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: firstname.lastname@example.org, 9830697368 1) Crafting & Executing Strategy – Thompson & Strickland. 2) Strategic Management – Pearce & Robinson. 3) Strategic Management – Fred. R. David. 4) Exploring Corporate Strategy – Johnson & Scholes. 5) Competitive Advantage – Michael E. Porter. 6) HBR – Articles & Case Studies.
STRATEGY - DEFINITION
Strategy is all about making trade-offs between what to do and more importantly what not to do; consciously choosing to differentiate. It reflects a congruence between external opportunities and internal capabilities. Types of strategies – Corporate Strategies – It is all about making choices across various businesses and allocating resources among them. Business Strategies – It is all about developing leveraging and sustaining competitive advantage. Functional Strategies – It is all about finding newer ways to perform existing processes, or 3 better still adopting new processes altogether.
STRATEGIC MANAGEMENT DEFINITION
Strategic management attempts to integrate the traditional management functions and align the organization as a whole with the broader environment to make resource allocations in a way to achieve the strategic intent of the organization. This alignment is called strategic fit. It serves as a road-map for the organization in its growth trajectory. It provides the direction – extent – pace – timing. It depends on the turbulence of the environment and the aggressiveness of the organization. It distinguishes the winners from the losers.
PILLARS OF STRATEGIC MANAGEMENT
Differentiation – Differentiation of key inputs and technologies helps a firm to consciously move away from homogeneous to heterogeneous markets enabling them to earn super-normal profits from normal profits. Integration – Whenever dealing with a complex task of managing a business (i.e. involving a no. of variables with cross linkages) it is in the interest of simplicity that the task be broken up in smaller components. However, for effective control, integration is essential. Alignment – Since differentiation is prone to replication, it is in the interest of the firm to differentiate continuously by aligning the resources with environmental opportunities.
STRATEGIC MANAGEMENT FRAMEWORK
Economic al Strategic Finance Fit Political Strategic Intent Fit Political Marketin g Manageme nt Social & Cultural
It is long-term in nature. It is irreversible.FEATURES It forms the core activity of the top management. It is about adaptation and response to the same. It is a holistic and integrated approach. It provides broad guidelines. It is all about creativity and innovation.STRATEGIC MANAGEMENT . It involves substantial resource outlay. 7 . It requires full commitment of the top management.
It brings instant success. It is about a definite formula. It is fool-proof in nature. It is rocket science. It a bundle of techniques or even tricks.STRATEGIC MANAGEMENT – MYTHS It involves short-cuts. It attempts to minimize risk. It is about forecasting. It involves nitty-gritty's. 8 . It involves only the top management. It about mere data and facts.
scale and scope. 9 To develop core–competencies. To assimilate change faster.STRATEGIC MANAGEMENT IMPERATIVES To be continuously alert. To be insulated against environmental threats. To leverage size. rather than reactive. . To innovate. To gain expertise in technologies. To generate large resource pool. again and again ……. To tap markets across boundaries. To be proactive. To be future oriented.
and more importantly . but by virtue of their courage. battles fought on the market front are won by companies by virtue of their obsession & strategies.STRATEGY . obsession. today's battles are fought over markets. 10 . In the ancient days battles were fought over land. In the ancient days battles were won not by virtue of size of the army or armory. In contrast. It is an old wine in a new bottle. whose origin can be traced to some of the greatest battles fought in the ancient days. but with a lot a rigour and robustness. Even in today’s markets.strategies.ORIGIN The word strategy has its origin from the Greek word strategia meaning Military Commander.
– Toyota’s entry in the US. 11 . challenging GM and Ford. US attack of Morocco to capture Germany – Strategy: Pin-hole strategy – Wal-Mart challenging Sears by entering small towns. Napoleon’s attack on Russia – Strategy: Waiting for the right time.SOME PARALLELS Japan’s attack on Pearl Harbour – Strategy: Attack where it hurts the most. – Yahoo and Microsoft challenging Google. Allied Forces Vs Germany (WW-II) – Strategy: Forging alliances. – Reliance’s entry into telecom.
EVOLUTION OF MANAGEMENT As Peter Drucker refers to it. 12 . – Mass Production Organization Size – Complicated Processes – Complex Structures Evolving of an emerging paradigm – survival of the fittest (Fayol & Taylor.Industrial Revolution. 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 things happening around the firm when totally disconnected from the past leads to a paradigm shift. 1910). The first major discontinuity in the history of global business environment was the .
– Affluence of the new customer (i. – Global market place.EVOLUTION OF STRATEGIC MANAGEMENT The second major discontinuity in the history of global economic environment – World War II. – Homogeneous to heterogeneous products. Survival of the most adaptable becomes a new management paradigm (Ansoff. 1960). 13 . Efficiency and effectiveness are no longer sufficient. The question of outperforming the benchmark became the new buzzword. push to pull). performance across firms became differentiated.e. – Changes in the technology fore-front. From uniform performance.
ENVIRONMENTAL CHANGE Phase IV: Horizon of Scenarios 2 1 Phase I: Extrapolation of the past 1 3 1990 onwards 1 2 1 3 1A 1B 2A Prior to 1950 Phase II: Discrete Scenarios Phase III: Range of Scenarios 1970 to 1990 2 2B 1950 to 1970 14 .
– Biases and prejudices has a very little role to play in strategic choices pursued by managers. Learning always begin on a clean sheet of paper. Ansoff (1960) – Strategy can be segregated into certain mutually exclusive and inter-related components aimed at managing the growth of an organization. – The choice of product-market mix is based on conscious evaluation of risk – return factors.APPROACHES TO STRATEGY Analytical Approach – Igor H. – It is primarily the top management’s prerogative. – The choice of strategy is primarily concerned with external ones rather than internal ones. 15 .
– The top managers then decide on the type of organization structure & systems to be in place. everything else follows. how it will compete. 16 . Once the control systems are in place. – Organization structure will precede and cause changes in strategy. who will be the top managers. Successful organizations align authority and responsibility of various departments in way to reach overall objectives. The organization initially decides which industry to enter. – Management control systems has a dominating role in influencing firm performance.APPROACHES TO STRATEGY Design Approach – Alfred Chandler (1970) – Structure follows strategy.
Porter (1980) – Choose a consumer segment and position your product accordingly. competitors. new entrant. – An organization is seldom in a position to influence the larger business environment. – A firms performance is inversely related with the bargaining power of environmental forces to which it is exposed.APPROACHES TO STRATEGY Positioning Approach – Michael E. 17 . customer. – The organization will outperform the industry where environmental forces are weak and vice-versa. substitutes. – The environmental forces comprises of – supplier.
They are complex resources and undermines a firms competitive advantage. locating in most attractive industries and pursuing the same strategy.APPROACHES TO STRATEGY Core Competence – C. 18 . K. but exploiting the resource differences among them. – Core competencies are a set of skills that are unique and can be leveraged. – It enables a firm to deliver unimaginable value ahead of time. – Organizations can significantly alter the way an industry functions. Prahalad (1990) – The key to superior performance is not doing the same as other organizations.
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 involves an obsession to be the best or outperform the best. It provides a sense of direction and destiny.STRATEGIC INTENT If you cannot see the future. It’s a philosophy that distinguishes it from its competitors. 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. It implies a significant stretch. 21 . A strategic intent is a statement of purpose of existence.
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 .
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. strategic variety) is apparent. To put it more simply. It is core to the strategic intent of the firm. 23 . Dominant logic changes.e. 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.
– It stands for the unchanging core values of the company. It enables the top management to remain focused. – It represents the company’s audacious. It provides an unity of purpose amidst diversity of personal goals. but achievable aspirations. 24 . beyond just making money. It is a combination of three basic elements – – An organizations fundamental reason for existence. It ensures that the company does not wander off into unrelated zones or fall into an activity trap.VISION It is a dream (not a forecast) about what the company wants to become in the foreseeable future.
Brevity – It should be short. 25 . Empathy – It should reflect the company’s beliefs to which it is sensitive. 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.VISION . In Reliance when a new project becomes operational top managers hand over charge to the SBU heads and move on to a new project. not an utopian dream. clear.CHARACTERISTICS Reliance – Where growth is a way of life. Sharing – The company across all hierarchies should have faith in it. and memorizable.
VISION . It facilitates development of skills & capabilities.ADVANTAGES To stay focused on the right track. It lends integrity and genuineness. 26 . It gives the impression of a forward-looking organisation. It provides a holistic picture. It gives a shared platform. It gives enlightment. It makes strategic alignment easier. It fosters risk taking and experimentation. To prevent the fall in a activity trap.
MISSION Mission defines the space that a business wants to create for itself in a competitive terrain. It serves as a road map to reach the vision. 27 . Although the purpose may change over time. It enables the firm to define its business landscape and identify its competitive forces. A broad mission statement helps in fending competitors. its reason for existence. It is intuitive for managers to conceive their business in terms of the customer needs they are serving – What business are we in? – Which customer needs are we serving? It should be broad based and relevant to all stake-holders.
Some other examples – We do not offer shoes.MISSION – SOME IDEAS Reliance – We are in the business of integration. We offer solutions. – We do not offer insurance. …………………. We offer strength. …………………. We offer comfort. All the businesses of the company are strongly integrated with their main business. though some may seem unrelated in nature. …………………. …………………. – We do not offer steel. – We do not offer software's. 28 . We offer security.
It is an end result (quantifiable) something a firm aims and tries to reach in a time bound frame.GOALS & OBJECTIVES Reliance – We want to become a Rs. – It is based on Management by Objectives (MBO). – It keeps the mid management pre-occupied. – It prevents deviation. – It lends direction – time frame in the medium term. – It helps identifying key success factors. It provides a quantitative feel to an abstract proposition.100K crore company by the year 2005. – It provides a benchmark for evaluation. 29 . – It adds legitimacy and motivation.
The details of the plan Reliance Telecom adopted were – Backward integrate process technologies. coordinating appropriate technologies. and gaining access to desired markets to achieve the desired goals and objectives. It is the process of garnering necessary inputs.PLANS Reliance – Desire to invest 25K crore in telecom business by circa 2010. 30 . – Leverage economies of size and scale. – Use price-elasticity to break market barriers. It is specific to a particular business. – Acquire a market share of indomitable position. – Compress project times.
When changes in the environment is incremental. past strategies tend to have a bearing on future strategies. strategies lose touch with the emerging realities. In such a context. Historical studies have shown that most organizations tend to continue with their existing strategies.STRATEGIC DRIFT Due to top management commitment. equilibrium is maintained. This state of affairs is known as strategic drift. However. 31 . radical change may lead to disequilibrium. This tendency to restore continuity is known as inertia (resistance to change). It often leads to an organizational crisis.
STRATEGIC DRIFT FRAMEWORK Environmental Change Degree of change Strategic Change Radical Change Incremental Change State of Flux Continuity Stage of Transformation Strategic Drift Stage of Atrophy Time 32 .
– Distorting information to gain mileage. – Creating obligations of reciprocity. 33 . – Developing a platform of support.ORGANIZATIONAL POLITICS Strategic drift often leads to organizational politics. Organizational politics involves intentional acts of influence to enhance or protect the self-interest of individuals or groups over organizational goals. Some instances of organizational politics – Formation of powerful groups or coteries. – Creating a favourable image. – Hiding vulnerability. – Using covert tactics to pursue self interests.
– Persons responsible for strategy conceptualization and implementation are34 divergent. Other causes – – The plans are unworkable and utopian. – Influential stake-holders back out.INTENDED & REALISED STRATEGIES An intended strategy is an expression of interest of a desired strategic direction. A realized strategy is what the top management actually translates into practice. Usually there is wide gap between the two when organizational politics is evident. – The environment context has changed. .
They simply unfold the particulars of the sub-system in stages. but as a defensible response to the complexities of a large organization that mitigate against publicizing goals. Strategy formulation and implementation are linked together in a continuous improvement cycle.LOGICAL INCREMENTALISM According to the incrementalism approach (contrary to integrated approach) practitioners simply do not arrive at goals and announce them in crafted and well defined packages. but the master scheme of the rational comprehensive scheme is not apparent. 35 . this is not to be treated as “muddling”. Learning is an integral part of logical incrementalism. However.
Macro Broadcasting – The broad idea is floated without details to invite pros and cons leading to finer refinements. 36 . Leveraging Crisis – A sudden crisis or an opportunity should be used as a trigger to facilitate acceptance and implementation of change.IMPLEMENTING INCREMENTALISM General Concern – A vaguely felt awareness of an issue or opportunity. Adaptation – As implementation progresses. Agent of Change – Formal ratification of a change plan through MBO. The broader objective should serve the overall interest of the organization.
Tampering with surface level factors often leads to atrophy. Dominant logic’s are the cornerstones of change when strategic transformation is apparent. It creates blinders. 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. As it brings 37 with it a different dominant logic. Dominant logic’s are very rigid and sticky and prone to inertia. .
experience. – Constructive Bargaining – Agree to disagree. 38 . – Informal Networks – Emerging of new ideas. and skills that fosters experimentation and questioning and challenge around a shared purpose. – Experimentation – Fosters a culture of risk taking. A learning organization must continuously focus on unlearning as well. – Organisational Slack – Enough free space.LEARNING ORGANIZATION A learning organization is capable of continual regeneration from knowledge. It helps prevent a strategic drift from occurring at the first place. Factors that fosters a learning organization – Pluralistic – An environment where different and even conflicting ideas are welcome.
ENVIRONMENTAL CONDITIONS Dynamic Scenario Planning Learning Organization Static Forecasting Decentralization Simple Complex 39 .
ANALYZING BUSINESS ENVIRONMENT 40 .
PLANNING & STRATEGIC PLANNING Formal planning is a function of extrapolating the past.e. 41 . Strategic planning is a function of discounting the future. It requires a quantum leap (i. It is pro-active in nature. It is reactive in nature. It is based on the assumption of incremental change. Strategic gap basically points towards a vacuum of where the organisation wants to be and where it is. gap analysis). Competitive advantage provides the surest way to fulfill the strategic gap. It points to a position of superiority with relation to competition. It is based on the assumption of radical change.
and influences that affect an organizations way of doing things. The world is flat. Environmental scanning is very important component of strategic planning. It is exploratory in nature. resources and ideas move unhindered. The segments of the environment a top manager scans selectively depends upon his dominant logics. 42 . events. A manager has to continuously scan the environment to ensure alignment of the strategies with the radically changing environment.ENVIRONMENTAL SCANNING The environment is defined as the aggregate of conditions. not guided by any boundaries. Environmental factors can be external as well as internal to the organization.
for which a holistic picture is required. but also to analyze the complex linkages across them. It is not intended to be used as an exhaustive list. Understanding the composite effect is critical.PESTEL PESTEL attempts to provide a broad framework on how the broader environmental forces affects an organization and influences the way it practices strategy. It is important not only to identify the structural drivers of change. 43 . which may be different from the past impact. It is particularly important that PESTEL be used to look at the future impact of environmental factors.
Fiscal Deficit. Economic Cycles. Subsidies & Protection. Economic Model. Government Attitude. Social Values. Religious Sentiments. Licensing & Quotas.PESTEL FRAMEWORK Political – Government Stability. Savings & Investment. Economic – GDP. FDI Inflows. Income & Age Distribution. Monsoon & Food Grains Reserves. Literacy Levels. Capital Market & Forex Reserves. Central – State Co-alignment. Infra-Structural Investments. Language Barriers. 44 . Social – Population Diversity. Inflation & Interest Rates. Currency Stability.
ERP. Extended Producer Responsibility. 45 . Employment Laws. Pollution Control Laws. Non-Fossil & Alternative Fuels. Carbon Credits. Environmental – Global Warming & CSR. Product Safety & Health Hazards. Technological Convergence.PESTEL FRAMEWORK Technological – Innovation. Direct & Indirect Taxes. Patent Laws. Research & Development. Environmentally Preferable Purchasing. Patents. Obsolescence Rate. Legal – Monopolies Legislation. Product Design. Consumer Protection Laws. Waste Disposal & Emissions.
Curtailment of PSU’s. Dismantling price controls. New Trade Policy (NTP) – Lowering import tariffs. Capital Market Reforms. Structural Adjustments – Phasing out subsidies. Banking Sector Reforms. Economic Reforms – Fiscal & Monetary Reforms. PSU Disinvestments. Encouraging FDI. Rupee convertibility. FERA Liberalization.ECONOMIC LIBERALISATION New Industrial Policy (NIP) – Liberalizing industrial licensing.VRS. Abolition of import licenses. 46 . MRTP Liberalization. Encouraging exports. Exit Policy.
Survival of the fittest MNC Onslaught – Enhancing stakes – Power Equation – Joint Ventures – Technological Alliances – Take-over threat. Mergers & Acquisitions 47 .DISCONTINUITY Destabilization due to entrepreneurial freedom – Cocoon of protection disappears – Diversification spree – Existing notions of size shaken – Industry structures change radically – Economic Darwinism .
Globalization – Cheap Imports & Dumping – Push to Pull Marketing Buyers exacting demands – Shortage to surplus – Price competition – Life-style changes – Stress on quality. Consumerism Challenges on the technology front – Competencies become technology based – Investment in R&D become inescapable 48 .DISCONTINUITY Hyper Competition – MNC’s .
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 should not only be used to understand the forces. The model should not be used as a snapshot in time. the forces are subject to changes. incremental or otherwise. It depicts the attractiveness of an industry (i.e. profit potential) per se.FIVE FORCES MODEL ASSUMPTIONS The model is to be used at the SBU level and not at the industry level. but also used to understand how they can be countered and overcome. 51 . It is even wiser to apply the same at the product – market level. The five forces have strong cross-linkages.
Product differentiation through proprietary technology or brand power. Capital requirements. Access to distribution channels. Low margins & stagnancy. High switching costs. Low customer switching costs. Scope for backward integration. Unimportance of product quality. Learning curve advantages. Low relative importance of the segment. Government policy. 52 . Industry stagnation.PORTERS FIVE FORCES ANALYSIS Threat to Entry – Economies of size and scale. Threat of Customers – Buyer concentration and volumes. Undifferentiated product. Presence of substitutes or unorganized sector. Resource profile & fear of retaliation.
Piracy and counterfeits. Unorganised sector. 53 . Produced by industries earning high profits. Diversity of players. Product perishability. Jockeying for position – Fragmented market. High exit barriers. Differentiated inputs. Buyer’s propensity to substitute. Intermittent overcapacity. Industry stagnancy. High customer switching costs. Lack of substitute inputs. Scope for forward integration.PORTERS FIVE FORCES ANALYSIS Threat of Suppliers – Supplier monopoly. Low level of differentiation. Threat of Substitutes – Improvement in price -performance trade-off. Low relative importance of the segment.
dominant or related diversified or unrelated diversified businesses (Infosys. Business Scope – The intention whether the firm wants to be in a single. 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. Tata). Resource Profile – It highlights the capabilities (generic) or competencies (business specific) of the firm. Cohesiveness – Degree of bonding existing across affiliated firms. Reliance). 54 .
Matured firms will always be positioned advantageously on the ECurve than new entrants. experience teaches better and more effective way of doing things. However. and with lower prices it can increase its sales volume. an E-Curve can prove to be futile during discontinuity. 55 . The E-Curve thus enables organisations to build entry barriers. it can price its products more competitively. which further reduces costs. With lower costs. leverage it as a competitive advantage. 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 .
EXPERIENCE CURVE .TRADITIONAL VIEW Efficiency = Lower Costs 2 3 1 Experience = Efficiency Lower Costs = Higher Sales Entry Barrier = Better Performance 4 6 5 Higher Sales = Lower Costs Lower Costs = Entry Barrier 57 .
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 .
Press Clippings & Interviews. A SWOT audit involves – Company Records – Annual Reports. 59 Analysts. Suppliers. Websites. It helps an organisation to capitalize on the opportunities by maximizing its strengths and neutralizing the threats minimizing the weaknesses. Observation. Competitors. Acronym for Strengths – Weaknesses – Opportunities – Threats.VULNERABILITY ANALYSIS .SWOT The framework was originally conceptualized by Kenneth Andrews in 1970. Case Studies – Structured Questionnaires. Customers. Interviews. It is one of the earliest models in environmental scanning. . Business Intelligence – Bankers.
SWOT ANALYSIS .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 .
Dr. High quality products – Eg. Motivated employees & cordial industrial relations – Eg. Tata. Reliance. Strong R&D base – Eg. Siemens. Honda. Reddy’s. HUL. 61 . Caterpillar. Good credit rating – Eg. Ranbaxy. Infosys. Strong after sales & service network – Eg. Excellent penetration – Eg. Infosys. Volkswagen. ITC. Tata Steel. Toyota. SBI.SOURCES OF STRENGTH Strong brand identity – Eg. Economies of scale – Eg. Sony. Large resource pool – Eg. Biocon. Engineering Skills – Eg. Aditya Birla. Reliance.
Ballarpur Inds. B. Lack of product / brand clout – Eg. Inertia – Eg. Tatas. Excessive diversification – Eg. Single product syndrome – Eg. CESC. Modi Group. CMC (Tata Group) 62 .SOURCES OF WEAKNESSES Outdated technology – Eg. Procter & Gamble. Lacking experimentation culture – Eg. Narrow business scope – Eg. K. Inefficient top management – Eg. J. Group . Excess manpower – Eg.Raymond. K. Hindustan Motors. Bijoligrill. Strategic myopia – Eg. Organizational Politics – Eg. SAIL. Nirma.
Growing population – Eg. ECB’s. Life style changes – Eg. Exit Policy – Eg. Retailing. Fertilizer. GDR’s.SOURCES OF OPPORTUNITIES Delicensing of Industries – Eg. Globalization – Eg.Tata Motors. Capital market reforms – Eg. Fertilizers. Free pricing – Eg. Maruti. VRS. 63 . Abolishing CCI. Middle-class buying power. Telecom. Collaborations & Joint Ventures – Bharti & WalMart. Abolishing MRTP – Eg. Sugar. Market driven Pricing – Eg. Banking. Market driven Interest rates – Eg. Insurance. Sugar.
Onida. 26/11. Reliance. Terrorist attacks – Eg. 64 . Import relaxation – Eg. Tsunami. Tata Steel. Hostile take-over – Eg. Economic recession – Eg. (2008). Lack of Corporate Governance – Eg. Satyam. Nationalisation – Eg. (1985–1990). 11/9. Bajoria – Bombay Dyeing.Social activism – Eg. Group disintegration – Eg.SOURCES OF THREATS Political instability – Eg. Earth Quake. Dumping from China. Natural disaster – Eg. Singur SEZ. Foreign Direct Investment (FDI) – Eg. Land acquisition .
Stages in ETOP analysis – List the aspects of the environment that has a bearing on the organization. Strategic responses (including adaptation) to opportunities and threats is critical for survival and success. 65 . Assess the extent of impact of the factors. scenario analysis).e. Holistic view – Prepare a complete overall picture. Delphi's technique. It represents a summary picture of the external environmental factors and their likely impact on the organization. time series.ETOP Acronym for Environment – Threat – Opportunity – Profile. Forecasting – Predict the future (i.
Relative attractiveness of the market. It is also a form of assessing vulnerability through longitudinal analysis. . selectively. 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. 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. As every organization is unique in its own way. therefore 67 validity may be a question.LIMITATIONS The analysis is based on historical data and it does not take care of future challenges. – Contexts may vary over time. – Contexts may vary across countries. when radical changes in the economy takes place. Managers should be particularly cautious while referring to such data during times of discontinuity as it makes past patterns futile.PIMS .
It enables the top management to draw focus. It involves a three-stage process – Identify KSF – What does it take to be successful in a business? Drawing KSF – What should be the organizations response to the same? Benchmarking KSF – How do we evaluate organization success on this factor? 68 . KSF helps organizations spot early opportunities and convert them into value adding business propositions.KEY SUCCESS FACTORS (KSF) KSF relates to identification and putting concentrated effort on a particular activity or process which forms the very basis of competitive advantage.
IDENTIFYING ALTERNATIVE STRATEGIES 69 .
global) of a firm and deals with choices of allocating resources across them. dominant. It reflects the customer needs it intends to satisfy. A corporate strategy identifies and fixes the strategic gap it proposes to fill. unrelated) and geographical scope (local. It provides broad direction to the groups vision and mission.CORPORATE . related.GRAND STRATEGY It is concerned with the overall business scope (single. It indicates the quality of growth an organization is looking for. national. It determines the locus a firm encounters with internal and external environment. 70 .
CORPORATE STRATEGY MATRIX Corporate Strategy Stability Stability Growth Growth Combination Diversification Divestment Intensification Market Penetration Related Vertical Market Development Product Development Unrelated Horizontal 71 .
Even during adverse times firms need to adopt a strategy to sustain current performance levels. Stability however. The reasons for stability strategy – – Lack of attractive opportunities. The scale and scope of present operations remains almost intact. – The firm may not be willing to take additional risk associated with new projects. does not relate to do-nothing (Eg. Hindustan Motors).STABILITY It involves maintaining status-quo or growing in a slow and selective manner. – Why disturb the existing equilibrium set up? – Limited resource position. – To stop for a while and assess past records. Citibank). 72 . (Eg. erosion of capabilities.
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. 73 .
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. 74 . within a well defined market segment. Nirma. direct non-users to users. – Suitable for industries where scope for technological breakthrough is limited. Ujjala. Britannia). Market penetration can be achieved by – increasing sales to current customers. convert competitors customers. – The company carries a risk of product obsolescence. (Eg. – Elongated product life-cycle. – Helps firms which are not comfortable with unfamiliar terrain.
– Unconventional and flexible distribution channels. – Immense customer reach & flexible advertising. (Eg. – Creativity and innovation – thinking out of the box. fabrics. – Moves across geographical boundaries.MARKET DEVELOPMENT It is a strategy where a firm tries to achieve growth by finding new uses of existing products or its close variants and tap a new potential customer base altogether. Du Pont – Nylon: parachutes. 75 . socks & stockings. – Stretches product life cycles. upholstery.…… or Teflon: aircraft technologies to cutlery to paints or Raytheon Corp – Microwaves: radars to kitchen appliances). carpets. tyres.
– Leveraging through – innovation. Refills) 76 . perception.Strolleys). Close Up: Fluoride – Gel toothpaste or VIP . serviceability. reliability. – Areas of product improvement – performance. Microsoft: DOS to Windows) or a substantial improved version (incremental) of an existing product to repeatedly enter the same market (Eg. durability. – Deliverable through – redesigning or reengineering. – Leverage on customer and brand loyalty. – Substitutes that serve the same needs (Eg. aesthetics. conformance. features.PRODUCT DEVELOPMENT It is a strategy where a firm tries to achieve growth through a radical new product (Eg.
– Permits: quotas. dominance).e. Why do firms diversify in the Indian context? – Shift the growth trajectory or opportunistic. 77 . – High transaction costs and institutional gaps. licenses (i. – Internal capital market. – Risk reduction.DIVERSIFICATION It marks the entry of a firm into newer markets with new products. thereby creating a new business. industrial embassies). From the traditional point of view. the new business is distinct from the existing business in terms of – inputs – technologies – markets. From the modern point of view they are strategically dissimilar.e. – Conglomerate or market power (i.
HOW DIVERSIFICATION REDUCES RISK? Consider a hypothetical planet. What would be your ideal diversification strategy through optimization? 78 . while the coffee business would register a return of 10%. ice-cream business would register a return of 10%. If the hot wave dominates the planet. either of which is equally likely to prevail. Let us assume that there are two businesses constituting the entire market – coffee and icecream. in which a given year is either under hot or cold wave. cold wave dominates the planet. the ice-cream business would register a return of 30%. while the coffee business would register a return of 30%. If on the other hand.
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.
Dr. Usually the firm concentrates on its core activities. Ranbaxy.A firm produces part of its own requirements and buys the rest from outside suppliers with a variable degree of ownership and control. 85 . Reddy’s).Where one firm has full ownership and control over all the stages of a value-chain in the manufacturing of a product (Eg.QUASI & TAPERED INTEGRATION Full Integration . Quasi-integration . Reliance). Maruti – Sona Steering).A firm gets most of its requirements from one or more outside suppliers that is under its partial control through value chain partnerships (Eg. Tapered integration . and out-sources the noncore activities (Eg.
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 .
Drawbacks of unrelated diversification – – Cost of failure (i. synergies pulling in opposite directions).e. myopia). lack of knowledge of competitive forces).e. Firms usually engage in conglomerate diversification when emerging opportunities are very attractive and offers potential growth opportunities. – Cost of neglect (i. and are also strategically dissimilar. – Cost of ignorance (i. core business).CONGLOMERATE DIVERSIFICATION It relates to entry of firms into businesses which are distinct in terms of – inputs – technologies – markets.e. – Cost of dysynergy (i. 87 . lack of strategic intent.e.
CONGLOMERATE DIVERSIFICATION Paper & Packaging Edible Oils Tobacco Hotels Food & Confectionary 88 .
ACC) in full to an independent entity. Tata Pharma. It may also involve a SBU (Eg. where a company simply exits because the business no longer contribute to or fit its dominant logic. It taken into account when performance is disappointing (i.DIVESTMENT Divestment is a defensive strategy involving the sale of entire stake (Eg.e. reactive) and survival is at stake and the firm does not have resources to fend off competitive forces. 89 . Tatas sale of Goodlass Nerolac. Tata Press). In strategy there is no scope for sentimentality with divestment. L&TCement Division to Aditya Birla Group) technically known as divestiture or a product (Eg. Glaxo’s “Glucon-D” to Heinz). (Eg. It is may also be a pro-active strategy.
where the equity is allotted amongst the existing shareholders on a pro-rata basis. (Eg. Leveraged Buy-Out (LBO) – Here the company’s shareholders are bought out through a negotiated deal using borrowed funds.ROUTES Outright Sale – Popularly known as the asset route. Hive-Off – A hive off is the creation of a new entity followed by transfer of assets. 90 .3 billion. Tatas buy-out of Corus for US $ 11. 1956 does not permit this mode. the Companies Act.DIVESTMENT . Sale of Diamond Beverages to Coca-Cola for US $ 40 million). However. involving 608 pence per share). where 100% of the assets (including intangibles) are valued and paid for. (Eg.
e.COMBINATION STRATEGY It is a mixture of stability. mergers and acquisition. developing facilities right from the scratch) or through brown-field projects (i. 91 . joint ventures). and divestment strategies applied simultaneously or sequentially for a portfolio of businesses. There can be no ideal strategy for every business. because every business has its own unique external and internal environment. It is usually pursued by a business group with diverse interests across multiple industries.e. growth. A combination strategy can be implemented through green-field projects (i.
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. What then is the magical number? 93 . It attempts to answer the following questions – How effective has the existing strategy been? How effective will that strategy be in the future? What will be the effectiveness of alternative strategies? It is impossible for a manager to assess all the alternatives. In most cases the trade-off is between resources and opportunities.
They must choose problems which will lead to the right kind of opportunities. The key task before a top manager is to identify the right problems. For an optimal choice the following four issues need to be resolved – Is the strategy clearly identifiable? Is it consistent with the resources of the firm? Will it be able to exploit the opportunities in full? Is it in tune with the values and beliefs of the firm? 94 . To identify the right problems. managers need to ask the right questions. nor is to a define a problem for others to solve. if addressed.SELECTIVITY IS THE KEY The role of a top manager is not to solve a problem. will help the firm achieve its intent.
Proximity to the corridors of power (i. .BUSINESS GROUP . High degree of centralized control (GEO. formal and informal ties. Resource sharing.DEFINITION A business group is known by various names in various countries – guanxique in China. chaebols in Korea. Their origins can be traced back to market imperfections existing in an economy (MRTP Laws. Managing Agency). embassies). keiretsus in Japan. Their roots can be traced to a single family or clan and share broad similarities. BRC). business houses in India.e. Licenses & Quotas. 95 Succession planning is critical to continuity.
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 .
PORTFOLIO ANALYSIS Resource allocation across a portfolio of businesses is an important strategic choice. 99 . therefore. Redeployment of resources upsets the established power bases of a group. Relatedness across resources are difficult to realize. Investing in emerging businesses may not actually be so simple as it appears to be. sometimes impossible. there are high costs associated with entry and exit. Power and resources often goes hand in hand. next only to choice of business. Rules of the game are different. Why? Businesses are not about liquid assets.
BCG GROWTH MODEL Relative Market Share (%) Industry Growth (%) Low High High Low Stars Question Mark ? Cash Cow Dogs 100 .
Stars – They achievers in the near term. TCS. but to larger extent than a question mark. market development. Tata-AIG). These businesses are also net users of resources (Eg. 101 .e.BUSINESS ANALYSIS – TATA GROUP Question Marks – They have potentials in the long term.e. diversification). Tata Steel). provided the company is able to build up on its market-share (i. provided the industry growth rate continues and the company is able to maintain its growth (i. product development). and their risk profile is high (Eg. market penetration. Trent. which remains a big? These businesses are net users of resources. Tata Telecom.
e. harvest. Dogs – They are a drag on the group. Indian Hotels. Tata Pharma. Groups prefer to dispose off such businesses (i. 102 . Nelco. Given that the growth potential in the business is low. they are generators of resources. Tata Chemicals). stability). divest) as achieving a dominant position in these businesses is a difficult task. Tata Motors. Tata Press). cash cows may also need to invest provided the industry takes an upswing (Eg. and they lack on competencies to take on competition and are basically cash traps (Eg. However.BUSINESS ANALYSIS – TATA GROUP Cash Cow – These are matured businesses. and the company dominates the industry ahead of competition (i. Tata Tea.e.
Armani). factors are limited.e. Certain businesses in the low market share category may be the result of a conscious strategy (i. Cartier. Cash cows may actually need substantial investments to retain their market position (Eg. The model does not provide specific solutions within a particular category.BCG . The terminologies used are somewhat prohibitive.LIMITATIONS It does not address the concerns of a business which is in the average category (usually the majority). HUL). Data may be prohibitive. neither in high or low. Mercedes Benz. niche – Rolex. 103 .
-) 104 .MATRIX Distinctive Capabilities Strong High Medium Weak Stability Industry Attractiveness Diversify (++) Intensify (+) Med Intensify(+) Stability Harvest (-) Low Stability Harvest (-) Divest (.GE .
ARTHUR’ D. LITTLE Inception Dominant Strong Favourable Tenable Weak Growth Maturity Decline Improve Selective Niche Abandon Industry Life-Cycle Divest Harvest 105 Competitive Position Invest Consolidate Hold .
SHELL – DIRECTIONAL POLICY MATRIX Business Sector Prospects Attractive Average Unattractive Generate Cash Phased Withdrawal Distinctive Capabilities Strong Market Leadership Try Harder Double Or Quit Growth Average Custodial Weak Phased Expand Withdrawal Divest 106 .
Gap Analysis – It emphasizes what a firm wants to achieve. Disinvestment involves selling in phases. 107 . SBU – A business unit which is strategically different from another and also shares a different SIC code. Divest – Selling a part or the entire business at one go. BCG – Boston Consulting Group. Portfolio – An organization is perceived as a portfolio of businesses.TERMINOLOGIES Harvest – It entails minimizing investments while trying to maximize short-run profits and cash flow with the intention to exit the business in the near future.
BUSINESS STRATEGY & COMPETITION 108 .
Competitive advantage refers to a firms resources or activities in which it is way ahead of competition. Competitive advantage is the back-bone of strategy. building market-share. and earning super-normal profits (i.COMPETITIVE STRATEGY A competitive strategy deals with how a firm competes in a particular business or product-market segment. rent). The principal focus is on meeting competition. Such resources or activities should be distinctive and sustainable over time. 109 .e. The strength of a firm in a particular business usually stems from its competitive advantage.
Delta Lock In – Two dominant players co-opt to selfreinforce and create or escalate an entry barrier. Blue Ocean – Consciously moving away from overcrowded industries to uncharted territories and making competition irrelevant (Kim & Mauborgne). identifying critical success factors. involving harmonizing and integrating multiple streams of technologies. leveraging (Prahalad). Resource Based View – Obsession with competence building. preventing new entry and/or competition (Hax & Wilde). 110 . developing competitive advantage (Porter).BUSINESS STRATEGY FRAMEWORKS How to be distinctive and yet sustainable – Differentiation – Understanding of the dynamics of competition.
Compress project duration through crashing. Ayur. Nirma. backward integration. 111 . T-Series). preferential access to raw materials. Steep experience curve effects. proprietary technology. Reliance) or may pass it to customers to increase market-share (Eg. Sources of cost advantage are varied and depends on the structure of the industry – Economies of size. Locational or early entry advantage. The firm may retain the benefits of cost advantage by enjoying higher margins (Eg.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.
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. undeterred attention to quality. Successful product differentiation is often followed by premium pricing. innovation and out of the box thinking. avoiding brand dilution. (Eg. 112 . Sony. Intel. Culture of experimentation. Feeling the pulse of the customer. Means of product differentiation are peculiar to each industry. Rayban). Focus on brand loyalty. It selects one or more attributes that buyers perceive as important. Creativity.
coupled with fear of structural erosion.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. though it may not possess an overall competitive advantage. Maybach. They are poorly served by mainstream players. Armani). Mont-Blanc. The target segment must have unusual needs or the delivery system catering to this segment must be unique. Cartier. Rolex. Sub optimization alone may not be a source of superior performance. A focuser seeks to achieve a competitive advantage in its target segment. 113 .
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 .
Tata Nano). 115 . jugaad or frugal engineering).HYBRID STRATEGY A hybrid strategy is the simultaneous pursuit of cost leadership and differentiation.e. Reducing cost does not always involve a sacrifice in differentiation. Firms focusing on a hybrid strategy typically aim at shifting the productivity frontier and recreating a new product-market segment altogether (Eg. and usually outperforms a stand alone generic strategy. in a hyper competitive context the two strategies need not be mutually exclusive. Though cost leadership and differentiation are inconsistent. similarly differentiation may not always lead to rising costs (i.
It will have a competitive disadvantage vis-à-vis a clearly positioned generic player. leading to what is called – straddling. Industry maturity will usually widen the gap.stuck in the middle. It tries to compete through every means. It is usually the result of a firm not willing to make trade offs. The positioning therefore gets – blurred. but achieves none. 116 . unless such a player is capable of discovering a profitable segment.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 .
Eg. 117 . There is a lot of scope to define the rules of competition. It is characterized by – High level of technological uncertainty. First-time buyers. coupled with low penetration levels.EMERGING INDUSTRY Emerging Industry – An evolving industry characterized by . Consumer behaviour pattern unstable and evolving. technological innovations. leading to a blurred productivity frontier and steep learning curve.radical environmental changes. 3D imaging.) Excessive turbulence in the dynamics of the environment. (Eg. Nano technology. ending in a differential cost economics. Speech recognition software's. Market segmentation not well defined. Artificial intelligence). changing customer needs.
Scope for players to change the rules of the game. Paints. Eg. MRTP may also cause fragmentation. IT.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). Diverse customer needs. High exit barriers because of huge investment in CAPEX. Retail and telecom. It is characterized by – Low entry barriers. Consumer durables. leading to clear fragmentation. Air Conditioning. because of lack of economies of size and scale. 118 . Government regulations in the form Eg. Eg. Eg.
technological maturity. well defined consumer behavioral patterns and imperfect competition leading to near monopoly. distribution networks. collaboration and co-option. Strong entry barriers. established industry dynamics.MATURED INDUSTRY Matured Industry – An industry characterized by saturation in growth rates. Cartel among existing players through collusion. Limited scope for innovation . because of economies of size and learning curve effects. Firms are rule takers in the segment as productivity frontier is well defined.technological maturity. early entry and location advantages. 119 .
scooters. (Eg. Typewriters. Exit barriers are extremely high because of limited prospective buyers. and costly price wars. 120 . backed by corporate espionage. Learning abilities have been stunted and firms adverse to investment in R&D and make fresh investments. dot-matrix printers). Nature of competition extremely high. with little or no signs of recovery. Firms facing a declining phase are characterized by inertia and slow to react to environmental changes.DECLINING INDUSTRY Declining Industry – An industry which has outlived its utility due to the entry of close substitutes and or radical product innovations which results in a shift of the productivity frontier.
mergers and acquisition. focus more on product differentiation or even a hybrid one. or else exit the segment. 121 . strictly product differentiation and not standardization. Locate a defendable position. branding and promotion. aggressive building of distribution networks. move beyond boundaries. Declining Industry – Redesign. regenerate.COMPETITIVE STRATEGIES Emerging Industry – Set benchmarks. reengineer. process innovation. premium pricing. strike alliances. Matured Industry – Sophisticated cost analysis. increasing scope. Fragmented Industry – Identify. recreate new markets. strictly cost differentiation. assess and overcome fragmentation.
However. and complex learning experiences in integrating and harmonizing technologies (distinctive capabilities) that play an important role in delivering competitive advantage through “causal ambiguity”. A firms resources can be classified into – Tangible – These refer to real assets. brands. Intangible – These refer to goodwill. They are a standard in nature. hence very rarely confer competitive advantage as can be easily acquired or replicated. positions based on resources which are unique and inimitable are far more sustainable even in the long term. patents.RESOURCE BASED VIEW Differentiation based on cost or products saturates and ceases to exist beyond the medium term. 122 .
They play a very critical role in shaping competitive advantage. There is a high degree of internal and external causal ambiguity involved in it. Capabilities can be generic (i. they are woven around technologies. Typically.CAPABILITIES & COPMPETENCIES These include a complex combinations of tangible and intangible resources that organizations use to convert inputs to outputs. can be leveraged across businesses) or specific to a particular business.e. Therefore firms should concentrate on developing complex resources that forms the very basis of differentiation. differentiation based on capabilities can be sustained even in the long run. but not necessarily. 123 . Hence.
COMPETITIVE ADVANTAGE 124 .
It results in a distinct differentiation advantage or a cost advantage or hybrid as well. competitive advantage subsequently becomes the back bone for a competitive strategy.COMPETITIVE ADVANTAGE A competitive advantage is a position of superiority relative (i. and results in well springs of new business development. It enlarges the scope of an organization.e. A portfolio of competitive advantage comprises strategic advantage profile (SAP). 125 . Success of a strategy critically depends on SAP. not absolute) to competition. Strategy drives competitive advantage.
Most successful organizations around the world have a well balanced SAP. In most cases SAP is hidden and dormant.STRATEGIC ADVANTAGE PROFILE (SAP) Organizations have to systematically and continuously conduct exercises to identify its SAP. In today's world of discontinuity. 126 . 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. SAP changes from time to time.
VALUE CHAIN ANALYSIS A value-chain segregates a firm into strategically relevant activities to understand its composite behaviour. kaizen or internal customer). Today SCM is integrated with greening the environment as CSR practices. A VC is often compared with a relay team. and enhanced customer tracking – higher market share. each of the players need to be efficient backed by sufficient coordination at the contact points (i. VC pay-offs: better product availability. Substantial cost reductions also follow. 127 . faster product launches. Competitive advantage arises not from an individual activity but a stream of inter-related activities.e. Inventory Mgt to Logistics Mgt to Supply Chain Mgt (SCM).
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 .
129 .STRATEGIC FIT – THE PORTER WAY The sustainability of the value chain depends on the degree of fit between the activities. Fit is important because discrete activities result in negative synergy and can also be easily copied by competitors. – Third order fit refers to optimization of effort. A high fit involving a complex chain of activities drives both competitive advantage and its sustainability. A learning organization helps create strategic fit. – First order fit refers to simple consistency between each activity and the overall strategy. – Second order fit occurs when activities are reinforcing amongst them. Operational effectiveness is not strategy.
It forms the very basis of competitive advantage. These skills results in distinctive activities and processes. – Can be leveraged across businesses. – Cannot be easily imitated or substituted.CORE COMPETENCE A core competence represents the collective learning's of an organization around diverse streams of technologies. Core competence has a high degree of external and 130 internal causal ambiguity embedded in it. but not necessarily. It should satisfy the following conditions – Contributes significantly to customer benefits. – Can be sustained even in the long run. A core competence usually has its roots in technology. .
a core competence is sustainable even in the long-term. a core competence usually does.CORE COMPETENCE A competitive advantage does not necessarily imply a core competence. only global leaders possess a core competence. A competitive advantage is sustainable in the shortmedium term. A competitive advantage manifests from a function. Majority of the firms have competitive advantage. A competitive advantage may or may not lead to superior performance. a core competence always implies a competitive advantage. 131 . a core competence has its roots in a set of skills.
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. Subsequent work on game theory by John Nash led him to win the Nobel prize in 1994. However. In fact there are no. A game is a contest involving two or more players. each of whom wants to win. illustrations depicting a win-win situation. Here the magnitude of gain offsets the magnitude of loss equally. 132 . In a game (similar to a business) one players win is always another's loss. This is known as a zero-sum game.
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.
Firm Y’s Strategy Use Radio +3 +1 Use Newspaper +7 -2 134 Firm X’s Strategy Saddle Point Use Radio Use Newspaper Firm X’s Pay-Off Matrix . A saddle point is a situation where both the players are facing pure strategies.PURE STRATEGY GAME The strategy each player follows will always be the same regardless of the other players strategy.
This is usually through learning by “experience or observation” (i.e. However. Repeated Games – In this situation the players interact repeatedly with each other sub-optimizing the outcome possibilities. there is likely to be temptation by any of the players to try to steal the advantage over the other by breaking the rules of the game (Eg.TYPES OF GAMES Simultaneous Games – This is a situation where the players have an option to choose to cooperate or not through collusion. iteration) rather than through collusion (E. Yahoo Vs Microsoft). Coke Vs Pepsi).g. 135 . It represents the classical “prisoner’s dilemma”. collaboration or cooption.
In a market dominated by price-based differentiation one may attempt to change the rules of the game by/when – – Bases of differentiation dependent on clear identification of what customer wants or value. Game theory relies on the principle of rationality. but 136 players do not always behave rationally.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. It results in a shift in the productivity frontier. . – Building incentives for customer loyalty. – Making pricing more transparent.
DELTA MODEL & LOCK-IN
Its a systematic approach where-in two or more industry majors, who by default has achieved a proprietary position (Microsoft – Software / IBM – Computers) which are not necessarily best-products in the industry, co-opt to create a lock-in. A lock-in implies that other players has to conform or relate to that standard in order to prosper. Becoming the industry standard requires – strong brand, causal ambiguity, and close relationship with other companies offering complimentary services. Lock-in is self reinforcing and escalating (i.e. accelerating effect).
THE THREE STRATEGIC POSITIONS
System Economics Market Dominance Complementary Share
Enabled through effective use of technology
Total Customer Solutions
Customer Economics Cooperation Customer Share
Product Economics Rivalry Product Share 138
Bill Gates is the richest man in the world not necessarily because he has developed the world’s best software's or excels at customer satisfaction; but he has got an army of people working for him who are not on his payroll – all the application software providers who are writing programs based on “Windows” compatible operating platform. Once you create the lock-in it is sustainable because of the “network effects”; which creates the proverbial “virtuous cycle” – customers want to buy the computer with largest set of applications and software developers want to write programs for the computers with the largest installed base.
The proponents (Hax & Wilde) believe that every organization has the ability to create and sustain a “lock-in” positioning (though in varying degree). This “system lock-in” is referred to as “delta” – delta being the Greek letter that stands for transformation and change amongst the players. The lock-in once created becomes very difficult for a firm to penetrate, and becomes a distinct entry barrier. The model is based on the belief that it compliments Porter’s differentiation model and RBV framework instead of contradicting them. In a lock-in strategy the performance outcomes are dependent on the success of another.
It relates to translating strategy formulations into practice. Performance realization of a strategy depends on the implementation effort. Successful implementation also depends on the appropriateness of the strategy. Since strategy implementation is a time bound process, alignment (i.e. strategic fit) is a key variable during times of radical change. Some of the other levers of successful strategy implementation are – Transformational leadership and motivating power. Resource allocation; its stretching and leveraging. Compatible organization structure & control systems. Inertia & resistance to change.
– Resource commitment from top management. – Development of capabilities & competencies.IMPORTANCE OF STRATEGIC FIT Strategic fit has a central role to play in strategic management. – Changing the rules of the game. – Better strategic and operational control. – Unlearning & learning of new skill sets. 143 . While external strategic fit (strategy – environment) is relevant for strategy formulation. A high strategic fit (co alignment) is useful because it enables – – Appropriate and timely response. internal strategic fit (strategy – dominant logic) is critical to strategy implementation.
effective strategies are better crafted when there is a subtle overlapping between the two (i. learning levels are very high.FORMULATION Vs IMPLEMENTATION Traditionally. In fact. In such a situation. Some of the key strategic learning's exists at the contact point between the organization and its customer.e. According to Mintzberg. 144 . In such a situation. emergent strategy vis-à-vis intended & realized). while control is very effective. learning levels are very low. strategy formulation and implementation has been perceived to be distinct & independent. formulation & implementation can occur simultaneously. at the cost of sacrificing a lesser degree of control.
145 . In contrast. bring about transparency. Install a system of shared beliefs and values. A transactional leader is usually confined to allocating tasks & responsibilities and extracting performance. companies depend more on transformational leaders than transactional leaders. transformational leaders go one step beyond – Design a well crafted and designed strategic intent of the organization. shift from compliance to commitment. Pragmatism is the ability to make things happen. He should be an agent of change.ROLE OF TOP MANAGEMENT To bring about change and to implement strategies successfully.
Intangible resources (Eg.RESOURCE ALLOCATION Resources allocation includes tangible resources (Eg. 146 . patents. Zero Based Budget – In this case the budget of a SBU has to be worked out right from the scratch. labour. brands. machines) referred to as threshold resources (i. minimum requirement).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. land. skills) also includes complex resources like capabilities and competencies. The various methods of resource allocation includes Historical Budget – The budgets framed by HQ for a particular SBU keeping in mind past trends.
147 . these capabilities are sustainable even in the medium to long term. Distinctive capabilities are complex set of skills woven around technologies. Mobiles). convergence of multiple streams of technologies at the product – market level is becoming increasingly evident (Eg.CAPABILITIES & COMPETENCIES Technology and business are slowly becoming in – separable. Due to causal ambiguity (complexity). Flat Screen Displays. Distinctive capabilities helps in stretching and leveraging resources thereby overcoming two major constraints involved in strategy implementation – times & costs. though not necessarily in the case of emerging markets. Moreover.
The level of centralization and decentralization is decisive. A firm in several related businesses usually employs a divisional structure. A single product or a dominant business firm usually employs a functional structure. 148 . Once the structure is in place. processes become people independent.STRATEGY & STRUCTURE It is a framework within which individual efforts are coordinated to bring synergy. A firm in several unrelated businesses usually employs a SBU structure. An appropriate organization structure & adequate control systems are essential to implement strategies and achieve stated goals.
149 . or geographical locations. 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. based on skills and competencies. processes. Finance). disbanded subsequently. SBU Structure – Businesses segregated in terms of strategic dissimilarities (Eg. Marketing. Output). with team members having dual line of control. Inputs . Team Structure – An informal group formed for a crisis. Virtual Structure – A boundary less or hollow organization. Divisional Structure – Units grouped together in terms of products.Technology.
assuming responsibility. facing challenges & crises. 150 . structures are becoming flatter and more simpler. Technology – With more and more convergence of technologies in business. as span is broader.FACTORS INFLUENCING STRUCTURE Size – As an organizations size increases there is more specialization and differentiation leading to the top management moving away from operational issues and control. It includes the desire for independence. Environment & People – Economic and political conditions have a major bearing on structure coupled with the attitude and aspirations of the people in the organization. leading to a tall structure.
there is a tendency to continue along the same lines.e. Top managers resist change. Common sources of 151 inertia – complacency with past successes.INERTIA When a firm has been operating in a certain fashion for a long time. co0ntinuity). Inertia is a characteristic of a firm that endures status quo (i. irrespective whether it is from worse to good or good to worse. Inertia acts as an impediment in strategy implementation. Changes in top management and unlearning helps overcome inertia. Most firms undergo periods of strategic continuity rather than strategic discontinuity. .
strategies need to be evaluated on an ongoing basis to prevent deviations of fit. To prevent deviation of fit. Since the internal and external environment is in a state of continuous flux. . firms should move beyond financial performance to strategic performance as organization systems are becoming complex. Deviation of fit is detrimental to performance and may lead to strategic failure.STRATEGY EVALUATION Strategy evaluation centers around assessment of strategic fit. certain authors propose misfit as a source of superior 152 performance. However.
detecting changes in the external and internal environment and taking corrective action wherever necessary. . It attempts to answer the following questions – Is the strategic intent appropriate to the changing context? Are the organizations capabilities still holding good. 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.
Implementation Control – It aims at assessing whether key activities are proceeding as per schedule. It is open-ended as well as . However. Special Alert Control – It intends to uncover unanticipated information having critical impact 154 on strategies. checking every premise is costly as well as difficult. Premise Control – Checking the validity of the assumptions on which a strategy was based. It involves assessing – strategic thrusts and milestones.STRATEGY CONTROL IMPLEMENTATION It involves steering the company towards its original growth trajectory & stated goals.
Strategy intent not linked with goals and objectives – Lack of coordination at lower levels leading to negative synergy. difficult to translate into practice.BARRIERS TO STRATEGY EXECUTION Vision and strategy not actionable – Utopian ideas. “If you cannot . Performance measures are defective – What to evaluate against? How to measure the 155 construct? As a saying goes. Strategy not linked to resource allocation & capabilities – Lacking commitment of top management. low strategic fit due to consultants intervention.
Today it is considered one of the most powerful tools for strategy implementation determining success or failure.7S FRAMEWORK OF Mc KINSEY The 7-S Framework of McKinsey is a management model that describes 7 factors to organize a company in an holistic and effective way. the relative importance of each factor may vary over time and context. Managers should take into account all seven of these factors. important or not they're all interdependent. Large or small. so if one fails to pay proper attention to one of them. to be sure of successful implementation of a strategy. this may effect all others as well. 156 . Together these factors determine the way in which a corporation operates. On top of that.
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. They had been investigating how Japanese industry had been so successful. 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. and was taken up as a basic tool by the global management consultancy company McKinsey. 157 .
processes and routines that characterize how work should be done. formal & informal . Skills – An organizations capabilities and competencies. Systems – The procedures. Style – The way in which the top management influences the functioning of an organization. over time. Structure – The way in which the organization's units relate to each other in terms of their commonalities.THE 7’S Shared Values – It represents what the organization stands for and what the top management believes in. Strategy – Trade-offs for the allocation of a firms scarce resources. to reach identified & stated goals. Staff – Human inter-relationships. 158 .
STRATEGIC FIT Strategy Structure Shared Values Systems Skills Staff Style 1st Order Fit 2nd Order Fit 3rd Order Fit 159 .
style. because most often they are culturally embedded and often neglected. Consider the 4P’s of marketing or 3R’s of SCM. systems) are comparatively easy to identify and influence. In contrast. structure. A choice of an alphabet often limits the scope and skews the interpretation of a model. shared values) are very malleable and comparatively more difficult to identify & influence. While the American co’s focuses on the hard S’s. their Japanese counterparts focus more on the soft S’s for their early success and sustainability. Ineffective in case of a virtual company. 160 .A CRITIC OF THE 7S MODEL While the hard S’s (strategy. staff. the soft S’s (skill.
Low Take Overs 161 .High Organic Growth Strategic Alliance Joint Venture Mergers & Acquisition Strategic Fit .STRATEGY IMPLEMENTATION ROUTES Strategic Fit .
Reliance Industries). tax holidays. concessions are available for green-field projects. soft loans. (Eg. i. green-field projects. Govt.e. (Eg. It has complete control over inputs. Long gestation leads to delayed market entry. subsidized power). . The entire infra-structural facilities are set up afresh having its own gestation and break-even.e. technologies. i. 162 Risk of cost and time overruns. SEZ’s. and markets.ORGANIC GROWTH Here a firm builds up its facilities right from the scratch and continues to do so without any external participation. the entire value chain.
It touches upon a limited aspects of a firms value chain. There is no funding or equity participation from the alliance partner & both the firms continue to operate independently. It has limited intervention power and usually lacks holistic commitment from the alliance partner. 163 It is a form of competitive collaboration. Tata Motors & Fiat). Alliances are usually in the areas of technologies or markets (Eg. Alliances are usually short-lived and disbanded once the purpose is achieved. .STRATEGIC ALLIANCE It involves a pro-active collaboration between two or more firms on a particular domain or function for mutual gain.
leaving minimum scope of overlapping. Hero .Honda). . Selecting the right partner is critical for success. It is a win-win situation for both the companies. Tata – AIG. Dominant logic of both the companies should be complimentary.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. (Eg. A comprehensive MOU is essential.
Coca Cola – Thums Up). Revival of a sick-unit through better management practices is a major motive behind an acquisition 165 strategy. Integration of assets and other financial resources. . Brooke Bond & Lipton). Economies in scale leading to lowering of costs. Integrated distribution channel leads to better market penetration and overall synergy. ITC Tribeni Tissues. with the individual firms ceasing to exist any more (Eg.MERGERS & ACQUISITION It refers to the fusion of two or more firms into a single entity. Acquisition is an outright purchase of a firm assets by another independent entity (Eg.
Make a public offer of not less than .Corus). Instant access to capacities and markets. Most countries have stringent laws that prevents hostile take over. often the new firm is “left alone”. Consolidation in a fragmented industry. Tata Steel .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. Larger geo-graphical diversity. Integration of organization structure & cultures is difficult. Inform SEBI / Stock Exchange after 5% stake is 166 acquired.
MANAGEMENT TOOLS IN STRATEGY 167 .
it is also a source of potential threat. Balanced Scorecard – Tracking strategy 3600. TQM – Doing the right thing the first time. Change provides enormous opportunities. Radical change is superseding incremental change. 168 . or better still create next practices Reengineering – Redesigning work processes right from the scratch. Companies therefore need to ensure competitive advantages doesn’t become competitive disadvantages. The past is ceasing to be an indication of the future. Some tools to ensure that – Benchmarking – Adopt certain best practices. every time.WHY MANAGEMENT TOOLS? Change is becoming pertinent in the business environment.
A best practice is defined as an activity performed by a company in a particular domain or function which distinguishes it from others and making them world-class. These exemplary practices involves the stakeholders of the company and helps achieve its strategic intent. Best practices centers around looking at a different way to satisfy various stakeholders. Benchmarking involves the identification, understanding and adapting of certain best practices and implementing them to enhance performance. Firms are moving towards next practices as best practices make firms look more and more homogeneous.
SOME BEST PRACTICES
Dell: Customized configuration of computers. Caterpillar: 48 hours delivery anywhere in the world. Citi Bank : Priority banking services. Maruti: Certified “true value” pre-owned cars. Microsoft: ESOP to employees. Infosys: Customized work-stations. TCS: Referencing potential new recruits. ITC: Shareholders factory visit. AmEx: Outsourcing data warehousing mining. MARG: Set-top box to study viewing patterns. Honda: CEO’s visit to dealers.
TYPES OF BENCHMARKING
Functional – Used by companies to improve a particular management activity. Eg. Motorola learnt delivery scheduling from Domino’s. Process – Improving specific key processes and operations from experiences in similar businesses. Eg. Ford adopting assembly lay-out plan of Toyota. Competitive – It involves assessing the sources of competitive advantage and imitating them. Eg. Samsung leveraging miniaturization skills of Sony. Strategic – It involves assessing business models and replicating them in a different market. Eg. Reliance replicating AT&T business model.
HOW TO BENCHMARK?
Phase 1: Planning – What to benchmark? Whom to benchmark? – Identify key performance indicators & Data source. Phase 2: Analysis – Assessment of performance gaps. – Predict future performance levels. Phase 3: Integration – Communicate findings and gain acceptance. – Establish functional goals and its implementation. Phase 4: Action – Implement and monitor progress. – Measure results against stakeholder wants and needs. – Recalibrate or outperform benchmarks.
WHOM TO BENCHMARK?
Selecting the benchmarking partner is critical to solving the problem. Firms should generally avoid selecting the industry leader, because it may not always adopt the best practices for every process or activity. Benchmarking partners may also be from different industries. Types – – Internal – It involves benchmarking against its own branches, divisions, SBU’s. Proximity to data and cooperation is taken care of automatically. – External – It involves benchmarking against firms that succeeded on account of their best practices. It may also involve benchmarking against world-class firms. Friction may arise due to presence in competing industries.
BENCHMARKING - ADVANTAGES
Finding better ways of meeting stakeholder needs. Organizational learning comes from internal as well as external sources. Establishing goals based on formal assessment of external conditions. Defining effective measure of indicators, facilitate comparison, adopt from other organizations. Ensuring a continuous learning organization. Reducing competitive disadvantage. Organizational turnaround, especially effective in case of a wide strategic drift when differentiation strategies fail to work. 174
It can at best complement it.e. clustering). the more similar they end up looking. Benchmarking merely reorients profits in the hands of few to profits in the hands in the hands of many (i. It does not shifts the growth 175 trajectory of the industry as a whole.BENCHMARKING .LIMITATIONS More and more companies benchmark. . Benchmarking is useful for bringing about operational efficiency. but it cannot be used as a strategic decision making tool. Strategy is more of creating best practices rather than copying them. While strategy is all about differentiation and not looking alike.
clean sheet). Windows 95 to 97). process mapping) and eliminating or improving them (E.e.g. DOS to Windows). for achieving performance improvement (E. . Re-engineering attempts to radically change an organizational products or process by challenging the basic assumptions surrounding it. Re-engineering involves complete reconstruction and overhauling of job descriptions from the scratch (i.e. The task demands a total change in organisational 176 culture and mindset.RE-ENGINEERING Redesigning leads to identification of superfluous activities or product features (i.g.
REENGINEERING – KEY TENETS Ambition Focus Attitude Enabler Performance Large scale improvement by questioning basic assumptions about how work is done Micro Vs Macro Business Processes Vs Organisational Processes Starting right from the scratch Not historical More IT driven. than people driven Innovative Vs Traditional Customer centric Vs Organisational centric 177 .
REENGINEERING .LEVELS Reengineering can be successfully leveraged at all levels of an organization with varying degree of results. structures. processes.e. 178 . . customers and suppliers and protects the organization from the future (i.e. It can be of the following types – Functional – It looks into the flow of operations (i. BPR). Strategic – It looks into the process of strategic planning. resource allocation and prepares the organization for the future through a reorientation of the entire strategic architecture. etc) and supports the organization for the present. products. Business – It looks into markets.
learning curve advantage. – Causal Ambiguity. While traditional manufacturing is a bottom-up approach. protection can be had in the following ways – – Patenting. Indonesia). It generally acts as a threat to innovation. – High cost and time acts as a deterrent.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. Cheaper versions of Intel chips and mother-boards manufactured in Taiwan. with an intention to copy it (Eg. 179 . However. – Early entry advantages.
Actualization – Obtaining and dismantling of the product to assess how it functions. cost and effort necessary for the purpose of reverse engineering. 180 . Implementation – Developing of a prototype. Inaccurate assessment at this stage may lead to a failure of the entire project. nano-technology). Usually in such cases segmentation and pricing is different from the original innovator.STAGES IN REVERSE ENGINEERING Awareness – Recognizing whether the product is found to be worth the time. Introduction – Launching the product in the market.e. machine tools to convert ideas into a marketable product (i. designing facilities.
– Serviceability – Large no. – Features – Anti-lock braking systems. More and more companies are moving towards meeting implied rather than stated needs. – Aesthetics – Appeal in design. Air bags. – Reliability – Consistency in mileage. – Durability – 1980 manufactured cars still on road. – Conformance – Emission standards .WHAT IS QUALITY? It involves the totality of a product or service in meeting certain stated or implied needs. Car) – – Performance – Mileage of 14 kms to a litre of fuel. It has eight dimensions (Eg.Euro IV. of service stations. 181 . – Perception – Customer notions.
It had little impact on improving overall productivity. which ensures good market standing. zero defects. TQM is a way of creating an organization culture committed to the continuous improvement of work processes – Deming. .fix it in nature. touching upon a limited aspect of a value chain.TOTAL QUALITY MANAGEMENT Objective – Management of quality ensures conformance to certain pre-set standards. It is deeply embedded as an aspect of 182 organisational life & culture. Management of quality was traditionally inspect it .
183 . fully involved in decision-making and fairly rewarded for results. Be customer centric – Generate the concept of internal customer (Ishikawa). the first time – From reactively fixing error in products to proactively preventing errors from occurring at the first place (Juran). Looking at quality as an endless journey. Empowerment – It takes place when employees are properly trained. not a final destination.TQM – KEY TENETS Do it right. Kaizen – Make continuous improvement a way of life. provided with all relevant information and best possible tools.
6-Sigma). equal participation). of units meet preset standards (Eg.e.STRATEGIES Outsourcing – It is the process of self-contracting services and operations which are routine and mundane. 184 . It is based on the principles of MBO (i. Quality Circles – It a small group of shop-floor employees who meet periodically to take decisions regarding operational problems and crises. enabling the firm to concentrate on core activities essential to customer satisfaction.TQM . 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. saving precious top management time.
it’s bad execution. – Less than 10% of strategies effectively formulated are effectively executed. – In the majority of failures – we estimate 70% – the real problem isn’t (bad strategy) .........BALANCED SCORE CARD Some interesting comments ... – Efficiency and effectiveness is passé. strategy implementation has never been more important. Source: Fortune Magazine Why CEO’s fail? 185 ...
These measures worked well when organizational systems were simple and unidirectional and more importantly the environment was static. rather than effects. 186 . 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.CONCEPTUALISATION A company’s performance depends on how it measures performance. Most managers tend to rely on traditional measures of performance having its origin in finance as they are well tried and tested.BSC . Focus more on causes. Organizations need to move from financial to strategic performance.
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. 187 . because they have too many. and distinguish strategic problems from operational ones.
ageing schedule) % of key customer transactions Ranking of key customer accounts No. of visits or calls made % of NPA’s 188 .e.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.
of new product launches Vs competition Product pricing Vs competition 189 .BUSINESS PERSPECTIVE GOALS Skills Excellence Exposure Introduction MEASURES New capabilities and competencies Implementation & gestation period Bank and supplier credit limits & PLR Unit Costs / Conversion Ratio / Defect Ratio No. of times covered in media No.
of product innovations 190 . of new patents registered Time to develop next generation products Average and spread in operating cycle % of products that equal 2/3 sales No.LEARNING PERSPECTIVE GOALS Technology Manufacturing Focus Timing MEASURES No.
Return on Investment Market Capitalization / PE ratio 191 .FINANCIAL PERSPECTIVE GOALS Survival Success Prosper Divestment MEASURES Cash flows Growth in Sales and Profits EPS.
STRATEGY MAPPING 192 .
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 .BSC .
sharing of vision). doing right things instead of doing things right).ADVANTAGES Most often top managers face information overload. they don’t know .e. 194 performance will automatically follow.BSC . Shift from control to strategy (i. The BSC brings together the different elements of a company’s strategy at a glance. Focus on cause not effects. .e. It helps translating strategy into practice (i. As a result. Seek excellence. Modern managers should be poised to ask the right questions.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. Porter 196 . but also sustains it. not only thrives. .Michael E.
CORPORATE RESTRUCTURING 197 .
from survival of the fittest .. Tata Group).CORPORATE RESTRUCTURING The only thing constant in today's business environment is change. To adapt to the changing environment.” 198 ... As Peter Drucker pointed out.. firms use restructuring strategies. to survival of the most adaptable.. “every organization must be prepared to abandon everything it does. Strategic variety may be caused by changes in the as external well as internal environment.. Radical change brings about strategic variety. Restructuring involves consciously driving significant changes in the way an organizations thinks and looks (Eg. Strategic variety brings paradigm shift.
ATM. etc). Instead. Core Business – Company’s should introspect – What business are we in? Business evolved out of opportunism or myopia should be divested. Walkman. Structural Changes – Conventional hierarchical structures should be disbanded in favour of more 199 flexible ones (i. they should strive to provide unimaginable value ahead of its time (Eg. . Company’s should go beyond just asking what he expects.RESTRUCTURING – BASIC TENETS Customer Focus – Restructuring ideally begins and ends with the customer. and dividing the core businesses into SBU’s (i. Internal customers should also not be neglected. Fax. downscoping).e. downsizing or rightsizing).e.
... . 200 ....) The Aditya Birla group typically relied on the “marwari” community for key management positions . Ratan Tata now drives the point the group means business.. During the times of JRD.) Reliance dismantled their industrial embassies ... Restructuring also requires cultural reorientation.RESTRUCTURING – BASIC TENETS Cultural Changes – A culture represents the values and beliefs of the people about the organization. It is created and institutionalized by the top management... the Tatas were considered a benevolent and charitable organization. Kumar Birla today is more dependent on professionals.. started focusing on their capabilities.
Publicizing welfare projects to demonstrate CSR. Restructuring provides a platform to close this gap.MOVING CLOSER TO THE CUSTOMER As companies evolve. Carry out PR campaigns. Getting feedback & addressing customer complaints. “ … one reason our customers are satisfied is that we aren’t. Organizing customer and supplier meets. Use the reach of networking technologies.” 201 . Communicating to the media about organization efforts to deliver quality products. they tend to move away from the customer. Honda’s ad says.
It may include brands as well. Further. Asset Swaps – It entails divesting and acquisition simultaneously by two companies. It can have two forms. Mittal – Arcelor) and can take various forms. 202 . or conglo-merate. Further spin-off can be classified as split-off and split-up. Hive Off – It involves siphoning of assets under control.ASSET RESTRUCTURING Asset Restructuring – The asset composition of a firm undergoes a major change. it may be smooth (Eg. where the difference in valuation is settled off through cash or equity (Eg. Tata – Corus) or hostile (Eg. Glaxo – Heinz). spin-off and equity carve. horizontal. including its intangibles – Mergers – It may be vertical.
HIVE OFF Spin-Off – A spin off is the creation of a new entity. the existing shareholders receive equity in the subsidiary in exchange for the stocks of the parent company. – Split-Up – In a split-up. Tata Industries selling 20% stake to Jardine Matheson). in which the equity is allotted amongst the existing shareholders on a pro-rata basis (Eg. – Split-Off – In a split-off. Equity Carve – It involves selling a minority stake to a third party while retaining control (Eg. Reliance Ent). Most of these practices are not in consonance with Indian laws. 203 . the entire parent company loses its identity after being split into a number of subsidiaries.
In 2005. Generic motives include – – Raise working capital. – Poor performance.DIVESTITURE It involves the sale of a brand or a division of a company to a third party. A complete sell-out is known as divestment (TOMCO). but retained its engineering division. Parle sold its Thums Up brand to Coke for $40 million apprehending fierce competition. In 1995. strategic misfit. 204 . repay long-term debts. for a specified market or in general with full management control. Selling out in phases is called disinvestment (IPCL). L&T sold its cements division to Aditya Birla group.
involving 608 pence per share).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 . Share Buyback – It is a process of cancellation of shares out of free reserves to the extent of 25% of paid-up capital (Eg.3 billion. Tatas take-over of Corus for US $11. Conversion – Replacing debt with equity or vice-versa or costlier with cheaper debt or cross currency debt. It provides greater leverage as well as management control. Wipro). 205 .
99 cr Tata Power – Rs. 1170 cr Goodlass Nerolac – Rs. 1860 cr . 1890 cr CMC – Rs. 1700 cr Trent – Rs.BUSINESS RESTRUCTURING – TATAS Divestments Lakme – Rs. 230 cr Diversifications Tata Motors – Rs. 950 cr Merind . 42 cr Voltas .Rs. 256 cr ACC – Rs.Rs. 1439 cr 206 Tata Timken – Rs 120 cr Tata Telecom – Rs. 250 cr Tata Tetley – Rs. 150 cr VSNL – Rs. 120 cr Tata AIG – Rs.
Rightsizing – It is phasing of excess and redundant employees resulted out of faulty internal planning (SAIL).ORGANIZATIONAL RESTRUCTURING Organizational structure and systems calls for a change when strategic variety is apparent. Turnaround is the primary motive. usually as a result external turbulence. of a firm’s employees and sometimes in the no. 207 . Downscoping – It involves reducing the business and/or geographical scope of a firm (Aditya Birla group). Survival is the primary motive. of operating units. keeping the composition of business intact (Jet Airways). It can be carried out in the following ways – Downsizing – It is a systematic one-time reduction in the no.
Strategy change is unviable without a preceding change in its dominant logics. The longer the period.e. The dominant logic represents the perceptions and biases (i.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. inertia). Dominant logic becomes deep-rooted in organizational contexts depending on the period it is in place (tenure of the CEO). the more difficult it becomes to uproot the paradigm (i. as strategies are based on such beliefs and biases. 208 . thumb rules) of the top management.e.
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. In most organizations. Companies achieve real agility only when people at every level rise above the ordinary to face the challenges – revitalization or transformation. 209 .e. the factor that stifled change & performance was – culture. Successful transformation requires – incorporating employees fully into the process – leading from a different place so as to maintain employee involvement – instill mental disciplines that will enable employees to behave differently.
never take no for an answer. Understand and deliver the quid pro quo. process ownership. Promote inventive accountability. Manage from the future. Create relentless discomfort with the status quo. Questioning every basic action of the organization. The best way is to alter the institutional point of view. Harness setbacks. it is not about winning but about learning. Encourage uncompromising straight talk.SUCCESSFUL TRANSFORMATION Build an intricate understanding of the business model at all levels of the organization. 210 .
that can be both enablers and blockages to change and restructuring.FORCE-FIELD ANALYSIS A force-field analysis provides an initial overview of change problems that needs to tackled. Culture and style of management are two main impediments in force-field analysis. Identify and implement facilitators of cultural change. It involves identifying – Aspects of current culture which needs to be reinforced. 211 . Aspects of current culture which needs to be overcome. by identifying forces for and against change. It involves diagnosing a change situation – systems & structures. also known as cultural-web.
Term Loss of human capital Lower performance Higher performance Capital .RESTRUCTURING .OUTCOMES Alternatives Organizational Short .Term Reduced labour costs Reduced debt costs Emphasis on strategic control Business High debt costs Higher risk 212 Long .
In order to put back the company on the right track they are resort to – Denominator – It assumes that turnover cannot be increased.NUMERATOR & DENOMINATOR MGT Most firms across emerging markets undergo strategic discontinuity and as a result are forced to restructure their businesses. While the first strategy produces results instantaneously. down-scoping or asset stripping. focuses on reengineering. Numerator – It assumes that turnover is not a barrier or constraint. reverse engineering and regenerating. 213 . the second one is a more viable strategy and sustainable option in the long run. hence go in for downsizing.
TURNAROUND MANAGEMENT 214 .
...WHY TURN AROUND MANAGEMENT? Some interesting insights . Source: Why do firms atrophy? (Business Today. . – Only seven of the first fifty Indian business groups in 1947 were even in business by the turn of this century.. 215 (Govindarajan and Trimble.. – Less than 10% of the Fortune 500 companies as first published in 1955. and that the thirty-two of the country’s largest business groups in 1969 are no longer among the top fifty today.. January 1997). still exist as on 2005.
Both content (what) and process (how) are equally important for a successful turnaround. 216 . A category of underlying principles and concepts. systems.TURN AROUND MANAGEMENT A turnaround is said to occur when a firm perseveres through an existence threatening performance decline.e. and capabilities. and achieves sustainable performance recovery. ends the threat with a combination of strategies. While content focuses on endogenous and exogenous variables. skills. process focuses on – A logic to explain a causal relationship between intervening variables. Stage Theory). As a sequence of events describing how things change and why they change (i.
Rising input costs. 217 . Uncompetitive products or services. unavailability or radical lowering of substitute costs or technological obsolescence. especially in key positions. Substantial shifts in consumer preferences. suppliers and bankers. Low employee morale leading to high employee attrition at all levels. Some indicators Continuous cash flow crises as a result of dwindling market-share and profits. Low stakeholder confidence. leading to lack of acceptability from distributors and customers.TURNAROUND INDICATORS Most firms atrophy simply because they fail to diagnose the indicators that acts as threat to organizational existence.
Common approaches adopted Change in key positions. prune work-force.. Product redesigning or reengineering. which most top managers fail to appreciate. “all is not well”. they adopt surface level measures (disprin popping) which most often fail. Extending work hours. be more customer centric. based on elasticity. liquidating dead assets. Recalibrate prices. 218 . Emphasis on advertising and market penetration. consider extension.TURNAROUND ILLUSION The first step to a successful turnaround is the basic acceptance of the fact that …. focus on power brands. Hence. Revamp product portfolio.
TURNAROUND STAGE THEORY Stage 1 Decline Stage 2 Stage 3 Stage 4 Outcome Response Transition Performance Equilibrium Line Success Failure Indeterminate Nadir Time 219 .
220 . It has its origin in “environment led fit” that subscribes to the view that a firm has little control over external factors. Identification of the stimulus leads to the arrest of the downfall. It involves the identification of the theoretical perspectives that explains performance decline – K-Extinction – It suggests that macro economic and industry wide factors are responsible for decline. primarily dwindling resources and capabilities are responsible for decline. R-Extinction – It suggests that organization factors.DECLINE Decline is the first stage in the turnaround process. It has its origin in “resource led stretch” and subscribes to the view that a firm has substantial power to override the context.
diversification. 221 . the response should be operational. new market initiatives. If the decline stems from structural shifts. the response should be strategic. The response must match the cause of the decline. asset reduction. If the underlying cause is internal efficiency. Strategic responses focus on changing or adjusting the business the firm is engaged in through long term moves such as – integration. Operating responses typically focuses on the way the firm conducts business and involves tactics geared towards – cost cutting and process redesigning (BPR).RESPONSE INITIATION Turnaround responses are typically categorized as operating or strategic.
Contour – It is easier to reverse decline in the earlier stages through operational measures.RESPONSE DICHOTOMY The response initiation is somewhat dichotomous and cannot be universally applicable. Similarly new market initiatives is feasible only for multi-product firms. 222 . which may be unavailable to a focused firm. Untangling this question brings into focus three events – Domain – Many of the strategic cures have limited applicability for an affiliated firm. Scope – A diversified conglomerate may acquire a distressed business to turn it around and gain valuable synergies. when decline deepens shifts in strategic position becomes essential.
Empirical studies show that average time is 7. substantial amount of time usually passes before results begin to show (i. 223 .TRANSITION Transition usually reflects the first signs of recovery. participative management (i.7 years with a range of (4-16) years. confidence building measures. many a times early signs of recovery fades out. Sustenance is the key factor in this stage. However. transparency. lead – lag). consensus). Support from all the stake holders through resource commitment. The top management has a key role to play through empowerment. role model. Effective levers of transition. However.e.e.
224 .OUTCOME Outcome is said to be successful when a firm breaches the equilibrium performance level. Share price indications and media coverage. it should adopt a holistic approach. Revival of key customers and new product launches. Cut off points must be unequivocal. Commanding a premium in the market. Failure is an indication that initial momentum was not sustainable characterized by irreversibility. Instead of focusing on financial parameters alone. Supplier and banker confidence. Regaining lost market share and distributor confidence.
COOPERATIVE STRATEGIES & ALLIANCES 225 .
the commitment and the involvement between the firms increases manifold.COOPERATIVE STRATEGIES Cooperative strategies are a logical and timely response to changes in business dynamics. technology. In the cooperative strategy continuum as firms move up the value order. Any cooperative strategy maybe between firms within the same country or cross border as well. More and more companies worldwide are moving away from competition to co-option to leverage their resources and enhance bargaining power. strategic alliance. consortia. supply-chain partnership. It can assume any of the following forms – franchising. 226 . and globalization . licensing. or joint venture.
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. It is an effective strategy to penetrate markets in a shortest possible time at a minimum cost. Titan Inds. owners of the brand Tanishq allows its franchisees to sell its jewellery products. 227 . owners of the brand Monginis allows its franchisees to sell its confectionary products. Switz Foods. Branding is critical to franchising.
Different levels of licensing Manufacturing without embracing any technology (CBU). Develop a product through its crude stage. HM manufacturing GM range of cars in India with a buy-back arrangement is a perfect example of CBU. as in Tata Indica. refine processes and adopt necessary technologies (SKD). Become a systems integrator (CKD). 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.
It can be of the following types – Multipartner – Intends to share an underlying technology or asset. Cross Holdings – A maze of equity holdings through centralised control to ensure earnings stability & threshold resources for critical mass (Eg. Airbus – Boeing). 229 . Tata. Collusion – Few firms in a matured industry collude to reduce industry output below the equilibrium level. Hyundai). leverage upon size to preempt competition by escalating entry barriers (Eg.CONSORTIA Consortia – They are defined as large inter-locking relationships & cross holdings between businesses in a similar industry. enabling them to increase prices (Eg. Coke – Pepsi).
Companies in different industries with different but complimentary skills. 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. . Tata Motors – IDEA).SUPPLY CHAIN PARTNERSHIP It is a pro-active & collaborative arrangement between supplier and customer aimed at achieving better control over the value chain (Eg. Continuous sharing of knowledge is critical to the success of a supply chain partnership.
Reliance – Du Pont). Tata Motors – Fiat. 231 . Partner selection is one of the critical success factors.STRATEGIC ALLIANCE It is an short to medium term understanding between two or more firms to share knowledge and risk. enter newer markets. instead of hurrying into a relationship. Generic motives involved are .learning organization. design next generation products. Firm’s should undertake a long courtship with potential partners. effective R&D management. Despite their popularity (50-60)% of the alliances fail to accomplish their stated objectives. preempt competition. to gain knowledge and to obtain access to new markets (Eg. enhance credibility.
Bajaj – Castrol). Bootstrap – An alliance between a weak and a strong company with an intention to acquire it. Coke – Pepsi). Complementary Equals – Two firms mutually promoting each others complimentary products (Eg.STRATEGIC ALLIANCE . Alliances of the Weak – An alliance is entered into to preempt competition (Eg. Airbus – Boeing). Maruti).TYPES Collusion – Tacit top management understanding to neutralize price wars (Eg. Backward – An alliance (quasi or tapered) with a supplier of critical components seeking commitment (Eg. 232 . Whirlpool – Tide.
– Japan Vs US). Too much stress on financials & structure be avoided.PARTNER SELECTION CRITERIA It is likely that partners will not have complete consent on alliance objectives because the institutional context in which the alliance embedded varies from country to country. Differences in level of economic development can produce differences in alliances motives. Firms from developed markets seek access to markets and firms from emerging markets seeking access to technology. 233 . Cultural orientation has been found to have a profound effect on top management’s strategic orientation (Eg.
Intangible Assets – Move beyond the financials of the firm. Dominant Logic’s – Similarity in beliefs & biases. including ability to provide quality products and services. Partner’s ability to acquire fresh skills. 234 . Willingness to share knowledge and skills.PARTNER CHARACTERISTICS Complimentarity of Capabilities – The degree to which partners resources can be used in conjunction. Unique Resources – Abilities or skills which cannot be easily duplicated. Experience related to previous alliances. Managerial capabilities.
235 . Getting Engaged – It should incorporate a specific joint activity. partners should nurture it. Selection & Courtship – It involves self analyzing. differences not anticipated earlier. the value chain. Changing within. Learning to collaborate – strategic. operational & cultural integration. Setting up the housekeeping. incorporating clear signs of continuing independence for all partners. vows to include commitment to expand the relationship.MANAGING ALLIANCES Alliances are more than just a deal. degree of compatibility. instead of focusing controlling the relationship. understanding the chemistry.
a joint venture is a selection among modes by which two or more firms can transact. There are substantial linkages in the value-chain. whilst the partners continue to operate independently. It lasts till the vision is reached. Conceptually. synergy) rather than mere exchange (i. separation is very 236 bitter. . It aims at creating new value (i.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. combining parts).e.
in addition to a high degree of asset specificity. though more profitable alternative to other choices.JOINT VENTURE – GENERIC MOTIVES Transaction Cost – The situational characteristics best suited for a JV are high performance uncertainty. Organizational Learning – It is a means through which a firm learns or seeks to retain their capabilities. Strategic Behaviour – Firms may override transaction costs. It may also be linked to deterring entry or eroding competitors position. The market fails as sellers are unwilling to reveal their technology and buyers are unwilling to purchase in the absence of inspection. 237 .
Maruti – Suzuki. Renault – Nissan (Minivans – Cars). Essar – Hutch (Vodafone). Endorsement from government authorities. – Eg.OTHER MOTIVES Entry into newer markets. Yamaha – Escorts. – Eg. – Eg. Define future industry standards. – Eg. Learning new technologies. TVS – Suzuki (4-Stroke Engines) Fill gaps in existing product lines. – Eg. Eli Lily – Ranbaxy. Sharing of resources. Daimler – Chrysler (Premium Cars) 238 . – Eg.
Modi – Telstra What after exit (parenting disadvantage)? – Eg. – Godrej – Procter & Gamble.Enka. Tata – Aditya Birla in Idea Cellular 239 . – Maruti – Suzuki.RISKS INVOLVED Incompatibility – Differences in cultural background.e. LML – Piaggio Differences in size and resource base. PAL – Fiat If the cost of continuing exceeds the exit costs? – Eg. Century . technology) drain. Risk of over dependence. Risk of brain (i. – Eg. – Eg.
Equality – Lack of dominance. 240 . Incompatibility – Performance expectations. Focus – Avoid strategic myopia. Flexibility – Sufficient space to breathe and adjust. Culture – Reconcile gaps. Objectives – Shared vision. Inertia – Differences in age and evolution patterns. Agreement – Clarity on operational control.PRE-REQUISITES FOR SUCCESS Commitment – Mutual trust. Costs – Other modes of transaction becomes cheaper. respect. time sharing. Partner – Avoid duplication of skills and capabilities.
MERGERS & ACQUISITION 241 .
The larger objective is to leverage on size. An acquisition is said be smooth if it is with the consent of the management (Eg. Most countries have stringent laws that prevents hostile takeovers (Eg. 2002). HLL – Tomco). however. Ranbaxy . Brooke Bond – Lipton). SEBI Takeover Code.Daichi) and hostile if it is without the consent of the management (Eg. Mittal Arcelor). An acquisition is the purchase of a firm by a firm (of larger size. reverses are also taking place through LBO) with a view to acquire conglomerate power and induce synergy (Eg.MERGERS & ACQUISITION A merger is a mutually beneficial consent between two or more firms (usually of similar size) to form a newly evolved entity by absolving their individual entities to preempt competition (Eg. 242 .
creeping acquisition).e.SEBI TAKEOVER CODE. 2002 Promoter – A person who has a clear control of atleast 51% of the voting rights of the company and confidence of all the major stakeholders. Hike – An acquirer who has already picked up a 5% has to make a mandatory disclosure for every additional 1% stake that it acquires. Control – A special resolution of 75% of the share 243 holders approving the change of guard. . Acquirer – Someone (individual or firm) who picks up an atleast 5% stake without mandatory disclosure having an intention to wrest management control (i. Preferential – A preferential allottee ending up acquiring 5% stake also comes under its purview.
2002 Pricing – Acquirers will have to offer minority shareholders (at least 20%) the past 26 weeks or past 2 weeks average price. asset stripping).e. the SEBI can intervene and block share transfers if: the acquirer has ulterior motives (i. Grasim – L&T Cement. 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. Gujarat Ambuja – ACC).SEBI TAKEOVER CODE. credentials or track record is at stake. SEBI – In case of a hostile take over. 244 . whichever is higher as an exit route (Eg. and/or does not enjoy the confidence of the different stake holders.
Conglomerate – It involves integration of two distinctly unrelated businesses. Vertical – It involves complimentarily (partially related) in terms of supply of inputs or marketing activities (Eg. Horizontal – It involves integration of two highly related businesses (Eg. Electrolux . usually opportunistic (Eg. Godrej. ITC).Kelvinator). The type of merger is depends on the degree of relatedness (strategic) between the two businesses. Reliance). 245 .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.
Tax benefits (Eg. Global image (Eg. Reduction in risk. Tata Steel – Corus). quick access). 246 . ITC Bhadrachalam).MERGERS & ACQUISITION . Reduced gestation (i. Acquiring assets or capabilities (Eg. Ulterior motives – (Eg. ICICI –ITC Classic). scale and scope. Asset Stripping – Shaw Wallace). Avoiding risk of new product development. Coinsurance effect – Higher debt raising capability. Access to newer segments (Eg. Ranbaxy – Crosslands). Mittal – Arcelor). Overcoming entry barriers (Eg. Economies of size.MOTIVES Increased market / conglomerate power.e.
Inability to achieve synergy. Overvaluation is often as a result of an ego drive and substantially affects future returns.MERGERS & ACQUISITIONS PITFALLS Cultural differences (Eg. Top management overtly focused on due diligence exercise and negotiations. neglecting core business. their initial offer was around 420 pence/share. Tata – Corus). Managing size. 247 . When Tata Steel started negotiations with Corus. Overvaluation of buying firms (Eg. Managing over-diversification. while the ultimate acquisition was made at 607 pence/share). Merging of organisational structures.
Maturity – A larger firm acquires a smaller firm with an objective to achieve economies of scale and experience curve effects (Eg.MERGER TYPE & PLC Introduction – A larger firm may acquire a newly formed entity with an objective to preempt new competition or acquire its license (Eg. Kingfisher – Air Deccan). Tata Steel – Corus). with an objective to reinforce its growth trajectory or to take on the might of a comparatively larger player (Eg. vertical to save transactions costs. Brooke Bond – Lipton). Growth – This stage may witness parallel merger of two firms of similar size. 248 . Decline – Horizontal mergers are undertaken to ensure survival.
A concern of respect and trust for the business of the acquired company. Strong differences may stifle plans and its execution. Left alone syndrome.FRAMEWORK Positive contribution to the acquired company. Blanket promotions across entities and confidence building exercises needs to be practiced. active top management intervention in phases. Immediate attempts to super impose structure and culture may cause bottle necks. A common shared vision.INTERNATIONAL M&A . 249 . An acquisition just for the sake of it or reputation yields very little value in the long term.
Redefine responsibilities and authority. They can carry the message to the various stake holders. promptly. Integrating work processes. Shift attention from business portfolio to people and processes.INTEGRATION . It will enable focus on customers and key people. Decide on the new hierarchy. Determine business strategy.BLUEPRINT Take the media into confidence. 250 Do not ignore the “people factor”. Decide upon management control systems. .
operational & financial). Valuation decisions are arrived through a due diligence process when the prospective acquirer gets access to the books of accounts of acquiring company. over valuation can become a curse. 251 . – Synergy – Potential value gain from combining operations (i.VALUATION The process of valuation is central to M&A. While under valuation may be a significant opportunity.M&A . Financial motives – Undervaluation relative to true value. – Market for corporate control.e. – Unstated reasons – Personal self interest and hubris. The process takes (6-12) months.
– Vertical Synergy – Gains come from controlling the supplychain and savings in transaction costs. Synergy can be negative as well. or from increased market power which increases sales and margins. Innovative product – Good distribution network). 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. Sources of operational synergy – Horizontal Synergy – Gains come from economies of scale which reduces costs. – Conglomerate Synergy – Gains come when one firm complements the resources or capabilities of another (Eg. 252 .
VALUING FINANCIAL SYNERGY Diversification – Reduce variability in earnings by diversifying into unrelated industries. 253 . Cash Slack – It reduces asymmetry between cash starved firms with deserving projects and cash cows with no investment opportunities. and without paying take-over premiums. but availed after being merged with a profitable firm (Eg. shareholders can accomplish the same at a much lesser cost. However. Hotmail). Tax Benefits – Tax benefits may accrue from tax entitlements and depreciation benefits unutilized by a loss making firm. ITC – Bhadrachalam Paper). Synergy comes from projects which would not have been undertaken if the two firms stayed apart (Eg.
higher leverage. It relates to the concept of diversification. 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.VALUING FINANCIAL SYNERGY Co-Insurance Effect – If the cash flows of the two firms are less than perfectly correlated. – Default risk comes down and credit rating improves. 254 . the cash flow the merged firm will be less variable than the individual firms. as risky debt is spread across the new firm's operations. – Coupon rates may also be negotiated at lower rates. This will induce higher debt capacity. hence better performance.
255 . While value of corporate control is negligible for firms that are operating close to their optimal value. since a restructuring can lead to significant increase in value. Assessment of perceived quality is critical. The value of control can be substantial for firms that are operating well below optimal value. – – Value of Control = Value of firm after restructuring Value of firm before restructuring.VALUING CORPORATE CONTROL Premium of M&A are often justified to control the management of the firm. The value of wrestling control is inversely proportional to the perceived quality of that management.
LBO facilitates a relatively smaller firm to bid for a comparatively larger firm in the bid for management control. The assets of the acquired company are used as collateral for the borrowed capital. It is a very costly and risky proposition. sometimes in combination with the assets of the acquiring company.LEVERAGE BUYOUT (LBO) The basic difference between a take-over and a LBO is the high inherent leverage (i. 256 . Confidence of investment bankers and the international financial community is essential.e. debt component) at the time of buyout and rapid changes in capital structure over time.
– Increased information needs. However. on-going valuation. – Separation of ownership from management. liquidity. 257 . – The need to satisfy analysts and shareholders.TO GO PUBLIC OR NOT? However. The increased benefit showed in the following way – reduced costs and increased revenue. A research study showed that 30% of the publicly listed firms reported above average returns after going private. the advantages of going public includes . off-late many publicly traded firms have gone private keeping in mind the following – – The fear of LBO.access to financial markets.
– Debts repaid off from increased value after successful restructuring and wresting management control.e. – Managers cannot be trusted to invest free cash flows wisely. which disappears once assets are liquidated and significant portion of debt is paid off. 258 . – It is a temporary phenomenon.RATIONALE FOR HIGH LEVERAGE The high leverage in a LBO can be justified by – – If the target firm has too little debt (relative to its optimal capital structure). – Cost of debt coming down (i. – Cash trapped company unable to utilize opportunities. co-insurance effect).
initial rise in leverage is anticipated. Any discounting has to reflect these changing cost of capital. Lack of sufficient cash flows to repay costly debts resulting in a possible debt trap. leverage is expected to decrease over time. As the firm liquidates / pledges assets and pays off debt. 259 . Therefore. A LBO has to pass two tests to be viable – – Restructuring to pay-off increased debt.EFFECT OF HIGH LEVERAGE Increases the riskiness of dividend flows to shareholders by increasing the interest cost to debt holders. – Increase equity valuation.
Objectives – – Traditional route of filing prospectus and undergoing an IPO is costly. shell company) by a private company. – Facilitates better valuation and forthcoming offerings. which has discontinued its operations (i. small in size but having a promising business. – Automatic listing in major exchanges.e. – Prevents dilution of equity. time-barred. 260 .REVERSE MERGER Reverse Merger – The acquisition of a public company. or costly. allowing the private company to bypass the usually lengthy and complex process of going public. – Tax shelter.
– Takeover announcements reported 30% excess returns. 261 . and 35% during bullish periods. Excess returns also vary across time periods. During bearish periods excess returns were 19%. However. – Merger announcements reported 20% excess returns. takeover failures have only initial negative effects on stock prices. Most target firms are taken over within (6090) days.EFFECT OF TAKE-OVER ANNOUNCEMENT The shareholders of target firms are the clear winners. Initial anomaly in stock prices usually normalizes over a period of time (6-12) months.
Desai. and Kim. 262 Jarrel. – Most studies reported insignificant excess returns around take-over offers or merger announcements. Bradley. as stock markets become more and more perfect such anomalies would reduce Source: Jensen and Ruback. – However. 1983. 1983. – However. in the event of take-over failure negative returns to the extent of 5% on bidder firm stock prices is reflected.EFFECT OF TAKE-OVER ANNOUNCEMENT The effect of take-over announcement on bidder firm’s stock prices are not clear cut. over time. and Netter. Brickley. 1988 .
so that nothing is left for the raider to strip off.DEFENSIVE STRATEGIES Golden Parachute – An employment contract that compensates top managers for loss of jobs as a result of change in management control. Asset Stripping – The targeted company hives off its key assets to another subsidiary. Poison Put – Premature retirement of bonds at attractive rates to pour surplus cash and make target investment unattractive. Rights). Poison Pill – An offer to existing shareholders to buy shares at a substantial discount to increase their voting rights (Eg. 263 .
Shapoorji Pallonji). Pac Man – The target company makes a counter bid to take over the raider company. Green Mail – The targeted company buys large blocks from holders either through premium or through pressure tactics (Eg. thus thwarting the raider company’s attention.DEFENSIVE STRATEGIES White Knight – It is the placing of stocks to a cash rich investor and bargaining for protection in return. Gray Knight – The target company takes the help of friendly company to buy the shares of the raiding company. 264 . East India Hotels – Reliance Industries – ITC). But often the White Knight turns a betrayer himself (Eg.
COMPETING FOR THE FUTURE 265 .
GETTING OFF THE TREADMILL Canon overpowering Xerox. Most companies were too preoccupied with the present than the future? 99% of the companies overpowered. Honda overpowering GM. Honda overpowering Volkswagen. Compaq overpowering IBM. were spending 99% of their precious time dealing with present. Hitachi overpowering Westinghouse. Wal-Mart overpowering Sears. British Air overpowering Pan Am. Nokia overpowering Motorola. What went wrong???? What were they doing with the present? What were they pre-occupied with? 266 . The reverse was true for the companies overpowering.
most often they ended up cutting corporate muscle as well and became anorexic. decluttering. Not knowing when to stop. Thus efficiency was grievously hurt. These denominator based managers stuck to their restructuring strategies (like building pyramids) and didn't know what to do next? Thus they became history? (like the pharaohs) 267 . declining margins.THE PAST OF COMPETITION Beyond Restructuring – When a competitiveness become inescapable problem (stagnant growth. downsizing). falling market share). CEO’s brutally pick up the knife and ruthlessly carve away layers of corporate flab (delayering.
The future is not about catching up with competition. but not of the future. 268 .S.THE PRESENT OF COMPETITION Beyond Reengineering – Numerator based managers (innovation) at least offers some hope. top managers believed that quality will be a source of competitive advantage of the future. On the contrary only 20% of Japanese managers believed that quality will be a source of competitive advantage of the future. A poll in circa 2000 revealed that 80% of the U. but forging ahead in competition. However. ensuring only survival of the present. incrementalism or nominal innovation has almost reached a plateau.
better. Empower from bottom to top. It involves Dream about the company’s future. reinvent its industry. Creating the future requires industry foresight. aspirations and resources. Transform the industry. don’t predict. Create a potential gap. demographics and lifestyles. as important as these may be. not the other way. and regenerate its strategies (breaking its – managerial frames). Companies need to fundamentally reconcieve itself. 269 . they are not enough to get a company to the future.THE FUTURE OF COMPETITION Regenerating – Leaner. It is based on deep insights into trends in technology. not just the organization. faster.
ABOUT THE DREAM Which customers will you be serving? What will the potential customer look like? Who will be your future competitors? What will be the basis of your competitive advantage? Where would your margins come from? What will be your future competencies? Which end product markets would you cater? 270 .
Change in at least one fundamental way the rules of engagement in an industry. It is about deliberately creating a strategic misfit.e. Therefore. Redraw the boundaries between industries. blue oceans). hence do not fall sick in the first place. Successful companies have a complete grip over the industry. It drives a hunger and a passion to transform. Create entirely new industries (i.ABOUT THE TRANSFORMATION The future does not belong to those who take the industry for granted. by converging technologies complex. 271 . they do not need to restructure.
the revolution must start at the bottom and spread in all directions of the organization. A revolution that is thrust upon from the top seldom sustains. More importantly. The middle management plays a strong moderating role.ABOUT THE EMPOWERMENT Bring about a revolution (a paradigm shift) in the organization. 272 . Such a process is called institutionalization (from people centric to organisational centric). Transformational leaders merely lead the way. Most successful revolutions (Gandhi to Mandela) rose from the dispossessed.
THE FUTURE OF STRATEGY A company must get to the future not only first but also for less. Companies need to strategize (think ahead of times). Apple – iphone). Toshiba – LCD. South West Airlines – LCC. An ability to energize the company. without taking undue risk. Apply the 40 – 30 – 20 principle. It requires a lot of common sense and a little bit of out of the box thinking. What does it take to get to the future first? Understanding how competition for the future is different. Get to the future first. A process for finding and gaining insight into tomorrows opportunities (Eg. 273 .
as on their aspirations. is the ability to imagine in a different way what the future could be. but hundreds.HOW DOES THE FUTURE LOOK LIKE? There is no rule which says that for every leader there will be a follower. We are in the midst of a 3600 vacuum. greatness from mediocrity. As there is no one future. Companies of the future will be not based so much on the strength of their resources. the farther it will be away from competition. 274 . What distinguishes a leader from a laggard. each point in space represents a unique business opportunity. The farther one can see in this endless space.
THE EMERGING STRATEGY PARADIGM Not Only Reengineering Processes But Also Regenerating Strategy The Competitive Challenge Organizational Transformation Industry Transformation Competing for Market Share Competing for Opportunity Share Finding the Future Strategy as Learning Strategy as Positioning Strategy as Engineering Strategy as Unlearning Strategy as Dream Strategy as Architecture 275 .
THE EMERGING STRATEGY PARADIGM Not Only But Also Mobilising for the Future Strategic Fit Resource Allocation Strategic Misfit Resource Stretch & Leverage Getting to the Future First Existing Industry Structure Product Leadership Single Entity Product Hits & Timing Future Industry Structure Competency Leadership Dominant Coalitions / Co-option Market Learning & Preemption 276 .
LEARNING TO FORGET P1: The degree of learning in current period is directly proportional to the degree of unlearning in the previous period. Learning Curve t1 t2 t3 Time t4 t5 277 . Degree of Learning Unlearning Curve P2: Unlearning in previous period does not necessarily ensure learning in the current period.
278 . It is characterized by the following – Unique – It provides unimaginable customer value ahead of its times. Leverage – They are the gateways to future markets. It represents the collective learning's of an organization centering around diverse streams of technologies.CORE COMPETENCE A core competence relates to a bundle of skills (not an asset or a business) that revolves around activities or processes and critically underpins a firm’s competitive advantage. Inimitable & Insubstitutable – A high degree causal ambiguity between these skills yield sustainable competitive advantage. It cannot be matched even by its closest competitors.
Wal-Mart – logistics. Most companies around the world do not possess one. Toshiba – flat screen displays. SKF – antifriction and precision. Although a core competence may lose value over time. leaders have one. Core competencies are the roots of the organization. it is deeply embedded in the heart of the organization. Canon – imaging. A core competency cannot be outsourced. it gets more refined and valuable through use. Nike – designing. Toyota – lean manufacturing. 279 .MORE ABOUT CORE COMPETENCE Sony – miniaturization. Honda – engines. at the most three to four. Intel – nano-electronics. Coca Cola – brand.
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 .
strategies suited for the developed markets may not be appropriate for emerging markets. Emerging markets are characterised by infrastructural bottlenecks. Diversified groups in operating in emerging markets therefore benefit from unrelated diversification.EMERGING MARKETS Emerging markets (India. high levels of market imperfection).e. 1997). Therefore focused strategies based on core competence may not be suitable for emerging markets (Khanna & Palepu. China. Korea. and high transaction costs. 288 . Chile) provide a different context (i. Therefore. institutional gaps.
Size & Scale. Entropy).PERFORMANCE (I) Diversity attempts to measure the degree and extent of diversification (Herfindahl.DIVERSITY . Concentric. Experience Strategic Fit Diversity Palich. (2000) 289 . subsequently negatively related across developed markets. Synergy. Optimum level of diversification Performance Diversity is initially positively related with performance. et al.
PERFORMANCE (II) Diversity is initially negatively related with performance. Huge initial investment.DIVERSITY . subsequently positively related across emerging markets. brand building Risk diversification. conglomerate power Threshold level of diversification Performance Diversity (Khanna & Palepu. 2001) 290 .
HSBC). 291 . It should have a spread of assets. It should have a spread of manufacturing facilities. Characteristics – It should have a spread of affiliates or subsidiaries. It should have a spread of interest groups / stake holders. It should think globally. act locally (Eg. revenues and profits.INTERNATIONAL IDENTITY MNC’s consciously engage in FDI in different parts of the globe to forge resource diversity as a distinct competitive advantage.
It reflects the disparities in women in workforce (Eg. Risk Profile – It reflects the risk attitude of the top management (Eg. high feminity index in developed markets and vice versa for emerging markets).It reflects the relative role of team building (Eg. 292 . low risk profile in developed markets and vice versa for emerging markets). low power distance in developed markets and vice versa for emerging markets). low group scale in developed markets and vice versa for emerging markets). Group Scale .GLOBAL BUSINESS ENVIRONMENT Power Distance – It reflects the disparities in income and intellectual development (Eg. Feminity Index .
interest rates. time value. currency. high cultural adaptability in developed markets and vice versa for emerging markets). customs. way of life. dress sense. inflation. political stability. 293 . corruption.culture. judiciary) of doing business in a particular country (Eg. credit rating. Country Risk – It reflects the political and economic risk (Eg. attitude. FOREX reserves. code of conduct.GLOBAL BUSINESS ENVIRONMENT Cultural Adaptability – It reflects the adaptive ability to a changing environment . flexibility (Eg. terrorism (9/11). low country risk in developed markets and vice versa for emerging markets).
Ethnocentrism – Developed country managers tend to regard their own culture as superior. in most emerging markets use of an interpreter may be a standard protocol. Language Barriers – Developed country managers expect foreign partners to communicate in their languages. time-zones. 294 .GLOBAL BUSINESS ENVIRONMENT Time Sensitiveness – Developed country managers regard time as precious. however. and vice-versa. High levels of ethnocentrism usually has a negative effect on business. in most emerging markets meetings are delayed and lasts unusually long. Other factors – local celebrations.
In 1995 (Uruguay Round) GATT was renamed to WTO. copyrights. It also highlighted the nexus between US & WTO. The 2001 (Doha Round) focused on power blocks (NAFTA. It also initiated provisions on anti-dumping.GATT GATT was a bi-lateral treaty initiated between US and some member countries in 1947 to promote free trade. 295 . It focused largely on TRIPS (patents. BRIC). trademarks). It a multi-lateral treaty with 143 (as on 2002) member countries to reduce tariff and non-tariff (quota) barriers. The 1999 (Seattle Round) saw a lot of protest amidst bringing agriculture under the purview of TRIPS. ASEAN.
However.EURO – SINGLE CURRENCY In 1999 twelve member countries in Europe joined hands to move over to a single currency (i.e.Pound). 296 . Euro).e. three countries joined in 2002 increasing it to fifteen members as of 2008. the Dollar still remains the most preferred currency globally. However with current recession in the US 2002 onwards. The Euro was significantly devalued against the Dollar till 2002. the Euro slowly started outperforming the Dollar. The notable exception was Great Britain which still continues with its local currency (i. Sterling . primarily the OPEC countries.
Trade Block – It will strengthen the EU identity which would not have been possible otherwise. but it may have spill-over effects.SINGLE Vs MULTIPLE CURRENCY Transaction Costs – Though the initial cost of introduction of a single currency is very complicated and costly. it helps avoiding transaction costs associated with a multiple currency. 297 . Rate Uncertainty – A single currency eliminates the risk of competitive devaluations. However. a multiple currency is preferable where the business cycles of member nations are different. Transparency – A single currency is transparent and competitive.
e. – FDI (transfer of tangible resources) is slow but steady for the purpose of economic growth. – FII (transfer of intangible resources) is fast but may have strong repercussions (i. 298 . hot money). the gain of one country is loss of another). It is long term with high levels of commitment.FII Vs FDI INVESTMENT Classical economists believed that foreign investment (in any form) is basically a zero sum game (i.e. Neo classical economists believe that foreign investment may in fact be a win-win game. It is short-medium term with comparatively low levels of commitment.
lifestyle (petroleum 299 outlets – departmental stores). usage (talk time). Distribution – It depends on the market characteristics (fragmented – concentrated). technology (microchip). customer awareness (microwaves). economic (middle class buying power). Pricing – It depends on the competitive structure (PLC – Kellogg's). promotion (surrogate advertising). buying patterns (spread).culture (food habits).INTERNATION MARKETING Product – The various attributes of a product may receive different degrees of emphasis depending on differences in . .
INTERNATION FINANCE Currency Risk – Many Indian IT companies (Rs) having business in US (Dollar) are asking for quotes in (Euro) or are shifting bases out of US to avoid risk of devaluation of Dollar.India) may be different from that another trading country (US – GAAP or IRS). 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). Leverage – The leverage may vary across countries depending upon money and capital market conditions (Eg. Accounting Norms – The accounting norms of one country (AS .
however. skills are more important that cultural fit and vice-versa. social security. shortened life cycles). Compensation – Differential pay packages exists because of differences in purchasing power. in most cases it is not desirable nor practiced. 301 . Recruitment – In local recruitment. and cultural barriers (language) vis-à-vis emerging markets. technology (convergence. labour laws. double taxation. Training – It is a pre-requisite for international business to reduce language.INTERNATIONAL HR An uniform HR policy is idealistic to enable parity in performance appraisal.
. reduce power costs) vis-à-vis infrastructural bottlenecks.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.
CONTEMPORARY TOPICS 303 .
Innovation is all about staying ahead of competition. Innovations typically paves the way for more secured and improved lifestyle for consumers in general. it has destructive effects as well. innovation is the first attempt to carry it out in practice. While innovation typically adds value for organizations. 304 .INNOVATION An invention is the first occurrence of an idea for a new product or process. Innovation is the most preferred strategy today to maintain competitive advantage in the present turbulent business environment. but has inherent risks involved as well.
process innovations are organizational driven.TYPES OF INNOVATION A key challenge is maintaining a balance between process and product innovations. However. Strategic innovation has the potential to change the rules of the game. process innovation is necessary to sustain the competitive advantage of product innovation. While product innovations are typically customer driven. Tangible impact of product innovation on performance is significantly higher than process innovation. Process innovation usually follows product innovation. 305 .
about how an organization makes money (i.e. Disruptive business models brings in a new frame of reference (i. Data Storage (Pen Drives). putting an idea into practice).BUSINESS MODEL It is a simplified description and representation of a complex real world. 306 .e. Innovations are the back-bone of successful business models . Drug Development (Bio Chemicals). Telecom (CDMA Technology). a paradigm shift). Medical Surgery (Lasik). Processors (Pentium). It leads to a shift in the price – performance envelope.
NINE BUILDING BLOCKS Value proposition offered to the market. The key partners involved in the activities. 307 . The segment(s) of clients to be addressed. The channels to reach out to the clients. The proposed relationships established with clients. The revenue streams generated by the activities. The key activities / processes necessary for execution. The key resources and capabilities required. The cost structure resulting from the business model.
BUSINESS MODEL FRAMEWORK 308 .
It involves – Product Visualization – Product Prototype – Product Test – Capacity – Pricing – Distribution. It is just one piece of the puzzle. innovative companies to carve out unique business models to fend off competition. 309 . The revenue model described here are the means to generate revenues. With the rapid erosion of certain industries (IT.REVENUE MODEL Positioning is just not sufficient. Investment Banking. Real Estate) companies need to untangle and understand the intricacies of their business model.
Allow the management sufficient slack to be future oriented. Provide reasonable incentives (not necessarily monetary). 310 . Have a lean and a flat organization structure. Promote the grape-vine. Allow the workforce idiosyncrasies for their errors. Promote the culture of experimentation. A favourable intellectual property (IP) climate.HOW TO MAKE INNOVATIVE CO’S Innovative company’s are a matter of culture and aspirations rather than tangible resources.
HOW TO PROTECT INNOVATION? Without adequate protection (external or otherwise) the effects of innovation does not translate to performance. The most preferred strategy of internal protection includes imbibing “causal ambiguity” in the production process to make reverse engineering difficult. companies are increasingly relying on internal protection to sustain innovation effects. 311 311 . however that possibility is slowly atrophying. Collusion with the judiciary is also another distinct possibility in emerging markets. In most emerging markets where the IP climate is not so favorable.
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. 312 312 . Corporate governance aims to reduce the principal-agent problem present in most professional managed organizations through appropriate forms of accountability and control mechanisms. 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.AGENCY THEORY The root of Corporate Governance goes back to the Agency Theory. This exposes the shareholders to additional risks and higher costs. However. shareholders can diversify their portfolio at a much lesser risk and cost. 313 . According to the agency theory top managers and shareholders interests are usually conflicting in nature and tend to pull in opposite directions. not present in portfolio diversifications. also known as the principal-agent problem or agency dilemma.
SEBI Report – 2005. 2002 to restore public confidence in corporate governance. After the Enron downfall. . various laws were enacted to ensure proper usage of these funds. defines corporate governance (headed by Kumar Mangalam Birla) as the acceptance by management of the inalienable rights of shareholders as the true owners of the corporation and of their own role as trustees on behalf of the 314 shareholders.ORIGIN & CONTEXT Since the early 20th century since a large part of public funds were held by publicly traded firms in the US. the US government passed the Sarbanes – Oxley Act.
Interests of other stakeholders: Recognize the legal and other obligations of all legitimate stakeholders. 315 . Role and responsibilities of the board: It deals with issues about an appropriate mix of executive and nonexecutive directors. The key roles of chairperson and CEO should not be held by the same person and their offices be clearly separated. including the society at large.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.
assessment and mitigation of risks and retirement by rotation over a fixed period of time. 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.. Disclosure and transparency: Disclosure of information should be timely and balanced to ensure that investors have clear access to data and facts. They should also implement systems to independently verify and safeguard the integrity of the company's financial reporting. Independence of the entity's auditors: Identification.
Remuneration: Performance-based remuneration is designed to relate some proportion of salary to individual performance. they should provide no mechanism or scope for opportunistic behaviour. safeguards invested capital. discussed and resolved. Balance of power: The simplest balance of power is very common. a person benefitting from a decision should abstain from it.GOVERNANCE STRATEGIES Monitoring by the board of directors: The board of directors. However. with its legal authority to hire. fire and compensate top management. Regular board meetings allow potential problems to be identified. 317 .
318 . and was responsive to investors' requests for information on governance issues. They defined a well-governed company as one that had mostly out-side directors. Egypt and Russia) to around 40% for Canadian & European companies. undertook formal evaluation of its directors. The size of the premium varied by market. McKinsey found that 80% of the respondents would pay a premium for wellgoverned companies. from 10% for companies where the regulatory backdrop was least certain (those in Morocco.GOVERNANCE & PERFORMANCE In its “Global Investor Opinion Survey” of over 200 institutional investors in 2002. who had no management ties.
SHAREHODER – STAKE HOLDER THEORY Till the early part of the 20th the basic objective of modern organizations was to provide goods and services for public consumption for profit maximisation. 319 . The basic premise is that firms cannot exist in vacuum. 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. Therefore. corporate philanthropy should be a part of every corporate mission. the short-term view of profit maximisation gave way to a more broader and mediumterm view wealth maximisation of the shareholders. However.
the debate on CRS still continues whether firms should detract its focus from its business? 320 . However. CSR can be defined as. in fact a large part of it is significantly overlapping. “an enterprises decisions and actions being taken for reasons at least partially beyond its immediate economic interests”. Therefore. giving a very important message that one cannot exist without the other.CORPORATE SOCIAL RESPONSIBILITY As Peter Drucker rightly pointed out that. Therefore. economic and social responsibilities cannot be mutually exclusive. “a healthy business cannot exist in a sick and impoverished society”.
people are becoming increasingly aware of their right to a decent and healthy life. The role of media: The media and various consumer organizations have come up in protecting consumer rights and exposing mal-practices. Public image: Entrepreneurs are increasingly relying on public image as a source of competitive advantage and a higher financial discounting. MRTP). 321 .GROWING CONCERN FOR CSR Awareness due to education: With growing literacy. Fear of government interference: Excessive quench for profits may lead to build up of adverse public opinion compelling the government to intervene (Eg.
Exide – Product take back). Tata Steel – Life Line Express).CSR STRATEGIES Green Supply Chain Management: It includes environmentally preferable purchasing. Cement .Paper packaging. designing eco-friendly products. Literacy & Training Programs – (Eg. eco efficiency. 322 . Education. Refrigerators – CFC. and extended producer responsibility (Eg. Aditya Birla Research Centre – LBS). Health & Hygiene – Attending the health hazards due to wastes and by-products to employees and society in proximity (Eg.
323 . Strategic innovations leading to disruptive business models can show the way out. They represent an enormous opportunity for companies who learn how to serve them. In turn companies by serving these markets. Prahalad notes that future markets exist collectively.BOTTOM OF THE PYRAMID With the market across most developed markets including the US getting saturated. across the world's billions of poor people having immense untapped buying power. K. they're helping millions of the world's poorest people to escape poverty. C.
BLUE OCEAN STRATEGY 324 .
MARKETSPACE .TWO WORLDS 325 .
profitable growth. one companies gain is always at the 326 cost of another companies loss. and struggled for differentiation (cost or product). They have fought for profits. . battled over market-share. In today’s red oceans. 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.WHAT IS RED OCEAN? Companies have long engaged in head-to-head competition in search of sustained. where most industries are saturated.
it will exist 327 in the future as well. It helps in creating powerful leaps in value for both the firm and its buyers. Such strategic moves are possible through the pursuit of product differentiation and low cost simultaneously. Blue Ocean’s have existed in the past.WHAT IS BLUE OCEAN? Tomorrow’s leading companies will succeed not by battling in red oceans. rendering rivals obsolete and unleashing new demand. but by creating blue oceans of uncontested market space ripe for growth . It is only the frames of the .
RED OCEAN Vs BLUE OCEAN Compete in existing markets Compete in uncontested markets Beat the competition Exploit existing demand Make the competition irrelevant Create and capture demand Make the value-cost trade off Break the value-cost trade off Demand is the limiting factor Supply is the limiting factor 328 .
Technological advances have substantially 329 improved industrial productivity. Niche markets & monopoly havens are continuing to disappear. of European nations. . Demand across developed markets reaching a plateau. As trade barriers between nations & regions fall. Population shrinkage across a no. information imperfections atrophy instantly.BLUE OCEAN STRATEGY IMPERATIVES Prospects in most established market spaces – red oceans – are shrinking steadily.
They are not necessarily about technology. the underlying technology was often already in existence. History indicates that blue oceans exist in three basic industries – automobiles (how people get to work) – computers (what people use at work) – entertainment (what people do after work). Incumbents often create blue oceans within the ambit of their core business. Company & industry are the wrong units of 330 strategic analysis.CONCEPTUAL UNDERPINNINGS Blue oceans have existed in the past and will exist in the future as well. . managerial moves are.
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 .BLUE OCEAN .
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.SOME GLARING EXAMPLES In the last century authors Kim and Mauborgne have documented the creation of more than 150 blue ocean creations across 30 industries – Virgin Atlantic: Fractional jet ownership or travel to space. Sony Play Station: Redefining machine-human interface in entertainment and targeting an altogether new user base. Citibank – Automated teller machines & credit 333 cards.
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. All they need to do is change their managerial frames. 334 . 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. companies & managers are largely at the mercy of economic forces. According to this view managers need not be constrained to act within the confines of their industry. greater than themselves.
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 listening from where you left off, or restart the preview.