This action might not be possible to undo. Are you sure you want to continue?
Course Code: 611 & 612 Dr. Subir Sen – Faculty Member, IBS
E-Mail: email@example.com, 9830697368 1) Crafting & Executing Strategy – Thompson & Strickland. 2) Strategic Management – Pearce & Robinson. 3) Strategic Management – Fred. R. David. 4) Exploring Corporate Strategy – Johnson & Scholes. 5) Competitive Advantage – Michael E. Porter. 6) HBR – Articles & Case Studies.
STRATEGY - DEFINITION
Strategy is all about making trade-offs between what to do and more importantly what not to do; consciously choosing to differentiate. It reflects a congruence between external opportunities and internal capabilities. Types of strategies – Corporate Strategies – It is all about making choices across various businesses and allocating resources among them. Business Strategies – It is all about developing leveraging and sustaining competitive advantage. Functional Strategies – It is all about finding newer ways to perform existing processes, or 3 better still adopting new processes altogether.
STRATEGIC MANAGEMENT DEFINITION
Strategic management attempts to integrate the traditional management functions and align the organization as a whole with the broader environment to make resource allocations in a way to achieve the strategic intent of the organization. This alignment is called strategic fit. It serves as a road-map for the organization in its growth trajectory. It provides the direction – extent – pace – timing. It depends on the turbulence of the environment and the aggressiveness of the organization. It distinguishes the winners from the losers.
PILLARS OF STRATEGIC MANAGEMENT
Differentiation – Differentiation of key inputs and technologies helps a firm to consciously move away from homogeneous to heterogeneous markets enabling them to earn super-normal profits from normal profits. Integration – Whenever dealing with a complex task of managing a business (i.e. involving a no. of variables with cross linkages) it is in the interest of simplicity that the task be broken up in smaller components. However, for effective control, integration is essential. Alignment – Since differentiation is prone to replication, it is in the interest of the firm to differentiate continuously by aligning the resources with environmental opportunities.
STRATEGIC MANAGEMENT FRAMEWORK
Economic al Strategic Finance Fit Political Strategic Intent Fit Political Marketin g Manageme nt Social & Cultural
7 . It is about adaptation and response to the same.STRATEGIC MANAGEMENT .FEATURES It forms the core activity of the top management. It is irreversible. It is long-term in nature. It is a holistic and integrated approach. It requires full commitment of the top management. It involves substantial resource outlay. It provides broad guidelines. It is all about creativity and innovation.
It is about forecasting. It involves nitty-gritty's. It is about a definite formula. It is fool-proof in nature. It is rocket science. It attempts to minimize risk. It involves only the top management. It a bundle of techniques or even tricks. 8 . It brings instant success.STRATEGIC MANAGEMENT – MYTHS It involves short-cuts. It about mere data and facts.
To gain expertise in technologies. 9 To develop core–competencies. To be insulated against environmental threats. . To tap markets across boundaries. To leverage size. To be future oriented. To assimilate change faster.STRATEGIC MANAGEMENT IMPERATIVES To be continuously alert. To innovate. To be proactive. rather than reactive. again and again ……. scale and scope. To generate large resource pool.
Even in today’s markets. but by virtue of their courage. obsession.strategies. 10 . In the ancient days battles were won not by virtue of size of the army or armory. In contrast. 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. It is an old wine in a new bottle. today's battles are fought over markets. In the ancient days battles were fought over land.ORIGIN The word strategy has its origin from the Greek word strategia meaning Military Commander.STRATEGY . but with a lot a rigour and robustness.
– Reliance’s entry into telecom. US attack of Morocco to capture Germany – Strategy: Pin-hole strategy – Wal-Mart challenging Sears by entering small towns. – Yahoo and Microsoft challenging Google. – Toyota’s entry in the US. 11 .SOME PARALLELS Japan’s attack on Pearl Harbour – Strategy: Attack where it hurts the most. Napoleon’s attack on Russia – Strategy: Waiting for the right time. Allied Forces Vs Germany (WW-II) – Strategy: Forging alliances. challenging GM and Ford.
– Mass Production Organization Size – Complicated Processes – Complex Structures Evolving of an emerging paradigm – survival of the fittest (Fayol & Taylor. A paradigm is a dominant belief about how the business and its environment operates. a radical change in the business environment brings about discontinuity. The first major discontinuity in the history of global business environment was the . The things happening around the firm when totally disconnected from the past leads to a paradigm shift. 1910). 12 .EVOLUTION OF MANAGEMENT As Peter Drucker refers to it.Industrial Revolution.
EVOLUTION OF STRATEGIC MANAGEMENT The second major discontinuity in the history of global economic environment – World War II.e. The question of outperforming the benchmark became the new buzzword. Efficiency and effectiveness are no longer sufficient. 13 . – Global market place. performance across firms became differentiated. – Affluence of the new customer (i. – Homogeneous to heterogeneous products. Survival of the most adaptable becomes a new management paradigm (Ansoff. 1960). push to pull). From uniform performance. – Changes in the technology fore-front.
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 .
– The choice of product-market mix is based on conscious evaluation of risk – return factors. Learning always begin on a clean sheet of paper. 15 . – The choice of strategy is primarily concerned with external ones rather than internal ones. – Biases and prejudices has a very little role to play in strategic choices pursued by managers. Ansoff (1960) – Strategy can be segregated into certain mutually exclusive and inter-related components aimed at managing the growth of an organization.APPROACHES TO STRATEGY Analytical Approach – Igor H. – It is primarily the top management’s prerogative.
everything else follows. Successful organizations align authority and responsibility of various departments in way to reach overall objectives. how it will compete. 16 . – Management control systems has a dominating role in influencing firm performance. who will be the top managers. Once the control systems are in place. The organization initially decides which industry to enter. – The top managers then decide on the type of organization structure & systems to be in place. – Organization structure will precede and cause changes in strategy.APPROACHES TO STRATEGY Design Approach – Alfred Chandler (1970) – Structure follows strategy.
APPROACHES TO STRATEGY Positioning Approach – Michael E. – An organization is seldom in a position to influence the larger business environment. new entrant. substitutes. Porter (1980) – Choose a consumer segment and position your product accordingly. 17 . competitors. – A firms performance is inversely related with the bargaining power of environmental forces to which it is exposed. – The environmental forces comprises of – supplier. customer. – The organization will outperform the industry where environmental forces are weak and vice-versa.
APPROACHES TO STRATEGY Core Competence – C. They are complex resources and undermines a firms competitive advantage. – It enables a firm to deliver unimaginable value ahead of time. locating in most attractive industries and pursuing the same strategy. K. Prahalad (1990) – The key to superior performance is not doing the same as other organizations. – Core competencies are a set of skills that are unique and can be leveraged. – Organizations can significantly alter the way an industry functions. 18 . but exploiting the resource differences among them.
STRATEGIC MANAGEMENT PROCESS Strategic Intent Strategic Planning Strategic Gap – Environmental Scanning – Internal Appraisal of the Firm Strategy Formulation – Corporate Strategy – Business Strategy Strategic Choices – Functional Strategy Strategy Implementation Strategy Performance Strategy Evaluation & Control 19 .
TOP MANAGEMENT PERSPECTIVE 20 .
It’s a philosophy that distinguishes it from its competitors. A strategic intent is a statement of purpose of existence. It implies a significant stretch. 21 . It involves an obsession to be the best or outperform the best. It provides a sense of direction and destiny. A gap that consciously manages between stagnation and atrophy. A substantial gap between its resources and aspirations. It is the cornerstone of an organizations strategic architecture reflecting its desired future state or its aspirations. you cannot reach there.STRATEGIC INTENT If you cannot see the future.
STRATEGIC INTENT .HIERARCHY Integrativ e m Do an in Visio n Mission Dominant Objective s Goal s Plans Lo g ic Single Specifi c Man y 22 t .
strategic variety) is apparent. Dominant logic changes.e.DOMINANT LOGIC A dominant logic can be defined as the way in which the top management team conceptualizes its various businesses and make critical resource allocation decisions. it can be perceived as a set of working rules (similar to thumb rules) that enables the top management to decide what can be done and more importantly what cannot be done. when radical changes in the internal and external environment (i. To put it more simply. 23 . It is core to the strategic intent of the firm.
– It represents the company’s audacious. 24 . beyond just making money. It ensures that the company does not wander off into unrelated zones or fall into an activity trap. It enables the top management to remain focused. It provides an unity of purpose amidst diversity of personal goals.VISION It is a dream (not a forecast) about what the company wants to become in the foreseeable future. – It stands for the unchanging core values of the company. but achievable aspirations. It is a combination of three basic elements – – An organizations fundamental reason for existence.
and memorizable. Brevity – It should be short. not an utopian dream.VISION .CHARACTERISTICS Reliance – Where growth is a way of life. Empathy – It should reflect the company’s beliefs to which it is sensitive. clear. Sharing – The company across all hierarchies should have faith in it. Reachable – It should be within a reasonable target in the known future. Clarity – Vividly descriptive image of what the company wants to be known for in the future. 25 . In Reliance when a new project becomes operational top managers hand over charge to the SBU heads and move on to a new project.
26 . It gives a shared platform. It fosters risk taking and experimentation.ADVANTAGES To stay focused on the right track.VISION . It makes strategic alignment easier. It lends integrity and genuineness. To prevent the fall in a activity trap. It facilitates development of skills & capabilities. It provides a holistic picture. It gives enlightment. It gives the impression of a forward-looking organisation.
It enables the firm to define its business landscape and identify its competitive forces. its reason for existence. It is intuitive for managers to conceive their business in terms of the customer needs they are serving – What business are we in? – Which customer needs are we serving? It should be broad based and relevant to all stake-holders. It serves as a road map to reach the vision. Although the purpose may change over time. A broad mission statement helps in fending competitors. 27 .MISSION Mission defines the space that a business wants to create for itself in a competitive terrain.
…………………. We offer comfort. …………………. – We do not offer software's. We offer solutions. 28 . Some other examples – We do not offer shoes. – We do not offer steel. We offer security. – We do not offer insurance.MISSION – SOME IDEAS Reliance – We are in the business of integration. We offer strength. though some may seem unrelated in nature. …………………. All the businesses of the company are strongly integrated with their main business. ………………….
– It helps identifying key success factors. – It adds legitimacy and motivation. – It prevents deviation. – It is based on Management by Objectives (MBO).100K crore company by the year 2005. 29 .GOALS & OBJECTIVES Reliance – We want to become a Rs. – It lends direction – time frame in the medium term. It provides a quantitative feel to an abstract proposition. – It provides a benchmark for evaluation. – 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.
and gaining access to desired markets to achieve the desired goals and objectives. – Use price-elasticity to break market barriers. 30 . It is specific to a particular business.PLANS Reliance – Desire to invest 25K crore in telecom business by circa 2010. It is the process of garnering necessary inputs. The details of the plan Reliance Telecom adopted were – Backward integrate process technologies. coordinating appropriate technologies. – Leverage economies of size and scale. – Compress project times. – Acquire a market share of indomitable position.
strategies lose touch with the emerging realities.STRATEGIC DRIFT Due to top management commitment. It often leads to an organizational crisis. radical change may lead to disequilibrium. equilibrium is maintained. past strategies tend to have a bearing on future strategies. 31 . When changes in the environment is incremental. Historical studies have shown that most organizations tend to continue with their existing strategies. This state of affairs is known as strategic drift. However. In such a context. This tendency to restore continuity is known as inertia (resistance to change).
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 .
Some instances of organizational politics – Formation of powerful groups or coteries. – Creating obligations of reciprocity. 33 . – Using covert tactics to pursue self interests. – Developing a platform of support.ORGANIZATIONAL POLITICS Strategic drift often leads to organizational politics. – Hiding vulnerability. – Creating a favourable image. – Distorting information to gain mileage. Organizational politics involves intentional acts of influence to enhance or protect the self-interest of individuals or groups over organizational goals.
A realized strategy is what the top management actually translates into practice. – Persons responsible for strategy conceptualization and implementation are34 divergent.INTENDED & REALISED STRATEGIES An intended strategy is an expression of interest of a desired strategic direction. – The environment context has changed. – Influential stake-holders back out. Other causes – – The plans are unworkable and utopian. . Usually there is wide gap between the two when organizational politics is evident.
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. but as a defensible response to the complexities of a large organization that mitigate against publicizing goals. Learning is an integral part of logical incrementalism. Strategy formulation and implementation are linked together in a continuous improvement cycle. 35 . They simply unfold the particulars of the sub-system in stages. this is not to be treated as “muddling”. but the master scheme of the rational comprehensive scheme is not apparent. However.
36 . Macro Broadcasting – The broad idea is floated without details to invite pros and cons leading to finer refinements. Leveraging Crisis – A sudden crisis or an opportunity should be used as a trigger to facilitate acceptance and implementation of change. Agent of Change – Formal ratification of a change plan through MBO.IMPLEMENTING INCREMENTALISM General Concern – A vaguely felt awareness of an issue or opportunity. The broader objective should serve the overall interest of the organization. Adaptation – As implementation progresses.
Strategic transformation becomes smooth through a change in top leadership.STRATEGIC TRANSFORMATION Strategic transformation (a complete overhauling of the strategic architecture) becomes inevitable whenever a strategic drift takes place. Dominant logic’s are very rigid and sticky and prone to inertia. . Dominant logic’s are the cornerstones of change when strategic transformation is apparent. As it brings 37 with it a different dominant logic. Tampering with surface level factors often leads to atrophy. It creates blinders.
Factors that fosters a learning organization – Pluralistic – An environment where different and even conflicting ideas are welcome. A learning organization must continuously focus on unlearning as well. – Organisational Slack – Enough free space. – Constructive Bargaining – Agree to disagree. 38 . and skills that fosters experimentation and questioning and challenge around a shared purpose. It helps prevent a strategic drift from occurring at the first place.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.
ENVIRONMENTAL CONDITIONS Dynamic Scenario Planning Learning Organization Static Forecasting Decentralization Simple Complex 39 .
ANALYZING BUSINESS ENVIRONMENT 40 .
It is based on the assumption of radical change.e. Competitive advantage provides the surest way to fulfill the strategic gap.PLANNING & STRATEGIC PLANNING Formal planning is a function of extrapolating the past. 41 . Strategic gap basically points towards a vacuum of where the organisation wants to be and where it is. It is reactive in nature. It is based on the assumption of incremental change. gap analysis). Strategic planning is a function of discounting the future. It is pro-active in nature. It requires a quantum leap (i. It points to a position of superiority with relation to competition.
Environmental factors can be external as well as internal to the organization. It is exploratory in nature. 42 . The segments of the environment a top manager scans selectively depends upon his dominant logics. not guided by any boundaries. Environmental scanning is very important component of strategic planning. and influences that affect an organizations way of doing things.ENVIRONMENTAL SCANNING The environment is defined as the aggregate of conditions. events. The world is flat. A manager has to continuously scan the environment to ensure alignment of the strategies with the radically changing environment. resources and ideas move unhindered.
It is not intended to be used as an exhaustive list. for which a holistic picture is required. 43 . It is particularly important that PESTEL be used to look at the future impact of environmental factors.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. but also to analyze the complex linkages across them. which may be different from the past impact. Understanding the composite effect is critical.
Infra-Structural Investments. Economic Cycles. Monsoon & Food Grains Reserves.PESTEL FRAMEWORK Political – Government Stability. Literacy Levels. 44 . Fiscal Deficit. Subsidies & Protection. Economic Model. Licensing & Quotas. Capital Market & Forex Reserves. Savings & Investment. Social Values. Language Barriers. Government Attitude. Inflation & Interest Rates. Central – State Co-alignment. Social – Population Diversity. Religious Sentiments. Income & Age Distribution. Currency Stability. Economic – GDP. FDI Inflows.
Patents. ERP. Legal – Monopolies Legislation. Consumer Protection Laws. 45 . Carbon Credits. Environmentally Preferable Purchasing. Waste Disposal & Emissions. Product Design. Extended Producer Responsibility.PESTEL FRAMEWORK Technological – Innovation. Research & Development. Non-Fossil & Alternative Fuels. Employment Laws. Pollution Control Laws. Obsolescence Rate. Product Safety & Health Hazards. Patent Laws. Technological Convergence. Direct & Indirect Taxes. Environmental – Global Warming & CSR.
VRS. Encouraging FDI.ECONOMIC LIBERALISATION New Industrial Policy (NIP) – Liberalizing industrial licensing. Capital Market Reforms. Encouraging exports. Dismantling price controls. 46 . FERA Liberalization. MRTP Liberalization. Banking Sector Reforms. PSU Disinvestments. Curtailment of PSU’s. Abolition of import licenses. New Trade Policy (NTP) – Lowering import tariffs. Economic Reforms – Fiscal & Monetary Reforms. Exit Policy. Rupee convertibility. Structural Adjustments – Phasing out subsidies.
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 .
Globalization – Cheap Imports & Dumping – Push to Pull Marketing Buyers exacting demands – Shortage to surplus – Price competition – Life-style changes – Stress on quality.DISCONTINUITY Hyper Competition – MNC’s . Consumerism Challenges on the technology front – Competencies become technology based – Investment in R&D become inescapable 48 .
DISCONTINUITY Compulsion to find export markets – Identifying competitive advantage – Technological gap – Global presence – Depreciating currency – Exports Corporate vulnerability – It is no longer business as usual – Capital inadequacy – Lack of product clout and brand power – One product syndrome – Loss of monopoly 49 .
FIVE FORCES MODEL .PORTER Threat of New Entrants Bargainin g power of Suppliers Competition from Existing Players Bargainin gBargainin power g of power of Suppliers Customer s Threat of Substitutes 50 .
It depicts the attractiveness of an industry (i. profit potential) per se. but also used to understand how they can be countered and overcome. the forces are subject to changes.FIVE FORCES MODEL ASSUMPTIONS The model is to be used at the SBU level and not at the industry level. It should not only be used to understand the forces. incremental or otherwise.e. The five forces have strong cross-linkages. It is even wiser to apply the same at the product – market level. 51 . The model should not be used as a snapshot in time.
Undifferentiated product. Low margins & stagnancy. Presence of substitutes or unorganized sector. 52 . Threat of Customers – Buyer concentration and volumes. Unimportance of product quality. High switching costs. Government policy. Resource profile & fear of retaliation. Capital requirements. Access to distribution channels. Low customer switching costs. Learning curve advantages. Low relative importance of the segment. Scope for backward integration.PORTERS FIVE FORCES ANALYSIS Threat to Entry – Economies of size and scale. Industry stagnation. Product differentiation through proprietary technology or brand power.
Lack of substitute inputs. Differentiated inputs. Product perishability. 53 . Low level of differentiation. Industry stagnancy. Piracy and counterfeits. Jockeying for position – Fragmented market. High exit barriers. Threat of Substitutes – Improvement in price -performance trade-off. Buyer’s propensity to substitute. Low relative importance of the segment. Produced by industries earning high profits. Scope for forward integration. Unorganised sector. Intermittent overcapacity. High customer switching costs. Diversity of players.PORTERS FIVE FORCES ANALYSIS Threat of Suppliers – Supplier monopoly.
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. 54 . dominant or related diversified or unrelated diversified businesses (Infosys. Reliance). Tata). Inertia – Excessive commitment to past strategies prevents firms from tapping emerging opportunities.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.
experience teaches better and more effective way of doing things. 55 . it can price its products more competitively. However. Matured firms will always be positioned advantageously on the ECurve than new entrants. an E-Curve can prove to be futile during discontinuity. and with lower prices it can increase its sales volume. leverage it as a competitive advantage. With lower costs. The E-Curve thus enables organisations to build entry barriers. which further reduces costs. Experience curve has strong linkages with performance.EXPERIENCE CURVE The cost of performing an activity declines on per-unit basis as a firm becomes more efficient.
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 .
STRATEGIC VIEW Inertia = Limited Growth Experience = Inertia 2 3 1 Limited Growth = Diversification Strategic Failure = Poor Performance 6 5 4 Diversification = New Experience New Experience ≠ Old Experience 58 .EXPERIENCE CURVE .
It is one of the earliest models in environmental scanning. Websites. Press Clippings & Interviews. Observation. Business Intelligence – Bankers. Customers. Competitors. Suppliers. 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.SWOT The framework was originally conceptualized by Kenneth Andrews in 1970. Interviews.VULNERABILITY ANALYSIS . A SWOT audit involves – Company Records – Annual Reports. . Case Studies – Structured Questionnaires. 59 Analysts.
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 .
ITC. Aditya Birla. Strong after sales & service network – Eg. Sony. SBI. High quality products – Eg. Volkswagen. Economies of scale – Eg. HUL. Good credit rating – Eg. Biocon. Honda. Reliance. Motivated employees & cordial industrial relations – Eg. Reliance. Infosys. Excellent penetration – Eg. 61 . Infosys. Siemens. Caterpillar. Engineering Skills – Eg. Dr. Strong R&D base – Eg. Toyota. Large resource pool – Eg.SOURCES OF STRENGTH Strong brand identity – Eg. Tata. Reddy’s. Ranbaxy. Tata Steel.
B.SOURCES OF WEAKNESSES Outdated technology – Eg. CESC. Excess manpower – Eg. Modi Group. Tatas. Lacking experimentation culture – Eg. Group . Ballarpur Inds. Excessive diversification – Eg. Narrow business scope – Eg. Single product syndrome – Eg. Nirma. Inertia – Eg. CMC (Tata Group) 62 . SAIL.Raymond. Lack of product / brand clout – Eg. Inefficient top management – Eg. Organizational Politics – Eg. Procter & Gamble. K. K. Bijoligrill. Strategic myopia – Eg. Hindustan Motors. J.
Banking. Sugar. Abolishing CCI. Middle-class buying power. Abolishing MRTP – Eg. Sugar. Retailing. Exit Policy – Eg.Tata Motors. GDR’s.SOURCES OF OPPORTUNITIES Delicensing of Industries – Eg. Fertilizer. Globalization – Eg. Market driven Pricing – Eg. ECB’s. Life style changes – Eg. Maruti. Telecom. 63 . Collaborations & Joint Ventures – Bharti & WalMart. VRS. Market driven Interest rates – Eg. Growing population – Eg. Insurance. Fertilizers. Free pricing – Eg. Capital market reforms – Eg.
Bajoria – Bombay Dyeing. Lack of Corporate Governance – Eg. 64 . Reliance. Economic recession – Eg. Tsunami. Nationalisation – Eg. Dumping from China. Tata Steel. Foreign Direct Investment (FDI) – Eg. Earth Quake. Land acquisition . Singur SEZ. Group disintegration – Eg.SOURCES OF THREATS Political instability – Eg.Social activism – Eg. (1985–1990). Import relaxation – Eg. Hostile take-over – Eg. Onida. Natural disaster – Eg. Satyam. 11/9. Terrorist attacks – Eg. 26/11. (2008).
Strategic responses (including adaptation) to opportunities and threats is critical for survival and success. Assess the extent of impact of the factors. Forecasting – Predict the future (i. Holistic view – Prepare a complete overall picture. 65 . Delphi's technique. scenario analysis).ETOP Acronym for Environment – Threat – Opportunity – Profile. time series. Stages in ETOP analysis – List the aspects of the environment that has a bearing on the organization. It represents a summary picture of the external environmental factors and their likely impact on the organization.e.
It is also a form of assessing vulnerability through longitudinal analysis. Relative attractiveness of the market. 66 Vertical integration is a powerful strategy. An organization can draw upon the experience of its peers in similar situations. Some key findings on major performance drivers that explains 75% deviations in performance – Product quality and relative market share. selectively. High investment intensity acts as a drag. .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.
Authenticity of data is of prime importance – Contexts drawn across one organization may not be applicable to another. . – Contexts may vary across countries. when radical changes in the economy takes place. 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. As every organization is unique in its own way.LIMITATIONS The analysis is based on historical data and it does not take care of future challenges. – Contexts may vary over time.PIMS .
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. It indicates the quality of growth an organization is looking for. dominant. national. It determines the locus a firm encounters with internal and external environment. A corporate strategy identifies and fixes the strategic gap it proposes to fill. global) of a firm and deals with choices of allocating resources across them. unrelated) and geographical scope (local. 70 .CORPORATE . related.GRAND STRATEGY It is concerned with the overall business scope (single. It reflects the customer needs it intends to satisfy.
CORPORATE STRATEGY MATRIX Corporate Strategy Stability Stability Growth Growth Combination Diversification Divestment Intensification Market Penetration Related Vertical Market Development Product Development Unrelated Horizontal 71 .
72 . Even during adverse times firms need to adopt a strategy to sustain current performance levels. Stability however. The scale and scope of present operations remains almost intact. erosion of capabilities. Citibank). The reasons for stability strategy – – Lack of attractive opportunities. Hindustan Motors). (Eg. does not relate to do-nothing (Eg. – Why disturb the existing equilibrium set up? – Limited resource position.STABILITY It involves maintaining status-quo or growing in a slow and selective manner. – To stop for a while and assess past records. – The firm may not be willing to take additional risk associated with new projects.
73 .GROWTH .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.
convert competitors customers. direct non-users to users. Britannia). – Elongated product life-cycle. Market penetration can be achieved by – increasing sales to current customers. Nirma. within a well defined market segment. – The company carries a risk of product obsolescence. – Suitable for industries where scope for technological breakthrough is limited.MARKET PENETRATION It is a strategy where a firm directs its entire resources to the growth of a single product or a closely knit product set. Ujjala. 74 . – Helps firms which are not comfortable with unfamiliar terrain. (Eg.
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. – Stretches product life cycles. – Moves across geographical boundaries. – Unconventional and flexible distribution channels. socks & stockings. upholstery.…… or Teflon: aircraft technologies to cutlery to paints or Raytheon Corp – Microwaves: radars to kitchen appliances). carpets. (Eg. – Immense customer reach & flexible advertising. fabrics. – Creativity and innovation – thinking out of the box. Du Pont – Nylon: parachutes. tyres. 75 .
Microsoft: DOS to Windows) or a substantial improved version (incremental) of an existing product to repeatedly enter the same market (Eg. features. – Leveraging through – innovation. – Leverage on customer and brand loyalty.PRODUCT DEVELOPMENT It is a strategy where a firm tries to achieve growth through a radical new product (Eg. durability. Close Up: Fluoride – Gel toothpaste or VIP . perception. aesthetics. – Substitutes that serve the same needs (Eg. Refills) 76 .Strolleys). – Deliverable through – redesigning or reengineering. conformance. serviceability. reliability. – Areas of product improvement – performance.
the new business is distinct from the existing business in terms of – inputs – technologies – markets. From the traditional point of view. licenses (i. From the modern point of view they are strategically dissimilar.DIVERSIFICATION It marks the entry of a firm into newer markets with new products. – Internal capital market. thereby creating a new business. industrial embassies). Why do firms diversify in the Indian context? – Shift the growth trajectory or opportunistic.e. – Conglomerate or market power (i. – Permits: quotas.e. – Risk reduction. 77 . dominance). – High transaction costs and institutional gaps.
while the coffee business would register a return of 10%. If on the other hand. If the hot wave dominates the planet. either of which is equally likely to prevail. in which a given year is either under hot or cold wave. ice-cream business would register a return of 10%.HOW DIVERSIFICATION REDUCES RISK? Consider a hypothetical planet. What would be your ideal diversification strategy through optimization? 78 . the ice-cream business would register a return of 30%. Let us assume that there are two businesses constituting the entire market – coffee and icecream. while the coffee business would register a return of 30%. cold wave dominates the planet.
If we diversified in either of the two businesses, our expected return will be 20%, with a possible risk of 10%. If, we split our investment between the two businesses in equal proportion, half of our investment will earn a return of 30%, while the other half would earn 10%, so our expected return would still be 20%. But in the second instance there is no possibility of deviation of returns (i.e. risk). Diversification results in 20% expected return with zero risk, whereas investing in individual businesses was yielding an expected return of 20% with a risk factor of 10%. The pivotal point is that the two businesses are negatively correlated. 79
It takes place when a company increases the breadth of a firms business or geographical scope by getting into product – market segments which compliments its existing businesses (Eg. Reliance). Alternatively, existing business may recreate new businesses, which are distinct, but supplements its existing business (Eg. Bajaj – scooters to motorcycles, Dove – soaps to shampoo). – It results in increased market power. – Leveraging existing capabilities. – Resources can be shared for mutual benefit. – Reduces economic risk (i.e. business cycles). – Enables brand or product line extension.
It increases the depth of its business scope either in a backward business process or in a forward one. Backward integration occurs when the company starts manufacturing its inputs or catalysts. In forward integration a firm moves into marketing of its products and services. Advantages of backward integration – – Cost competitiveness – entry barrier. – Better operational control – timely supplies, quality control, coordination – JIT, savings in indirect taxes. Disadvantages of backward integration – – It may spark of a chain reaction - contagion effect. – Long gestation & break even - investment in CAPEX.
Oil & Gas exploration Naptha-cracking Acetic Acid Paraxylene (PX)
Purified tetra-pthalic acid
Polyester Filament Polyester Staple Fibre (PSF) Yarn (PFY) Textiles 83
DIVERSIFICATION SUCCESS ?
While diversifying into new businesses, the scope of relatedness or unrelatedness should not be judged from the traditional static view, but from the modern dynamic view which incorporates strategic factors like capabilities and dominant logic. Countermanding reasons – Potential to reap economies of scope across SBU’s that can share the same strategic asset. Potential to use an existing capability to help improve the quality of a strategic asset in another business. Potential to use an existing capability to create a new strategic asset in another business. Potential to expand the existing pool of capabilities. Dominant logic ensures timely & appropriate response.
Where one firm has full ownership and control over all the stages of a value-chain in the manufacturing of a product (Eg.QUASI & TAPERED INTEGRATION Full Integration . Usually the firm concentrates on its core activities. Ranbaxy. Quasi-integration . Reliance).A firm gets most of its requirements from one or more outside suppliers that is under its partial control through value chain partnerships (Eg. and out-sources the noncore activities (Eg. Tapered integration . Maruti – Sona Steering). 85 . Dr.A firm produces part of its own requirements and buys the rest from outside suppliers with a variable degree of ownership and control. Reddy’s).
A CASE OF TAPERED INTEGRATION Partial Ownershi p Transmission Engine Design Electricals Steering 86 Seats & Carpets Windscreen Ordinary Components Zero Ownership Very Critical Component s Full Ownership Critical Component s .
e. – Cost of dysynergy (i. – Cost of neglect (i.e. Firms usually engage in conglomerate diversification when emerging opportunities are very attractive and offers potential growth opportunities. myopia). lack of strategic intent.e.e. core business).CONGLOMERATE DIVERSIFICATION It relates to entry of firms into businesses which are distinct in terms of – inputs – technologies – markets. 87 . synergies pulling in opposite directions). and are also strategically dissimilar. lack of knowledge of competitive forces). – Cost of ignorance (i. Drawbacks of unrelated diversification – – Cost of failure (i.
CONGLOMERATE DIVERSIFICATION Paper & Packaging Edible Oils Tobacco Hotels Food & Confectionary 88 .
It taken into account when performance is disappointing (i. Tata Press). It may also involve a SBU (Eg. (Eg. L&TCement Division to Aditya Birla Group) technically known as divestiture or a product (Eg. where a company simply exits because the business no longer contribute to or fit its dominant logic. 89 .DIVESTMENT Divestment is a defensive strategy involving the sale of entire stake (Eg. ACC) in full to an independent entity. It is may also be a pro-active strategy. Tatas sale of Goodlass Nerolac. Glaxo’s “Glucon-D” to Heinz). In strategy there is no scope for sentimentality with divestment. Tata Pharma. reactive) and survival is at stake and the firm does not have resources to fend off competitive forces.e.
where 100% of the assets (including intangibles) are valued and paid for. 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).ROUTES Outright Sale – Popularly known as the asset route. However. (Eg.3 billion. Sale of Diamond Beverages to Coca-Cola for US $ 40 million). the Companies Act. 90 .DIVESTMENT . (Eg. 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. where the equity is allotted amongst the existing shareholders on a pro-rata basis.
A combination strategy can be implemented through green-field projects (i. developing facilities right from the scratch) or through brown-field projects (i. It is usually pursued by a business group with diverse interests across multiple industries. 91 . There can be no ideal strategy for every business. mergers and acquisition. growth.COMBINATION STRATEGY It is a mixture of stability.e.e. because every business has its own unique external and internal environment. joint ventures). and divestment strategies applied simultaneously or sequentially for a portfolio of businesses.
STRATEGY CHOICE & PORTFOLIO ANALYSIS 92 .
Dominant logic enables top managers to selectively scan the environment and make trade-offs.STRATEGIC CHOICE A strategic choice seeks to determine the alternative courses of action available before top managers to achieve its strategic intent. In most cases the trade-off is between resources and opportunities. It attempts to answer the following questions – How effective has the existing strategy been? How effective will that strategy be in the future? What will be the effectiveness of alternative strategies? It is impossible for a manager to assess all the alternatives. What then is the magical number? 93 .
The key task before a top manager is to identify the right problems.SELECTIVITY IS THE KEY The role of a top manager is not to solve a problem. nor is to a define a problem for others to solve. will help the firm achieve its intent. managers need to ask the right questions. They must choose problems which will lead to the right kind of opportunities. 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 . if addressed. To identify the right problems.
Licenses & Quotas. embassies). formal and informal ties. . chaebols in Korea. Managing Agency).DEFINITION A business group is known by various names in various countries – guanxique in China. keiretsus in Japan. business houses in India. Resource sharing. Proximity to the corridors of power (i. Their origins can be traced back to market imperfections existing in an economy (MRTP Laws.e. Their roots can be traced to a single family or clan and share broad similarities. 95 Succession planning is critical to continuity. High degree of centralized control (GEO.BUSINESS GROUP . BRC).
RESOURCE SHARING ACROSS FIRMS Parent Company Firm 1 Firm 5 Firm 3 Firm 2 Firm 4 96 .
STRATEGIC CHOICE – MACRO TIMING Recession (Stability) Prosperity (Diversificatio n) Depression (Divestmen t) Recovery (Intensification ) 97 .
Divestment Duration (Yrs) Inception Intensification 98 .STRATEGIC CHOICE – MICRO TIMING ReEngineering Growth (%) Maturity Stability Growth Diversification Decline .
Relatedness across resources are difficult to realize. there are high costs associated with entry and exit. Investing in emerging businesses may not actually be so simple as it appears to be. next only to choice of business. Why? Businesses are not about liquid assets. Rules of the game are different.PORTFOLIO ANALYSIS Resource allocation across a portfolio of businesses is an important strategic choice. 99 . Power and resources often goes hand in hand. Redeployment of resources upsets the established power bases of a group. therefore. sometimes impossible.
BCG GROWTH MODEL Relative Market Share (%) Industry Growth (%) Low High High Low Stars Question Mark ? Cash Cow Dogs 100 .
These businesses are also net users of resources (Eg. diversification). Trent. Stars – They achievers in the near term.e. but to larger extent than a question mark.e. 101 . provided the company is able to build up on its market-share (i.BUSINESS ANALYSIS – TATA GROUP Question Marks – They have potentials in the long term. Tata-AIG). product development). provided the industry growth rate continues and the company is able to maintain its growth (i. Tata Steel). TCS. market development. which remains a big? These businesses are net users of resources. Tata Telecom. market penetration. and their risk profile is high (Eg.
stability). Tata Motors. divest) as achieving a dominant position in these businesses is a difficult task. Groups prefer to dispose off such businesses (i. Tata Pharma.e. Given that the growth potential in the business is low. they are generators of resources. harvest. and the company dominates the industry ahead of competition (i. Indian Hotels. Tata Tea. 102 . cash cows may also need to invest provided the industry takes an upswing (Eg.e.BUSINESS ANALYSIS – TATA GROUP Cash Cow – These are matured businesses. Nelco. and they lack on competencies to take on competition and are basically cash traps (Eg. Tata Chemicals). Tata Press). However. Dogs – They are a drag on the group.
factors are limited. Mercedes Benz. niche – Rolex.e. Data may be prohibitive. HUL). Armani).BCG . Cash cows may actually need substantial investments to retain their market position (Eg.LIMITATIONS It does not address the concerns of a business which is in the average category (usually the majority). neither in high or low. The model does not provide specific solutions within a particular category. The terminologies used are somewhat prohibitive. Cartier. 103 . Certain businesses in the low market share category may be the result of a conscious strategy (i.
MATRIX Distinctive Capabilities Strong High Medium Weak Stability Industry Attractiveness Diversify (++) Intensify (+) Med Intensify(+) Stability Harvest (-) Low Stability Harvest (-) Divest (.GE .-) 104 .
LITTLE Inception Dominant Strong Favourable Tenable Weak Growth Maturity Decline Improve Selective Niche Abandon Industry Life-Cycle Divest Harvest 105 Competitive Position Invest Consolidate Hold .ARTHUR’ D.
SHELL – DIRECTIONAL POLICY MATRIX Business Sector Prospects Attractive Average Unattractive Generate Cash Phased Withdrawal Distinctive Capabilities Strong Market Leadership Try Harder Double Or Quit Growth Average Custodial Weak Phased Expand Withdrawal Divest 106 .
107 . Disinvestment involves selling in phases. BCG – Boston Consulting Group. Portfolio – An organization is perceived as a portfolio of businesses. SBU – A business unit which is strategically different from another and also shares a different SIC code. Gap Analysis – It emphasizes what a firm wants to achieve.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.
BUSINESS STRATEGY & COMPETITION 108 .
Competitive advantage is the back-bone of strategy. and earning super-normal profits (i. The principal focus is on meeting competition.COMPETITIVE STRATEGY A competitive strategy deals with how a firm competes in a particular business or product-market segment. 109 . Competitive advantage refers to a firms resources or activities in which it is way ahead of competition. building market-share. rent).e. Such resources or activities should be distinctive and sustainable over time. The strength of a firm in a particular business usually stems from its competitive advantage.
BUSINESS STRATEGY FRAMEWORKS How to be distinctive and yet sustainable – Differentiation – Understanding of the dynamics of competition. involving harmonizing and integrating multiple streams of technologies. Blue Ocean – Consciously moving away from overcrowded industries to uncharted territories and making competition irrelevant (Kim & Mauborgne). 110 . developing competitive advantage (Porter). Delta Lock In – Two dominant players co-opt to selfreinforce and create or escalate an entry barrier. Resource Based View – Obsession with competence building. preventing new entry and/or competition (Hax & Wilde). identifying critical success factors. leveraging (Prahalad).
PORTERS – COST LEADERSHIP Cost Leadership – It is a strategy that focuses on making a firm more competitive by producing its products more cheaply than its competitors. 111 . Steep experience curve effects. The firm may retain the benefits of cost advantage by enjoying higher margins (Eg. proprietary technology. T-Series). Compress project duration through crashing. backward integration. Sources of cost advantage are varied and depends on the structure of the industry – Economies of size. Ayur. Nirma. Reliance) or may pass it to customers to increase market-share (Eg. preferential access to raw materials. Locational or early entry advantage.
Focus on brand loyalty. Creativity. (Eg. Means of product differentiation are peculiar to each industry. Feeling the pulse of the customer. It selects one or more attributes that buyers perceive as important. avoiding brand dilution.PORTERS – PRODUCT DIFFERENTIATION Product Differentiation – It is a strategy that attempts to provide products or services that are differentiated from competitive products in terms of its value proposition and uniqueness. and sufficient slack. innovation and out of the box thinking. Intel. Successful product differentiation is often followed by premium pricing. undeterred attention to quality. 112 . Rayban). Sony. Culture of experimentation.
They are poorly served by mainstream players. coupled with fear of structural erosion. A focuser seeks to achieve a competitive advantage in its target segment. Rolex. Maybach. Sub optimization alone may not be a source of superior performance.PORTERS NICHE OR FOCUS Focus / Niche – It is a variant strategy of cost leadership or product differentiation targeting a specific market or buyer sub-segment with the exclusion of others (Eg. Armani). 113 . The target segment must have unusual needs or the delivery system catering to this segment must be unique. though it may not possess an overall competitive advantage. Mont-Blanc. Cartier.
COMPETITIVE POSITIONS Competitive Advantage Cost Differentiation Product Differentiation Competitive Scope Broad Cost Leadership (Toyota) Product Differentiation (General Motors) Narrow Cost Focus (Hyundai) Differentiation Focus (Mercedes) 114 .
jugaad or frugal engineering). Reducing cost does not always involve a sacrifice in differentiation. in a hyper competitive context the two strategies need not be mutually exclusive.e.HYBRID STRATEGY A hybrid strategy is the simultaneous pursuit of cost leadership and differentiation. 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. Though cost leadership and differentiation are inconsistent. 115 . similarly differentiation may not always lead to rising costs (i. Tata Nano).
stuck in the middle. 116 . It tries to compete through every means. The positioning therefore gets – blurred.STUCK IN THE MIDDLE A firm that engages in a hybrid strategy and fails to achieve a competitive advantage because it was ill conceived will be . It will have a competitive disadvantage vis-à-vis a clearly positioned generic player. but achieves none. Industry maturity will usually widen the gap. It is usually the result of a firm not willing to make trade offs. leading to what is called – straddling. unless such a player is capable of discovering a profitable segment.
changing customer needs. Speech recognition software's.radical environmental changes. There is a lot of scope to define the rules of competition. Artificial intelligence). leading to a blurred productivity frontier and steep learning curve. Consumer behaviour pattern unstable and evolving. 117 . Market segmentation not well defined. ending in a differential cost economics. It is characterized by – High level of technological uncertainty.) Excessive turbulence in the dynamics of the environment. 3D imaging. (Eg. First-time buyers. Nano technology. technological innovations. coupled with low penetration levels. Eg.EMERGING INDUSTRY Emerging Industry – An evolving industry characterized by .
MRTP may also cause fragmentation. IT. Diverse customer needs. Eg. Eg. Paints. Government regulations in the form Eg. 118 .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). Retail and telecom. Consumer durables. because of lack of economies of size and scale. Scope for players to change the rules of the game. leading to clear fragmentation. It is characterized by – Low entry barriers. Air Conditioning. Eg. High exit barriers because of huge investment in CAPEX.
technological maturity. Limited scope for innovation . because of economies of size and learning curve effects. distribution networks. well defined consumer behavioral patterns and imperfect competition leading to near monopoly. Strong entry barriers. Firms are rule takers in the segment as productivity frontier is well defined. Cartel among existing players through collusion. collaboration and co-option. early entry and location advantages. 119 .MATURED INDUSTRY Matured Industry – An industry characterized by saturation in growth rates.technological maturity. established industry dynamics.
Firms facing a declining phase are characterized by inertia and slow to react to environmental changes. backed by corporate espionage. Exit barriers are extremely high because of limited prospective buyers. Nature of competition extremely high. dot-matrix printers). and costly price wars.DECLINING INDUSTRY Declining Industry – An industry which has outlived its utility due to the entry of close substitutes and or radical product innovations which results in a shift of the productivity frontier. 120 . with little or no signs of recovery. Typewriters. scooters. Learning abilities have been stunted and firms adverse to investment in R&D and make fresh investments. (Eg.
121 . strictly product differentiation and not standardization. focus more on product differentiation or even a hybrid one. process innovation. Fragmented Industry – Identify. or else exit the segment. branding and promotion. Declining Industry – Redesign. recreate new markets. strike alliances.COMPETITIVE STRATEGIES Emerging Industry – Set benchmarks. regenerate. increasing scope. reengineer. strictly cost differentiation. mergers and acquisition. aggressive building of distribution networks. Matured Industry – Sophisticated cost analysis. premium pricing. move beyond boundaries. assess and overcome fragmentation. Locate a defendable position.
hence very rarely confer competitive advantage as can be easily acquired or replicated. 122 . patents. brands. positions based on resources which are unique and inimitable are far more sustainable even in the long term. They are a standard in nature. A firms resources can be classified into – Tangible – These refer to real assets. Intangible – These refer to goodwill. and complex learning experiences in integrating and harmonizing technologies (distinctive capabilities) that play an important role in delivering competitive advantage through “causal ambiguity”.RESOURCE BASED VIEW Differentiation based on cost or products saturates and ceases to exist beyond the medium term. However.
They play a very critical role in shaping competitive advantage.e. but not necessarily. Hence. Capabilities can be generic (i.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. There is a high degree of internal and external causal ambiguity involved in it. they are woven around technologies. Typically. Therefore firms should concentrate on developing complex resources that forms the very basis of differentiation. can be leveraged across businesses) or specific to a particular business. 123 .
COMPETITIVE ADVANTAGE 124 .
Strategy drives competitive advantage.COMPETITIVE ADVANTAGE A competitive advantage is a position of superiority relative (i. Success of a strategy critically depends on SAP. competitive advantage subsequently becomes the back bone for a competitive strategy. It results in a distinct differentiation advantage or a cost advantage or hybrid as well.e. not absolute) to competition. It enlarges the scope of an organization. 125 . A portfolio of competitive advantage comprises strategic advantage profile (SAP). and results in well springs of new business development.
STRATEGIC ADVANTAGE PROFILE (SAP) Organizations have to systematically and continuously conduct exercises to identify its SAP. Identification of SAP is critical for and stretching and leveraging of resources. Internal strategic fit between its strategy and dominant logics is essential for the top management to stretch and leverage SAP. In today's world of discontinuity. In most cases SAP is hidden and dormant. 126 . SAP changes from time to time. Most successful organizations around the world have a well balanced SAP.
Inventory Mgt to Logistics Mgt to Supply Chain Mgt (SCM). A VC is often compared with a relay team.e. Competitive advantage arises not from an individual activity but a stream of inter-related activities. faster product launches.VALUE CHAIN ANALYSIS A value-chain segregates a firm into strategically relevant activities to understand its composite behaviour. 127 . Today SCM is integrated with greening the environment as CSR practices. Substantial cost reductions also follow. and enhanced customer tracking – higher market share. kaizen or internal customer). each of the players need to be efficient backed by sufficient coordination at the contact points (i. VC pay-offs: better product availability.
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 .
– Second order fit occurs when activities are reinforcing amongst them. – Third order fit refers to optimization of effort. A high fit involving a complex chain of activities drives both competitive advantage and its sustainability. Operational effectiveness is not strategy.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. 129 . – First order fit refers to simple consistency between each activity and the overall strategy. Fit is important because discrete activities result in negative synergy and can also be easily copied by competitors.
– Can be leveraged across businesses. Core competence has a high degree of external and 130 internal causal ambiguity embedded in it. . – Cannot be easily imitated or substituted. – Can be sustained even in the long run. It should satisfy the following conditions – Contributes significantly to customer benefits. It forms the very basis of competitive advantage. but not necessarily. A core competence usually has its roots in technology.CORE COMPETENCE A core competence represents the collective learning's of an organization around diverse streams of technologies. These skills results in distinctive activities and processes.
CORE COMPETENCE A competitive advantage does not necessarily imply a core competence. a core competence always implies a competitive advantage. 131 . a core competence is sustainable even in the long-term. A competitive advantage is sustainable in the shortmedium term. A competitive advantage manifests from a function. a core competence usually does. a core competence has its roots in a set of skills. A competitive advantage may or may not lead to superior performance. only global leaders possess a core competence. Majority of the firms have competitive advantage.
A game is a contest involving two or more players. This is known as a zero-sum game. each of whom wants to win. Subsequent work on game theory by John Nash led him to win the Nobel prize in 1994.GAME THEORY The game theory was developed in 1944 by Oscar Morgenstern. the stringent assumptions of game theory and difficulty in ascertaining of pay-offs makes game theory application difficult in business. illustrations depicting a win-win situation. 132 . Here the magnitude of gain offsets the magnitude of loss equally. In a game (similar to a business) one players win is always another's loss. In fact there are no. However.
Firm Y’s Strategy Use Radio Use Radio +2 +6 Use Newspaper +7 -4 133 Firm X’s Strategy Use Newspaper Firm X’s Pay-Off Matrix .BIASED AND UNBIASED GAME A game is said to be biased when one of the players have a disproportionate chance of winning. An unbiased game is one where both the players have equal chances of winning.
PURE STRATEGY GAME The strategy each player follows will always be the same regardless of the other players strategy. A saddle point is a situation where both the players are facing pure strategies. Firm Y’s Strategy Use Radio +3 +1 Use Newspaper +7 -2 134 Firm X’s Strategy Saddle Point Use Radio Use Newspaper Firm X’s Pay-Off Matrix .
135 .g. there is likely to be temptation by any of the players to try to steal the advantage over the other by breaking the rules of the game (Eg. Yahoo Vs Microsoft). collaboration or cooption. Coke Vs Pepsi). Repeated Games – In this situation the players interact repeatedly with each other sub-optimizing the outcome possibilities. It represents the classical “prisoner’s dilemma”. However. iteration) rather than through collusion (E.TYPES OF GAMES Simultaneous Games – This is a situation where the players have an option to choose to cooperate or not through collusion. This is usually through learning by “experience or observation” (i.e.
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. . Game theory relies on the principle of rationality. It results in a shift in the productivity frontier. In a market dominated by price-based differentiation one may attempt to change the rules of the game by/when – – Bases of differentiation dependent on clear identification of what customer wants or value. – Building incentives for customer loyalty. – Making pricing more transparent. but 136 players do not always behave rationally.
DELTA MODEL & LOCK-IN
Its a systematic approach where-in two or more industry majors, who by default has achieved a proprietary position (Microsoft – Software / IBM – Computers) which are not necessarily best-products in the industry, co-opt to create a lock-in. A lock-in implies that other players has to conform or relate to that standard in order to prosper. Becoming the industry standard requires – strong brand, causal ambiguity, and close relationship with other companies offering complimentary services. Lock-in is self reinforcing and escalating (i.e. accelerating effect).
THE THREE STRATEGIC POSITIONS
System Economics Market Dominance Complementary Share
Enabled through effective use of technology
Total Customer Solutions
Customer Economics Cooperation Customer Share
Product Economics Rivalry Product Share 138
Bill Gates is the richest man in the world not necessarily because he has developed the world’s best software's or excels at customer satisfaction; but he has got an army of people working for him who are not on his payroll – all the application software providers who are writing programs based on “Windows” compatible operating platform. Once you create the lock-in it is sustainable because of the “network effects”; which creates the proverbial “virtuous cycle” – customers want to buy the computer with largest set of applications and software developers want to write programs for the computers with the largest installed base.
The proponents (Hax & Wilde) believe that every organization has the ability to create and sustain a “lock-in” positioning (though in varying degree). This “system lock-in” is referred to as “delta” – delta being the Greek letter that stands for transformation and change amongst the players. The lock-in once created becomes very difficult for a firm to penetrate, and becomes a distinct entry barrier. The model is based on the belief that it compliments Porter’s differentiation model and RBV framework instead of contradicting them. In a lock-in strategy the performance outcomes are dependent on the success of another.
It relates to translating strategy formulations into practice. Performance realization of a strategy depends on the implementation effort. Successful implementation also depends on the appropriateness of the strategy. Since strategy implementation is a time bound process, alignment (i.e. strategic fit) is a key variable during times of radical change. Some of the other levers of successful strategy implementation are – Transformational leadership and motivating power. Resource allocation; its stretching and leveraging. Compatible organization structure & control systems. Inertia & resistance to change.
– Development of capabilities & competencies. – Changing the rules of the game. – Resource commitment from top management. While external strategic fit (strategy – environment) is relevant for strategy formulation.IMPORTANCE OF STRATEGIC FIT Strategic fit has a central role to play in strategic management. internal strategic fit (strategy – dominant logic) is critical to strategy implementation. – Better strategic and operational control. – Unlearning & learning of new skill sets. A high strategic fit (co alignment) is useful because it enables – – Appropriate and timely response. 143 .
Some of the key strategic learning's exists at the contact point between the organization and its customer.FORMULATION Vs IMPLEMENTATION Traditionally. According to Mintzberg. at the cost of sacrificing a lesser degree of control.e. 144 . In such a situation. In such a situation. learning levels are very low. while control is very effective. learning levels are very high. formulation & implementation can occur simultaneously. effective strategies are better crafted when there is a subtle overlapping between the two (i. In fact. strategy formulation and implementation has been perceived to be distinct & independent. emergent strategy vis-à-vis intended & realized).
Pragmatism is the ability to make things happen. He should be an agent of change. bring about transparency. transformational leaders go one step beyond – Design a well crafted and designed strategic intent of the organization. 145 . companies depend more on transformational leaders than transactional leaders. shift from compliance to commitment. A transactional leader is usually confined to allocating tasks & responsibilities and extracting performance.ROLE OF TOP MANAGEMENT To bring about change and to implement strategies successfully. Install a system of shared beliefs and values. In contrast.
Intangible resources (Eg.e. Performance Budget – SBU managers need to justify the distinctive resources in terms of the opportunity it is pursuing yields the highest possible pay-offs. machines) referred to as threshold resources (i. minimum requirement).RESOURCE ALLOCATION Resources allocation includes tangible resources (Eg. 146 . brands. patents. 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. land. labour. The various methods of resource allocation includes Historical Budget – The budgets framed by HQ for a particular SBU keeping in mind past trends.
Mobiles). Due to causal ambiguity (complexity). Distinctive capabilities are complex set of skills woven around technologies.CAPABILITIES & COMPETENCIES Technology and business are slowly becoming in – separable. Distinctive capabilities helps in stretching and leveraging resources thereby overcoming two major constraints involved in strategy implementation – times & costs. Flat Screen Displays. though not necessarily in the case of emerging markets. 147 . convergence of multiple streams of technologies at the product – market level is becoming increasingly evident (Eg. these capabilities are sustainable even in the medium to long term. Moreover.
An appropriate organization structure & adequate control systems are essential to implement strategies and achieve stated goals. A firm in several unrelated businesses usually employs a SBU structure. The level of centralization and decentralization is decisive. A single product or a dominant business firm usually employs a functional structure. processes become people independent.STRATEGY & STRUCTURE It is a framework within which individual efforts are coordinated to bring synergy. Once the structure is in place. A firm in several related businesses usually employs a divisional structure. 148 .
disbanded subsequently. or geographical locations.Technology. Divisional Structure – Units grouped together in terms of products. based on skills and competencies. SBU Structure – Businesses segregated in terms of strategic dissimilarities (Eg. processes. 149 . Marketing. Project / Matrix Structure – A formal but temporary framework initiated for the completion of a particular project/crisis.TYPES OF STRUCTURES Functional Structure – Activities grouped together by a common function (Eg. with team members having dual line of control. Team Structure – An informal group formed for a crisis. Virtual Structure – A boundary less or hollow organization. Finance). Inputs . Output).
structures are becoming flatter and more simpler. assuming responsibility. facing challenges & crises. Technology – With more and more convergence of technologies in business. leading to a tall structure. It includes the desire for independence.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. 150 . Environment & People – Economic and political conditions have a major bearing on structure coupled with the attitude and aspirations of the people in the organization.
there is a tendency to continue along the same lines. Common sources of 151 inertia – complacency with past successes. Inertia acts as an impediment in strategy implementation. irrespective whether it is from worse to good or good to worse.e. Top managers resist change.INERTIA When a firm has been operating in a certain fashion for a long time. co0ntinuity). Most firms undergo periods of strategic continuity rather than strategic discontinuity. Inertia is a characteristic of a firm that endures status quo (i. Changes in top management and unlearning helps overcome inertia. .
firms should move beyond financial performance to strategic performance as organization systems are becoming complex. Since the internal and external environment is in a state of continuous flux.STRATEGY EVALUATION Strategy evaluation centers around assessment of strategic fit. strategies need to be evaluated on an ongoing basis to prevent deviations of fit. Deviation of fit is detrimental to performance and may lead to strategic failure. certain authors propose misfit as a source of superior 152 performance. However. To prevent deviation of fit. .
competitive advantages becoming disadvantages? Has the company acquired any new competency? Has the company been able to overcome the 153 environmental threats. .STRATEGY CONTROL It is concerned with trafficking a strategy as it is being implemented. It attempts to answer the following questions – Is the strategic intent appropriate to the changing context? Are the organizations capabilities still holding good. detecting changes in the external and internal environment and taking corrective action wherever necessary.
STRATEGY CONTROL IMPLEMENTATION It involves steering the company towards its original growth trajectory & stated goals. checking every premise is costly as well as difficult. It involves assessing – strategic thrusts and milestones. Premise Control – Checking the validity of the assumptions on which a strategy was based. Special Alert Control – It intends to uncover unanticipated information having critical impact 154 on strategies. However. Implementation Control – It aims at assessing whether key activities are proceeding as per schedule. It is open-ended as well as .
Strategy not linked to resource allocation & capabilities – Lacking commitment of top management. difficult to translate into practice. low strategic fit due to consultants intervention. “If you cannot .BARRIERS TO STRATEGY EXECUTION Vision and strategy not actionable – Utopian ideas. Strategy intent not linked with goals and objectives – Lack of coordination at lower levels leading to negative synergy. Performance measures are defective – What to evaluate against? How to measure the 155 construct? As a saying goes.
to be sure of successful implementation of a strategy. important or not they're all interdependent. 156 . this may effect all others as well. so if one fails to pay proper attention to one of them. Large or small.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. Managers should take into account all seven of these factors. On top of that. Together these factors determine the way in which a corporation operates. Today it is considered one of the most powerful tools for strategy implementation determining success or failure. the relative importance of each factor may vary over time and context.
They had been investigating how Japanese industry had been so successful. 157 . and was taken up as a basic tool by the global management consultancy company McKinsey. At around the same time in the US Tom Peters and Robert Waterman were exploring what made a company excellent. It appeared also in "In Search of Excellence" by Peters and Waterman. Since then it is known as their 7-S model and is extensively used by corporations worldwide to implement their strategies.BACKGROUND & ORIGIN The 7-S Framework was first mentioned in "The Art Of Japanese Management" by Richard Pascale and Anthony Athos in 1981. The 7-S model was born at a meeting of these four authors in 1982.
processes and routines that characterize how work should be done. Structure – The way in which the organization's units relate to each other in terms of their commonalities. 158 . Systems – The procedures. Staff – Human inter-relationships. Style – The way in which the top management influences the functioning of an organization. Strategy – Trade-offs for the allocation of a firms scarce resources. to reach identified & stated goals. over time.THE 7’S Shared Values – It represents what the organization stands for and what the top management believes in. formal & informal . Skills – An organizations capabilities and competencies.
STRATEGIC FIT Strategy Structure Shared Values Systems Skills Staff Style 1st Order Fit 2nd Order Fit 3rd Order Fit 159 .
style. 160 . A choice of an alphabet often limits the scope and skews the interpretation of a model. the soft S’s (skill. their Japanese counterparts focus more on the soft S’s for their early success and sustainability. because most often they are culturally embedded and often neglected. shared values) are very malleable and comparatively more difficult to identify & influence. systems) are comparatively easy to identify and influence. Consider the 4P’s of marketing or 3R’s of SCM. While the American co’s focuses on the hard S’s. In contrast. Ineffective in case of a virtual company. staff. structure.A CRITIC OF THE 7S MODEL While the hard S’s (strategy.
STRATEGY IMPLEMENTATION ROUTES Strategic Fit .High Organic Growth Strategic Alliance Joint Venture Mergers & Acquisition Strategic Fit .Low Take Overs 161 .
e. It has complete control over inputs.ORGANIC GROWTH Here a firm builds up its facilities right from the scratch and continues to do so without any external participation. . i. and markets. concessions are available for green-field projects. tax holidays. subsidized power). SEZ’s.e. Long gestation leads to delayed market entry. the entire value chain. soft loans. (Eg. i. green-field projects. Reliance Industries). Govt. 162 Risk of cost and time overruns. The entire infra-structural facilities are set up afresh having its own gestation and break-even. (Eg. technologies.
It has limited intervention power and usually lacks holistic commitment from the alliance partner. 163 It is a form of competitive collaboration.STRATEGIC ALLIANCE It involves a pro-active collaboration between two or more firms on a particular domain or function for mutual gain. There is no funding or equity participation from the alliance partner & both the firms continue to operate independently. Alliances are usually in the areas of technologies or markets (Eg. Tata Motors & Fiat). . Alliances are usually short-lived and disbanded once the purpose is achieved. It touches upon a limited aspects of a firms value chain.
. Hero . leaving minimum scope of overlapping. A comprehensive MOU is essential. (Eg.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. Degree and extent of management control must be clearly 164 laid down. Tata – AIG.Honda). Dominant logic of both the companies should be complimentary. It is a win-win situation for both the companies. Selecting the right partner is critical for success.
ITC Tribeni Tissues. Acquisition is an outright purchase of a firm assets by another independent entity (Eg. Integrated distribution channel leads to better market penetration and overall synergy.MERGERS & ACQUISITION It refers to the fusion of two or more firms into a single entity. Coca Cola – Thums Up). Integration of assets and other financial resources. Revival of a sick-unit through better management practices is a major motive behind an acquisition 165 strategy. . Brooke Bond & Lipton). with the individual firms ceasing to exist any more (Eg. Economies in scale leading to lowering of costs.
Instant access to capacities and markets. Most countries have stringent laws that prevents hostile take over. often the new firm is “left alone”. Integration of organization structure & cultures is difficult.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. Make a public offer of not less than . Larger geo-graphical diversity. Inform SEBI / Stock Exchange after 5% stake is 166 acquired. Tata Steel .Corus). Consolidation in a fragmented industry.
MANAGEMENT TOOLS IN STRATEGY 167 .
The past is ceasing to be an indication of the future. Companies therefore need to ensure competitive advantages doesn’t become competitive disadvantages.WHY MANAGEMENT TOOLS? Change is becoming pertinent in the business environment. Some tools to ensure that – Benchmarking – Adopt certain best practices. TQM – Doing the right thing the first time. every time. or better still create next practices Reengineering – Redesigning work processes right from the scratch. Radical change is superseding incremental change. it is also a source of potential threat. Change provides enormous opportunities. 168 . Balanced Scorecard – Tracking strategy 3600.
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
BENCHMARKING .e. Benchmarking is useful for bringing about operational efficiency. Benchmarking merely reorients profits in the hands of few to profits in the hands in the hands of many (i. While strategy is all about differentiation and not looking alike. .LIMITATIONS More and more companies benchmark. It can at best complement it. clustering). the more similar they end up looking. It does not shifts the growth 175 trajectory of the industry as a whole. but it cannot be used as a strategic decision making tool. Strategy is more of creating best practices rather than copying them.
DOS to Windows).e.g. Re-engineering involves complete reconstruction and overhauling of job descriptions from the scratch (i. Re-engineering attempts to radically change an organizational products or process by challenging the basic assumptions surrounding it.e. The task demands a total change in organisational 176 culture and mindset. for achieving performance improvement (E. Windows 95 to 97).g. . process mapping) and eliminating or improving them (E. clean sheet).RE-ENGINEERING Redesigning leads to identification of superfluous activities or product features (i.
than people driven Innovative Vs Traditional Customer centric Vs Organisational centric 177 .REENGINEERING – KEY TENETS Ambition Focus Attitude Enabler Performance Large scale improvement by questioning basic assumptions about how work is done Micro Vs Macro Business Processes Vs Organisational Processes Starting right from the scratch Not historical More IT driven.
e.LEVELS Reengineering can be successfully leveraged at all levels of an organization with varying degree of results. BPR). products. 178 .e. Business – It looks into markets. . etc) and supports the organization for the present.REENGINEERING . Strategic – It looks into the process of strategic planning. processes. resource allocation and prepares the organization for the future through a reorientation of the entire strategic architecture. It can be of the following types – Functional – It looks into the flow of operations (i. structures. customers and suppliers and protects the organization from the future (i.
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. reverse engineering is a top-bottom approach. with an intention to copy it (Eg. 179 . However. – High cost and time acts as a deterrent. learning curve advantage. protection can be had in the following ways – – Patenting. – Causal Ambiguity. While traditional manufacturing is a bottom-up approach. It generally acts as a threat to innovation. Indonesia). Cheaper versions of Intel chips and mother-boards manufactured in Taiwan. – Early entry advantages.
machine tools to convert ideas into a marketable product (i.e. designing facilities. Usually in such cases segmentation and pricing is different from the original innovator. nano-technology). Inaccurate assessment at this stage may lead to a failure of the entire project.STAGES IN REVERSE ENGINEERING Awareness – Recognizing whether the product is found to be worth the time. Introduction – Launching the product in the market. cost and effort necessary for the purpose of reverse engineering. Implementation – Developing of a prototype. Actualization – Obtaining and dismantling of the product to assess how it functions. 180 .
Car) – – Performance – Mileage of 14 kms to a litre of fuel.WHAT IS QUALITY? It involves the totality of a product or service in meeting certain stated or implied needs. of service stations. – Aesthetics – Appeal in design.Euro IV. Air bags. – Durability – 1980 manufactured cars still on road. – Reliability – Consistency in mileage. – Conformance – Emission standards . It has eight dimensions (Eg. – Serviceability – Large no. – Features – Anti-lock braking systems. More and more companies are moving towards meeting implied rather than stated needs. – Perception – Customer notions. 181 .
It is deeply embedded as an aspect of 182 organisational life & culture.TOTAL QUALITY MANAGEMENT Objective – Management of quality ensures conformance to certain pre-set standards. Management of quality was traditionally inspect it .fix it in nature. which ensures good market standing. touching upon a limited aspect of a value chain. TQM is a way of creating an organization culture committed to the continuous improvement of work processes – Deming. zero defects. . It had little impact on improving overall productivity.
not a final destination.TQM – KEY TENETS Do it right. 183 . Be customer centric – Generate the concept of internal customer (Ishikawa). Looking at quality as an endless journey. Empowerment – It takes place when employees are properly trained. the first time – From reactively fixing error in products to proactively preventing errors from occurring at the first place (Juran). provided with all relevant information and best possible tools. fully involved in decision-making and fairly rewarded for results. Kaizen – Make continuous improvement a way of life.
saving precious top management time. equal participation). 6-Sigma). It is based on the principles of MBO (i.STRATEGIES Outsourcing – It is the process of self-contracting services and operations which are routine and mundane. enabling the firm to concentrate on core activities essential to customer satisfaction.TQM . Quality Circles – It a small group of shop-floor employees who meet periodically to take decisions regarding operational problems and crises. 184 . of units meet preset standards (Eg.e. 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.
BALANCED SCORE CARD Some interesting comments . Source: Fortune Magazine Why CEO’s fail? 185 ... – Efficiency and effectiveness is passé... – Less than 10% of strategies effectively formulated are effectively executed.. strategy implementation has never been more important... it’s bad execution..... – In the majority of failures – we estimate 70% – the real problem isn’t (bad strategy) ..
rather than effects.CONCEPTUALISATION A company’s performance depends on how it measures performance.BSC . 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. 186 . Organizations need to move from financial to strategic performance. Focus more on causes. These measures worked well when organizational systems were simple and unidirectional and more importantly the environment was static. Most managers tend to rely on traditional measures of performance having its origin in finance as they are well tried and tested.
because they have too many. and distinguish strategic problems from operational ones. 187 . It has four dimensions – – How do customers see us? – What must we excel at? – Can we continue to improve and create value? – How do we look to shareholders? Firms more often have problems. The most critical element of a BSC is to measure these four dimensions.BSC – KAPLAN & NORTON (1992) A BSC helps a manager to track and communicate the different elements of company’s strategy.
of visits or calls made % of NPA’s 188 . ageing schedule) % of key customer transactions Ranking of key customer accounts No.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.
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 times covered in media 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.
FINANCIAL PERSPECTIVE GOALS Survival Success Prosper Divestment MEASURES Cash flows Growth in Sales and Profits EPS. Return on Investment Market Capitalization / PE ratio 191 .
STRATEGY MAPPING 192 .
BSC .IMPLEMENTATION 2 Translate strategy into operational terms 1 Mobilize change through effective leadership 5 STRATEGY Make strategy a continual process 3 Align the organization to the strategy 4 Make strategy everyone’s job 193 .
194 performance will automatically follow.ADVANTAGES Most often top managers face information overload. Shift from control to strategy (i.BSC . . they don’t know . It helps translating strategy into practice (i.e. doing right things instead of doing things right). Focus on cause not effects. sharing of vision). Seek excellence. Modern managers should be poised to ask the right questions.e. As a result. The BSC brings together the different elements of a company’s strategy at a glance.what they don’t know.
EFFICIENCY Vs EFFECTIVENESS Ineffective Effective Inefficient Goes out of Business quickly Survives Efficient Dies Slowly Thrives 195 .
EFFECTIVENESS + STRATEGY A company which is effective as well as strategic. but also sustains it.Michael E. Porter 196 . . not only thrives.
CORPORATE RESTRUCTURING 197 .
.CORPORATE RESTRUCTURING The only thing constant in today's business environment is change. “every organization must be prepared to abandon everything it does.. firms use restructuring strategies. to survival of the most adaptable. Restructuring involves consciously driving significant changes in the way an organizations thinks and looks (Eg. Tata Group). As Peter Drucker pointed out. from survival of the fittest . Strategic variety may be caused by changes in the as external well as internal environment. Radical change brings about strategic variety..” 198 ... To adapt to the changing environment. Strategic variety brings paradigm shift..
they should strive to provide unimaginable value ahead of its time (Eg. etc).e. downscoping). and dividing the core businesses into SBU’s (i. Structural Changes – Conventional hierarchical structures should be disbanded in favour of more 199 flexible ones (i. Core Business – Company’s should introspect – What business are we in? Business evolved out of opportunism or myopia should be divested. Instead. . Internal customers should also not be neglected. Company’s should go beyond just asking what he expects.RESTRUCTURING – BASIC TENETS Customer Focus – Restructuring ideally begins and ends with the customer. ATM.e. Fax. downsizing or rightsizing). Walkman.
200 .. Restructuring also requires cultural reorientation..) The Aditya Birla group typically relied on the “marwari” community for key management positions . the Tatas were considered a benevolent and charitable organization. Ratan Tata now drives the point the group means business. started focusing on their capabilities.) Reliance dismantled their industrial embassies ... It is created and institutionalized by the top management..... Kumar Birla today is more dependent on professionals.... During the times of JRD.. .RESTRUCTURING – BASIC TENETS Cultural Changes – A culture represents the values and beliefs of the people about the organization.
Carry out PR campaigns. Publicizing welfare projects to demonstrate CSR.” 201 . “ … one reason our customers are satisfied is that we aren’t.MOVING CLOSER TO THE CUSTOMER As companies evolve. Communicating to the media about organization efforts to deliver quality products. Getting feedback & addressing customer complaints. Restructuring provides a platform to close this gap. Use the reach of networking technologies. Organizing customer and supplier meets. Honda’s ad says. they tend to move away from the customer.
Hive Off – It involves siphoning of assets under control. Glaxo – Heinz). Mittal – Arcelor) and can take various forms. It can have two forms. 202 . including its intangibles – Mergers – It may be vertical. Tata – Corus) or hostile (Eg. or conglo-merate. it may be smooth (Eg. Further. Asset Swaps – It entails divesting and acquisition simultaneously by two companies. where the difference in valuation is settled off through cash or equity (Eg. horizontal. spin-off and equity carve. Further spin-off can be classified as split-off and split-up.ASSET RESTRUCTURING Asset Restructuring – The asset composition of a firm undergoes a major change. It may include brands as well.
– Split-Up – In a split-up. 203 . Most of these practices are not in consonance with Indian laws.HIVE OFF Spin-Off – A spin off is the creation of a new entity. the entire parent company loses its identity after being split into a number of subsidiaries. in which the equity is allotted amongst the existing shareholders on a pro-rata basis (Eg. Reliance Ent). the existing shareholders receive equity in the subsidiary in exchange for the stocks of the parent company. Equity Carve – It involves selling a minority stake to a third party while retaining control (Eg. Tata Industries selling 20% stake to Jardine Matheson). – Split-Off – In a split-off.
but retained its engineering division. Parle sold its Thums Up brand to Coke for $40 million apprehending fierce competition. repay long-term debts. Generic motives include – – Raise working capital. – Poor performance. In 1995. strategic misfit. for a specified market or in general with full management control. A complete sell-out is known as divestment (TOMCO).DIVESTITURE It involves the sale of a brand or a division of a company to a third party. L&T sold its cements division to Aditya Birla group. In 2005. Selling out in phases is called disinvestment (IPCL). 204 .
Share Buyback – It is a process of cancellation of shares out of free reserves to the extent of 25% of paid-up capital (Eg. Wipro). 205 . Tatas take-over of Corus for US $11. It provides greater leverage as well as management control.3 billion. Conversion – Replacing debt with equity or vice-versa or costlier with cheaper debt or cross currency debt.The internal & external liability composition undergoes a major change – LBO – Acquiring control over a substantially larger company through borrowed funds (Eg.CAPITAL RESTRUCTURING Capital Restructuring . involving 608 pence per share).
Rs. 99 cr Tata Power – Rs. 250 cr Tata Tetley – Rs. 1700 cr Trent – Rs. 1890 cr CMC – Rs. 1170 cr Goodlass Nerolac – Rs. 230 cr Diversifications Tata Motors – Rs. 1439 cr 206 Tata Timken – Rs 120 cr Tata Telecom – Rs. 150 cr VSNL – Rs.BUSINESS RESTRUCTURING – TATAS Divestments Lakme – Rs. 950 cr Merind .Rs. 120 cr Tata AIG – Rs. 1860 cr . 256 cr ACC – Rs. 42 cr Voltas .
207 . Survival is the primary motive. keeping the composition of business intact (Jet Airways). Turnaround is the primary motive. It can be carried out in the following ways – Downsizing – It is a systematic one-time reduction in the no. Downscoping – It involves reducing the business and/or geographical scope of a firm (Aditya Birla group). usually as a result external turbulence. of a firm’s employees and sometimes in the no. Rightsizing – It is phasing of excess and redundant employees resulted out of faulty internal planning (SAIL). of operating units.ORGANIZATIONAL RESTRUCTURING Organizational structure and systems calls for a change when strategic variety is apparent.
Dominant logic becomes deep-rooted in organizational contexts depending on the period it is in place (tenure of the CEO). Strategy change is unviable without a preceding change in its dominant logics. inertia).e. the more difficult it becomes to uproot the paradigm (i.e. The dominant logic represents the perceptions and biases (i. thumb rules) of the top management. The longer the period. 208 . as strategies are based on such beliefs and biases.STRATEGIC CHANGE One of the most difficult components of organization restructuring is the mindset of the top management represented through its dominant logic and its shared values reflected in cultural orientation.
the factor that stifled change & performance was – culture. In most organizations. 20% of the people carry out 80% of the changes).FORCES AGAINST STRATEGIC CHANGE The problem with strategic change is that the whole burden typically rests on few people (i. Companies achieve real agility only when people at every level rise above the ordinary to face the challenges – revitalization or transformation.e. 209 . 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.
it is not about winning but about learning. Understand and deliver the quid pro quo. process ownership. Manage from the future. The best way is to alter the institutional point of view. Questioning every basic action of the organization. Create relentless discomfort with the status quo. Encourage uncompromising straight talk.SUCCESSFUL TRANSFORMATION Build an intricate understanding of the business model at all levels of the organization. Harness setbacks. Promote inventive accountability. never take no for an answer. 210 .
Culture and style of management are two main impediments in force-field analysis. that can be both enablers and blockages to change and restructuring. also known as cultural-web. Aspects of current culture which needs to be overcome. 211 . by identifying forces for and against change. It involves diagnosing a change situation – systems & structures. Identify and implement facilitators of cultural change. It involves identifying – Aspects of current culture which needs to be reinforced.FORCE-FIELD ANALYSIS A force-field analysis provides an initial overview of change problems that needs to tackled.
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 .
In order to put back the company on the right track they are resort to – Denominator – It assumes that turnover cannot be increased. focuses on reengineering. the second one is a more viable strategy and sustainable option in the long run. While the first strategy produces results instantaneously. Numerator – It assumes that turnover is not a barrier or constraint. 213 . reverse engineering and regenerating. down-scoping or asset stripping. hence go in for downsizing.NUMERATOR & DENOMINATOR MGT Most firms across emerging markets undergo strategic discontinuity and as a result are forced to restructure their businesses.
TURNAROUND MANAGEMENT 214 .
. ..WHY TURN AROUND MANAGEMENT? Some interesting insights . – Only seven of the first fifty Indian business groups in 1947 were even in business by the turn of this century. and that the thirty-two of the country’s largest business groups in 1969 are no longer among the top fifty today.. Source: Why do firms atrophy? (Business Today.... still exist as on 2005. 215 (Govindarajan and Trimble. January 1997). – Less than 10% of the Fortune 500 companies as first published in 1955.
skills. A category of underlying principles and concepts. and capabilities. systems.TURN AROUND MANAGEMENT A turnaround is said to occur when a firm perseveres through an existence threatening performance decline. ends the threat with a combination of strategies. and achieves sustainable performance recovery. 216 .e. As a sequence of events describing how things change and why they change (i. process focuses on – A logic to explain a causal relationship between intervening variables. While content focuses on endogenous and exogenous variables. Both content (what) and process (how) are equally important for a successful turnaround. Stage Theory).
Rising input costs. Low stakeholder confidence. 217 . Some indicators Continuous cash flow crises as a result of dwindling market-share and profits. Substantial shifts in consumer preferences. unavailability or radical lowering of substitute costs or technological obsolescence. Low employee morale leading to high employee attrition at all levels. especially in key positions. suppliers and bankers. leading to lack of acceptability from distributors and customers. Uncompetitive products or services.TURNAROUND INDICATORS Most firms atrophy simply because they fail to diagnose the indicators that acts as threat to organizational existence.
Revamp product portfolio. focus on power brands. 218 . “all is not well”. Recalibrate prices. based on elasticity. prune work-force. which most top managers fail to appreciate. be more customer centric. consider extension.TURNAROUND ILLUSION The first step to a successful turnaround is the basic acceptance of the fact that ….. Emphasis on advertising and market penetration. they adopt surface level measures (disprin popping) which most often fail. Hence. Common approaches adopted Change in key positions. Extending work hours. liquidating dead assets. Product redesigning or reengineering.
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 involves the identification of the theoretical perspectives that explains performance decline – K-Extinction – It suggests that macro economic and industry wide factors are responsible for decline. It has its origin in “environment led fit” that subscribes to the view that a firm has little control over external factors. primarily dwindling resources and capabilities are responsible for decline. It has its origin in “resource led stretch” and subscribes to the view that a firm has substantial power to override the context. Identification of the stimulus leads to the arrest of the downfall.DECLINE Decline is the first stage in the turnaround process. 220 . R-Extinction – It suggests that organization factors.
diversification. asset reduction. The response must match the cause of the decline. the response should be operational.RESPONSE INITIATION Turnaround responses are typically categorized as operating or strategic. Strategic responses focus on changing or adjusting the business the firm is engaged in through long term moves such as – integration. new market initiatives. Operating responses typically focuses on the way the firm conducts business and involves tactics geared towards – cost cutting and process redesigning (BPR). 221 . the response should be strategic. If the underlying cause is internal efficiency. If the decline stems from structural shifts.
RESPONSE DICHOTOMY The response initiation is somewhat dichotomous and cannot be universally applicable. 222 . Similarly new market initiatives is feasible only for multi-product firms. Untangling this question brings into focus three events – Domain – Many of the strategic cures have limited applicability for an affiliated firm. Scope – A diversified conglomerate may acquire a distressed business to turn it around and gain valuable synergies. which may be unavailable to a focused firm. Contour – It is easier to reverse decline in the earlier stages through operational measures. when decline deepens shifts in strategic position becomes essential.
223 . The top management has a key role to play through empowerment. Effective levers of transition. confidence building measures. However. lead – lag). transparency. Empirical studies show that average time is 7. Sustenance is the key factor in this stage.e.TRANSITION Transition usually reflects the first signs of recovery. many a times early signs of recovery fades out. role model.e. However. substantial amount of time usually passes before results begin to show (i.7 years with a range of (4-16) years. participative management (i. consensus). Support from all the stake holders through resource commitment.
Failure is an indication that initial momentum was not sustainable characterized by irreversibility. Share price indications and media coverage. 224 . Commanding a premium in the market. Regaining lost market share and distributor confidence. Supplier and banker confidence. it should adopt a holistic approach. Revival of key customers and new product launches. Cut off points must be unequivocal.OUTCOME Outcome is said to be successful when a firm breaches the equilibrium performance level. Instead of focusing on financial parameters alone.
COOPERATIVE STRATEGIES & ALLIANCES 225 .
Any cooperative strategy maybe between firms within the same country or cross border as well. supply-chain partnership. or joint venture. and globalization . consortia. In the cooperative strategy continuum as firms move up the value order. the commitment and the involvement between the firms increases manifold. technology. licensing. More and more companies worldwide are moving away from competition to co-option to leverage their resources and enhance bargaining power.COOPERATIVE STRATEGIES Cooperative strategies are a logical and timely response to changes in business dynamics. It can assume any of the following forms – franchising. 226 . strategic alliance.
227 . Titan Inds. Switz Foods. Branding is critical to franchising. owners of the brand Monginis allows its franchisees to sell its confectionary products. owners of the brand Tanishq allows its franchisees to sell its jewellery products. It is an effective strategy to penetrate markets in a shortest possible time at a minimum cost.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.
refine processes and adopt necessary technologies (SKD). Become a systems integrator (CKD). HM manufacturing GM range of cars in India with a buy-back arrangement is a perfect example of CBU. 228 .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. as in Tata Indica. Develop a product through its crude stage. Different levels of licensing Manufacturing without embracing any technology (CBU).
Airbus – Boeing).CONSORTIA Consortia – They are defined as large inter-locking relationships & cross holdings between businesses in a similar industry. leverage upon size to preempt competition by escalating entry barriers (Eg. It can be of the following types – Multipartner – Intends to share an underlying technology or asset. Collusion – Few firms in a matured industry collude to reduce industry output below the equilibrium level. enabling them to increase prices (Eg. 229 . Cross Holdings – A maze of equity holdings through centralised control to ensure earnings stability & threshold resources for critical mass (Eg. Coke – Pepsi). Hyundai). Tata.
Tata Motors – IDEA). otherwise it 230 becomes routine outsourcing. It usually provides a platform to sort out differences between conceptualization and implementation to suit local market needs. link their capabilities to create value for end users.SUPPLY CHAIN PARTNERSHIP It is a pro-active & collaborative arrangement between supplier and customer aimed at achieving better control over the value chain (Eg. Companies in different industries with different but complimentary skills. Continuous sharing of knowledge is critical to the success of a supply chain partnership. .
STRATEGIC ALLIANCE It is an short to medium term understanding between two or more firms to share knowledge and risk. 231 . Tata Motors – Fiat. Firm’s should undertake a long courtship with potential partners. design next generation products. instead of hurrying into a relationship. Partner selection is one of the critical success factors. Despite their popularity (50-60)% of the alliances fail to accomplish their stated objectives. Generic motives involved are . Reliance – Du Pont). to gain knowledge and to obtain access to new markets (Eg. enhance credibility. enter newer markets.learning organization. preempt competition. effective R&D management.
Maruti). Bajaj – Castrol). Bootstrap – An alliance between a weak and a strong company with an intention to acquire it. 232 .STRATEGIC ALLIANCE . Complementary Equals – Two firms mutually promoting each others complimentary products (Eg. Airbus – Boeing). Backward – An alliance (quasi or tapered) with a supplier of critical components seeking commitment (Eg. Alliances of the Weak – An alliance is entered into to preempt competition (Eg.TYPES Collusion – Tacit top management understanding to neutralize price wars (Eg. Coke – Pepsi). Whirlpool – Tide.
Differences in level of economic development can produce differences in alliances motives.PARTNER SELECTION CRITERIA It is likely that partners will not have complete consent on alliance objectives because the institutional context in which the alliance embedded varies from country to country. – Japan Vs US). Firms from developed markets seek access to markets and firms from emerging markets seeking access to technology. Cultural orientation has been found to have a profound effect on top management’s strategic orientation (Eg. 233 . Too much stress on financials & structure be avoided.
Unique Resources – Abilities or skills which cannot be easily duplicated. including ability to provide quality products and services. Intangible Assets – Move beyond the financials of the firm. 234 .PARTNER CHARACTERISTICS Complimentarity of Capabilities – The degree to which partners resources can be used in conjunction. Willingness to share knowledge and skills. Experience related to previous alliances. Partner’s ability to acquire fresh skills. Managerial capabilities. Dominant Logic’s – Similarity in beliefs & biases.
Setting up the housekeeping. instead of focusing controlling the relationship. vows to include commitment to expand the relationship. operational & cultural integration. differences not anticipated earlier. partners should nurture it. Selection & Courtship – It involves self analyzing. Getting Engaged – It should incorporate a specific joint activity. incorporating clear signs of continuing independence for all partners. Learning to collaborate – strategic.MANAGING ALLIANCES Alliances are more than just a deal. Changing within. 235 . degree of compatibility. the value chain. understanding the chemistry.
whilst the partners continue to operate independently. It aims at creating new value (i. a joint venture is a selection among modes by which two or more firms can transact. There are substantial linkages in the value-chain. It lasts till the vision is reached. separation is very 236 bitter.e. .JOINT VENTURE A joint venture is a long term association between two equal partners to create an independent firm (SPV) by complementing their resources and capabilities to explore newer businesses or markets for achieving a shared vision.e. Conceptually. synergy) rather than mere exchange (i. combining parts).
JOINT VENTURE – GENERIC MOTIVES Transaction Cost – The situational characteristics best suited for a JV are high performance uncertainty. Strategic Behaviour – Firms may override transaction costs. The market fails as sellers are unwilling to reveal their technology and buyers are unwilling to purchase in the absence of inspection. 237 . It may also be linked to deterring entry or eroding competitors position. Organizational Learning – It is a means through which a firm learns or seeks to retain their capabilities. in addition to a high degree of asset specificity. though more profitable alternative to other choices.
Endorsement from government authorities. Yamaha – Escorts. Learning new technologies. Maruti – Suzuki. – Eg. Define future industry standards. Daimler – Chrysler (Premium Cars) 238 . Eli Lily – Ranbaxy. – Eg. – Eg. Renault – Nissan (Minivans – Cars).OTHER MOTIVES Entry into newer markets. Essar – Hutch (Vodafone). – Eg. Sharing of resources. – Eg. – Eg. TVS – Suzuki (4-Stroke Engines) Fill gaps in existing product lines.
– Godrej – Procter & Gamble. technology) drain. Tata – Aditya Birla in Idea Cellular 239 . – Eg. Century . Risk of over dependence. – Maruti – Suzuki.Enka.e. LML – Piaggio Differences in size and resource base.RISKS INVOLVED Incompatibility – Differences in cultural background. Risk of brain (i. Modi – Telstra What after exit (parenting disadvantage)? – Eg. – Eg. PAL – Fiat If the cost of continuing exceeds the exit costs? – Eg.
Inertia – Differences in age and evolution patterns. 240 . Flexibility – Sufficient space to breathe and adjust. Agreement – Clarity on operational control.PRE-REQUISITES FOR SUCCESS Commitment – Mutual trust. time sharing. Objectives – Shared vision. Incompatibility – Performance expectations. Culture – Reconcile gaps. Equality – Lack of dominance. Costs – Other modes of transaction becomes cheaper. Focus – Avoid strategic myopia. Partner – Avoid duplication of skills and capabilities. respect.
MERGERS & ACQUISITION 241 .
2002). 242 . The larger objective is to leverage on size. however. 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. HLL – Tomco). An acquisition is said be smooth if it is with the consent of the management (Eg. An acquisition is the purchase of a firm by a firm (of larger size. SEBI Takeover Code. Most countries have stringent laws that prevents hostile takeovers (Eg.MERGERS & ACQUISITION A merger is a mutually beneficial consent between two or more firms (usually of similar size) to form a newly evolved entity by absolving their individual entities to preempt competition (Eg. Brooke Bond – Lipton). Ranbaxy . Mittal Arcelor).
Acquirer – Someone (individual or firm) who picks up an atleast 5% stake without mandatory disclosure having an intention to wrest management control (i. Control – A special resolution of 75% of the share 243 holders approving the change of guard.SEBI TAKEOVER CODE.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. creeping acquisition). . 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. Preferential – A preferential allottee ending up acquiring 5% stake also comes under its purview.
credentials or track record is at stake.e. Grasim – L&T Cement. the SEBI can intervene and block share transfers if: the acquirer has ulterior motives (i. and/or does not enjoy the confidence of the different stake holders. 2002 Pricing – Acquirers will have to offer minority shareholders (at least 20%) the past 26 weeks or past 2 weeks average price. Disclosure – All acquirers have to inform the respective stock exchanges where it is listed and SEBI upon acquiring the basic limit and upon every incremental limit thereon. whichever is higher as an exit route (Eg. 244 . asset stripping).SEBI TAKEOVER CODE. SEBI – In case of a hostile take over. Gujarat Ambuja – ACC).
Conglomerate – It involves integration of two distinctly unrelated businesses.Kelvinator). ITC). 245 . Horizontal – It involves integration of two highly related businesses (Eg. Vertical – It involves complimentarily (partially related) in terms of supply of inputs or marketing activities (Eg. usually opportunistic (Eg. Godrej. Electrolux . The type of merger is depends on the degree of relatedness (strategic) between the two businesses.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. Reliance).
Acquiring assets or capabilities (Eg. Global image (Eg. Asset Stripping – Shaw Wallace). Overcoming entry barriers (Eg. Reduced gestation (i. Economies of size. Access to newer segments (Eg. scale and scope. 246 . ICICI –ITC Classic).MOTIVES Increased market / conglomerate power. Tax benefits (Eg. Tata Steel – Corus).MERGERS & ACQUISITION . quick access). Reduction in risk. Mittal – Arcelor). Ranbaxy – Crosslands). Coinsurance effect – Higher debt raising capability. Avoiding risk of new product development.e. Ulterior motives – (Eg. ITC Bhadrachalam).
Top management overtly focused on due diligence exercise and negotiations. Merging of organisational structures. Inability to achieve synergy. Overvaluation is often as a result of an ego drive and substantially affects future returns. When Tata Steel started negotiations with Corus. neglecting core business. Managing size. 247 . Tata – Corus). their initial offer was around 420 pence/share. while the ultimate acquisition was made at 607 pence/share).MERGERS & ACQUISITIONS PITFALLS Cultural differences (Eg. Overvaluation of buying firms (Eg. Managing over-diversification.
Brooke Bond – Lipton). vertical to save transactions costs. 248 . Maturity – A larger firm acquires a smaller firm with an objective to achieve economies of scale and experience curve effects (Eg. Growth – This stage may witness parallel merger of two firms of similar size.MERGER TYPE & PLC Introduction – A larger firm may acquire a newly formed entity with an objective to preempt new competition or acquire its license (Eg. Tata Steel – Corus). Kingfisher – Air Deccan). Decline – Horizontal mergers are undertaken to ensure survival. with an objective to reinforce its growth trajectory or to take on the might of a comparatively larger player (Eg.
A concern of respect and trust for the business of the acquired company.FRAMEWORK Positive contribution to the acquired company.INTERNATIONAL M&A . Immediate attempts to super impose structure and culture may cause bottle necks. Blanket promotions across entities and confidence building exercises needs to be practiced. 249 . Strong differences may stifle plans and its execution. An acquisition just for the sake of it or reputation yields very little value in the long term. Left alone syndrome. A common shared vision. active top management intervention in phases.
They can carry the message to the various stake holders. It will enable focus on customers and key people. .BLUEPRINT Take the media into confidence. Integrating work processes. Shift attention from business portfolio to people and processes. Redefine responsibilities and authority. promptly. Decide on the new hierarchy. Decide upon management control systems.INTEGRATION . Determine business strategy. 250 Do not ignore the “people factor”.
e. Valuation decisions are arrived through a due diligence process when the prospective acquirer gets access to the books of accounts of acquiring company. – Market for corporate control.M&A . operational & financial). – Unstated reasons – Personal self interest and hubris. Financial motives – Undervaluation relative to true value. The process takes (6-12) months. 251 . While under valuation may be a significant opportunity.VALUATION The process of valuation is central to M&A. over valuation can become a curse. – Synergy – Potential value gain from combining operations (i.
– Vertical Synergy – Gains come from controlling the supplychain and savings in transaction costs. – Conglomerate Synergy – Gains come when one firm complements the resources or capabilities of another (Eg. Sources of operational synergy – Horizontal Synergy – Gains come from economies of scale which reduces costs. 252 . when the “fit” between the two entities is very poor.VALUING OPERATIONAL SYNERGY Synergy – It refers to the potential value gain where the whole is greater than the sum of the parts. Synergy can be negative as well. Innovative product – Good distribution network). or from increased market power which increases sales and margins.
Synergy comes from projects which would not have been undertaken if the two firms stayed apart (Eg. However. Tax Benefits – Tax benefits may accrue from tax entitlements and depreciation benefits unutilized by a loss making firm. but availed after being merged with a profitable firm (Eg. Hotmail).VALUING FINANCIAL SYNERGY Diversification – Reduce variability in earnings by diversifying into unrelated industries. and without paying take-over premiums. shareholders can accomplish the same at a much lesser cost. ITC – Bhadrachalam Paper). Cash Slack – It reduces asymmetry between cash starved firms with deserving projects and cash cows with no investment opportunities. 253 .
This will induce higher debt capacity. 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. higher leverage. the cash flow the merged firm will be less variable than the individual firms. hence better performance. – Coupon rates may also be negotiated at lower rates. It relates to the concept of diversification. as risky debt is spread across the new firm's operations. 254 . – Default risk comes down and credit rating improves.VALUING FINANCIAL SYNERGY Co-Insurance Effect – If the cash flows of the two firms are less than perfectly correlated.
– – Value of Control = Value of firm after restructuring Value of firm before restructuring. 255 . Assessment of perceived quality is critical. The value of wrestling control is inversely proportional to the perceived quality of that management.VALUING CORPORATE CONTROL Premium of M&A are often justified to control the management of the firm. While value of corporate control is negligible for firms that are operating close to their optimal value. since a restructuring can lead to significant increase in value. The value of control can be substantial for firms that are operating well below optimal value.
e. LBO facilitates a relatively smaller firm to bid for a comparatively larger firm in the bid for management control.LEVERAGE BUYOUT (LBO) The basic difference between a take-over and a LBO is the high inherent leverage (i. 256 . sometimes in combination with the assets of the acquiring company. Confidence of investment bankers and the international financial community is essential. The assets of the acquired company are used as collateral for the borrowed capital. debt component) at the time of buyout and rapid changes in capital structure over time. It is a very costly and risky proposition.
access to financial markets. – Separation of ownership from management. the advantages of going public includes . liquidity. on-going valuation. However. – 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. 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. – Increased information needs. 257 .
co-insurance effect). – It is a temporary phenomenon. – Cost of debt coming down (i. – Cash trapped company unable to utilize opportunities.e. – Debts repaid off from increased value after successful restructuring and wresting management control. – Managers cannot be trusted to invest free cash flows wisely.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). 258 . which disappears once assets are liquidated and significant portion of debt is paid off.
Lack of sufficient cash flows to repay costly debts resulting in a possible debt trap. 259 . As the firm liquidates / pledges assets and pays off debt. A LBO has to pass two tests to be viable – – Restructuring to pay-off increased debt. leverage is expected to decrease over time. Therefore. initial rise in leverage is anticipated.EFFECT OF HIGH LEVERAGE Increases the riskiness of dividend flows to shareholders by increasing the interest cost to debt holders. – Increase equity valuation. Any discounting has to reflect these changing cost of capital.
time-barred.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. – Prevents dilution of equity.e. – Tax shelter. 260 . or costly. – Automatic listing in major exchanges. – Facilitates better valuation and forthcoming offerings. which has discontinued its operations (i. Objectives – – Traditional route of filing prospectus and undergoing an IPO is costly. shell company) by a private company. small in size but having a promising business.
261 . – Takeover announcements reported 30% excess returns.EFFECT OF TAKE-OVER ANNOUNCEMENT The shareholders of target firms are the clear winners. – Merger announcements reported 20% excess returns. However. Initial anomaly in stock prices usually normalizes over a period of time (6-12) months. Most target firms are taken over within (6090) days. and 35% during bullish periods. During bearish periods excess returns were 19%. takeover failures have only initial negative effects on stock prices. Excess returns also vary across time periods.
– However. – However. 1988 . and Netter.EFFECT OF TAKE-OVER ANNOUNCEMENT The effect of take-over announcement on bidder firm’s stock prices are not clear cut. and Kim. 1983. as stock markets become more and more perfect such anomalies would reduce Source: Jensen and Ruback. Desai. in the event of take-over failure negative returns to the extent of 5% on bidder firm stock prices is reflected. Brickley. – Most studies reported insignificant excess returns around take-over offers or merger announcements. 1983. Bradley. over time. 262 Jarrel.
263 . 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.DEFENSIVE STRATEGIES Golden Parachute – An employment contract that compensates top managers for loss of jobs as a result of change in management control. Rights). so that nothing is left for the raider to strip off. Poison Put – Premature retirement of bonds at attractive rates to pour surplus cash and make target investment unattractive.
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. thus thwarting the raider company’s attention. Shapoorji Pallonji). East India Hotels – Reliance Industries – ITC). 264 . Gray Knight – The target company takes the help of friendly company to buy the shares of the raiding company. Green Mail – The targeted company buys large blocks from holders either through premium or through pressure tactics (Eg. But often the White Knight turns a betrayer himself (Eg.
COMPETING FOR THE FUTURE 265 .
Honda overpowering Volkswagen. were spending 99% of their precious time dealing with present. Hitachi overpowering Westinghouse. Honda overpowering GM. Most companies were too preoccupied with the present than the future? 99% of the companies overpowered. What went wrong???? What were they doing with the present? What were they pre-occupied with? 266 . Wal-Mart overpowering Sears. British Air overpowering Pan Am.GETTING OFF THE TREADMILL Canon overpowering Xerox. The reverse was true for the companies overpowering. Nokia overpowering Motorola. Compaq overpowering IBM.
declining margins. most often they ended up cutting corporate muscle as well and became anorexic. Not knowing when to stop. falling market share). downsizing). decluttering.THE PAST OF COMPETITION Beyond Restructuring – When a competitiveness become inescapable problem (stagnant growth. 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 . CEO’s brutally pick up the knife and ruthlessly carve away layers of corporate flab (delayering. Thus efficiency was grievously hurt.
However. top managers believed that quality will be a source of competitive advantage of the future.THE PRESENT OF COMPETITION Beyond Reengineering – Numerator based managers (innovation) at least offers some hope. A poll in circa 2000 revealed that 80% of the U.S. but forging ahead in competition. incrementalism or nominal innovation has almost reached a plateau. The future is not about catching up with competition. 268 . but not of the future. ensuring only survival of the present. On the contrary only 20% of Japanese managers believed that quality will be a source of competitive advantage of the future.
not the other way. Create a potential gap. faster. Transform the industry. It is based on deep insights into trends in technology. Creating the future requires industry foresight. better. Empower from bottom to top. It involves Dream about the company’s future. they are not enough to get a company to the future. don’t predict. reinvent its industry. demographics and lifestyles. as important as these may be. not just the organization. aspirations and resources. 269 . and regenerate its strategies (breaking its – managerial frames). Companies need to fundamentally reconcieve itself.THE FUTURE OF COMPETITION Regenerating – Leaner.
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 .
271 . Therefore. blue oceans). by converging technologies complex.ABOUT THE TRANSFORMATION The future does not belong to those who take the industry for granted. Successful companies have a complete grip over the industry. Change in at least one fundamental way the rules of engagement in an industry. Redraw the boundaries between industries. they do not need to restructure.e. hence do not fall sick in the first place. It drives a hunger and a passion to transform. It is about deliberately creating a strategic misfit. Create entirely new industries (i.
Transformational leaders merely lead the way. Most successful revolutions (Gandhi to Mandela) rose from the dispossessed. The middle management plays a strong moderating role. 272 . Such a process is called institutionalization (from people centric to organisational centric). the revolution must start at the bottom and spread in all directions of the organization.ABOUT THE EMPOWERMENT Bring about a revolution (a paradigm shift) in the organization. A revolution that is thrust upon from the top seldom sustains. More importantly.
What does it take to get to the future first? Understanding how competition for the future is different. Toshiba – LCD. Get to the future first. Apple – iphone). An ability to energize the company. Companies need to strategize (think ahead of times). 273 . South West Airlines – LCC. without taking undue risk.THE FUTURE OF STRATEGY A company must get to the future not only first but also for less. Apply the 40 – 30 – 20 principle. A process for finding and gaining insight into tomorrows opportunities (Eg. It requires a lot of common sense and a little bit of out of the box thinking.
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. As there is no one future. but hundreds.HOW DOES THE FUTURE LOOK LIKE? There is no rule which says that for every leader there will be a follower. greatness from mediocrity. the farther it will be away from competition. as on their aspirations. The farther one can see in this endless space. each point in space represents a unique business opportunity. 274 . What distinguishes a leader from a laggard. is the ability to imagine in a different way what the future could be.
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 .
Degree of Learning Unlearning Curve P2: Unlearning in previous period does not necessarily ensure learning in the current period. 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.
It represents the collective learning's of an organization centering around diverse streams of technologies. It is characterized by the following – Unique – It provides unimaginable customer value ahead of its times.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. Inimitable & Insubstitutable – A high degree causal ambiguity between these skills yield sustainable competitive advantage. 278 . Leverage – They are the gateways to future markets. It cannot be matched even by its closest competitors.
Honda – engines. Canon – imaging. Toyota – lean manufacturing. Intel – nano-electronics. 279 . Most companies around the world do not possess one. leaders have one. Wal-Mart – logistics. Core competencies are the roots of the organization. Although a core competence may lose value over time. Nike – designing. it is deeply embedded in the heart of the organization. A core competency cannot be outsourced. Toshiba – flat screen displays.MORE ABOUT CORE COMPETENCE Sony – miniaturization. Coca Cola – brand. it gets more refined and valuable through use. SKF – antifriction and precision. at the most three to four.
ROOTS OF COMPETITIVENESS End Products 1 2 3 4 5 6 7 8 9 10 Core Businesses Core Business 1 Core Business 2 Core Business 3 Core Business 4 Core Product 2 Core Products Core Competencies Core Product 1 Competence 1 Competence 2 Competence 3 Competence 4 280 .
RESOURCE STRETCH & LEVERAGE
Initial resource position is a very poor indicator of future performance. It leads to atrophy and stagnation. Successful companies consciously create a potential gap between aspirations and resources. Resource crunch is a common factor among firms that faces a wealthy rival, and outperforms them. Leveraging what a company already has, rather than allocating it is a more creative response to scarcity. – By concentrating existing resources. – By accumulating existing resources. – By complementing existing resources. – By conserving existing resources. – By recovering existing resources.
Concentrating – It involves effectively directing portfolio of resources on key strategic goals in which individual efforts converge over time. It is a balance between individual mediocrity and collective brilliance. It is achieved through – Converging – Redirecting multiple diverging (i.e. fragmented) short term goals into one long term goal. It is then resources can be stretched over time. Focusing – Making trade-offs and preventing dilution of resources at a particular point of time. Targeting – Focusing on the right innovations that are likely to have the biggest impact on customer value.
Accumulating – Using existing reservoir of resources to build new resources. Each and every individual is a rich & potential source of learning, discover better ways of doing things. It is achieved through Mining – Extracting learning experiences from existing body of each additional experience (i.e. success or failure). It is an attitude that can be acquired, but never learnt. It leads to a substantial jump in the experience curve. Borrowing – Utilizing resources outside the firm through licensing, alliances, joint ventures. A firms absorptive capacity is as important as its inventive capacity.
Complementing – Using resources of one type with another that aligns smoothly to create higher order value. In a way it produces an accelerating effect on each individual resource. It is achieved through – Blending – Interweaving discrete capabilities to create world class technologies (GM – Honda) through integration and imagination. Different functional skills can also be blended to create a world class end products (Yamaha – Keyboard). Balancing – An ability to exploit excellence in one area is never imperiled by mediocrity in another (GE acquiring the CT scanning rights from EMI because of its inadequate market reach).
Conserving – Sustaining competencies over time through frequent usage. Resources are never abandoned; they are always preserved for future use. Recycling – Increasing the velocity of use of a competencies over time. As a result core competencies can be leveraged across an array of products (Sony - Betamax). It includes brand extensions as well. Co-Opting – Enticing resources of potential competitors to exercise influence in an industry (Fujitsu – IBM). Shielding – It involves identifying competitors blind spots and then attacking without having the fear of retaliation.
Recovering - It is the process of reducing the elapsed time between investing in resources and the recovery of those resources in the form of revenues via the market. Speeding – Prior to the 1980’s Detroit’s majors took an average of 8 years to develop an entirely new model; the Japanese reduced it to less than 4.5 years, with major new variants in 2 years. This envisaged Japanese players in giving customers more opportunities to switch allegiance and loyalty (Toyota). Protecting – It uses competitors strength to one’s own advantage, by deflecting it, rather than absorbing it as practiced in Judo.
INTERNATIONAL BUSINESS ENVIRONMENT 287 .
and high transaction costs. Emerging markets are characterised by infrastructural bottlenecks. 288 .e. Chile) provide a different context (i. institutional gaps. Therefore focused strategies based on core competence may not be suitable for emerging markets (Khanna & Palepu. Diversified groups in operating in emerging markets therefore benefit from unrelated diversification. Korea. Therefore. high levels of market imperfection). 1997). China. strategies suited for the developed markets may not be appropriate for emerging markets.EMERGING MARKETS Emerging markets (India.
Entropy). subsequently negatively related across developed markets. Optimum level of diversification Performance Diversity is initially positively related with performance. Concentric. Experience Strategic Fit Diversity Palich. Size & Scale. Synergy. et al.PERFORMANCE (I) Diversity attempts to measure the degree and extent of diversification (Herfindahl. (2000) 289 .DIVERSITY .
brand building Risk diversification. conglomerate power Threshold level of diversification Performance Diversity (Khanna & Palepu. 2001) 290 . Huge initial investment.DIVERSITY .PERFORMANCE (II) Diversity is initially negatively related with performance. subsequently positively related across emerging markets.
INTERNATIONAL IDENTITY MNC’s consciously engage in FDI in different parts of the globe to forge resource diversity as a distinct competitive advantage. revenues and profits. It should have a spread of interest groups / stake holders. It should have a spread of assets. 291 . act locally (Eg. It should have a spread of manufacturing facilities. Characteristics – It should have a spread of affiliates or subsidiaries. It should think globally. HSBC).
GLOBAL BUSINESS ENVIRONMENT Power Distance – It reflects the disparities in income and intellectual development (Eg. Feminity Index . low power distance in developed markets and vice versa for emerging markets). 292 .It reflects the relative role of team building (Eg. high feminity index in developed markets and vice versa for emerging markets).It reflects the disparities in women in workforce (Eg. Group Scale . low risk profile in developed markets and vice versa for emerging markets). Risk Profile – It reflects the risk attitude of the top management (Eg. low group scale in developed markets and vice versa for emerging markets).
293 .culture. time value. dress sense. inflation. attitude. flexibility (Eg. Country Risk – It reflects the political and economic risk (Eg. customs. interest rates. way of life. code of conduct. credit rating. judiciary) of doing business in a particular country (Eg. currency. corruption. high cultural adaptability in developed markets and vice versa for emerging markets). political stability. terrorism (9/11). low country risk in developed markets and vice versa for emerging markets).GLOBAL BUSINESS ENVIRONMENT Cultural Adaptability – It reflects the adaptive ability to a changing environment . FOREX reserves.
and vice-versa. Ethnocentrism – Developed country managers tend to regard their own culture as superior. however. 294 . in most emerging markets meetings are delayed and lasts unusually long.GLOBAL BUSINESS ENVIRONMENT Time Sensitiveness – Developed country managers regard time as precious. time-zones. in most emerging markets use of an interpreter may be a standard protocol. Language Barriers – Developed country managers expect foreign partners to communicate in their languages. High levels of ethnocentrism usually has a negative effect on business. Other factors – local celebrations.
GATT GATT was a bi-lateral treaty initiated between US and some member countries in 1947 to promote free trade. The 2001 (Doha Round) focused on power blocks (NAFTA. 295 . It a multi-lateral treaty with 143 (as on 2002) member countries to reduce tariff and non-tariff (quota) barriers. trademarks). In 1995 (Uruguay Round) GATT was renamed to WTO. The 1999 (Seattle Round) saw a lot of protest amidst bringing agriculture under the purview of TRIPS. copyrights. ASEAN. It focused largely on TRIPS (patents. It also initiated provisions on anti-dumping. BRIC). It also highlighted the nexus between US & WTO.
296 . Euro). three countries joined in 2002 increasing it to fifteen members as of 2008. The Euro was significantly devalued against the Dollar till 2002. However.Pound). The notable exception was Great Britain which still continues with its local currency (i. the Euro slowly started outperforming the Dollar. Sterling . the Dollar still remains the most preferred currency globally. primarily the OPEC countries.e.e.EURO – SINGLE CURRENCY In 1999 twelve member countries in Europe joined hands to move over to a single currency (i. However with current recession in the US 2002 onwards.
Transparency – A single currency is transparent and competitive. a multiple currency is preferable where the business cycles of member nations are different. Trade Block – It will strengthen the EU identity which would not have been possible otherwise. However. 297 . but it may have spill-over effects. it helps avoiding transaction costs associated with a multiple currency. Rate Uncertainty – A single currency eliminates the risk of competitive devaluations.SINGLE Vs MULTIPLE CURRENCY Transaction Costs – Though the initial cost of introduction of a single currency is very complicated and costly.
hot money). – FDI (transfer of tangible resources) is slow but steady for the purpose of economic growth. It is long term with high levels of commitment.e. It is short-medium term with comparatively low levels of commitment. the gain of one country is loss of another). Neo classical economists believe that foreign investment may in fact be a win-win game.e. 298 . – FII (transfer of intangible resources) is fast but may have strong repercussions (i.FII Vs FDI INVESTMENT Classical economists believed that foreign investment (in any form) is basically a zero sum game (i.
Pricing – It depends on the competitive structure (PLC – Kellogg's). Distribution – It depends on the market characteristics (fragmented – concentrated).INTERNATION MARKETING Product – The various attributes of a product may receive different degrees of emphasis depending on differences in . economic (middle class buying power). technology (microchip). usage (talk time). buying patterns (spread). customer awareness (microwaves). lifestyle (petroleum 299 outlets – departmental stores).culture (food habits). . promotion (surrogate advertising).
Accounting Norms – The accounting norms of one country (AS .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. 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. equity is cheap in India).India) may be different from that another trading country (US – GAAP or IRS). Leverage – The leverage may vary across countries depending upon money and capital market conditions (Eg.
skills are more important that cultural fit and vice-versa. and cultural barriers (language) vis-à-vis emerging markets. however. 301 . technology (convergence. Recruitment – In local recruitment.INTERNATIONAL HR An uniform HR policy is idealistic to enable parity in performance appraisal. in most cases it is not desirable nor practiced. double taxation. social security. Training – It is a pre-requisite for international business to reduce language. labour laws. shortened life cycles). Compensation – Differential pay packages exists because of differences in purchasing power.
INTERNATIONAL OPERATIONS Location Incentives – FDI in emerging markets should explore options for SEZ’s to explore benefits (tax holidays. . Technology – The cost to be evaluated in terms of latest technology (Euro VI) vis-à-vis effective cost of appropriate technology (Euro II). Outsourcing – A company having a core competence may be the source of global outsourcing (Eg. Bosch spark plugs are used by car manufacturers worldwide). SCM – Use of ERP to network the extended enterprise 302 across the globe. reduce power costs) vis-à-vis infrastructural bottlenecks.
CONTEMPORARY TOPICS 303 .
While innovation typically adds value for organizations. it has destructive effects as well. Innovations typically paves the way for more secured and improved lifestyle for consumers in general. Innovation is the most preferred strategy today to maintain competitive advantage in the present turbulent business environment. innovation is the first attempt to carry it out in practice. Innovation is all about staying ahead of competition. but has inherent risks involved as well.INNOVATION An invention is the first occurrence of an idea for a new product or process. 304 .
Process innovation usually follows product innovation.TYPES OF INNOVATION A key challenge is maintaining a balance between process and product innovations. Strategic innovation has the potential to change the rules of the game. process innovations are organizational driven. 305 . While product innovations are typically customer driven. process innovation is necessary to sustain the competitive advantage of product innovation. Tangible impact of product innovation on performance is significantly higher than process innovation. However.
Processors (Pentium). Disruptive business models brings in a new frame of reference (i. Telecom (CDMA Technology). about how an organization makes money (i. Medical Surgery (Lasik). Drug Development (Bio Chemicals). putting an idea into practice). It leads to a shift in the price – performance envelope.e.BUSINESS MODEL It is a simplified description and representation of a complex real world.e. Innovations are the back-bone of successful business models . a paradigm shift). 306 . Data Storage (Pen Drives).
NINE BUILDING BLOCKS Value proposition offered to the market. The revenue streams generated by the activities. The key resources and capabilities required. The proposed relationships established with clients. The cost structure resulting from the business model. The key partners involved in the activities. The channels to reach out to the clients. The segment(s) of clients to be addressed. The key activities / processes necessary for execution. 307 .
BUSINESS MODEL FRAMEWORK 308 .
Real Estate) companies need to untangle and understand the intricacies of their business model.REVENUE MODEL Positioning is just not sufficient. It is just one piece of the puzzle. Investment Banking. It involves – Product Visualization – Product Prototype – Product Test – Capacity – Pricing – Distribution. 309 . The revenue model described here are the means to generate revenues. innovative companies to carve out unique business models to fend off competition. With the rapid erosion of certain industries (IT.
Promote the culture of experimentation. Allow the workforce idiosyncrasies for their errors. Promote the grape-vine.HOW TO MAKE INNOVATIVE CO’S Innovative company’s are a matter of culture and aspirations rather than tangible resources. Have a lean and a flat organization structure. 310 . A favourable intellectual property (IP) climate. Provide reasonable incentives (not necessarily monetary). Allow the management sufficient slack to be future oriented.
HOW TO PROTECT INNOVATION? Without adequate protection (external or otherwise) the effects of innovation does not translate to performance. however that possibility is slowly atrophying. companies are increasingly relying on internal protection to sustain innovation effects. Collusion with the judiciary is also another distinct possibility in emerging markets. 311 311 . In most emerging markets where the IP climate is not so favorable. The most preferred strategy of internal protection includes imbibing “causal ambiguity” in the production process to make reverse engineering difficult.
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 .CORPORATE GOVERNANCE The basic theme of corporate governance is to ensure that professional managers are identified and made accountable in terms of clear business processes or activities and held responsible through adequate mechanisms & control systems for channelizing their decisions for the benefit of stakeholders at large. In fact the principles of corporate governance implies that managers go beyond in satisfying the stated and unstated needs of the multiple stakeholders.
From the strategic point of view managers tend to diversify into unrelated businesses as it provides higher returns hence a more favourable appraisal. This exposes the shareholders to additional risks and higher costs. According to the agency theory top managers and shareholders interests are usually conflicting in nature and tend to pull in opposite directions. However.AGENCY THEORY The root of Corporate Governance goes back to the Agency Theory. shareholders can diversify their portfolio at a much lesser risk and cost. not present in portfolio diversifications. 313 . also known as the principal-agent problem or agency dilemma.
the US government passed the Sarbanes – Oxley Act. After the Enron downfall.ORIGIN & CONTEXT Since the early 20th century since a large part of public funds were held by publicly traded firms in the US. SEBI Report – 2005. . defines corporate governance (headed by Kumar Mangalam Birla) as the acceptance by management of the inalienable rights of shareholders as the true owners of the corporation and of their own role as trustees on behalf of the 314 shareholders. various laws were enacted to ensure proper usage of these funds. 2002 to restore public confidence in corporate governance.
including the society at large. Interests of other stakeholders: Recognize the legal and other obligations of all legitimate stakeholders. 315 . 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. Role and responsibilities of the board: It deals with issues about an appropriate mix of executive and nonexecutive directors.
. assessment and mitigation of risks and retirement by rotation over a fixed period of time. Disclosure and transparency: Disclosure of information should be timely and balanced to ensure that investors have clear access to data and facts. 316 316 .GOVERNANCE PRINCIPLES Integrity and ethical behaviour: Organizations should develop a code of conduct for their top management that promotes ethical and responsible decision making. They should also implement systems to independently verify and safeguard the integrity of the company's financial reporting. Independence of the entity's auditors: Identification.
GOVERNANCE STRATEGIES Monitoring by the board of directors: The board of directors. 317 . a person benefitting from a decision should abstain from it. Remuneration: Performance-based remuneration is designed to relate some proportion of salary to individual performance. However. they should provide no mechanism or scope for opportunistic behaviour. discussed and resolved. safeguards invested capital. with its legal authority to hire. fire and compensate top management. Regular board meetings allow potential problems to be identified. Balance of power: The simplest balance of power is very common.
McKinsey found that 80% of the respondents would pay a premium for wellgoverned companies.GOVERNANCE & PERFORMANCE In its “Global Investor Opinion Survey” of over 200 institutional investors in 2002. 318 . undertook formal evaluation of its directors. who had no management ties. Egypt and Russia) to around 40% for Canadian & European companies. They defined a well-governed company as one that had mostly out-side directors. from 10% for companies where the regulatory backdrop was least certain (those in Morocco. and was responsive to investors' requests for information on governance issues. The size of the premium varied by market.
Therefore. corporate philanthropy should be a part of every corporate mission. Over a period of time. today economic institutions are considered as a major drivers of improvement in quality of life in general and therefore needs to include multiple stakeholders.SHAREHODER – STAKE HOLDER THEORY Till the early part of the 20th the basic objective of modern organizations was to provide goods and services for public consumption for profit maximisation. the short-term view of profit maximisation gave way to a more broader and mediumterm view wealth maximisation of the shareholders. 319 . The basic premise is that firms cannot exist in vacuum. However.
However. giving a very important message that one cannot exist without the other. in fact a large part of it is significantly overlapping. “a healthy business cannot exist in a sick and impoverished society”. the debate on CRS still continues whether firms should detract its focus from its business? 320 . Therefore. economic and social responsibilities cannot be mutually exclusive. Therefore. “an enterprises decisions and actions being taken for reasons at least partially beyond its immediate economic interests”. CSR can be defined as.CORPORATE SOCIAL RESPONSIBILITY As Peter Drucker rightly pointed out that.
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. MRTP).GROWING CONCERN FOR CSR Awareness due to education: With growing literacy. The role of media: The media and various consumer organizations have come up in protecting consumer rights and exposing mal-practices. people are becoming increasingly aware of their right to a decent and healthy life. 321 .
CSR STRATEGIES Green Supply Chain Management: It includes environmentally preferable purchasing. Cement . designing eco-friendly products. Health & Hygiene – Attending the health hazards due to wastes and by-products to employees and society in proximity (Eg. Aditya Birla Research Centre – LBS). and extended producer responsibility (Eg. Refrigerators – CFC. Exide – Product take back). Literacy & Training Programs – (Eg. Tata Steel – Life Line Express). Education. eco efficiency. 322 .Paper packaging.
They represent an enormous opportunity for companies who learn how to serve them. 323 . K. In turn companies by serving these markets. C. Strategic innovations leading to disruptive business models can show the way out. they're helping millions of the world's poorest people to escape poverty. across the world's billions of poor people having immense untapped buying power. Prahalad notes that future markets exist collectively.BOTTOM OF THE PYRAMID With the market across most developed markets including the US getting saturated.
BLUE OCEAN STRATEGY 324 .
TWO WORLDS 325 .MARKETSPACE .
one companies gain is always at the 326 cost of another companies loss. In today’s red oceans.WHAT IS RED OCEAN? Companies have long engaged in head-to-head competition in search of sustained. and struggled for differentiation (cost or product). They have fought for profits. Yet in today’s overcrowded industries. competing head on results in nothing but a bloody red ocean of rivals fighting over a shrinking profit pool. where most industries are saturated. . battled over market-share. profitable growth.
it will exist 327 in the future as well. but by creating blue oceans of uncontested market space ripe for growth . Such strategic moves are possible through the pursuit of product differentiation and low cost simultaneously. rendering rivals obsolete and unleashing new demand.WHAT IS BLUE OCEAN? Tomorrow’s leading companies will succeed not by battling in red oceans. It is only the frames of the . It helps in creating powerful leaps in value for both the firm and its buyers. Blue Ocean’s have existed in the past.
RED OCEAN Vs BLUE OCEAN Compete in existing markets Compete in uncontested markets Beat the competition Exploit existing demand Make the competition irrelevant Create and capture demand Make the value-cost trade off Break the value-cost trade off Demand is the limiting factor Supply is the limiting factor 328 .
Niche markets & monopoly havens are continuing to disappear. Demand across developed markets reaching a plateau. of European nations. Population shrinkage across a no.BLUE OCEAN STRATEGY IMPERATIVES Prospects in most established market spaces – red oceans – are shrinking steadily. Technological advances have substantially 329 improved industrial productivity. As trade barriers between nations & regions fall. . information imperfections atrophy instantly.
managerial moves are. They are not necessarily about technology. Incumbents often create blue oceans within the ambit of their core business. History indicates that blue oceans exist in three basic industries – automobiles (how people get to work) – computers (what people use at work) – entertainment (what people do after work). .CONCEPTUAL UNDERPINNINGS Blue oceans have existed in the past and will exist in the future as well. the underlying technology was often already in existence. Company & industry are the wrong units of 330 strategic analysis.
BLUE OCEAN .IMPLEMENTATION Reduce Which factors to be reduced below the industry standard Eliminate Which of the industry factors that the industry takes for granted should be eliminated Create VI Which factors should be created that the industry has not offered Raise Which of the factors should be raised above the industry’s standard 331 .
IMPLEMENTATION SEQUENCE Buyer Utility (1) Is there exceptional buyer utility in your business idea? Price (2) Is your price easily accessible to the mass of buyers? Blue Ocean Strategy Adoption (4) What are the adoption hurdles in actualizing your business idea? Are you addressing them up front? Cost (3) Can you attain your cost target to profit at your strategic price? 332 .
Southwest Airlines: Pioneering the concept of LCC. . Sony Play Station: Redefining machine-human interface in entertainment and targeting an altogether new user base. Citibank – Automated teller machines & credit 333 cards.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.
All they need to do is change their managerial frames. According to this view managers need not be constrained to act within the confines of their industry. According to this view. Off late emerging views in strategy having its origin in (Organization Theory) led to a paradigm shift to what is called the – reconstructionist view. greater than themselves.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. companies & managers are largely at the mercy of economic forces. 334 .
This action might not be possible to undo. Are you sure you want to continue?
We've moved you to where you read on your other device.
Get the full title to continue reading from where you left off, or restart the preview.