment of the strategies with the radically changing environment. events.ENVIRONMENTAL SCANNING The environment is defined as the aggregate of conditions. not guided by any boundaries. The world is flat. resources and ideas move unhindered.
but also to analyze the complex linkages across them. It is particularly important that PESTEL be used to look at the future impact of environmental factors. Understanding the composite effect is critical.PESTEL PESTEL attempts to provide a broad framework on how the broader environmental forces affects an organization and influences the way it practices strategy. It is important not only to identify the structural drivers of change. 43 . It is not intended to be used as an exhaustive list. which may be different from the past impact. for which a holistic picture is required.
Central – State Co-alignment. Religious Sentiments. Capital Market & Forex Reserves. Licensing & Quotas. Savings & Investment. Government Attitude. Fiscal Deficit. 44 . Literacy Levels. Social Values. Infra-Structural Investments. Inflation & Interest Rates. Currency Stability. Economic Cycles.PESTEL FRAMEWORK Political – Government Stability. Language Barriers. Subsidies & Protection. Income & Age Distribution. Economic – GDP. FDI Inflows. Monsoon & Food Grains Reserves. Social – Population Diversity. Economic Model.
Consumer Protection Laws. Product Design. Environmentally Preferable Purchasing. Extended Producer Responsibility. Obsolescence Rate.PESTEL FRAMEWORK Technological – Innovation. Patent Laws. Non-Fossil & Alternative Fuels. Technological Convergence. Patents. ERP. Product Safety & Health Hazards. Pollution Control Laws. Employment Laws. Carbon Credits. Direct & Indirect Taxes. Research & Development. Waste Disposal & Emissions. Legal – Monopolies Legislation. 45 . Environmental – Global Warming & CSR.
FERA Liberalization. Curtailment of PSU’s. Rupee convertibility. Dismantling price controls. Economic Reforms – Fiscal & Monetary Reforms. Abolition of import licenses. PSU Disinvestments. Banking Sector Reforms. Capital Market Reforms.VRS. Encouraging FDI. New Trade Policy (NTP) – Lowering import tariffs. Exit Policy. 46 .ECONOMIC LIBERALISATION New Industrial Policy (NIP) – Liberalizing industrial licensing. Encouraging exports. Structural Adjustments – Phasing out subsidies. MRTP Liberalization.
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 .
DISCONTINUITY Hyper Competition – MNC’s .Globalization – Cheap Imports & Dumping – Push to Pull Marketing Buyers exacting demands – Shortage to surplus – Price competition – Life-style changes – Stress on quality. Consumerism Challenges on the technology front – Competencies become technology based – Investment in R&D become inescapable 48 .
DISCONTINUITY Compulsion to find export markets – Identifying competitive advantage – Technological gap – Global presence – Depreciating currency – Exports Corporate vulnerability – It is no longer business as usual – Capital inadequacy – Lack of product clout and brand power – One product syndrome – Loss of monopoly 49 .
FIVE FORCES MODEL .PORTER Threat of New Entrants Bargainin g power of Suppliers Competition from Existing Players Bargainin gBargainin power g of power of Suppliers Customer s Threat of Substitutes 50 .
51 . the forces are subject to changes. The model should not be used as a snapshot in time. The five forces have strong cross-linkages. It should not only be used to understand the forces. It is even wiser to apply the same at the product – market level. It depicts the attractiveness of an industry (i. incremental or otherwise. profit potential) per se. 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.
52 . Low customer switching costs. High switching costs. Low margins & stagnancy. Unimportance of product quality. Scope for backward integration. Industry stagnation. Resource profile & fear of retaliation. Threat of Customers – Buyer concentration and volumes. Access to distribution channels. Capital requirements. Presence of substitutes or unorganized sector. Low relative importance of the segment. Undifferentiated product. Product differentiation through proprietary technology or brand power.PORTERS FIVE FORCES ANALYSIS Threat to Entry – Economies of size and scale. Government policy. Learning curve advantages.
High customer switching costs. Intermittent overcapacity. Buyer’s propensity to substitute. Differentiated inputs. Produced by industries earning high profits. 53 . Unorganised sector. Threat of Substitutes – Improvement in price -performance trade-off. Diversity of players. Lack of substitute inputs. Scope for forward integration. Product perishability. High exit barriers. Jockeying for position – Fragmented market. Piracy and counterfeits. Low relative importance of the segment.PORTERS FIVE FORCES ANALYSIS Threat of Suppliers – Supplier monopoly. Low level of differentiation. Industry stagnancy.
Business Scope – The intention whether the firm wants to be in a single. Resource Profile – It highlights the capabilities (generic) or competencies (business specific) of the firm. Inertia – Excessive commitment to past strategies prevents firms from tapping emerging opportunities. Reliance). 54 . dominant or related diversified or unrelated diversified businesses (Infosys.FIRM ENVIRONMENT Size and Scale of Operations – It is a very important component of competitiveness in today's global context (Bharti – MTN. Cohesiveness – Degree of bonding existing across affiliated firms. Tata).
experience teaches better and more effective way of doing things. 55 . leverage it as a competitive advantage. The E-Curve thus enables organisations to build entry barriers. which further reduces costs. it can price its products more competitively. and with lower prices it can increase its sales volume. With lower costs.EXPERIENCE CURVE The cost of performing an activity declines on per-unit basis as a firm becomes more efficient. However. an E-Curve can prove to be futile during discontinuity. Matured firms will always be positioned advantageously on the ECurve than new entrants. Experience curve has strong linkages with performance.
EXPERIENCE CURVE Cost per unit of output Decreases at an increasing rate Point of inflexion Decreases at a constant rate Decreases at a decreasing rate Production / Volume 56 .
TRADITIONAL VIEW Efficiency = Lower Costs 2 3 1 Experience = Efficiency Lower Costs = Higher Sales Entry Barrier = Better Performance 4 6 5 Higher Sales = Lower Costs Lower Costs = Entry Barrier 57 .EXPERIENCE CURVE .
EXPERIENCE CURVE .STRATEGIC VIEW Inertia = Limited Growth Experience = Inertia 2 3 1 Limited Growth = Diversification Strategic Failure = Poor Performance 6 5 4 Diversification = New Experience New Experience ≠ Old Experience 58 .
Acronym for Strengths – Weaknesses – Opportunities – Threats. It helps an organisation to capitalize on the opportunities by maximizing its strengths and neutralizing the threats minimizing the weaknesses. 59 Analysts. Business Intelligence – Bankers. Competitors. Press Clippings & Interviews. Suppliers. Websites.VULNERABILITY ANALYSIS .SWOT The framework was originally conceptualized by Kenneth Andrews in 1970. Customers. Observation. Case Studies – Structured Questionnaires. A SWOT audit involves – Company Records – Annual Reports. It is one of the earliest models in environmental scanning. Interviews. .
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. HUL. Strong R&D base – Eg. Honda. SBI. Biocon. Reliance. Toyota.SOURCES OF STRENGTH Strong brand identity – Eg. High quality products – Eg. Excellent penetration – Eg. Infosys. Dr. Good credit rating – Eg. Volkswagen. Tata Steel. Large resource pool – Eg. Reliance. ITC. 61 . Caterpillar. Aditya Birla. Motivated employees & cordial industrial relations – Eg. Infosys. Siemens. Ranbaxy. Strong after sales & service network – Eg. Reddy’s. Sony. Economies of scale – Eg. Engineering Skills – Eg.
Hindustan Motors. Single product syndrome – Eg. Tatas.Raymond. Bijoligrill. J. CESC. Excessive diversification – Eg. Organizational Politics – Eg. K. Inertia – Eg. Narrow business scope – Eg. Lack of product / brand clout – Eg. Inefficient top management – Eg. Ballarpur Inds. SAIL. Lacking experimentation culture – Eg. Excess manpower – Eg.SOURCES OF WEAKNESSES Outdated technology – Eg. Procter & Gamble. B. Modi Group. Nirma. K. Strategic myopia – Eg. Group . CMC (Tata Group) 62 .
Globalization – Eg. ECB’s. Sugar. Insurance. GDR’s. Retailing. Capital market reforms – Eg. Exit Policy – Eg. Middle-class buying power. Banking. Market driven Pricing – Eg. Free pricing – Eg. Growing population – Eg. Sugar. Fertilizer. Abolishing CCI.Tata Motors. VRS. Abolishing MRTP – Eg. 63 . Telecom. Collaborations & Joint Ventures – Bharti & WalMart. Maruti. Market driven Interest rates – Eg. Fertilizers.SOURCES OF OPPORTUNITIES Delicensing of Industries – Eg. Life style changes – Eg.
Reliance. Land acquisition . Foreign Direct Investment (FDI) – Eg. Bajoria – Bombay Dyeing. Group disintegration – Eg. Dumping from China. Tsunami. Hostile take-over – Eg. Satyam. Terrorist attacks – Eg. Onida. Economic recession – Eg. Import relaxation – Eg. 26/11. Earth Quake. (1985–1990). Lack of Corporate Governance – Eg.SOURCES OF THREATS Political instability – Eg.Social activism – Eg. Natural disaster – Eg. 64 . Singur SEZ. Tata Steel. (2008). 11/9. Nationalisation – Eg.
Stages in ETOP analysis – List the aspects of the environment that has a bearing on the organization. Strategic responses (including adaptation) to opportunities and threats is critical for survival and success. Delphi's technique. Forecasting – Predict the future (i.e. Holistic view – Prepare a complete overall picture. It represents a summary picture of the external environmental factors and their likely impact on the organization. 65 .ETOP Acronym for Environment – Threat – Opportunity – Profile. Assess the extent of impact of the factors. scenario analysis). time series.
High investment intensity acts as a drag. An organization can draw upon the experience of its peers in similar situations. selectively.PROFIT IMPACT OF MARKET STRATEGY PIMS is a database model developed by GE and later extended by HBS to examine the impact of a wide range of strategy variables on business performance. Some key findings on major performance drivers that explains 75% deviations in performance – Product quality and relative market share. Relative attractiveness of the market. . 66 Vertical integration is a powerful strategy. It is also a form of assessing vulnerability through longitudinal analysis.
As every organization is unique in its own way. – Contexts may vary across countries. – Contexts may vary over time. Authenticity of data is of prime importance – Contexts drawn across one organization may not be applicable to another.LIMITATIONS The analysis is based on historical data and it does not take care of future challenges.PIMS . therefore 67 validity may be a question. . Managers should be particularly cautious while referring to such data during times of discontinuity as it makes past patterns futile. when radical changes in the economy takes place.
It enables the top management to draw focus.KEY SUCCESS FACTORS (KSF) KSF relates to identification and putting concentrated effort on a particular activity or process which forms the very basis of competitive advantage. It involves a three-stage process – Identify KSF – What does it take to be successful in a business? Drawing KSF – What should be the organizations response to the same? Benchmarking KSF – How do we evaluate organization success on this factor? 68 . KSF helps organizations spot early opportunities and convert them into value adding business propositions.
IDENTIFYING ALTERNATIVE STRATEGIES 69 .
It provides broad direction to the groups vision and mission. dominant. global) of a firm and deals with choices of allocating resources across them. It reflects the customer needs it intends to satisfy.CORPORATE . It determines the locus a firm encounters with internal and external environment. unrelated) and geographical scope (local. 70 . It indicates the quality of growth an organization is looking for. national.GRAND STRATEGY It is concerned with the overall business scope (single. related. A corporate strategy identifies and fixes the strategic gap it proposes to fill.
CORPORATE STRATEGY MATRIX Corporate Strategy Stability Stability Growth Growth Combination Diversification Divestment Intensification Market Penetration Related Vertical Market Development Product Development Unrelated Horizontal 71 .
Citibank). (Eg. Stability however. The reasons for stability strategy – – Lack of attractive opportunities. – To stop for a while and assess past records. The scale and scope of present operations remains almost intact. does not relate to do-nothing (Eg. – The firm may not be willing to take additional risk associated with new projects. – Why disturb the existing equilibrium set up? – Limited resource position.STABILITY It involves maintaining status-quo or growing in a slow and selective manner. Hindustan Motors). Even during adverse times firms need to adopt a strategy to sustain current performance levels. erosion of capabilities. 72 .
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.
– Elongated product life-cycle. Market penetration can be achieved by – increasing sales to current customers. – The company carries a risk of product obsolescence.MARKET PENETRATION It is a strategy where a firm directs its entire resources to the growth of a single product or a closely knit product set. within a well defined market segment. direct non-users to users. convert competitors customers. (Eg. Nirma. Britannia). Ujjala. – Helps firms which are not comfortable with unfamiliar terrain. 74 . – Suitable for industries where scope for technological breakthrough is limited.
carpets. (Eg. 75 . socks & stockings. – Moves across geographical boundaries.MARKET DEVELOPMENT It is a strategy where a firm tries to achieve growth by finding new uses of existing products or its close variants and tap a new potential customer base altogether. fabrics.…… or Teflon: aircraft technologies to cutlery to paints or Raytheon Corp – Microwaves: radars to kitchen appliances). – Creativity and innovation – thinking out of the box. upholstery. – Unconventional and flexible distribution channels. Du Pont – Nylon: parachutes. – Immense customer reach & flexible advertising. – Stretches product life cycles. tyres.
perception.Strolleys). reliability. Close Up: Fluoride – Gel toothpaste or VIP . aesthetics.PRODUCT DEVELOPMENT It is a strategy where a firm tries to achieve growth through a radical new product (Eg. Microsoft: DOS to Windows) or a substantial improved version (incremental) of an existing product to repeatedly enter the same market (Eg. features. – Substitutes that serve the same needs (Eg. durability. serviceability. – Areas of product improvement – performance. Refills) 76 . – Leveraging through – innovation. – Leverage on customer and brand loyalty. – Deliverable through – redesigning or reengineering. conformance.
From the traditional point of view.e. – Permits: quotas. industrial embassies). – Conglomerate or market power (i. the new business is distinct from the existing business in terms of – inputs – technologies – markets. – Risk reduction. thereby creating a new business. – Internal capital market. – High transaction costs and institutional gaps. 77 . dominance). Why do firms diversify in the Indian context? – Shift the growth trajectory or opportunistic. From the modern point of view they are strategically dissimilar.e. licenses (i.DIVERSIFICATION It marks the entry of a firm into newer markets with new products.
If on the other hand. either of which is equally likely to prevail. If the hot wave dominates the planet. the ice-cream business would register a return of 30%. cold wave dominates the planet.HOW DIVERSIFICATION REDUCES RISK? Consider a hypothetical planet. in which a given year is either under hot or cold wave. ice-cream business would register a return of 10%. while the coffee business would register a return of 10%. Let us assume that there are two businesses constituting the entire market – coffee and icecream. while the coffee business would register a return of 30%. What would be your ideal diversification strategy through optimization? 78 .
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.
A firm produces part of its own requirements and buys the rest from outside suppliers with a variable degree of ownership and control. Reliance). 85 . and out-sources the noncore activities (Eg.A firm gets most of its requirements from one or more outside suppliers that is under its partial control through value chain partnerships (Eg.QUASI & TAPERED INTEGRATION Full Integration . Ranbaxy. Usually the firm concentrates on its core activities. Dr. Tapered integration . Reddy’s).Where one firm has full ownership and control over all the stages of a value-chain in the manufacturing of a product (Eg. Maruti – Sona Steering). Quasi-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 .
and are also strategically dissimilar. synergies pulling in opposite directions). – Cost of ignorance (i.CONGLOMERATE DIVERSIFICATION It relates to entry of firms into businesses which are distinct in terms of – inputs – technologies – markets. lack of knowledge of competitive forces).e. – Cost of dysynergy (i. core business).e.e. Drawbacks of unrelated diversification – – Cost of failure (i. myopia). 87 . Firms usually engage in conglomerate diversification when emerging opportunities are very attractive and offers potential growth opportunities. lack of strategic intent.e. – Cost of neglect (i.
CONGLOMERATE DIVERSIFICATION Paper & Packaging Edible Oils Tobacco Hotels Food & Confectionary 88 .
Tata Press). 89 .e. Glaxo’s “Glucon-D” to Heinz). It is may also be a pro-active strategy. L&TCement Division to Aditya Birla Group) technically known as divestiture or a product (Eg. Tatas sale of Goodlass Nerolac. where a company simply exits because the business no longer contribute to or fit its dominant logic. ACC) in full to an independent entity. reactive) and survival is at stake and the firm does not have resources to fend off competitive forces. It may also involve a SBU (Eg. It taken into account when performance is disappointing (i. (Eg.DIVESTMENT Divestment is a defensive strategy involving the sale of entire stake (Eg. Tata Pharma. In strategy there is no scope for sentimentality with divestment.
the Companies Act. where 100% of the assets (including intangibles) are valued and paid for. However. (Eg.ROUTES Outright Sale – Popularly known as the asset route. Hive-Off – A hive off is the creation of a new entity followed by transfer of assets. 1956 does not permit this mode. involving 608 pence per share). Sale of Diamond Beverages to Coca-Cola for US $ 40 million). Leveraged Buy-Out (LBO) – Here the company’s shareholders are bought out through a negotiated deal using borrowed funds. Tatas buy-out of Corus for US $ 11.3 billion. where the equity is allotted amongst the existing shareholders on a pro-rata basis. 90 . (Eg.DIVESTMENT .
growth. developing facilities right from the scratch) or through brown-field projects (i. 91 . A combination strategy can be implemented through green-field projects (i. and divestment strategies applied simultaneously or sequentially for a portfolio of businesses. mergers and acquisition.e.e.COMBINATION STRATEGY It is a mixture of stability. It is usually pursued by a business group with diverse interests across multiple industries. because every business has its own unique external and internal environment. There can be no ideal strategy for every business. joint ventures).
STRATEGY CHOICE & PORTFOLIO ANALYSIS 92 .
In most cases the trade-off is between resources and opportunities. Dominant logic enables top managers to selectively scan the environment and make trade-offs. 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. What then is the magical number? 93 .STRATEGIC CHOICE A strategic choice seeks to determine the alternative courses of action available before top managers to achieve its strategic intent.
will help the firm achieve its intent. nor is to a define a problem for others to solve. To identify the right problems. They must choose problems which will lead to the right kind of opportunities. The key task before a top manager is to identify the right problems. For an optimal choice the following four issues need to be resolved – Is the strategy clearly identifiable? Is it consistent with the resources of the firm? Will it be able to exploit the opportunities in full? Is it in tune with the values and beliefs of the firm? 94 .SELECTIVITY IS THE KEY The role of a top manager is not to solve a problem. if addressed. managers need to ask the right questions.
DEFINITION A business group is known by various names in various countries – guanxique in China. Managing Agency).e. Proximity to the corridors of power (i. BRC). keiretsus in Japan. Their origins can be traced back to market imperfections existing in an economy (MRTP Laws.BUSINESS GROUP . High degree of centralized control (GEO. . Resource sharing. embassies). 95 Succession planning is critical to continuity. Their roots can be traced to a single family or clan and share broad similarities. formal and informal ties. Licenses & Quotas. chaebols in Korea. business houses in India.
RESOURCE SHARING ACROSS FIRMS Parent Company Firm 1 Firm 5 Firm 3 Firm 2 Firm 4 96 .
STRATEGIC CHOICE – MACRO TIMING Recession (Stability) Prosperity (Diversificatio n) Depression (Divestmen t) Recovery (Intensification ) 97 .
Divestment Duration (Yrs) Inception Intensification 98 .STRATEGIC CHOICE – MICRO TIMING ReEngineering Growth (%) Maturity Stability Growth Diversification Decline .
next only to choice of business. Why? Businesses are not about liquid assets. therefore. sometimes impossible. Rules of the game are different.PORTFOLIO ANALYSIS Resource allocation across a portfolio of businesses is an important strategic choice. there are high costs associated with entry and exit. Investing in emerging businesses may not actually be so simple as it appears to be. Redeployment of resources upsets the established power bases of a group. 99 . Power and resources often goes hand in hand. Relatedness across resources are difficult to realize.
BCG GROWTH MODEL Relative Market Share (%) Industry Growth (%) Low High High Low Stars Question Mark ? Cash Cow Dogs 100 .
which remains a big? These businesses are net users of resources. product development). provided the company is able to build up on its market-share (i. provided the industry growth rate continues and the company is able to maintain its growth (i. Tata-AIG). but to larger extent than a question mark. These businesses are also net users of resources (Eg.BUSINESS ANALYSIS – TATA GROUP Question Marks – They have potentials in the long term. market penetration.e. TCS. Tata Steel). diversification).e. Tata Telecom. Stars – They achievers in the near term. Trent. 101 . and their risk profile is high (Eg. market development.
e. However. they are generators of resources. harvest. and the company dominates the industry ahead of competition (i. Tata Chemicals). Given that the growth potential in the business is low. Tata Motors. divest) as achieving a dominant position in these businesses is a difficult task. stability). Nelco.BUSINESS ANALYSIS – TATA GROUP Cash Cow – These are matured businesses. Tata Pharma. 102 .e. Dogs – They are a drag on the group. Indian Hotels. cash cows may also need to invest provided the industry takes an upswing (Eg. and they lack on competencies to take on competition and are basically cash traps (Eg. Tata Tea. Groups prefer to dispose off such businesses (i. Tata Press).
Certain businesses in the low market share category may be the result of a conscious strategy (i. Data may be prohibitive.e.LIMITATIONS It does not address the concerns of a business which is in the average category (usually the majority). The model does not provide specific solutions within a particular category. factors are limited. Cash cows may actually need substantial investments to retain their market position (Eg. Mercedes Benz.BCG . Armani). 103 . Cartier. niche – Rolex. HUL). The terminologies used are somewhat prohibitive. neither in high or low.
MATRIX Distinctive Capabilities Strong High Medium Weak Stability Industry Attractiveness Diversify (++) Intensify (+) Med Intensify(+) Stability Harvest (-) Low Stability Harvest (-) Divest (.GE .-) 104 .
ARTHUR’ D. LITTLE Inception Dominant Strong Favourable Tenable Weak Growth Maturity Decline Improve Selective Niche Abandon Industry Life-Cycle Divest Harvest 105 Competitive Position Invest Consolidate Hold .
SHELL – DIRECTIONAL POLICY MATRIX Business Sector Prospects Attractive Average Unattractive Generate Cash Phased Withdrawal Distinctive Capabilities Strong Market Leadership Try Harder Double Or Quit Growth Average Custodial Weak Phased Expand Withdrawal Divest 106 .
SBU – A business unit which is strategically different from another and also shares a different SIC code. Portfolio – An organization is perceived as a portfolio of businesses. BCG – Boston Consulting Group.TERMINOLOGIES Harvest – It entails minimizing investments while trying to maximize short-run profits and cash flow with the intention to exit the business in the near future. Divest – Selling a part or the entire business at one go. Gap Analysis – It emphasizes what a firm wants to achieve. Disinvestment involves selling in phases. 107 .
BUSINESS STRATEGY & COMPETITION 108 .
Competitive advantage is the back-bone of strategy. The principal focus is on meeting competition. Such resources or activities should be distinctive and sustainable over time. 109 . building market-share. The strength of a firm in a particular business usually stems from its competitive advantage.COMPETITIVE STRATEGY A competitive strategy deals with how a firm competes in a particular business or product-market segment. rent). Competitive advantage refers to a firms resources or activities in which it is way ahead of competition. and earning super-normal profits (i.e.
identifying critical success factors. Blue Ocean – Consciously moving away from overcrowded industries to uncharted territories and making competition irrelevant (Kim & Mauborgne). preventing new entry and/or competition (Hax & Wilde). leveraging (Prahalad). Resource Based View – Obsession with competence building.BUSINESS STRATEGY FRAMEWORKS How to be distinctive and yet sustainable – Differentiation – Understanding of the dynamics of competition. 110 . developing competitive advantage (Porter). involving harmonizing and integrating multiple streams of technologies. Delta Lock In – Two dominant players co-opt to selfreinforce and create or escalate an entry barrier.
backward integration. T-Series). Locational or early entry advantage. Steep experience curve effects. The firm may retain the benefits of cost advantage by enjoying higher margins (Eg. Sources of cost advantage are varied and depends on the structure of the industry – Economies of size. Ayur. 111 . Compress project duration through crashing. preferential access to raw materials.PORTERS – COST LEADERSHIP Cost Leadership – It is a strategy that focuses on making a firm more competitive by producing its products more cheaply than its competitors. Reliance) or may pass it to customers to increase market-share (Eg. proprietary technology. Nirma.
Intel. innovation and out of the box thinking. Successful product differentiation is often followed by premium pricing. It selects one or more attributes that buyers perceive as important. and sufficient slack. avoiding brand dilution. (Eg. Rayban). undeterred attention to quality. Sony. Feeling the pulse of the customer. Focus on brand loyalty. 112 . 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. Creativity. Culture of experimentation.
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. coupled with fear of structural erosion. though it may not possess an overall competitive advantage. Mont-Blanc. Maybach. 113 . A focuser seeks to achieve a competitive advantage in its target segment. Cartier. Rolex. Sub optimization alone may not be a source of superior performance. Armani). The target segment must have unusual needs or the delivery system catering to this segment must be unique. They are poorly served by mainstream players.
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 . and usually outperforms a stand alone generic strategy. Firms focusing on a hybrid strategy typically aim at shifting the productivity frontier and recreating a new product-market segment altogether (Eg. jugaad or frugal engineering). in a hyper competitive context the two strategies need not be mutually exclusive. Though cost leadership and differentiation are inconsistent. Tata Nano). Reducing cost does not always involve a sacrifice in differentiation.e. similarly differentiation may not always lead to rising costs (i.HYBRID STRATEGY A hybrid strategy is the simultaneous pursuit of cost leadership and differentiation.
but achieves none.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 . 116 . leading to what is called – straddling. It is usually the result of a firm not willing to make trade offs. It will have a competitive disadvantage vis-à-vis a clearly positioned generic player. unless such a player is capable of discovering a profitable segment.stuck in the middle. It tries to compete through every means. The positioning therefore gets – blurred. Industry maturity will usually widen the gap.
Speech recognition software's. 117 . It is characterized by – High level of technological uncertainty. changing customer needs. coupled with low penetration levels. There is a lot of scope to define the rules of competition.radical environmental changes. Consumer behaviour pattern unstable and evolving. Eg. First-time buyers. leading to a blurred productivity frontier and steep learning curve. technological innovations. 3D imaging. (Eg. Artificial intelligence).EMERGING INDUSTRY Emerging Industry – An evolving industry characterized by .) Excessive turbulence in the dynamics of the environment. Nano technology. Market segmentation not well defined. ending in a differential cost economics.
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). Scope for players to change the rules of the game. High exit barriers because of huge investment in CAPEX. Diverse customer needs. IT. It is characterized by – Low entry barriers. Government regulations in the form Eg. Eg. leading to clear fragmentation. Eg. because of lack of economies of size and scale. 118 . Consumer durables. Eg. Air Conditioning. Paints. Retail and telecom. MRTP may also cause fragmentation.
Cartel among existing players through collusion. well defined consumer behavioral patterns and imperfect competition leading to near monopoly. early entry and location advantages. 119 . distribution networks. Limited scope for innovation . collaboration and co-option. because of economies of size and learning curve effects. Firms are rule takers in the segment as productivity frontier is well defined.technological maturity. Strong entry barriers. technological maturity.MATURED INDUSTRY Matured Industry – An industry characterized by saturation in growth rates. established industry dynamics.
and costly price wars. (Eg. 120 . with little or no signs of recovery. Typewriters.DECLINING INDUSTRY Declining Industry – An industry which has outlived its utility due to the entry of close substitutes and or radical product innovations which results in a shift of the productivity frontier. backed by corporate espionage. dot-matrix printers). Firms facing a declining phase are characterized by inertia and slow to react to environmental changes. Nature of competition extremely high. scooters. Exit barriers are extremely high because of limited prospective buyers. Learning abilities have been stunted and firms adverse to investment in R&D and make fresh investments.
regenerate. focus more on product differentiation or even a hybrid one. increasing scope. Locate a defendable position. reengineer. move beyond boundaries. premium pricing. Declining Industry – Redesign. strike alliances. assess and overcome fragmentation. aggressive building of distribution networks. mergers and acquisition. process innovation. recreate new markets.COMPETITIVE STRATEGIES Emerging Industry – Set benchmarks. Fragmented Industry – Identify. branding and promotion. strictly product differentiation and not standardization. Matured Industry – Sophisticated cost analysis. strictly cost differentiation. or else exit the segment. 121 .
and complex learning experiences in integrating and harmonizing technologies (distinctive capabilities) that play an important role in delivering competitive advantage through “causal ambiguity”. patents. positions based on resources which are unique and inimitable are far more sustainable even in the long term. Intangible – These refer to goodwill. However. 122 . A firms resources can be classified into – Tangible – These refer to real assets. hence very rarely confer competitive advantage as can be easily acquired or replicated. They are a standard in nature. brands.RESOURCE BASED VIEW Differentiation based on cost or products saturates and ceases to exist beyond the medium term.
CAPABILITIES & COPMPETENCIES These include a complex combinations of tangible and intangible resources that organizations use to convert inputs to outputs. differentiation based on capabilities can be sustained even in the long run. but not necessarily. Typically. They play a very critical role in shaping competitive advantage. can be leveraged across businesses) or specific to a particular business.e. they are woven around technologies. 123 . Therefore firms should concentrate on developing complex resources that forms the very basis of differentiation. There is a high degree of internal and external causal ambiguity involved in it. Hence. Capabilities can be generic (i.
COMPETITIVE ADVANTAGE 124 .
It results in a distinct differentiation advantage or a cost advantage or hybrid as well. and results in well springs of new business development. not absolute) to competition. Strategy drives competitive advantage.COMPETITIVE ADVANTAGE A competitive advantage is a position of superiority relative (i. A portfolio of competitive advantage comprises strategic advantage profile (SAP). It enlarges the scope of an organization. competitive advantage subsequently becomes the back bone for a competitive strategy. Success of a strategy critically depends on SAP.e. 125 .
Most successful organizations around the world have a well balanced SAP. In today's world of discontinuity. Internal strategic fit between its strategy and dominant logics is essential for the top management to stretch and leverage SAP. 126 . In most cases SAP is hidden and dormant. Identification of SAP is critical for and stretching and leveraging of resources. SAP changes from time to time.STRATEGIC ADVANTAGE PROFILE (SAP) Organizations have to systematically and continuously conduct exercises to identify its SAP.
VALUE CHAIN ANALYSIS A value-chain segregates a firm into strategically relevant activities to understand its composite behaviour. and enhanced customer tracking – higher market share. A VC is often compared with a relay team. Inventory Mgt to Logistics Mgt to Supply Chain Mgt (SCM). Competitive advantage arises not from an individual activity but a stream of inter-related activities. kaizen or internal customer). each of the players need to be efficient backed by sufficient coordination at the contact points (i. faster product launches. Today SCM is integrated with greening the environment as CSR practices.e. VC pay-offs: better product availability. Substantial cost reductions also follow. 127 .
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 .
Fit is important because discrete activities result in negative synergy and can also be easily copied by competitors. 129 . – Second order fit occurs when activities are reinforcing amongst them.STRATEGIC FIT – THE PORTER WAY The sustainability of the value chain depends on the degree of fit between the activities. A learning organization helps create strategic fit. A high fit involving a complex chain of activities drives both competitive advantage and its sustainability. Operational effectiveness is not strategy. – First order fit refers to simple consistency between each activity and the overall strategy. – Third order fit refers to optimization of effort.
– Can be sustained even in the long run. These skills results in distinctive activities and processes. – Cannot be easily imitated or substituted. – Can be leveraged across businesses. It forms the very basis of competitive advantage. 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. . Core competence has a high degree of external and 130 internal causal ambiguity embedded in it. A core competence usually has its roots in technology.
A competitive advantage is sustainable in the shortmedium term. A competitive advantage manifests from a function. a core competence is sustainable even in the long-term. only global leaders possess a core competence. Majority of the firms have competitive advantage. 131 . a core competence has its roots in a set of skills. a core competence usually does.CORE COMPETENCE A competitive advantage does not necessarily imply a core competence. A competitive advantage may or may not lead to superior performance. a core competence always implies a competitive advantage.
This is known as a zero-sum game. illustrations depicting a win-win situation. each of whom wants to win. the stringent assumptions of game theory and difficulty in ascertaining of pay-offs makes game theory application difficult in business. In fact there are no. 132 . Here the magnitude of gain offsets the magnitude of loss equally.GAME THEORY The game theory was developed in 1944 by Oscar Morgenstern. A game is a contest involving two or more players. In a game (similar to a business) one players win is always another's loss. Subsequent work on game theory by John Nash led him to win the Nobel prize in 1994. However.
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.
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.TYPES OF GAMES Simultaneous Games – This is a situation where the players have an option to choose to cooperate or not through collusion. However. Yahoo Vs Microsoft). collaboration or cooption. It represents the classical “prisoner’s dilemma”. Coke Vs Pepsi). 135 . This is usually through learning by “experience or observation” (i.g. iteration) rather than through collusion (E. Repeated Games – In this situation the players interact repeatedly with each other sub-optimizing the outcome possibilities.e.
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.CHANGING THE RULES OF THE GAME In a situation where a player is unable to compete with the existing rules of the game may attempt to change the rules of the game altogether. – Building incentives for customer loyalty. . Game theory relies on the principle of rationality. It results in a shift in the productivity frontier. but 136 players do not always behave rationally. – Making pricing more transparent.
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.
While external strategic fit (strategy – environment) is relevant for strategy formulation. 143 . internal strategic fit (strategy – dominant logic) is critical to strategy implementation. – Unlearning & learning of new skill sets. – Development of capabilities & competencies.IMPORTANCE OF STRATEGIC FIT Strategic fit has a central role to play in strategic management. – Better strategic and operational control. A high strategic fit (co alignment) is useful because it enables – – Appropriate and timely response. – Resource commitment from top management. – Changing the rules of the game.
144 . formulation & implementation can occur simultaneously. strategy formulation and implementation has been perceived to be distinct & independent. Some of the key strategic learning's exists at the contact point between the organization and its customer. learning levels are very high. In fact. effective strategies are better crafted when there is a subtle overlapping between the two (i. In such a situation. According to Mintzberg. In such a situation. while control is very effective.e. at the cost of sacrificing a lesser degree of control. learning levels are very low. emergent strategy vis-à-vis intended & realized).FORMULATION Vs IMPLEMENTATION Traditionally.
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. Pragmatism is the ability to make things happen. 145 .ROLE OF TOP MANAGEMENT To bring about change and to implement strategies successfully. companies depend more on transformational leaders than transactional leaders. He should be an agent of change. bring about transparency. shift from compliance to commitment. Install a system of shared beliefs and values. In contrast.
Intangible resources (Eg. minimum requirement). 146 . 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. 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. labour. Performance Budget – SBU managers need to justify the distinctive resources in terms of the opportunity it is pursuing yields the highest possible pay-offs. land. brands. machines) referred to as threshold resources (i.e. patents.
Mobiles).CAPABILITIES & COMPETENCIES Technology and business are slowly becoming in – separable. Due to causal ambiguity (complexity). these capabilities are sustainable even in the medium to long term. Moreover. Distinctive capabilities are complex set of skills woven around technologies. convergence of multiple streams of technologies at the product – market level is becoming increasingly evident (Eg. Flat Screen Displays. 147 . though not necessarily in the case of emerging markets. Distinctive capabilities helps in stretching and leveraging resources thereby overcoming two major constraints involved in strategy implementation – times & costs.
A firm in several unrelated businesses usually employs a SBU structure. Once the structure is in place. An appropriate organization structure & adequate control systems are essential to implement strategies and achieve stated goals. processes become people independent. A single product or a dominant business firm usually employs a functional structure. 148 . The level of centralization and decentralization is decisive.STRATEGY & STRUCTURE It is a framework within which individual efforts are coordinated to bring synergy. A firm in several related businesses usually employs a divisional structure.
TYPES OF STRUCTURES Functional Structure – Activities grouped together by a common function (Eg. Divisional Structure – Units grouped together in terms of products. Marketing. or geographical locations. disbanded subsequently. Project / Matrix Structure – A formal but temporary framework initiated for the completion of a particular project/crisis. 149 . processes. Virtual Structure – A boundary less or hollow organization.Technology. Inputs . Team Structure – An informal group formed for a crisis. with team members having dual line of control. based on skills and competencies. SBU Structure – Businesses segregated in terms of strategic dissimilarities (Eg. Output). Finance).
assuming responsibility. 150 . It includes the desire for independence. Environment & People – Economic and political conditions have a major bearing on structure coupled with the attitude and aspirations of the people in the organization. facing challenges & crises. leading to a tall structure.FACTORS INFLUENCING STRUCTURE Size – As an organizations size increases there is more specialization and differentiation leading to the top management moving away from operational issues and control. as span is broader. Technology – With more and more convergence of technologies in business. structures are becoming flatter and more simpler.
Most firms undergo periods of strategic continuity rather than strategic discontinuity. irrespective whether it is from worse to good or good to worse. Inertia acts as an impediment in strategy implementation. Inertia is a characteristic of a firm that endures status quo (i. there is a tendency to continue along the same lines. co0ntinuity). Top managers resist change. .e. Changes in top management and unlearning helps overcome inertia.INERTIA When a firm has been operating in a certain fashion for a long time. Common sources of 151 inertia – complacency with past successes.
Since the internal and external environment is in a state of continuous flux. However. To prevent deviation of fit. firms should move beyond financial performance to strategic performance as organization systems are becoming complex. . strategies need to be evaluated on an ongoing basis to prevent deviations of fit. certain authors propose misfit as a source of superior 152 performance. Deviation of fit is detrimental to performance and may lead to strategic failure.STRATEGY EVALUATION Strategy evaluation centers around assessment of strategic fit.
STRATEGY CONTROL It is concerned with trafficking a strategy as it is being implemented. competitive advantages becoming disadvantages? Has the company acquired any new competency? Has the company been able to overcome the 153 environmental threats. . 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.
Special Alert Control – It intends to uncover unanticipated information having critical impact 154 on strategies. Implementation Control – It aims at assessing whether key activities are proceeding as per schedule. However. Premise Control – Checking the validity of the assumptions on which a strategy was based. It is open-ended as well as . It involves assessing – strategic thrusts and milestones.STRATEGY CONTROL IMPLEMENTATION It involves steering the company towards its original growth trajectory & stated goals. checking every premise is costly as well as difficult.
Strategy intent not linked with goals and objectives – Lack of coordination at lower levels leading to negative synergy. Strategy not linked to resource allocation & capabilities – Lacking commitment of top management. low strategic fit due to consultants intervention. Performance measures are defective – What to evaluate against? How to measure the 155 construct? As a saying goes. “If you cannot . difficult to translate into practice.BARRIERS TO STRATEGY EXECUTION Vision and strategy not actionable – Utopian ideas.
to be sure of successful implementation of a strategy. On top of that. this may effect all others as well. Together these factors determine the way in which a corporation operates. the relative importance of each factor may vary over time and context.7S FRAMEWORK OF Mc KINSEY The 7-S Framework of McKinsey is a management model that describes 7 factors to organize a company in an holistic and effective way. 156 . important or not they're all interdependent. so if one fails to pay proper attention to one of them. Today it is considered one of the most powerful tools for strategy implementation determining success or failure. Managers should take into account all seven of these factors. Large or small.
157 . It appeared also in "In Search of Excellence" by Peters and Waterman. The 7-S model was born at a meeting of these four authors in 1982. They had been investigating how Japanese industry had been so successful.BACKGROUND & ORIGIN The 7-S Framework was first mentioned in "The Art Of Japanese Management" by Richard Pascale and Anthony Athos in 1981. 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. Since then it is known as their 7-S model and is extensively used by corporations worldwide to implement their strategies.
Structure – The way in which the organization's units relate to each other in terms of their commonalities. Systems – The procedures. formal & informal . over time. Skills – An organizations capabilities and competencies. Style – The way in which the top management influences the functioning of an organization. Strategy – Trade-offs for the allocation of a firms scarce resources.THE 7’S Shared Values – It represents what the organization stands for and what the top management believes in. to reach identified & stated goals. Staff – Human inter-relationships. processes and routines that characterize how work should be done. 158 .
STRATEGIC FIT Strategy Structure Shared Values Systems Skills Staff Style 1st Order Fit 2nd Order Fit 3rd Order Fit 159 .
Consider the 4P’s of marketing or 3R’s of SCM. Ineffective in case of a virtual company. systems) are comparatively easy to identify and influence. While the American co’s focuses on the hard S’s. shared values) are very malleable and comparatively more difficult to identify & influence. style. because most often they are culturally embedded and often neglected. staff. structure. the soft S’s (skill. their Japanese counterparts focus more on the soft S’s for their early success and sustainability. In contrast.A CRITIC OF THE 7S MODEL While the hard S’s (strategy. A choice of an alphabet often limits the scope and skews the interpretation of a model. 160 .
High Organic Growth Strategic Alliance Joint Venture Mergers & Acquisition Strategic Fit .STRATEGY IMPLEMENTATION ROUTES Strategic Fit .Low Take Overs 161 .
technologies. i. concessions are available for green-field projects. (Eg. . Reliance Industries). It has complete control over inputs. Long gestation leads to delayed market entry. soft loans.ORGANIC GROWTH Here a firm builds up its facilities right from the scratch and continues to do so without any external participation. The entire infra-structural facilities are set up afresh having its own gestation and break-even. subsidized power).e.e. Govt. SEZ’s. 162 Risk of cost and time overruns. i. the entire value chain. tax holidays. and markets. (Eg. green-field projects.
STRATEGIC ALLIANCE It involves a pro-active collaboration between two or more firms on a particular domain or function for mutual gain. Alliances are usually short-lived and disbanded once the purpose is achieved. It has limited intervention power and usually lacks holistic commitment from the alliance partner. Tata Motors & Fiat). . It touches upon a limited aspects of a firms value chain. Alliances are usually in the areas of technologies or markets (Eg. There is no funding or equity participation from the alliance partner & both the firms continue to operate independently. 163 It is a form of competitive collaboration.
Hero . It is a win-win situation for both the companies. .Honda). A comprehensive MOU is essential. leaving minimum scope of overlapping. Tata – AIG. Dominant logic of both the companies should be complimentary. 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. Selecting the right partner is critical for success. (Eg.
MERGERS & ACQUISITION It refers to the fusion of two or more firms into a single entity. Revival of a sick-unit through better management practices is a major motive behind an acquisition 165 strategy. Coca Cola – Thums Up). Economies in scale leading to lowering of costs. with the individual firms ceasing to exist any more (Eg. . Acquisition is an outright purchase of a firm assets by another independent entity (Eg. Integration of assets and other financial resources. Integrated distribution channel leads to better market penetration and overall synergy. ITC Tribeni Tissues. Brooke Bond & Lipton).
Make a public offer of not less than . Most countries have stringent laws that prevents hostile take over. Inform SEBI / Stock Exchange after 5% stake is 166 acquired.Corus). Integration of organization structure & cultures is difficult. Instant access to capacities and markets.TAKE OVERS It refers to the acquisition of significant management control by buying out majority stake in a firm through due diligence or hostility (Eg. Consolidation in a fragmented industry. Larger geo-graphical diversity. often the new firm is “left alone”. Tata Steel .
MANAGEMENT TOOLS IN STRATEGY 167 .
TQM – Doing the right thing the first time. The past is ceasing to be an indication of the future. Change provides enormous opportunities. every time. or better still create next practices Reengineering – Redesigning work processes right from the scratch.WHY MANAGEMENT TOOLS? Change is becoming pertinent in the business environment. 168 . it is also a source of potential threat. Balanced Scorecard – Tracking strategy 3600. Radical change is superseding incremental change. Some tools to ensure that – Benchmarking – Adopt certain best practices. Companies therefore need to ensure competitive advantages doesn’t become competitive disadvantages.
A best practice is defined as an activity performed by a company in a particular domain or function which distinguishes it from others and making them world-class. These exemplary practices involves the stakeholders of the company and helps achieve its strategic intent. Best practices centers around looking at a different way to satisfy various stakeholders. Benchmarking involves the identification, understanding and adapting of certain best practices and implementing them to enhance performance. Firms are moving towards next practices as best practices make firms look more and more homogeneous.
SOME BEST PRACTICES
Dell: Customized configuration of computers. Caterpillar: 48 hours delivery anywhere in the world. Citi Bank : Priority banking services. Maruti: Certified “true value” pre-owned cars. Microsoft: ESOP to employees. Infosys: Customized work-stations. TCS: Referencing potential new recruits. ITC: Shareholders factory visit. AmEx: Outsourcing data warehousing mining. MARG: Set-top box to study viewing patterns. Honda: CEO’s visit to dealers.
TYPES OF BENCHMARKING
Functional – Used by companies to improve a particular management activity. Eg. Motorola learnt delivery scheduling from Domino’s. Process – Improving specific key processes and operations from experiences in similar businesses. Eg. Ford adopting assembly lay-out plan of Toyota. Competitive – It involves assessing the sources of competitive advantage and imitating them. Eg. Samsung leveraging miniaturization skills of Sony. Strategic – It involves assessing business models and replicating them in a different market. Eg. Reliance replicating AT&T business model.
HOW TO BENCHMARK?
Phase 1: Planning – What to benchmark? Whom to benchmark? – Identify key performance indicators & Data source. Phase 2: Analysis – Assessment of performance gaps. – Predict future performance levels. Phase 3: Integration – Communicate findings and gain acceptance. – Establish functional goals and its implementation. Phase 4: Action – Implement and monitor progress. – Measure results against stakeholder wants and needs. – Recalibrate or outperform benchmarks.
WHOM TO BENCHMARK?
Selecting the benchmarking partner is critical to solving the problem. Firms should generally avoid selecting the industry leader, because it may not always adopt the best practices for every process or activity. Benchmarking partners may also be from different industries. Types – – Internal – It involves benchmarking against its own branches, divisions, SBU’s. Proximity to data and cooperation is taken care of automatically. – External – It involves benchmarking against firms that succeeded on account of their best practices. It may also involve benchmarking against world-class firms. Friction may arise due to presence in competing industries.
BENCHMARKING - ADVANTAGES
Finding better ways of meeting stakeholder needs. Organizational learning comes from internal as well as external sources. Establishing goals based on formal assessment of external conditions. Defining effective measure of indicators, facilitate comparison, adopt from other organizations. Ensuring a continuous learning organization. Reducing competitive disadvantage. Organizational turnaround, especially effective in case of a wide strategic drift when differentiation strategies fail to work. 174
clustering).BENCHMARKING .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.LIMITATIONS More and more companies benchmark. . Benchmarking is useful for bringing about operational efficiency. Strategy is more of creating best practices rather than copying them. but it cannot be used as a strategic decision making tool. It can at best complement it. It does not shifts the growth 175 trajectory of the industry as a whole. While strategy is all about differentiation and not looking alike.
for achieving performance improvement (E. DOS to Windows). clean sheet). . Re-engineering attempts to radically change an organizational products or process by challenging the basic assumptions surrounding it.g.e.RE-ENGINEERING Redesigning leads to identification of superfluous activities or product features (i. Re-engineering involves complete reconstruction and overhauling of job descriptions from the scratch (i.g. Windows 95 to 97). The task demands a total change in organisational 176 culture and mindset. process mapping) and eliminating or improving them (E.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 .
Business – It looks into markets. etc) and supports the organization for the present. BPR).e.e. products. 178 . Strategic – It looks into the process of strategic planning.REENGINEERING . resource allocation and prepares the organization for the future through a reorientation of the entire strategic architecture. processes.LEVELS Reengineering can be successfully leveraged at all levels of an organization with varying degree of results. It can be of the following types – Functional – It looks into the flow of operations (i. . customers and suppliers and protects the organization from the future (i. structures.
Cheaper versions of Intel chips and mother-boards manufactured in Taiwan. – Causal Ambiguity. Indonesia). – High cost and time acts as a deterrent. protection can be had in the following ways – – Patenting.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. It generally acts as a threat to innovation. 179 . – Early entry advantages. reverse engineering is a top-bottom approach. with an intention to copy it (Eg. While traditional manufacturing is a bottom-up approach. However. learning curve advantage.
180 . machine tools to convert ideas into a marketable product (i. Introduction – Launching the product in the market. Implementation – Developing of a prototype. Usually in such cases segmentation and pricing is different from the original innovator.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. Actualization – Obtaining and dismantling of the product to assess how it functions.e. Inaccurate assessment at this stage may lead to a failure of the entire project. designing facilities. nano-technology).
– Reliability – Consistency in mileage. – Durability – 1980 manufactured cars still on road.Euro IV. – Features – Anti-lock braking systems. It has eight dimensions (Eg.WHAT IS QUALITY? It involves the totality of a product or service in meeting certain stated or implied needs. – Serviceability – Large no. 181 . More and more companies are moving towards meeting implied rather than stated needs. – Perception – Customer notions. – Aesthetics – Appeal in design. Car) – – Performance – Mileage of 14 kms to a litre of fuel. – Conformance – Emission standards . of service stations. Air bags.
touching upon a limited aspect of a value chain. It is deeply embedded as an aspect of 182 organisational life & culture. It had little impact on improving overall productivity. . zero defects. Management of quality was traditionally inspect it .TOTAL QUALITY MANAGEMENT Objective – Management of quality ensures conformance to certain pre-set standards. which ensures good market standing. TQM is a way of creating an organization culture committed to the continuous improvement of work processes – Deming.fix it in nature.
TQM – KEY TENETS Do it right. provided with all relevant information and best possible tools. Looking at quality as an endless journey. fully involved in decision-making and fairly rewarded for results. 183 . Empowerment – It takes place when employees are properly trained. Be customer centric – Generate the concept of internal customer (Ishikawa). not a final destination. the first time – From reactively fixing error in products to proactively preventing errors from occurring at the first place (Juran). Kaizen – Make continuous improvement a way of life.
of units meet preset standards (Eg. saving precious top management time. 184 .STRATEGIES Outsourcing – It is the process of self-contracting services and operations which are routine and mundane.TQM . 6-Sigma).e. enabling the firm to concentrate on core activities essential to customer satisfaction. SQC – It is a process used to determine how many units of a product should be inspected to calculate a probability that the total no. It is based on the principles of MBO (i. Quality Circles – It a small group of shop-floor employees who meet periodically to take decisions regarding operational problems and crises. equal participation).
....BALANCED SCORE CARD Some interesting comments . – In the majority of failures – we estimate 70% – the real problem isn’t (bad strategy) ... – Less than 10% of strategies effectively formulated are effectively executed.. it’s bad execution.... strategy implementation has never been more important.. Source: Fortune Magazine Why CEO’s fail? 185 .. – Efficiency and effectiveness is passé.
Most managers tend to rely on traditional measures of performance having its origin in finance as they are well tried and tested. Focus more on causes. rather than effects.BSC . 186 . These measures worked well when organizational systems were simple and unidirectional and more importantly the environment was static. In today’s context when organizational systems have become complex and multi-directional we need to have a holistic view of performance to cut the lag effects. Organizations need to move from financial to strategic performance.CONCEPTUALISATION A company’s performance depends on how it measures performance.
The most critical element of a BSC is to measure these four dimensions. 187 . and distinguish strategic problems from operational ones.BSC – KAPLAN & NORTON (1992) A BSC helps a manager to track and communicate the different elements of company’s strategy. because they have too many. 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.
ageing schedule) % of key customer transactions Ranking of key customer accounts No. of visits or calls made % of NPA’s 188 .CUSTOMER PERSPECTIVE GOALS Products Supply Preference Relationship MEASURES Relative market share (%) % of sales from new Vs proprietary products Timely deliveries and service Customer credit analysis (i.e.
of times covered in media No.BUSINESS PERSPECTIVE GOALS Skills Excellence Exposure Introduction MEASURES New capabilities and competencies Implementation & gestation period Bank and supplier credit limits & PLR Unit Costs / Conversion Ratio / Defect Ratio No. of new product launches Vs competition Product pricing Vs competition 189 .
of product innovations 190 .LEARNING PERSPECTIVE GOALS Technology Manufacturing Focus Timing MEASURES No. of new patents registered Time to develop next generation products Average and spread in operating cycle % of products that equal 2/3 sales No.
Return on Investment Market Capitalization / PE ratio 191 .FINANCIAL PERSPECTIVE GOALS Survival Success Prosper Divestment MEASURES Cash flows Growth in Sales and Profits EPS.
STRATEGY MAPPING 192 .
BSC .IMPLEMENTATION 2 Translate strategy into operational terms 1 Mobilize change through effective leadership 5 STRATEGY Make strategy a continual process 3 Align the organization to the strategy 4 Make strategy everyone’s job 193 .
they don’t know .e.e.ADVANTAGES Most often top managers face information overload. Modern managers should be poised to ask the right questions. Shift from control to strategy (i.what they don’t know.BSC . As a result. sharing of vision). 194 performance will automatically follow. The BSC brings together the different elements of a company’s strategy at a glance. Seek excellence. Focus on cause not effects. . It helps translating strategy into practice (i. doing right things instead of doing things right).
EFFICIENCY Vs EFFECTIVENESS Ineffective Effective Inefficient Goes out of Business quickly Survives Efficient Dies Slowly Thrives 195 .
Michael E. but also sustains it. Porter 196 .EFFECTIVENESS + STRATEGY A company which is effective as well as strategic. . not only thrives.
CORPORATE RESTRUCTURING 197 .
from survival of the fittest . Radical change brings about strategic variety.. firms use restructuring strategies. “every organization must be prepared to abandon everything it does.. Strategic variety may be caused by changes in the as external well as internal environment... To adapt to the changing environment.” 198 .. As Peter Drucker pointed out. Tata Group). Strategic variety brings paradigm shift..CORPORATE RESTRUCTURING The only thing constant in today's business environment is change. Restructuring involves consciously driving significant changes in the way an organizations thinks and looks (Eg. to survival of the most adaptable.
Company’s should go beyond just asking what he expects. Walkman. Instead. . etc). downscoping). Internal customers should also not be neglected. they should strive to provide unimaginable value ahead of its time (Eg. and dividing the core businesses into SBU’s (i. Core Business – Company’s should introspect – What business are we in? Business evolved out of opportunism or myopia should be divested.e. Structural Changes – Conventional hierarchical structures should be disbanded in favour of more 199 flexible ones (i. Fax. downsizing or rightsizing).RESTRUCTURING – BASIC TENETS Customer Focus – Restructuring ideally begins and ends with the customer. ATM.e.
Ratan Tata now drives the point the group means business. During the times of JRD.... 200 . .RESTRUCTURING – BASIC TENETS Cultural Changes – A culture represents the values and beliefs of the people about the organization. started focusing on their capabilities.) Reliance dismantled their industrial embassies ..) The Aditya Birla group typically relied on the “marwari” community for key management positions ...... It is created and institutionalized by the top management. Kumar Birla today is more dependent on professionals.... Restructuring also requires cultural reorientation. the Tatas were considered a benevolent and charitable organization.
Restructuring provides a platform to close this gap. they tend to move away from the customer. Carry out PR campaigns. Getting feedback & addressing customer complaints. Communicating to the media about organization efforts to deliver quality products. Use the reach of networking technologies. Honda’s ad says.MOVING CLOSER TO THE CUSTOMER As companies evolve. Publicizing welfare projects to demonstrate CSR. Organizing customer and supplier meets. “ … one reason our customers are satisfied is that we aren’t.” 201 .
Glaxo – Heinz). 202 . Hive Off – It involves siphoning of assets under control. Further. Mittal – Arcelor) and can take various forms. horizontal. Tata – Corus) or hostile (Eg. spin-off and equity carve.ASSET RESTRUCTURING Asset Restructuring – The asset composition of a firm undergoes a major change. It can have two forms. where the difference in valuation is settled off through cash or equity (Eg. including its intangibles – Mergers – It may be vertical. Further spin-off can be classified as split-off and split-up. Asset Swaps – It entails divesting and acquisition simultaneously by two companies. It may include brands as well. or conglo-merate. it may be smooth (Eg.
Reliance Ent). – Split-Up – In a split-up. the existing shareholders receive equity in the subsidiary in exchange for the stocks of the parent company. 203 . – Split-Off – In a split-off. Most of these practices are not in consonance with Indian laws. Tata Industries selling 20% stake to Jardine Matheson). the entire parent company loses its identity after being split into a number of subsidiaries. Equity Carve – It involves selling a minority stake to a third party while retaining control (Eg.HIVE OFF Spin-Off – A spin off is the creation of a new entity. in which the equity is allotted amongst the existing shareholders on a pro-rata basis (Eg.
A complete sell-out is known as divestment (TOMCO). Parle sold its Thums Up brand to Coke for $40 million apprehending fierce competition. strategic misfit. repay long-term debts. In 1995. 204 . L&T sold its cements division to Aditya Birla group. Selling out in phases is called disinvestment (IPCL).DIVESTITURE It involves the sale of a brand or a division of a company to a third party. but retained its engineering division. – Poor performance. In 2005. Generic motives include – – Raise working capital. for a specified market or in general with full management control.
Wipro). Share Buyback – It is a process of cancellation of shares out of free reserves to the extent of 25% of paid-up capital (Eg.CAPITAL RESTRUCTURING Capital Restructuring . 205 .The internal & external liability composition undergoes a major change – LBO – Acquiring control over a substantially larger company through borrowed funds (Eg. Conversion – Replacing debt with equity or vice-versa or costlier with cheaper debt or cross currency debt. It provides greater leverage as well as management control. involving 608 pence per share).3 billion. Tatas take-over of Corus for US $11.
Rs. 950 cr Merind . 256 cr ACC – Rs. 99 cr Tata Power – Rs. 1860 cr . 230 cr Diversifications Tata Motors – Rs. 1439 cr 206 Tata Timken – Rs 120 cr Tata Telecom – Rs. 150 cr VSNL – Rs. 250 cr Tata Tetley – Rs. 42 cr Voltas .Rs. 1170 cr Goodlass Nerolac – Rs.BUSINESS RESTRUCTURING – TATAS Divestments Lakme – Rs. 1700 cr Trent – Rs. 1890 cr CMC – Rs. 120 cr Tata AIG – Rs.
of operating units. Turnaround is the primary motive.ORGANIZATIONAL RESTRUCTURING Organizational structure and systems calls for a change when strategic variety is apparent. keeping the composition of business intact (Jet Airways). It can be carried out in the following ways – Downsizing – It is a systematic one-time reduction in the no. Downscoping – It involves reducing the business and/or geographical scope of a firm (Aditya Birla group). Survival is the primary motive. Rightsizing – It is phasing of excess and redundant employees resulted out of faulty internal planning (SAIL). usually as a result external turbulence. 207 . of a firm’s employees and sometimes in the no.
The longer the period. thumb rules) of the top management.e. Strategy change is unviable without a preceding change in its dominant logics. as strategies are based on such beliefs and biases. The dominant logic represents the perceptions and biases (i. inertia).e. the more difficult it becomes to uproot the paradigm (i. 208 .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).
In most organizations. Successful transformation requires – incorporating employees fully into the process – leading from a different place so as to maintain employee involvement – instill mental disciplines that will enable employees to behave differently. the factor that stifled change & performance was – culture.FORCES AGAINST STRATEGIC CHANGE The problem with strategic change is that the whole burden typically rests on few people (i.e. Companies achieve real agility only when people at every level rise above the ordinary to face the challenges – revitalization or transformation. 209 . 20% of the people carry out 80% of the changes).
never take no for an answer. Harness setbacks. it is not about winning but about learning. The best way is to alter the institutional point of view. Promote inventive accountability.SUCCESSFUL TRANSFORMATION Build an intricate understanding of the business model at all levels of the organization. 210 . Manage from the future. process ownership. Encourage uncompromising straight talk. Questioning every basic action of the organization. Understand and deliver the quid pro quo. Create relentless discomfort with the status quo.
It involves identifying – Aspects of current culture which needs to be reinforced. that can be both enablers and blockages to change and restructuring. by identifying forces for and against change.FORCE-FIELD ANALYSIS A force-field analysis provides an initial overview of change problems that needs to tackled. 211 . It involves diagnosing a change situation – systems & structures. Identify and implement facilitators of cultural change. Culture and style of management are two main impediments in force-field analysis. also known as cultural-web. Aspects of current culture which needs to be overcome.
RESTRUCTURING .OUTCOMES Alternatives Organizational Short .Term Reduced labour costs Reduced debt costs Emphasis on strategic control Business High debt costs Higher risk 212 Long .Term Loss of human capital Lower performance Higher performance Capital .
NUMERATOR & DENOMINATOR MGT Most firms across emerging markets undergo strategic discontinuity and as a result are forced to restructure their businesses. Numerator – It assumes that turnover is not a barrier or constraint. reverse engineering and regenerating. the second one is a more viable strategy and sustainable option in the long run. In order to put back the company on the right track they are resort to – Denominator – It assumes that turnover cannot be increased. hence go in for downsizing. focuses on reengineering. While the first strategy produces results instantaneously. 213 . 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).WHY TURN AROUND MANAGEMENT? Some interesting insights .. still exist as on 2005... – Less than 10% of the Fortune 500 companies as first published in 1955.... Source: Why do firms atrophy? (Business Today. and that the thirty-two of the country’s largest business groups in 1969 are no longer among the top fifty today.
A category of underlying principles and concepts. ends the threat with a combination of strategies. 216 .e. and capabilities. process focuses on – A logic to explain a causal relationship between intervening variables. As a sequence of events describing how things change and why they change (i. skills. While content focuses on endogenous and exogenous variables. systems. and achieves sustainable performance recovery.TURN AROUND MANAGEMENT A turnaround is said to occur when a firm perseveres through an existence threatening performance decline. Both content (what) and process (how) are equally important for a successful turnaround. Stage Theory).
unavailability or radical lowering of substitute costs or technological obsolescence. especially in key positions. 217 . suppliers and bankers. leading to lack of acceptability from distributors and customers. Low employee morale leading to high employee attrition at all levels. Rising input costs.TURNAROUND INDICATORS Most firms atrophy simply because they fail to diagnose the indicators that acts as threat to organizational existence. Some indicators Continuous cash flow crises as a result of dwindling market-share and profits. Uncompetitive products or services. Low stakeholder confidence. Substantial shifts in consumer preferences.
Product redesigning or reengineering. consider extension.. Emphasis on advertising and market penetration. Recalibrate prices. Revamp product portfolio.TURNAROUND ILLUSION The first step to a successful turnaround is the basic acceptance of the fact that …. based on elasticity. they adopt surface level measures (disprin popping) which most often fail. “all is not well”. Hence. Common approaches adopted Change in key positions. Extending work hours. 218 . liquidating dead assets. which most top managers fail to appreciate. focus on power brands. prune work-force. be more customer centric.
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. 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. 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. 220 . R-Extinction – It suggests that organization factors.DECLINE Decline is the first stage in the turnaround process.
Strategic responses focus on changing or adjusting the business the firm is engaged in through long term moves such as – integration. the response should be strategic. If the underlying cause is internal efficiency. 221 . diversification.RESPONSE INITIATION Turnaround responses are typically categorized as operating or strategic. new market initiatives. If the decline stems from structural shifts. the response should be operational. asset reduction. The response must match the cause of the decline. Operating responses typically focuses on the way the firm conducts business and involves tactics geared towards – cost cutting and process redesigning (BPR).
RESPONSE DICHOTOMY The response initiation is somewhat dichotomous and cannot be universally applicable. Similarly new market initiatives is feasible only for multi-product firms. when decline deepens shifts in strategic position becomes essential. Contour – It is easier to reverse decline in the earlier stages through operational measures. 222 . which may be unavailable to a focused firm. 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.
transparency. 223 .e.TRANSITION Transition usually reflects the first signs of recovery. Support from all the stake holders through resource commitment. role model. consensus). Sustenance is the key factor in this stage. substantial amount of time usually passes before results begin to show (i. The top management has a key role to play through empowerment. However. However. Empirical studies show that average time is 7. confidence building measures. participative management (i. lead – lag).e. many a times early signs of recovery fades out.7 years with a range of (4-16) years. Effective levers of transition.
Revival of key customers and new product launches. Instead of focusing on financial parameters alone. Regaining lost market share and distributor confidence. Failure is an indication that initial momentum was not sustainable characterized by irreversibility. Cut off points must be unequivocal. Supplier and banker confidence. Commanding a premium in the market.OUTCOME Outcome is said to be successful when a firm breaches the equilibrium performance level. Share price indications and media coverage. 224 . it should adopt a holistic approach.
COOPERATIVE STRATEGIES & ALLIANCES 225 .
and globalization . technology. consortia. 226 .COOPERATIVE STRATEGIES Cooperative strategies are a logical and timely response to changes in business dynamics. licensing. Any cooperative strategy maybe between firms within the same country or cross border as well. In the cooperative strategy continuum as firms move up the value order. strategic alliance. the commitment and the involvement between the firms increases manifold. 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. supply-chain partnership. or joint venture.
owners of the brand Tanishq allows its franchisees to sell its jewellery products.FRANCHISING Franchising – It is a contractual agreement between two legally independent firms whereby the franchiser grants the right to the franchisee to sell the franchisor’s product or service or do business under its brand-name in a given location for a specified period of time for a consideration. owners of the brand Monginis allows its franchisees to sell its confectionary products. Titan Inds. Branding is critical to franchising. Switz Foods. It is an effective strategy to penetrate markets in a shortest possible time at a minimum cost. 227 .
LICENSING Licensing – It is a contractual agreement between two legally independent firms whereby the licensor grants the right to the licensee to manufacture the licensor’s product and do business under its brand-name in a given location for a specified period of time for a consideration. 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. Become a systems integrator (CKD). as in Tata Indica. Different levels of licensing Manufacturing without embracing any technology (CBU). 228 . refine processes and adopt necessary technologies (SKD).
leverage upon size to preempt competition by escalating entry barriers (Eg. 229 . Airbus – Boeing). It can be of the following types – Multipartner – Intends to share an underlying technology or asset. Coke – Pepsi). enabling them to increase prices (Eg. Cross Holdings – A maze of equity holdings through centralised control to ensure earnings stability & threshold resources for critical mass (Eg. Tata. Hyundai).CONSORTIA Consortia – They are defined as large inter-locking relationships & cross holdings between businesses in a similar industry. Collusion – Few firms in a matured industry collude to reduce industry output below the equilibrium level.
link their capabilities to create value for end users. It usually provides a platform to sort out differences between conceptualization and implementation to suit local market needs. . otherwise it 230 becomes routine outsourcing. Continuous sharing of knowledge is critical to the success of a supply chain partnership. Companies in different industries with different but complimentary skills.SUPPLY CHAIN PARTNERSHIP It is a pro-active & collaborative arrangement between supplier and customer aimed at achieving better control over the value chain (Eg. Tata Motors – IDEA).
Partner selection is one of the critical success factors. to gain knowledge and to obtain access to new markets (Eg. effective R&D management. 231 . Reliance – Du Pont). design next generation products. Generic motives involved are . Firm’s should undertake a long courtship with potential partners. Tata Motors – Fiat. Despite their popularity (50-60)% of the alliances fail to accomplish their stated objectives.STRATEGIC ALLIANCE It is an short to medium term understanding between two or more firms to share knowledge and risk.learning organization. preempt competition. enter newer markets. enhance credibility. instead of hurrying into a relationship.
Maruti). Alliances of the Weak – An alliance is entered into to preempt competition (Eg. Complementary Equals – Two firms mutually promoting each others complimentary products (Eg. 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.STRATEGIC ALLIANCE . 232 . Coke – Pepsi). Backward – An alliance (quasi or tapered) with a supplier of critical components seeking commitment (Eg. Whirlpool – Tide. Airbus – Boeing). Bajaj – Castrol).
Too much stress on financials & structure be avoided. 233 . – Japan Vs US). Cultural orientation has been found to have a profound effect on top management’s strategic orientation (Eg. 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. Differences in level of economic development can produce differences in alliances motives.
Partner’s ability to acquire fresh skills. Managerial capabilities.PARTNER CHARACTERISTICS Complimentarity of Capabilities – The degree to which partners resources can be used in conjunction. Intangible Assets – Move beyond the financials of the firm. Unique Resources – Abilities or skills which cannot be easily duplicated. including ability to provide quality products and services. 234 . Willingness to share knowledge and skills. Experience related to previous alliances. Dominant Logic’s – Similarity in beliefs & biases.
Getting Engaged – It should incorporate a specific joint activity. vows to include commitment to expand the relationship. Setting up the housekeeping. partners should nurture it.MANAGING ALLIANCES Alliances are more than just a deal. 235 . the value chain. differences not anticipated earlier. operational & cultural integration. instead of focusing controlling the relationship. Selection & Courtship – It involves self analyzing. degree of compatibility. Changing within. Learning to collaborate – strategic. understanding the chemistry. incorporating clear signs of continuing independence for all partners.
a joint venture is a selection among modes by which two or more firms can transact. It lasts till the vision is reached. combining parts).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. There are substantial linkages in the value-chain. Conceptually. . separation is very 236 bitter. synergy) rather than mere exchange (i.e. It aims at creating new value (i. whilst the partners continue to operate independently.e.
237 . though more profitable alternative to other choices. It may also be linked to deterring entry or eroding competitors position. in addition to a high degree of asset specificity. Organizational Learning – It is a means through which a firm learns or seeks to retain their capabilities. The market fails as sellers are unwilling to reveal their technology and buyers are unwilling to purchase in the absence of inspection. Strategic Behaviour – Firms may override transaction costs.JOINT VENTURE – GENERIC MOTIVES Transaction Cost – The situational characteristics best suited for a JV are high performance uncertainty.
Essar – Hutch (Vodafone). – Eg.OTHER MOTIVES Entry into newer markets. Define future industry standards. – Eg. Maruti – Suzuki. – Eg. Endorsement from government authorities. Yamaha – Escorts. Sharing of resources. Eli Lily – Ranbaxy. Renault – Nissan (Minivans – Cars). – Eg. – Eg. Learning new technologies. Daimler – Chrysler (Premium Cars) 238 . TVS – Suzuki (4-Stroke Engines) Fill gaps in existing product lines. – Eg.
Enka. Century .RISKS INVOLVED Incompatibility – Differences in cultural background. Risk of brain (i. – Godrej – Procter & Gamble. – Eg. – Eg. Tata – Aditya Birla in Idea Cellular 239 . LML – Piaggio Differences in size and resource base. Risk of over dependence. – Maruti – Suzuki.e. technology) drain. PAL – Fiat If the cost of continuing exceeds the exit costs? – Eg. Modi – Telstra What after exit (parenting disadvantage)? – Eg.
respect. time sharing. Agreement – Clarity on operational control. Focus – Avoid strategic myopia. Equality – Lack of dominance. Costs – Other modes of transaction becomes cheaper. 240 . Incompatibility – Performance expectations. Objectives – Shared vision. Inertia – Differences in age and evolution patterns. Partner – Avoid duplication of skills and capabilities. Culture – Reconcile gaps.PRE-REQUISITES FOR SUCCESS Commitment – Mutual trust. Flexibility – Sufficient space to breathe and adjust.
MERGERS & ACQUISITION 241 .
An acquisition is said be smooth if it is with the consent of the management (Eg. SEBI Takeover Code. Brooke Bond – Lipton). 242 . Mittal Arcelor). An acquisition is the purchase of a firm by a firm (of larger size.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. The larger objective is to leverage on size. Ranbaxy . HLL – Tomco). reverses are also taking place through LBO) with a view to acquire conglomerate power and induce synergy (Eg.Daichi) and hostile if it is without the consent of the management (Eg. Most countries have stringent laws that prevents hostile takeovers (Eg. however. 2002).
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.e. Hike – An acquirer who has already picked up a 5% has to make a mandatory disclosure for every additional 1% stake that it acquires. 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. .SEBI TAKEOVER CODE. creeping acquisition).
and/or does not enjoy the confidence of the different stake holders. whichever is higher as an exit route (Eg. 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. asset stripping).SEBI TAKEOVER CODE. credentials or track record is at stake. the SEBI can intervene and block share transfers if: the acquirer has ulterior motives (i. 2002 Pricing – Acquirers will have to offer minority shareholders (at least 20%) the past 26 weeks or past 2 weeks average price. 244 . Gujarat Ambuja – ACC). Grasim – L&T Cement.e. SEBI – In case of a hostile take over.
Godrej.Kelvinator). ITC). usually opportunistic (Eg. Vertical – It involves complimentarily (partially related) in terms of supply of inputs or marketing activities (Eg. Reliance). 245 . Horizontal – It involves integration of two highly related businesses (Eg.TYPES OF MERGERS A business is an activity that involves procuring of desired inputs to transform it to an output by using appropriate technologies and thereby creating value for its stake holders in the process. Conglomerate – It involves integration of two distinctly unrelated businesses. Electrolux . The type of merger is depends on the degree of relatedness (strategic) between the two businesses.
quick access). Tata Steel – Corus). Mittal – Arcelor). Global image (Eg. ITC Bhadrachalam). Reduction in risk. Ranbaxy – Crosslands). Access to newer segments (Eg. 246 .e. Ulterior motives – (Eg. Avoiding risk of new product development. Coinsurance effect – Higher debt raising capability. Acquiring assets or capabilities (Eg. Economies of size. Reduced gestation (i. scale and scope. ICICI –ITC Classic). Overcoming entry barriers (Eg.MERGERS & ACQUISITION .MOTIVES Increased market / conglomerate power. Asset Stripping – Shaw Wallace). Tax benefits (Eg.
When Tata Steel started negotiations with Corus. Top management overtly focused on due diligence exercise and negotiations. Overvaluation of buying firms (Eg. Tata – Corus). Managing over-diversification. Overvaluation is often as a result of an ego drive and substantially affects future returns. Managing size. while the ultimate acquisition was made at 607 pence/share). their initial offer was around 420 pence/share. Inability to achieve synergy. neglecting core business. 247 . Merging of organisational structures.MERGERS & ACQUISITIONS PITFALLS Cultural differences (Eg.
Kingfisher – Air Deccan).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. with an objective to reinforce its growth trajectory or to take on the might of a comparatively larger player (Eg. Decline – Horizontal mergers are undertaken to ensure survival. 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. 248 . Tata Steel – Corus). Growth – This stage may witness parallel merger of two firms of similar size.
INTERNATIONAL M&A .FRAMEWORK Positive contribution to the acquired company. Strong differences may stifle plans and its execution. Blanket promotions across entities and confidence building exercises needs to be practiced. active top management intervention in phases. Immediate attempts to super impose structure and culture may cause bottle necks. 249 . A common shared vision. An acquisition just for the sake of it or reputation yields very little value in the long term. Left alone syndrome. A concern of respect and trust for the business of the acquired company.
BLUEPRINT Take the media into confidence. Integrating work processes. They can carry the message to the various stake holders. Decide upon management control systems. Redefine responsibilities and authority. 250 Do not ignore the “people factor”. Decide on the new hierarchy. . Determine business strategy. Shift attention from business portfolio to people and processes. It will enable focus on customers and key people.INTEGRATION . promptly.
Valuation decisions are arrived through a due diligence process when the prospective acquirer gets access to the books of accounts of acquiring company. over valuation can become a curse. 251 . – Synergy – Potential value gain from combining operations (i. – Market for corporate control. Financial motives – Undervaluation relative to true value.VALUATION The process of valuation is central to M&A. – Unstated reasons – Personal self interest and hubris.e.M&A . operational & financial). The process takes (6-12) months. While under valuation may be a significant opportunity.
252 . – Vertical Synergy – Gains come from controlling the supplychain and savings in transaction costs. or from increased market power which increases sales and margins. Synergy can be negative as well. when the “fit” between the two entities is very poor. – Conglomerate Synergy – Gains come when one firm complements the resources or capabilities of another (Eg. Sources of operational synergy – Horizontal Synergy – Gains come from economies of scale which reduces costs. Innovative product – Good distribution network).VALUING OPERATIONAL SYNERGY Synergy – It refers to the potential value gain where the whole is greater than the sum of the parts.
ITC – Bhadrachalam Paper). but availed after being merged with a profitable firm (Eg. Tax Benefits – Tax benefits may accrue from tax entitlements and depreciation benefits unutilized by a loss making firm. shareholders can accomplish the same at a much lesser cost. Cash Slack – It reduces asymmetry between cash starved firms with deserving projects and cash cows with no investment opportunities. However. Hotmail). Synergy comes from projects which would not have been undertaken if the two firms stayed apart (Eg. 253 .VALUING FINANCIAL SYNERGY Diversification – Reduce variability in earnings by diversifying into unrelated industries. and without paying take-over premiums.
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. – Coupon rates may also be negotiated at lower rates. 254 . – Default risk comes down and credit rating improves. hence better performance. This will induce higher debt capacity. higher leverage.VALUING FINANCIAL SYNERGY Co-Insurance Effect – If the cash flows of the two firms are less than perfectly correlated. It relates to the concept of diversification. the cash flow the merged firm will be less variable than the individual firms.
Assessment of perceived quality is critical. While value of corporate control is negligible for firms that are operating close to their optimal value. The value of wrestling control is inversely proportional to the perceived quality of that management. – – Value of Control = Value of firm after restructuring Value of firm before restructuring.VALUING CORPORATE CONTROL Premium of M&A are often justified to control the management of the firm. The value of control can be substantial for firms that are operating well below optimal value. since a restructuring can lead to significant increase in value. 255 .
e.LEVERAGE BUYOUT (LBO) The basic difference between a take-over and a LBO is the high inherent leverage (i. LBO facilitates a relatively smaller firm to bid for a comparatively larger firm in the bid for management control. The assets of the acquired company are used as collateral for the borrowed capital. sometimes in combination with the assets of the acquiring company. Confidence of investment bankers and the international financial community is essential. debt component) at the time of buyout and rapid changes in capital structure over time. It is a very costly and risky proposition. 256 .
– Increased information needs. – The need to satisfy analysts and shareholders. A research study showed that 30% of the publicly listed firms reported above average returns after going private.TO GO PUBLIC OR NOT? However. on-going valuation. 257 . – Separation of ownership from management. the advantages of going public includes .access to financial markets. off-late many publicly traded firms have gone private keeping in mind the following – – The fear of LBO. The increased benefit showed in the following way – reduced costs and increased revenue. However. liquidity.
– Managers cannot be trusted to invest free cash flows wisely. which disappears once assets are liquidated and significant portion of debt is paid off.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). – Cost of debt coming down (i. 258 . – It is a temporary phenomenon. co-insurance effect).e. – Cash trapped company unable to utilize opportunities. – Debts repaid off from increased value after successful restructuring and wresting management control.
Any discounting has to reflect these changing cost of capital. As the firm liquidates / pledges assets and pays off debt.EFFECT OF HIGH LEVERAGE Increases the riskiness of dividend flows to shareholders by increasing the interest cost to debt holders. Lack of sufficient cash flows to repay costly debts resulting in a possible debt trap. A LBO has to pass two tests to be viable – – Restructuring to pay-off increased debt. initial rise in leverage is anticipated. 259 . Therefore. – Increase equity valuation. leverage is expected to decrease over time.
time-barred. – Automatic listing in major exchanges. or costly. shell company) by a private company. – Facilitates better valuation and forthcoming offerings. Objectives – – Traditional route of filing prospectus and undergoing an IPO is costly. – Prevents dilution of equity. – Tax shelter.e.REVERSE MERGER Reverse Merger – The acquisition of a public company. allowing the private company to bypass the usually lengthy and complex process of going public. small in size but having a promising business. 260 . which has discontinued its operations (i.
Excess returns also vary across time periods. – Takeover announcements reported 30% excess returns.EFFECT OF TAKE-OVER ANNOUNCEMENT The shareholders of target firms are the clear winners. 261 . – Merger announcements reported 20% excess returns. takeover failures have only initial negative effects on stock prices. However. and 35% during bullish periods. Initial anomaly in stock prices usually normalizes over a period of time (6-12) months. During bearish periods excess returns were 19%. Most target firms are taken over within (6090) days.
and Kim. 1983. – Most studies reported insignificant excess returns around take-over offers or merger announcements. as stock markets become more and more perfect such anomalies would reduce Source: Jensen and Ruback. Desai. 262 Jarrel. – However. – However. over time. 1983. in the event of take-over failure negative returns to the extent of 5% on bidder firm stock prices is reflected. Bradley.EFFECT OF TAKE-OVER ANNOUNCEMENT The effect of take-over announcement on bidder firm’s stock prices are not clear cut. Brickley. 1988 . and Netter.
263 .DEFENSIVE STRATEGIES Golden Parachute – An employment contract that compensates top managers for loss of jobs as a result of change in management control. Poison Put – Premature retirement of bonds at attractive rates to pour surplus cash and make target investment unattractive. Asset Stripping – The targeted company hives off its key assets to another subsidiary. Poison Pill – An offer to existing shareholders to buy shares at a substantial discount to increase their voting rights (Eg. Rights). 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.DEFENSIVE STRATEGIES White Knight – It is the placing of stocks to a cash rich investor and bargaining for protection in return. Pac Man – The target company makes a counter bid to take over the raider company. Green Mail – The targeted company buys large blocks from holders either through premium or through pressure tactics (Eg. East India Hotels – Reliance Industries – ITC). Shapoorji Pallonji). Gray Knight – The target company takes the help of friendly company to buy the shares of the raiding company. 264 .
COMPETING FOR THE FUTURE 265 .
GETTING OFF THE TREADMILL Canon overpowering Xerox. The reverse was true for the companies overpowering. Wal-Mart overpowering Sears. were spending 99% of their precious time dealing with present. Most companies were too preoccupied with the present than the future? 99% of the companies overpowered. British Air overpowering Pan Am. Compaq overpowering IBM. Honda overpowering GM. Hitachi overpowering Westinghouse. What went wrong???? What were they doing with the present? What were they pre-occupied with? 266 . Honda overpowering Volkswagen. Nokia overpowering Motorola.
downsizing). Not knowing when to stop. 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). declining margins. most often they ended up cutting corporate muscle as well and became anorexic.THE PAST OF COMPETITION Beyond Restructuring – When a competitiveness become inescapable problem (stagnant growth. decluttering. 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. ensuring only survival of the present.S. The future is not about catching up with competition. A poll in circa 2000 revealed that 80% of the U. On the contrary only 20% of Japanese managers believed that quality will be a source of competitive advantage of the future. incrementalism or nominal innovation has almost reached a plateau. but forging ahead in competition. 268 . but not of the future.THE PRESENT OF COMPETITION Beyond Reengineering – Numerator based managers (innovation) at least offers some hope. However.
Transform the industry. as important as these may be. and regenerate its strategies (breaking its – managerial frames). faster. not just the organization. It involves Dream about the company’s future. demographics and lifestyles. they are not enough to get a company to the future. Companies need to fundamentally reconcieve itself. It is based on deep insights into trends in technology. Empower from bottom to top. don’t predict. reinvent its industry. Create a potential gap. Creating the future requires industry foresight. aspirations and resources.THE FUTURE OF COMPETITION Regenerating – Leaner. not the other way. better. 269 .
ABOUT THE DREAM Which customers will you be serving? What will the potential customer look like? Who will be your future competitors? What will be the basis of your competitive advantage? Where would your margins come from? What will be your future competencies? Which end product markets would you cater? 270 .
It is about deliberately creating a strategic misfit. by converging technologies complex. It drives a hunger and a passion to transform. hence do not fall sick in the first place. Redraw the boundaries between industries. blue oceans). Therefore. Change in at least one fundamental way the rules of engagement in an industry. Successful companies have a complete grip over the industry. they do not need to restructure. 271 .e. Create entirely new industries (i.ABOUT THE TRANSFORMATION The future does not belong to those who take the industry for granted.
Such a process is called institutionalization (from people centric to organisational centric). More importantly. The middle management plays a strong moderating role. A revolution that is thrust upon from the top seldom sustains. 272 . the revolution must start at the bottom and spread in all directions of the organization. Transformational leaders merely lead the way. Most successful revolutions (Gandhi to Mandela) rose from the dispossessed.ABOUT THE EMPOWERMENT Bring about a revolution (a paradigm shift) in the organization.
without taking undue risk.THE FUTURE OF STRATEGY A company must get to the future not only first but also for less. It requires a lot of common sense and a little bit of out of the box thinking. 273 . Toshiba – LCD. What does it take to get to the future first? Understanding how competition for the future is different. Apple – iphone). Companies need to strategize (think ahead of times). Get to the future first. An ability to energize the company. A process for finding and gaining insight into tomorrows opportunities (Eg. South West Airlines – LCC. Apply the 40 – 30 – 20 principle.
274 . but hundreds. What distinguishes a leader from a laggard. greatness from mediocrity. The farther one can see in this endless space. the farther it will be away from competition. is the ability to imagine in a different way what the future could be. as on their aspirations. each point in space represents a unique business opportunity. As there is no one future. We are in the midst of a 3600 vacuum. Companies of the future will be not based so much on the strength of their resources.HOW DOES THE FUTURE LOOK LIKE? There is no rule which says that for every leader there will be a follower.
THE EMERGING STRATEGY PARADIGM Not Only Reengineering Processes But Also Regenerating Strategy The Competitive Challenge Organizational Transformation Industry Transformation Competing for Market Share Competing for Opportunity Share Finding the Future Strategy as Learning Strategy as Positioning Strategy as Engineering Strategy as Unlearning Strategy as Dream Strategy as Architecture 275 .
THE EMERGING STRATEGY PARADIGM Not Only But Also Mobilising for the Future Strategic Fit Resource Allocation Strategic Misfit Resource Stretch & Leverage Getting to the Future First Existing Industry Structure Product Leadership Single Entity Product Hits & Timing Future Industry Structure Competency Leadership Dominant Coalitions / Co-option Market Learning & Preemption 276 .
Learning Curve t1 t2 t3 Time t4 t5 277 .LEARNING TO FORGET P1: The degree of learning in current period is directly proportional to the degree of unlearning in the previous period. Degree of Learning Unlearning Curve P2: Unlearning in previous period does not necessarily ensure learning in the current period.
It 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. Leverage – They are the gateways to future markets. 278 . It represents the collective learning's of an organization centering around diverse streams of technologies. Inimitable & Insubstitutable – A high degree causal ambiguity between these skills yield sustainable competitive advantage. It is characterized by the following – Unique – It provides unimaginable customer value ahead of its times.
Toyota – lean manufacturing. it gets more refined and valuable through use. Canon – imaging. Coca Cola – brand. SKF – antifriction and precision. A core competency cannot be outsourced. Core competencies are the roots of the organization. Most companies around the world do not possess one. Toshiba – flat screen displays. at the most three to four. Wal-Mart – logistics. Intel – nano-electronics. leaders have one. Nike – designing. Honda – engines.MORE ABOUT CORE COMPETENCE Sony – miniaturization. 279 . it is deeply embedded in the heart of the organization. Although a core competence may lose value over time.
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 .
288 . Diversified groups in operating in emerging markets therefore benefit from unrelated diversification. China. Korea. Chile) provide a different context (i. strategies suited for the developed markets may not be appropriate for emerging markets. Therefore. Emerging markets are characterised by infrastructural bottlenecks. Therefore focused strategies based on core competence may not be suitable for emerging markets (Khanna & Palepu. and high transaction costs. 1997). high levels of market imperfection). institutional gaps.e.EMERGING MARKETS Emerging markets (India.
Synergy. Size & Scale. Entropy).DIVERSITY . Concentric.PERFORMANCE (I) Diversity attempts to measure the degree and extent of diversification (Herfindahl. Optimum level of diversification Performance Diversity is initially positively related with performance. et al. Experience Strategic Fit Diversity Palich. (2000) 289 . subsequently negatively related across developed markets.
DIVERSITY . Huge initial investment. brand building Risk diversification. conglomerate power Threshold level of diversification Performance Diversity (Khanna & Palepu. subsequently positively related across emerging markets. 2001) 290 .PERFORMANCE (II) Diversity is initially negatively related with performance.
HSBC). revenues and profits. It should have a spread of manufacturing facilities. act locally (Eg. Characteristics – It should have a spread of affiliates or subsidiaries. It should have a spread of interest groups / stake holders. 291 . It should have a spread of assets. It should think globally.INTERNATIONAL IDENTITY MNC’s consciously engage in FDI in different parts of the globe to forge resource diversity as a distinct competitive advantage.
It reflects the relative role of team building (Eg. Risk Profile – It reflects the risk attitude of the top management (Eg.GLOBAL BUSINESS ENVIRONMENT Power Distance – It reflects the disparities in income and intellectual development (Eg. Feminity Index . high feminity index in developed markets and vice versa for emerging markets). low group scale in developed markets and vice versa for emerging markets). 292 . low power distance in developed markets and vice versa for emerging markets).It reflects the disparities in women in workforce (Eg. low risk profile in developed markets and vice versa for emerging markets). Group Scale .
customs. FOREX reserves. Country Risk – It reflects the political and economic risk (Eg. low country risk in developed markets and vice versa for emerging markets). 293 . currency. judiciary) of doing business in a particular country (Eg. political stability. attitude. code of conduct. inflation. corruption. way of life. high cultural adaptability in developed markets and vice versa for emerging markets). time value.culture. interest rates. flexibility (Eg. terrorism (9/11).GLOBAL BUSINESS ENVIRONMENT Cultural Adaptability – It reflects the adaptive ability to a changing environment . credit rating. dress sense.
time-zones. Language Barriers – Developed country managers expect foreign partners to communicate in their languages.GLOBAL BUSINESS ENVIRONMENT Time Sensitiveness – Developed country managers regard time as precious. in most emerging markets use of an interpreter may be a standard protocol. in most emerging markets meetings are delayed and lasts unusually long. 294 . Ethnocentrism – Developed country managers tend to regard their own culture as superior. and vice-versa. Other factors – local celebrations. High levels of ethnocentrism usually has a negative effect on business. however.
The 1999 (Seattle Round) saw a lot of protest amidst bringing agriculture under the purview of TRIPS. It also highlighted the nexus between US & WTO. It focused largely on TRIPS (patents. It also initiated provisions on anti-dumping.GATT GATT was a bi-lateral treaty initiated between US and some member countries in 1947 to promote free trade. In 1995 (Uruguay Round) GATT was renamed to WTO. trademarks). The 2001 (Doha Round) focused on power blocks (NAFTA. copyrights. It a multi-lateral treaty with 143 (as on 2002) member countries to reduce tariff and non-tariff (quota) barriers. ASEAN. BRIC). 295 .
The notable exception was Great Britain which still continues with its local currency (i. The Euro was significantly devalued against the Dollar till 2002. However with current recession in the US 2002 onwards. Sterling . three countries joined in 2002 increasing it to fifteen members as of 2008.e.Pound). Euro). 296 . primarily the OPEC countries.e. the Dollar still remains the most preferred currency globally. the Euro slowly started outperforming the Dollar. However.EURO – SINGLE CURRENCY In 1999 twelve member countries in Europe joined hands to move over to a single currency (i.
a multiple currency is preferable where the business cycles of member nations are different. However. Rate Uncertainty – A single currency eliminates the risk of competitive devaluations. it helps avoiding transaction costs associated with a multiple currency. Transparency – A single currency is transparent and competitive. Trade Block – It will strengthen the EU identity which would not have been possible otherwise. but it may have spill-over effects. 297 .SINGLE Vs MULTIPLE CURRENCY Transaction Costs – Though the initial cost of introduction of a single currency is very complicated and costly.
It is long term with high levels of commitment. hot money).e. It is short-medium term with comparatively low levels of commitment.e.FII Vs FDI INVESTMENT Classical economists believed that foreign investment (in any form) is basically a zero sum game (i. 298 . Neo classical economists believe that foreign investment may in fact be a win-win game. the gain of one country is loss of another). – FII (transfer of intangible resources) is fast but may have strong repercussions (i. – FDI (transfer of tangible resources) is slow but steady for the purpose of economic growth.
culture (food habits).INTERNATION MARKETING Product – The various attributes of a product may receive different degrees of emphasis depending on differences in . usage (talk time). customer awareness (microwaves). Pricing – It depends on the competitive structure (PLC – Kellogg's). economic (middle class buying power). Distribution – It depends on the market characteristics (fragmented – concentrated). technology (microchip). lifestyle (petroleum 299 outlets – departmental stores). buying patterns (spread). promotion (surrogate advertising). .
Cost Structure – Companies in India need to investment in fixed costs due to poor infra-structure 300 compared to developed markets. debt is cheap in US. Leverage – The leverage may vary across countries depending upon money and capital market conditions (Eg.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. equity is cheap in India). . Accounting Norms – The accounting norms of one country (AS .India) may be different from that another trading country (US – GAAP or IRS).
Compensation – Differential pay packages exists because of differences in purchasing power. social security. shortened life cycles). and cultural barriers (language) vis-à-vis emerging markets. technology (convergence. skills are more important that cultural fit and vice-versa. double taxation. 301 . however. Recruitment – In local recruitment. Training – It is a pre-requisite for international business to reduce language. labour laws. in most cases it is not desirable nor practiced.INTERNATIONAL HR An uniform HR policy is idealistic to enable parity in performance appraisal.
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). 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. . Outsourcing – A company having a core competence may be the source of global outsourcing (Eg.
CONTEMPORARY TOPICS 303 .
innovation is the first attempt to carry it out in practice.INNOVATION An invention is the first occurrence of an idea for a new product or process. but has inherent risks involved as well. 304 . Innovation is the most preferred strategy today to maintain competitive advantage in the present turbulent business environment. Innovation is all about staying ahead of competition. it has destructive effects as well. Innovations typically paves the way for more secured and improved lifestyle for consumers in general. While innovation typically adds value for organizations.
TYPES OF INNOVATION A key challenge is maintaining a balance between process and product innovations. Tangible impact of product innovation on performance is significantly higher than process innovation. However. process innovations are organizational driven. Process innovation usually follows product innovation. 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.
Drug Development (Bio Chemicals).BUSINESS MODEL It is a simplified description and representation of a complex real world. Disruptive business models brings in a new frame of reference (i. putting an idea into practice). Processors (Pentium). Telecom (CDMA Technology). a paradigm shift). Data Storage (Pen Drives).e. Innovations are the back-bone of successful business models . 306 . about how an organization makes money (i. It leads to a shift in the price – performance envelope. Medical Surgery (Lasik).e.
The key partners involved in the activities. The segment(s) of clients to be addressed. 307 .NINE BUILDING BLOCKS Value proposition offered to the market. The cost structure resulting from the business model. The revenue streams generated by the activities. The channels to reach out to the clients. The proposed relationships established with clients. The key resources and capabilities required. The key activities / processes necessary for execution.
BUSINESS MODEL FRAMEWORK 308 .
innovative companies to carve out unique business models to fend off competition. With the rapid erosion of certain industries (IT. It involves – Product Visualization – Product Prototype – Product Test – Capacity – Pricing – Distribution. The revenue model described here are the means to generate revenues. It is just one piece of the puzzle. Investment Banking. Real Estate) companies need to untangle and understand the intricacies of their business model. 309 .REVENUE MODEL Positioning is just not sufficient.
Allow the workforce idiosyncrasies for their errors. 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 grape-vine. A favourable intellectual property (IP) climate. Promote the culture of experimentation. Provide reasonable incentives (not necessarily monetary). Have a lean and a flat organization structure. 310 .
however that possibility is slowly atrophying. Collusion with the judiciary is also another distinct possibility in emerging markets.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. In most emerging markets where the IP climate is not so favorable. 311 311 . The most preferred strategy of internal protection includes imbibing “causal ambiguity” in the production process to make reverse engineering difficult.
In fact the principles of corporate governance implies that managers go beyond in satisfying the stated and unstated needs of the multiple stakeholders.CORPORATE GOVERNANCE The basic theme of corporate governance is to ensure that professional managers are identified and made accountable in terms of clear business processes or activities and held responsible through adequate mechanisms & control systems for channelizing their decisions for the benefit of stakeholders at large. Corporate governance aims to reduce the principal-agent problem present in most professional managed organizations through appropriate forms of accountability and control mechanisms. 312 312 .
AGENCY THEORY The root of Corporate Governance goes back to the Agency Theory. From the strategic point of view managers tend to diversify into unrelated businesses as it provides higher returns hence a more favourable appraisal. However. not present in portfolio diversifications. 313 . shareholders can diversify their portfolio at a much lesser risk and cost. According to the agency theory top managers and shareholders interests are usually conflicting in nature and tend to pull in opposite directions. This exposes the shareholders to additional risks and higher costs. also known as the principal-agent problem or agency dilemma.
2002 to restore public confidence in corporate governance.ORIGIN & CONTEXT Since the early 20th century since a large part of public funds were held by publicly traded firms in the US. various laws were enacted to ensure proper usage of these funds. After the Enron downfall. . defines corporate governance (headed by Kumar Mangalam Birla) as the acceptance by management of the inalienable rights of shareholders as the true owners of the corporation and of their own role as trustees on behalf of the 314 shareholders. the US government passed the Sarbanes – Oxley Act. SEBI Report – 2005.
Interests of other stakeholders: Recognize the legal and other obligations of all legitimate stakeholders. including the society at large. 315 . Role and responsibilities of the board: It deals with issues about an appropriate mix of executive and nonexecutive directors. The key roles of chairperson and CEO should not be held by the same person and their offices be clearly separated.GOVERNANCE PRINCIPLES Rights and equitable treatment of shareholders: Help shareholders exercise their rights by effectively communicating information in transparent ways that is understandable and accessible and encouraging shareholders to participate in general meetings.
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. Disclosure and transparency: Disclosure of information should be timely and balanced to ensure that investors have clear access to data and facts. Independence of the entity's auditors: Identification. 316 316 . assessment and mitigation of risks and retirement by rotation over a fixed period of time..
discussed and resolved. Remuneration: Performance-based remuneration is designed to relate some proportion of salary to individual performance. with its legal authority to hire. However. 317 . safeguards invested capital. fire and compensate top management. Balance of power: The simplest balance of power is very common. Regular board meetings allow potential problems to be identified.GOVERNANCE STRATEGIES Monitoring by the board of directors: The board of directors. they should provide no mechanism or scope for opportunistic behaviour. a person benefitting from a decision should abstain from it.
Egypt and Russia) to around 40% for Canadian & European companies. and was responsive to investors' requests for information on governance issues. They defined a well-governed company as one that had mostly out-side directors.GOVERNANCE & PERFORMANCE In its “Global Investor Opinion Survey” of over 200 institutional investors in 2002. The size of the premium varied by market. from 10% for companies where the regulatory backdrop was least certain (those in Morocco. McKinsey found that 80% of the respondents would pay a premium for wellgoverned companies. 318 . who had no management ties. undertook formal evaluation of its directors.
corporate philanthropy should be a part of every corporate mission. 319 . However. The basic premise is that firms cannot exist in vacuum. Therefore. Over a period of time.SHAREHODER – STAKE HOLDER THEORY Till the early part of the 20th the basic objective of modern organizations was to provide goods and services for public consumption for profit maximisation. today economic institutions are considered as a major drivers of improvement in quality of life in general and therefore needs to include multiple stakeholders. the short-term view of profit maximisation gave way to a more broader and mediumterm view wealth maximisation of the shareholders.
the debate on CRS still continues whether firms should detract its focus from its business? 320 .CORPORATE SOCIAL RESPONSIBILITY As Peter Drucker rightly pointed out that. 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”. economic and social responsibilities cannot be mutually exclusive. Therefore. However. CSR can be defined as. “a healthy business cannot exist in a sick and impoverished society”. Therefore. giving a very important message that one cannot exist without the other.
people are becoming increasingly aware of their right to a decent and healthy life. MRTP). 321 . The role of media: The media and various consumer organizations have come up in protecting consumer rights and exposing mal-practices.GROWING CONCERN FOR CSR Awareness due to education: With growing literacy. Public image: Entrepreneurs are increasingly relying on public image as a source of competitive advantage and a higher financial discounting. Fear of government interference: Excessive quench for profits may lead to build up of adverse public opinion compelling the government to intervene (Eg.
Tata Steel – Life Line Express). eco efficiency. Cement . Health & Hygiene – Attending the health hazards due to wastes and by-products to employees and society in proximity (Eg. Aditya Birla Research Centre – LBS).CSR STRATEGIES Green Supply Chain Management: It includes environmentally preferable purchasing. designing eco-friendly products. and extended producer responsibility (Eg. Refrigerators – CFC. 322 .Paper packaging. Exide – Product take back). Education. Literacy & Training Programs – (Eg.
In turn companies by serving these markets. Prahalad notes that future markets exist collectively. They represent an enormous opportunity for companies who learn how to serve them. K. they're helping millions of the world's poorest people to escape poverty. 323 . C. across the world's billions of poor people having immense untapped buying power.BOTTOM OF THE PYRAMID With the market across most developed markets including the US getting saturated. Strategic innovations leading to disruptive business models can show the way out.
BLUE OCEAN STRATEGY 324 .
MARKETSPACE .TWO WORLDS 325 .
In today’s red oceans.WHAT IS RED OCEAN? Companies have long engaged in head-to-head competition in search of sustained. battled over market-share. . and struggled for differentiation (cost or product). Yet in today’s overcrowded industries. one companies gain is always at the 326 cost of another companies loss. profitable growth. competing head on results in nothing but a bloody red ocean of rivals fighting over a shrinking profit pool. They have fought for profits. where most industries are saturated.
but by creating blue oceans of uncontested market space ripe for growth . rendering rivals obsolete and unleashing new demand. It helps in creating powerful leaps in value for both the firm and its buyers. It is only the frames of the . Blue Ocean’s have existed in the past. it will exist 327 in the future as well. Such strategic moves are possible through the pursuit of product differentiation and low cost simultaneously.WHAT IS BLUE OCEAN? Tomorrow’s leading companies will succeed not by battling in red oceans.
RED OCEAN Vs BLUE OCEAN Compete in existing markets Compete in uncontested markets Beat the competition Exploit existing demand Make the competition irrelevant Create and capture demand Make the value-cost trade off Break the value-cost trade off Demand is the limiting factor Supply is the limiting factor 328 .
Demand across developed markets reaching a plateau. Population shrinkage across a no.BLUE OCEAN STRATEGY IMPERATIVES Prospects in most established market spaces – red oceans – are shrinking steadily. As trade barriers between nations & regions fall. of European nations. information imperfections atrophy instantly. Technological advances have substantially 329 improved industrial productivity. Niche markets & monopoly havens are continuing to disappear. .
. They are not necessarily about technology. managerial moves are. the underlying technology was often already in existence. History indicates that blue oceans exist in three basic industries – automobiles (how people get to work) – computers (what people use at work) – entertainment (what people do after work). Incumbents often create blue oceans within the ambit of their core business.CONCEPTUAL UNDERPINNINGS Blue oceans have existed in the past and will exist in the future as well. Company & industry are the wrong units of 330 strategic analysis.
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 .
.SOME GLARING EXAMPLES In the last century authors Kim and Mauborgne have documented the creation of more than 150 blue ocean creations across 30 industries – Virgin Atlantic: Fractional jet ownership or travel to space. Citibank – Automated teller machines & credit 333 cards. Southwest Airlines: Pioneering the concept of LCC. Sony Play Station: Redefining machine-human interface in entertainment and targeting an altogether new user base.
According to this view managers need not be constrained to act within the confines of their industry.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. 334 . greater than themselves. companies & managers are largely at the mercy of economic forces. According to this view. All they need to do is change their managerial frames. Off late emerging views in strategy having its origin in (Organization Theory) led to a paradigm shift to what is called the – reconstructionist view.