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Course Code: 611 & 612 Dr. Subir Sen – Faculty Member, IBS
E-Mail: email@example.com, 9830697368 1) Crafting & Executing Strategy – Thompson & Strickland. 2) Strategic Management – Pearce & Robinson. 3) Strategic Management – Fred. R. David. 4) Exploring Corporate Strategy – Johnson & Scholes. 5) Competitive Advantage – Michael E. Porter. 6) HBR – Articles & Case Studies.
STRATEGY - DEFINITION
Strategy is all about making trade-offs between what to do and more importantly what not to do; consciously choosing to differentiate. It reflects a congruence between external opportunities and internal capabilities. Types of strategies – Corporate Strategies – It is all about making choices across various businesses and allocating resources among them. Business Strategies – It is all about developing leveraging and sustaining competitive advantage. Functional Strategies – It is all about finding newer ways to perform existing processes, or 3 better still adopting new processes altogether.
STRATEGIC MANAGEMENT DEFINITION
Strategic management attempts to integrate the traditional management functions and align the organization as a whole with the broader environment to make resource allocations in a way to achieve the strategic intent of the organization. This alignment is called strategic fit. It serves as a road-map for the organization in its growth trajectory. It provides the direction – extent – pace – timing. It depends on the turbulence of the environment and the aggressiveness of the organization. It distinguishes the winners from the losers.
PILLARS OF STRATEGIC MANAGEMENT
Differentiation – Differentiation of key inputs and technologies helps a firm to consciously move away from homogeneous to heterogeneous markets enabling them to earn super-normal profits from normal profits. Integration – Whenever dealing with a complex task of managing a business (i.e. involving a no. of variables with cross linkages) it is in the interest of simplicity that the task be broken up in smaller components. However, for effective control, integration is essential. Alignment – Since differentiation is prone to replication, it is in the interest of the firm to differentiate continuously by aligning the resources with environmental opportunities.
STRATEGIC MANAGEMENT FRAMEWORK
Economic al Strategic Finance Fit Political Strategic Intent Fit Political Marketin g Manageme nt Social & Cultural
It is irreversible. It provides broad guidelines. It requires full commitment of the top management.FEATURES It forms the core activity of the top management.STRATEGIC MANAGEMENT . It is a holistic and integrated approach. It is long-term in nature. It is about adaptation and response to the same. 7 . It is all about creativity and innovation. It involves substantial resource outlay.
It is about a definite formula. 8 . It a bundle of techniques or even tricks. It involves only the top management. It attempts to minimize risk.STRATEGIC MANAGEMENT – MYTHS It involves short-cuts. It about mere data and facts. It is rocket science. It is about forecasting. It brings instant success. It is fool-proof in nature. It involves nitty-gritty's.
To tap markets across boundaries. To innovate. To gain expertise in technologies. rather than reactive. To be insulated against environmental threats. To leverage size.STRATEGIC MANAGEMENT IMPERATIVES To be continuously alert. scale and scope. To be proactive. To assimilate change faster. again and again ……. 9 To develop core–competencies. To be future oriented. To generate large resource pool. .
In contrast. but by virtue of their courage. but with a lot a rigour and robustness. In the ancient days battles were won not by virtue of size of the army or armory. It is an old wine in a new bottle.strategies.ORIGIN The word strategy has its origin from the Greek word strategia meaning Military Commander. and more importantly . 10 . whose origin can be traced to some of the greatest battles fought in the ancient days. battles fought on the market front are won by companies by virtue of their obsession & strategies.STRATEGY . today's battles are fought over markets. In the ancient days battles were fought over land. Even in today’s markets. obsession.
US attack of Morocco to capture Germany – Strategy: Pin-hole strategy – Wal-Mart challenging Sears by entering small towns.SOME PARALLELS Japan’s attack on Pearl Harbour – Strategy: Attack where it hurts the most. – Toyota’s entry in the US. Napoleon’s attack on Russia – Strategy: Waiting for the right time. – Reliance’s entry into telecom. challenging GM and Ford. 11 . – Yahoo and Microsoft challenging Google. Allied Forces Vs Germany (WW-II) – Strategy: Forging alliances.
12 .Industrial Revolution.EVOLUTION OF MANAGEMENT As Peter Drucker refers to it. The first major discontinuity in the history of global business environment was the . 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. – Mass Production Organization Size – Complicated Processes – Complex Structures Evolving of an emerging paradigm – survival of the fittest (Fayol & Taylor. 1910).
Efficiency and effectiveness are no longer sufficient. performance across firms became differentiated. – Homogeneous to heterogeneous products. – Affluence of the new customer (i. The question of outperforming the benchmark became the new buzzword. push to pull). – Changes in the technology fore-front.EVOLUTION OF STRATEGIC MANAGEMENT The second major discontinuity in the history of global economic environment – World War II. From uniform performance.e. Survival of the most adaptable becomes a new management paradigm (Ansoff. 1960). – Global market place. 13 .
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. – The choice of strategy is primarily concerned with external ones rather than internal ones.APPROACHES TO STRATEGY Analytical Approach – Igor H. – It is primarily the top management’s prerogative. – The choice of product-market mix is based on conscious evaluation of risk – return factors. 15 . Ansoff (1960) – Strategy can be segregated into certain mutually exclusive and inter-related components aimed at managing the growth of an organization. Learning always begin on a clean sheet of paper.
Once the control systems are in place. Successful organizations align authority and responsibility of various departments in way to reach overall objectives.APPROACHES TO STRATEGY Design Approach – Alfred Chandler (1970) – Structure follows strategy. how it will compete. who will be the top managers. The organization initially decides which industry to enter. 16 . – Management control systems has a dominating role in influencing firm performance. everything else follows. – Organization structure will precede and cause changes in strategy. – The top managers then decide on the type of organization structure & systems to be in place.
– 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. new entrant. customer. 17 . competitors. Porter (1980) – Choose a consumer segment and position your product accordingly. – The organization will outperform the industry where environmental forces are weak and vice-versa. – The environmental forces comprises of – supplier. substitutes. – An organization is seldom in a position to influence the larger business environment.
but exploiting the resource differences among them. K. – Core competencies are a set of skills that are unique and can be leveraged. – Organizations can significantly alter the way an industry functions. Prahalad (1990) – The key to superior performance is not doing the same as other organizations. – It enables a firm to deliver unimaginable value ahead of time.APPROACHES TO STRATEGY Core Competence – C. 18 . They are complex resources and undermines a firms competitive advantage. locating in most attractive industries and pursuing the same strategy.
STRATEGIC MANAGEMENT PROCESS Strategic Intent Strategic Planning Strategic Gap – Environmental Scanning – Internal Appraisal of the Firm Strategy Formulation – Corporate Strategy – Business Strategy Strategic Choices – Functional Strategy Strategy Implementation Strategy Performance Strategy Evaluation & Control 19 .
TOP MANAGEMENT PERSPECTIVE 20 .
21 . It’s a philosophy that distinguishes it from its competitors. It provides a sense of direction and destiny. It is the cornerstone of an organizations strategic architecture reflecting its desired future state or its aspirations. A gap that consciously manages between stagnation and atrophy. A substantial gap between its resources and aspirations. It implies a significant stretch. It involves an obsession to be the best or outperform the best. A strategic intent is a statement of purpose of existence.STRATEGIC INTENT If you cannot see the future. you cannot reach there.
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 .
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. strategic variety) is apparent. To put it more simply. Dominant logic changes. 23 . when radical changes in the internal and external environment (i.e.DOMINANT LOGIC A dominant logic can be defined as the way in which the top management team conceptualizes its various businesses and make critical resource allocation decisions. It is core to the strategic intent of the firm.
– It represents the company’s audacious. beyond just making money. It ensures that the company does not wander off into unrelated zones or fall into an activity trap. 24 . It provides an unity of purpose amidst diversity of personal goals. but achievable aspirations.VISION It is a dream (not a forecast) about what the company wants to become in the foreseeable future. It is a combination of three basic elements – – An organizations fundamental reason for existence. It enables the top management to remain focused. – It stands for the unchanging core values of the company.
Brevity – It should be short. Sharing – The company across all hierarchies should have faith in it.CHARACTERISTICS Reliance – Where growth is a way of life. 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. and memorizable. Empathy – It should reflect the company’s beliefs to which it is sensitive. 25 .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.
It gives enlightment. To prevent the fall in a activity trap. It lends integrity and genuineness.ADVANTAGES To stay focused on the right track. It facilitates development of skills & capabilities. It makes strategic alignment easier. It provides a holistic picture. It gives a shared platform.VISION . It gives the impression of a forward-looking organisation. It fosters risk taking and experimentation. 26 .
27 . Although the purpose may change over time. It serves as a road map to reach the vision.MISSION Mission defines the space that a business wants to create for itself in a competitive terrain. It enables the firm to define its business landscape and identify its competitive forces. A broad mission statement helps in fending competitors. 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. its reason for existence.
We offer solutions. – We do not offer steel. ………………….MISSION – SOME IDEAS Reliance – We are in the business of integration. …………………. We offer security. Some other examples – We do not offer shoes. though some may seem unrelated in nature. …………………. …………………. – We do not offer insurance. We offer comfort. 28 . All the businesses of the company are strongly integrated with their main business. We offer strength. – We do not offer software's.
– It prevents deviation. It is an end result (quantifiable) something a firm aims and tries to reach in a time bound frame. 29 .100K crore company by the year 2005. – It is based on Management by Objectives (MBO). – It keeps the mid management pre-occupied. – It lends direction – time frame in the medium term.GOALS & OBJECTIVES Reliance – We want to become a Rs. – It helps identifying key success factors. – It provides a benchmark for evaluation. It provides a quantitative feel to an abstract proposition. – It adds legitimacy and motivation.
It is the process of garnering necessary inputs. – Use price-elasticity to break market barriers. – Compress project times.PLANS Reliance – Desire to invest 25K crore in telecom business by circa 2010. – Acquire a market share of indomitable position. 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. 30 . – Leverage economies of size and scale. It is specific to a particular business.
31 . equilibrium is maintained. This state of affairs is known as strategic drift. In such a context. However. Historical studies have shown that most organizations tend to continue with their existing strategies. It often leads to an organizational crisis. strategies lose touch with the emerging realities. past strategies tend to have a bearing on future strategies.STRATEGIC DRIFT Due to top management commitment. When changes in the environment is incremental. This tendency to restore continuity is known as inertia (resistance to change). radical change may lead to disequilibrium.
STRATEGIC DRIFT FRAMEWORK Environmental Change Degree of change Strategic Change Radical Change Incremental Change State of Flux Continuity Stage of Transformation Strategic Drift Stage of Atrophy Time 32 .
ORGANIZATIONAL POLITICS Strategic drift often leads to organizational politics. – Using covert tactics to pursue self interests. – Developing a platform of support. 33 . – Creating a favourable image. Organizational politics involves intentional acts of influence to enhance or protect the self-interest of individuals or groups over organizational goals. – Distorting information to gain mileage. Some instances of organizational politics – Formation of powerful groups or coteries. – Hiding vulnerability. – Creating obligations of reciprocity.
. A realized strategy is what the top management actually translates into practice. – Influential stake-holders back out. – The environment context has changed. Usually there is wide gap between the two when organizational politics is evident. – Persons responsible for strategy conceptualization and implementation are34 divergent.INTENDED & REALISED STRATEGIES An intended strategy is an expression of interest of a desired strategic direction. Other causes – – The plans are unworkable and utopian.
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. However. 35 . but the master scheme of the rational comprehensive scheme is not apparent. this is not to be treated as “muddling”. 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. Learning is an integral part of logical incrementalism. They simply unfold the particulars of the sub-system in stages.
Agent of Change – Formal ratification of a change plan through MBO.IMPLEMENTING INCREMENTALISM General Concern – A vaguely felt awareness of an issue or opportunity. Macro Broadcasting – The broad idea is floated without details to invite pros and cons leading to finer refinements. Leveraging Crisis – A sudden crisis or an opportunity should be used as a trigger to facilitate acceptance and implementation of change. The broader objective should serve the overall interest of the organization. Adaptation – As implementation progresses. 36 .
STRATEGIC TRANSFORMATION Strategic transformation (a complete overhauling of the strategic architecture) becomes inevitable whenever a strategic drift takes place. It creates blinders. . Dominant logic’s are very rigid and sticky and prone to inertia. Dominant logic’s are the cornerstones of change when strategic transformation is apparent. Tampering with surface level factors often leads to atrophy. As it brings 37 with it a different dominant logic. Strategic transformation becomes smooth through a change in top leadership.
LEARNING ORGANIZATION A learning organization is capable of continual regeneration from knowledge. experience. – Experimentation – Fosters a culture of risk taking. 38 . – Informal Networks – Emerging of new ideas. It helps prevent a strategic drift from occurring at the first place. – Constructive Bargaining – Agree to disagree. A learning organization must continuously focus on unlearning as well. – Organisational Slack – Enough free space. Factors that fosters a learning organization – Pluralistic – An environment where different and even conflicting ideas are welcome. and skills that fosters experimentation and questioning and challenge around a shared purpose.
ENVIRONMENTAL CONDITIONS Dynamic Scenario Planning Learning Organization Static Forecasting Decentralization Simple Complex 39 .
ANALYZING BUSINESS ENVIRONMENT 40 .
e. It is pro-active in nature. Strategic gap basically points towards a vacuum of where the organisation wants to be and where it is. It is based on the assumption of incremental change. It requires a quantum leap (i. It is reactive in nature.PLANNING & STRATEGIC PLANNING Formal planning is a function of extrapolating the past. 41 . Strategic planning is a function of discounting the future. It is based on the assumption of radical change. Competitive advantage provides the surest way to fulfill the strategic gap. It points to a position of superiority with relation to competition. gap analysis).
and influences that affect an organizations way of doing things. Environmental scanning is very important component of strategic planning. The world is flat. events. It is exploratory in nature. resources and ideas move unhindered. Environmental factors can be external as well as internal to the organization. A manager has to continuously scan the environment to ensure alignment of the strategies with the radically changing environment. The segments of the environment a top manager scans selectively depends upon his dominant logics.ENVIRONMENTAL SCANNING The environment is defined as the aggregate of conditions. 42 . not guided by any boundaries.
It is important not only to identify the structural drivers of change.PESTEL PESTEL attempts to provide a broad framework on how the broader environmental forces affects an organization and influences the way it practices strategy. which may be different from the past impact. for which a holistic picture is required. It is not intended to be used as an exhaustive list. Understanding the composite effect is critical. but also to analyze the complex linkages across them. 43 . It is particularly important that PESTEL be used to look at the future impact of environmental factors.
44 . Inflation & Interest Rates. Language Barriers. Economic Model. Infra-Structural Investments. Currency Stability. Literacy Levels. Religious Sentiments. Fiscal Deficit.PESTEL FRAMEWORK Political – Government Stability. FDI Inflows. Economic – GDP. Government Attitude. Economic Cycles. Capital Market & Forex Reserves. Subsidies & Protection. Savings & Investment. Licensing & Quotas. Central – State Co-alignment. Social – Population Diversity. Income & Age Distribution. Monsoon & Food Grains Reserves. Social Values.
Research & Development. Product Design. Non-Fossil & Alternative Fuels. Consumer Protection Laws.PESTEL FRAMEWORK Technological – Innovation. Extended Producer Responsibility. Pollution Control Laws. Patent Laws. Obsolescence Rate. Waste Disposal & Emissions. Product Safety & Health Hazards. Direct & Indirect Taxes. Technological Convergence. Environmentally Preferable Purchasing. Carbon Credits. Environmental – Global Warming & CSR. Legal – Monopolies Legislation. ERP. Employment Laws. 45 . Patents.
Banking Sector Reforms. Rupee convertibility. Curtailment of PSU’s.ECONOMIC LIBERALISATION New Industrial Policy (NIP) – Liberalizing industrial licensing. Abolition of import licenses. FERA Liberalization. Structural Adjustments – Phasing out subsidies. Economic Reforms – Fiscal & Monetary Reforms. Capital Market Reforms. MRTP Liberalization. New Trade Policy (NTP) – Lowering import tariffs. Encouraging exports. 46 .VRS. Encouraging FDI. Dismantling price controls. PSU Disinvestments. Exit Policy.
Mergers & Acquisitions 47 .Survival of the fittest MNC Onslaught – Enhancing stakes – Power Equation – Joint Ventures – Technological Alliances – Take-over threat.DISCONTINUITY Destabilization due to entrepreneurial freedom – Cocoon of protection disappears – Diversification spree – Existing notions of size shaken – Industry structures change radically – Economic Darwinism .
Globalization – Cheap Imports & Dumping – Push to Pull Marketing Buyers exacting demands – Shortage to surplus – Price competition – Life-style changes – Stress on quality.DISCONTINUITY Hyper Competition – MNC’s . Consumerism Challenges on the technology front – Competencies become technology based – Investment in R&D become inescapable 48 .
DISCONTINUITY Compulsion to find export markets – Identifying competitive advantage – Technological gap – Global presence – Depreciating currency – Exports Corporate vulnerability – It is no longer business as usual – Capital inadequacy – Lack of product clout and brand power – One product syndrome – Loss of monopoly 49 .
FIVE FORCES MODEL .PORTER Threat of New Entrants Bargainin g power of Suppliers Competition from Existing Players Bargainin gBargainin power g of power of Suppliers Customer s Threat of Substitutes 50 .
It is even wiser to apply the same at the product – market level. The model should not be used as a snapshot in time. incremental or otherwise. It should not only be used to understand the forces. 51 .e. The five forces have strong cross-linkages. profit potential) per se. but also used to understand how they can be countered and overcome. It depicts the attractiveness of an industry (i. the forces are subject to changes.FIVE FORCES MODEL ASSUMPTIONS The model is to be used at the SBU level and not at the industry level.
Product differentiation through proprietary technology or brand power. High switching costs. Government policy. Low relative importance of the segment. Threat of Customers – Buyer concentration and volumes.PORTERS FIVE FORCES ANALYSIS Threat to Entry – Economies of size and scale. Scope for backward integration. Unimportance of product quality. Access to distribution channels. Capital requirements. Industry stagnation. 52 . Learning curve advantages. Presence of substitutes or unorganized sector. Undifferentiated product. Resource profile & fear of retaliation. Low customer switching costs. Low margins & stagnancy.
Differentiated inputs.PORTERS FIVE FORCES ANALYSIS Threat of Suppliers – Supplier monopoly. Low relative importance of the segment. High exit barriers. Low level of differentiation. Produced by industries earning high profits. Lack of substitute inputs. Product perishability. Threat of Substitutes – Improvement in price -performance trade-off. Unorganised sector. Scope for forward integration. Buyer’s propensity to substitute. 53 . Piracy and counterfeits. Jockeying for position – Fragmented market. Intermittent overcapacity. Industry stagnancy. Diversity of players. High customer switching costs.
Cohesiveness – Degree of bonding existing across affiliated firms. dominant or related diversified or unrelated diversified businesses (Infosys.FIRM ENVIRONMENT Size and Scale of Operations – It is a very important component of competitiveness in today's global context (Bharti – MTN. Inertia – Excessive commitment to past strategies prevents firms from tapping emerging opportunities. Tata). Business Scope – The intention whether the firm wants to be in a single. 54 . Reliance). Resource Profile – It highlights the capabilities (generic) or competencies (business specific) of the firm.
it can price its products more competitively. Experience curve has strong linkages with performance. an E-Curve can prove to be futile during discontinuity. With lower costs.EXPERIENCE CURVE The cost of performing an activity declines on per-unit basis as a firm becomes more efficient. Matured firms will always be positioned advantageously on the ECurve than new entrants. experience teaches better and more effective way of doing things. 55 . leverage it as a competitive advantage. which further reduces costs. and with lower prices it can increase its sales volume. However. The E-Curve thus enables organisations to build entry barriers.
EXPERIENCE CURVE Cost per unit of output Decreases at an increasing rate Point of inflexion Decreases at a constant rate Decreases at a decreasing rate Production / Volume 56 .
TRADITIONAL VIEW Efficiency = Lower Costs 2 3 1 Experience = Efficiency Lower Costs = Higher Sales Entry Barrier = Better Performance 4 6 5 Higher Sales = Lower Costs Lower Costs = Entry Barrier 57 .EXPERIENCE CURVE .
STRATEGIC VIEW Inertia = Limited Growth Experience = Inertia 2 3 1 Limited Growth = Diversification Strategic Failure = Poor Performance 6 5 4 Diversification = New Experience New Experience ≠ Old Experience 58 .EXPERIENCE CURVE .
A SWOT audit involves – Company Records – Annual Reports. Case Studies – Structured Questionnaires. Observation. Customers. It helps an organisation to capitalize on the opportunities by maximizing its strengths and neutralizing the threats minimizing the weaknesses. Press Clippings & Interviews. Acronym for Strengths – Weaknesses – Opportunities – Threats. Suppliers. 59 Analysts. Competitors. It is one of the earliest models in environmental scanning. Websites. Business Intelligence – Bankers.VULNERABILITY ANALYSIS . .SWOT The framework was originally conceptualized by Kenneth Andrews in 1970. Interviews.
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 .
Infosys. Honda. Strong after sales & service network – Eg. Dr. Caterpillar. Aditya Birla. Reddy’s. Infosys. High quality products – Eg. HUL. 61 . Reliance. Tata. Biocon. Tata Steel. Reliance. Sony. Ranbaxy. Motivated employees & cordial industrial relations – Eg. Engineering Skills – Eg. Strong R&D base – Eg. Volkswagen. Economies of scale – Eg. Excellent penetration – Eg. Good credit rating – Eg. Toyota.SOURCES OF STRENGTH Strong brand identity – Eg. SBI. Siemens. ITC. Large resource pool – Eg.
SAIL. Excess manpower – Eg.Raymond. Organizational Politics – Eg. Lack of product / brand clout – Eg. Lacking experimentation culture – Eg. CMC (Tata Group) 62 . Hindustan Motors. Ballarpur Inds. Single product syndrome – Eg. Narrow business scope – Eg. Strategic myopia – Eg. K. J. Inertia – Eg.SOURCES OF WEAKNESSES Outdated technology – Eg. Tatas. K. Excessive diversification – Eg. Nirma. Bijoligrill. Modi Group. B. Procter & Gamble. Group . CESC. Inefficient top management – Eg.
Fertilizer. Market driven Interest rates – Eg. Abolishing MRTP – Eg.SOURCES OF OPPORTUNITIES Delicensing of Industries – Eg. Banking. Retailing. Market driven Pricing – Eg. Telecom. Life style changes – Eg. Growing population – Eg. Insurance. GDR’s. Fertilizers. Middle-class buying power. 63 . Sugar. Maruti. Sugar. VRS.Tata Motors. Free pricing – Eg. Collaborations & Joint Ventures – Bharti & WalMart. Abolishing CCI. ECB’s. Globalization – Eg. Exit Policy – Eg. Capital market reforms – Eg.
Reliance. Tata Steel. Terrorist attacks – Eg. (1985–1990). Onida.SOURCES OF THREATS Political instability – Eg. Hostile take-over – Eg. Lack of Corporate Governance – Eg. Earth Quake. Satyam. Natural disaster – Eg. 64 . Tsunami. 11/9. 26/11. Import relaxation – Eg. (2008). Land acquisition . Nationalisation – Eg. Foreign Direct Investment (FDI) – Eg. Group disintegration – Eg. Economic recession – Eg. Dumping from China. Singur SEZ. Bajoria – Bombay Dyeing.Social activism – Eg.
It represents a summary picture of the external environmental factors and their likely impact on the organization. time series. Holistic view – Prepare a complete overall picture. 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 . scenario analysis). Delphi's technique. Assess the extent of impact of the factors.e. Forecasting – Predict the future (i.ETOP Acronym for Environment – Threat – Opportunity – Profile.
66 Vertical integration is a powerful strategy. An organization can draw upon the experience of its peers in similar situations. High investment intensity acts as a drag. selectively. Some key findings on major performance drivers that explains 75% deviations in performance – Product quality and relative market share. It is also a form of assessing vulnerability through longitudinal analysis.PROFIT IMPACT OF MARKET STRATEGY PIMS is a database model developed by GE and later extended by HBS to examine the impact of a wide range of strategy variables on business performance. . Relative attractiveness of the market.
when radical changes in the economy takes place. Authenticity of data is of prime importance – Contexts drawn across one organization may not be applicable to another. . – Contexts may vary across countries.PIMS . – Contexts may vary over time. As every organization is unique in its own way. therefore 67 validity may be a question. Managers should be particularly cautious while referring to such data during times of discontinuity as it makes past patterns futile.LIMITATIONS The analysis is based on historical data and it does not take care of future challenges.
KSF helps organizations spot early opportunities and convert them into value adding business propositions. It enables the top management to draw focus.KEY SUCCESS FACTORS (KSF) KSF relates to identification and putting concentrated effort on a particular activity or process which forms the very basis of competitive advantage. It involves a three-stage process – Identify KSF – What does it take to be successful in a business? Drawing KSF – What should be the organizations response to the same? Benchmarking KSF – How do we evaluate organization success on this factor? 68 .
IDENTIFYING ALTERNATIVE STRATEGIES 69 .
related. A corporate strategy identifies and fixes the strategic gap it proposes to fill. global) of a firm and deals with choices of allocating resources across them. dominant.GRAND STRATEGY It is concerned with the overall business scope (single. It provides broad direction to the groups vision and mission. It indicates the quality of growth an organization is looking for. It determines the locus a firm encounters with internal and external environment. 70 . It reflects the customer needs it intends to satisfy.CORPORATE . national. unrelated) and geographical scope (local.
CORPORATE STRATEGY MATRIX Corporate Strategy Stability Stability Growth Growth Combination Diversification Divestment Intensification Market Penetration Related Vertical Market Development Product Development Unrelated Horizontal 71 .
– The firm may not be willing to take additional risk associated with new projects. (Eg. Stability however. Even during adverse times firms need to adopt a strategy to sustain current performance levels. 72 . The scale and scope of present operations remains almost intact. Citibank). Hindustan Motors). – To stop for a while and assess past records.STABILITY It involves maintaining status-quo or growing in a slow and selective manner. The reasons for stability strategy – – Lack of attractive opportunities. erosion of capabilities. does not relate to do-nothing (Eg. – Why disturb the existing equilibrium set up? – Limited resource position.
ANSOFF’S MODEL New Product Existing Product Existing Market Market Penetration (+) Product Development (++) New Market Market Development (++) Diversificatio n (+++) Note: (+) indicates degree of growth and risk involved.GROWTH . 73 .
(Eg. 74 . convert competitors customers. Nirma. Britannia). – Helps firms which are not comfortable with unfamiliar terrain. direct non-users to users. – Suitable for industries where scope for technological breakthrough is limited. Market penetration can be achieved by – increasing sales to current customers.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. – Elongated product life-cycle. within a well defined market segment. Ujjala. – The company carries a risk of product obsolescence.
– Creativity and innovation – thinking out of the box. – Immense customer reach & flexible advertising. – Unconventional and flexible distribution channels. Du Pont – Nylon: parachutes. carpets.…… or Teflon: aircraft technologies to cutlery to paints or Raytheon Corp – Microwaves: radars to kitchen appliances). fabrics. tyres. 75 . (Eg. – Moves across geographical boundaries. upholstery. socks & stockings. – Stretches product life cycles.MARKET DEVELOPMENT It is a strategy where a firm tries to achieve growth by finding new uses of existing products or its close variants and tap a new potential customer base altogether.
serviceability. Refills) 76 . – Deliverable through – redesigning or reengineering. aesthetics. – Leverage on customer and brand loyalty. Close Up: Fluoride – Gel toothpaste or VIP . perception. features. – Areas of product improvement – performance. – Substitutes that serve the same needs (Eg.PRODUCT DEVELOPMENT It is a strategy where a firm tries to achieve growth through a radical new product (Eg. durability. reliability. conformance. – Leveraging through – innovation. Microsoft: DOS to Windows) or a substantial improved version (incremental) of an existing product to repeatedly enter the same market (Eg.Strolleys).
e. From the traditional point of view. Why do firms diversify in the Indian context? – Shift the growth trajectory or opportunistic. – Risk reduction. dominance). – High transaction costs and institutional gaps. From the modern point of view they are strategically dissimilar. – Internal capital market.e. 77 . the new business is distinct from the existing business in terms of – inputs – technologies – markets. – Permits: quotas. licenses (i. thereby creating a new business. industrial embassies).DIVERSIFICATION It marks the entry of a firm into newer markets with new products. – Conglomerate or market power (i.
the ice-cream business would register a return of 30%. What would be your ideal diversification strategy through optimization? 78 . Let us assume that there are two businesses constituting the entire market – coffee and icecream. ice-cream business would register a return of 10%. If on the other hand. while the coffee business would register a return of 30%.HOW DIVERSIFICATION REDUCES RISK? Consider a hypothetical planet. either of which is equally likely to prevail. while the coffee business would register a return of 10%. cold wave dominates the planet. If the hot wave dominates the planet. in which a given year is either under hot or cold wave.
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.
Reddy’s). Tapered integration . Maruti – Sona Steering). 85 .A firm produces part of its own requirements and buys the rest from outside suppliers with a variable degree of ownership and control. Usually the firm concentrates on its core activities. Quasi-integration . Reliance). and out-sources the noncore activities (Eg. Ranbaxy.QUASI & TAPERED INTEGRATION Full Integration .Where one firm has full ownership and control over all the stages of a value-chain in the manufacturing of a product (Eg. Dr.A firm gets most of its requirements from one or more outside suppliers that is under its partial control through value chain partnerships (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 .
– Cost of ignorance (i. lack of knowledge of competitive forces). synergies pulling in opposite directions). 87 . and are also strategically dissimilar. myopia). core business).e. – Cost of neglect (i. Drawbacks of unrelated diversification – – Cost of failure (i.e.e. lack of strategic intent.e.CONGLOMERATE DIVERSIFICATION It relates to entry of firms into businesses which are distinct in terms of – inputs – technologies – markets. Firms usually engage in conglomerate diversification when emerging opportunities are very attractive and offers potential growth opportunities. – Cost of dysynergy (i.
CONGLOMERATE DIVERSIFICATION Paper & Packaging Edible Oils Tobacco Hotels Food & Confectionary 88 .
e. L&TCement Division to Aditya Birla Group) technically known as divestiture or a product (Eg. Tata Pharma. Tata Press). It is may also be a pro-active strategy. (Eg.DIVESTMENT Divestment is a defensive strategy involving the sale of entire stake (Eg. It may also involve a SBU (Eg. where a company simply exits because the business no longer contribute to or fit its dominant logic. Tatas sale of Goodlass Nerolac. reactive) and survival is at stake and the firm does not have resources to fend off competitive forces. Glaxo’s “Glucon-D” to Heinz). ACC) in full to an independent entity. 89 . It taken into account when performance is disappointing (i. In strategy there is no scope for sentimentality with divestment.
ROUTES Outright Sale – Popularly known as the asset route. where the equity is allotted amongst the existing shareholders on a pro-rata basis. 1956 does not permit this mode. However. where 100% of the assets (including intangibles) are valued and paid for. Leveraged Buy-Out (LBO) – Here the company’s shareholders are bought out through a negotiated deal using borrowed funds. Sale of Diamond Beverages to Coca-Cola for US $ 40 million).3 billion. Tatas buy-out of Corus for US $ 11. 90 . (Eg. the Companies Act. involving 608 pence per share).DIVESTMENT . Hive-Off – A hive off is the creation of a new entity followed by transfer of assets. (Eg.
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. mergers and acquisition. growth. 91 . There can be no ideal strategy for every business.COMBINATION STRATEGY It is a mixture of stability. joint ventures). A combination strategy can be implemented through green-field projects (i.e. developing facilities right from the scratch) or through brown-field projects (i. and divestment strategies applied simultaneously or sequentially for a portfolio of businesses.e.
STRATEGY CHOICE & PORTFOLIO ANALYSIS 92 .
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.STRATEGIC CHOICE A strategic choice seeks to determine the alternative courses of action available before top managers to achieve its strategic intent. Dominant logic enables top managers to selectively scan the environment and make trade-offs. What then is the magical number? 93 . In most cases the trade-off is between resources and opportunities.
SELECTIVITY IS THE KEY The role of a top manager is not to solve a problem. will help the firm achieve its intent. if addressed. nor is to a define a problem for others to solve. The key task before a top manager is to identify the right problems. To identify the right problems. managers need to ask the right questions. They must choose problems which will lead to the right kind of opportunities. For an optimal choice the following four issues need to be resolved – Is the strategy clearly identifiable? Is it consistent with the resources of the firm? Will it be able to exploit the opportunities in full? Is it in tune with the values and beliefs of the firm? 94 .
Their origins can be traced back to market imperfections existing in an economy (MRTP Laws. business houses in India. 95 Succession planning is critical to continuity. BRC).DEFINITION A business group is known by various names in various countries – guanxique in China. Their roots can be traced to a single family or clan and share broad similarities. keiretsus in Japan. embassies). . formal and informal ties. Resource sharing. High degree of centralized control (GEO. Proximity to the corridors of power (i. chaebols in Korea.BUSINESS GROUP . Licenses & Quotas.e. Managing Agency).
RESOURCE SHARING ACROSS FIRMS Parent Company Firm 1 Firm 5 Firm 3 Firm 2 Firm 4 96 .
STRATEGIC CHOICE – MACRO TIMING Recession (Stability) Prosperity (Diversificatio n) Depression (Divestmen t) Recovery (Intensification ) 97 .
Divestment Duration (Yrs) Inception Intensification 98 .STRATEGIC CHOICE – MICRO TIMING ReEngineering Growth (%) Maturity Stability Growth Diversification Decline .
Investing in emerging businesses may not actually be so simple as it appears to be. therefore. 99 . Relatedness across resources are difficult to realize. next only to choice of business. sometimes impossible. Power and resources often goes hand in hand.PORTFOLIO ANALYSIS Resource allocation across a portfolio of businesses is an important strategic choice. Why? Businesses are not about liquid assets. Redeployment of resources upsets the established power bases of a group. there are high costs associated with entry and exit. Rules of the game are different.
BCG GROWTH MODEL Relative Market Share (%) Industry Growth (%) Low High High Low Stars Question Mark ? Cash Cow Dogs 100 .
provided the industry growth rate continues and the company is able to maintain its growth (i. Trent. provided the company is able to build up on its market-share (i.e. which remains a big? These businesses are net users of resources. and their risk profile is high (Eg. 101 . Stars – They achievers in the near term. Tata Steel).BUSINESS ANALYSIS – TATA GROUP Question Marks – They have potentials in the long term. These businesses are also net users of resources (Eg. but to larger extent than a question mark. Tata-AIG). product development). TCS. market development. market penetration. Tata Telecom.e. diversification).
Tata Tea. cash cows may also need to invest provided the industry takes an upswing (Eg. Tata Motors. Dogs – They are a drag on the group. Groups prefer to dispose off such businesses (i. Given that the growth potential in the business is low. stability). Tata Pharma.BUSINESS ANALYSIS – TATA GROUP Cash Cow – These are matured businesses. Tata Chemicals). However. and the company dominates the industry ahead of competition (i. 102 . Indian Hotels. Nelco.e. they are generators of resources. harvest. divest) as achieving a dominant position in these businesses is a difficult task. Tata Press). and they lack on competencies to take on competition and are basically cash traps (Eg.e.
The model does not provide specific solutions within a particular category.e. factors are limited.LIMITATIONS It does not address the concerns of a business which is in the average category (usually the majority).BCG . The terminologies used are somewhat prohibitive. neither in high or low. Mercedes Benz. Armani). Cash cows may actually need substantial investments to retain their market position (Eg. Data may be prohibitive. Cartier. Certain businesses in the low market share category may be the result of a conscious strategy (i. 103 . HUL). niche – Rolex.
-) 104 .GE .MATRIX Distinctive Capabilities Strong High Medium Weak Stability Industry Attractiveness Diversify (++) Intensify (+) Med Intensify(+) Stability Harvest (-) Low Stability Harvest (-) Divest (.
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. Portfolio – An organization is perceived as a portfolio of businesses. BCG – Boston Consulting Group. Divest – Selling a part or the entire business at one go. SBU – A business unit which is strategically different from another and also shares a different SIC code.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. 107 .
BUSINESS STRATEGY & COMPETITION 108 .
COMPETITIVE STRATEGY A competitive strategy deals with how a firm competes in a particular business or product-market segment. Competitive advantage refers to a firms resources or activities in which it is way ahead of competition. The principal focus is on meeting competition. building market-share. rent). Competitive advantage is the back-bone of strategy. The strength of a firm in a particular business usually stems from its competitive advantage. 109 . and earning super-normal profits (i. Such resources or activities should be distinctive and sustainable over time.e.
preventing new entry and/or competition (Hax & Wilde). 110 . Delta Lock In – Two dominant players co-opt to selfreinforce and create or escalate an entry barrier. Resource Based View – Obsession with competence building. Blue Ocean – Consciously moving away from overcrowded industries to uncharted territories and making competition irrelevant (Kim & Mauborgne). involving harmonizing and integrating multiple streams of technologies. identifying critical success factors.BUSINESS STRATEGY FRAMEWORKS How to be distinctive and yet sustainable – Differentiation – Understanding of the dynamics of competition. developing competitive advantage (Porter). leveraging (Prahalad).
Steep experience curve effects. The firm may retain the benefits of cost advantage by enjoying higher margins (Eg. T-Series). preferential access to raw materials. Ayur. backward integration.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. Compress project duration through crashing. Locational or early entry advantage. Nirma. proprietary technology. 111 . 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.
Rayban). Means of product differentiation are peculiar to each industry. Culture of experimentation. Feeling the pulse of the customer. (Eg. Creativity. and sufficient slack.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. Sony. avoiding brand dilution. 112 . It selects one or more attributes that buyers perceive as important. Successful product differentiation is often followed by premium pricing. Intel. undeterred attention to quality. innovation and out of the box thinking. Focus on brand loyalty.
Armani). A focuser seeks to achieve a competitive advantage in its target segment. though it may not possess an overall competitive advantage. The target segment must have unusual needs or the delivery system catering to this segment must be unique. Rolex. Maybach. They are poorly served by mainstream players.PORTERS NICHE OR FOCUS Focus / Niche – It is a variant strategy of cost leadership or product differentiation targeting a specific market or buyer sub-segment with the exclusion of others (Eg. coupled with fear of structural erosion. Sub optimization alone may not be a source of superior performance. Cartier. 113 . Mont-Blanc.
COMPETITIVE POSITIONS Competitive Advantage Cost Differentiation Product Differentiation Competitive Scope Broad Cost Leadership (Toyota) Product Differentiation (General Motors) Narrow Cost Focus (Hyundai) Differentiation Focus (Mercedes) 114 .
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. Reducing cost does not always involve a sacrifice in differentiation. 115 . Tata Nano).HYBRID STRATEGY A hybrid strategy is the simultaneous pursuit of cost leadership and differentiation.e. similarly differentiation may not always lead to rising costs (i. jugaad or frugal engineering).
Industry maturity will usually widen the gap.stuck in the middle.STUCK IN THE MIDDLE A firm that engages in a hybrid strategy and fails to achieve a competitive advantage because it was ill conceived will be . It will have a competitive disadvantage vis-à-vis a clearly positioned generic player. The positioning therefore gets – blurred. It is usually the result of a firm not willing to make trade offs. It tries to compete through every means. 116 . unless such a player is capable of discovering a profitable segment. leading to what is called – straddling. but achieves none.
Market segmentation not well defined. 117 . There is a lot of scope to define the rules of competition.radical environmental changes. Speech recognition software's. Artificial intelligence). (Eg. ending in a differential cost economics. Consumer behaviour pattern unstable and evolving. Eg. leading to a blurred productivity frontier and steep learning curve. changing customer needs. First-time buyers.EMERGING INDUSTRY Emerging Industry – An evolving industry characterized by . 3D imaging. Nano technology.) Excessive turbulence in the dynamics of the environment. coupled with low penetration levels. technological innovations. It is characterized by – High level of technological uncertainty.
Scope for players to change the rules of the game. High exit barriers because of huge investment in CAPEX. leading to clear fragmentation. Paints. Diverse customer needs. It is characterized by – Low entry barriers. Consumer durables. 118 . Eg. Government regulations in the form Eg.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). MRTP may also cause fragmentation. Eg. Retail and telecom. because of lack of economies of size and scale. IT. Air Conditioning. Eg.
established industry dynamics. 119 . Limited scope for innovation . technological maturity.technological maturity. collaboration and co-option. early entry and location advantages. Strong entry barriers. distribution networks.MATURED INDUSTRY Matured Industry – An industry characterized by saturation in growth rates. Cartel among existing players through collusion. Firms are rule takers in the segment as productivity frontier is well defined. well defined consumer behavioral patterns and imperfect competition leading to near monopoly. because of economies of size and learning curve effects.
(Eg. dot-matrix printers). scooters. Exit barriers are extremely high because of limited prospective buyers. backed by corporate espionage. 120 . and costly price wars. Typewriters. Learning abilities have been stunted and firms adverse to investment in R&D and make fresh investments. Nature of competition extremely high.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. Firms facing a declining phase are characterized by inertia and slow to react to environmental changes. with little or no signs of recovery.
premium pricing. process innovation. branding and promotion. aggressive building of distribution networks. focus more on product differentiation or even a hybrid one. recreate new markets. Matured Industry – Sophisticated cost analysis. increasing scope. 121 . or else exit the segment. Locate a defendable position. assess and overcome fragmentation. strictly cost differentiation. Fragmented Industry – Identify. reengineer. strike alliances.COMPETITIVE STRATEGIES Emerging Industry – Set benchmarks. mergers and acquisition. strictly product differentiation and not standardization. Declining Industry – Redesign. move beyond boundaries. regenerate.
However. brands. 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. Intangible – These refer to goodwill. They are a standard in nature. A firms resources can be classified into – Tangible – These refer to real assets. 122 . and complex learning experiences in integrating and harmonizing technologies (distinctive capabilities) that play an important role in delivering competitive advantage through “causal ambiguity”.
Typically. There is a high degree of internal and external causal ambiguity involved in it. but not necessarily.e. Capabilities can be generic (i. Hence. can be leveraged across businesses) or specific to a particular business.CAPABILITIES & COPMPETENCIES These include a complex combinations of tangible and intangible resources that organizations use to convert inputs to outputs. They play a very critical role in shaping competitive advantage. 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. they are woven around technologies. 123 .
COMPETITIVE ADVANTAGE 124 .
e. Success of a strategy critically depends on SAP. Strategy drives competitive advantage. It enlarges the scope of an organization.COMPETITIVE ADVANTAGE A competitive advantage is a position of superiority relative (i. and results in well springs of new business development. A portfolio of competitive advantage comprises strategic advantage profile (SAP). not absolute) to competition. It results in a distinct differentiation advantage or a cost advantage or hybrid as well. 125 . competitive advantage subsequently becomes the back bone for a competitive strategy.
126 . Most successful organizations around the world have a well balanced SAP. In most cases SAP is hidden and dormant. Internal strategic fit between its strategy and dominant logics is essential for the top management to stretch and leverage SAP.STRATEGIC ADVANTAGE PROFILE (SAP) Organizations have to systematically and continuously conduct exercises to identify its SAP. Identification of SAP is critical for and stretching and leveraging of resources. SAP changes from time to time. In today's world of discontinuity.
A VC is often compared with a relay team.e. each of the players need to be efficient backed by sufficient coordination at the contact points (i. kaizen or internal customer). Competitive advantage arises not from an individual activity but a stream of inter-related activities. 127 . VC pay-offs: better product availability. faster product launches. and enhanced customer tracking – higher market share. Inventory Mgt to Logistics Mgt to Supply Chain Mgt (SCM). Substantial cost reductions also follow.VALUE CHAIN ANALYSIS A value-chain segregates a firm into strategically relevant activities to understand its composite behaviour. Today SCM is integrated with greening the environment as CSR practices.
THE VALUE CHAIN Support Infrastructure n gi ar M Human Resource Management Technology Development Procurement Out Logistics Mktg & Sales In Logistics Operations Primary Service M ar gi n 128 .
A learning organization helps create strategic fit. – First order fit refers to simple consistency between each activity and the overall strategy. Fit is important because discrete activities result in negative synergy and can also be easily copied by competitors. A high fit involving a complex chain of activities drives both competitive advantage and its sustainability. Operational effectiveness is not strategy. – Second order fit occurs when activities are reinforcing amongst them. – Third order fit refers to optimization of effort. 129 .STRATEGIC FIT – THE PORTER WAY The sustainability of the value chain depends on the degree of fit between the activities.
It should satisfy the following conditions – Contributes significantly to customer benefits. – Cannot be easily imitated or substituted. – Can be leveraged across businesses. – Can be sustained even in the long run. A core competence usually has its roots in technology.CORE COMPETENCE A core competence represents the collective learning's of an organization around diverse streams of technologies. These skills results in distinctive activities and processes. Core competence has a high degree of external and 130 internal causal ambiguity embedded in it. . It forms the very basis of competitive advantage. but not necessarily.
Majority of the firms have competitive advantage. A competitive advantage may or may not lead to superior performance. a core competence has its roots in a set of skills.CORE COMPETENCE A competitive advantage does not necessarily imply a core competence. A competitive advantage is sustainable in the shortmedium term. a core competence usually does. A competitive advantage manifests from a function. a core competence always implies a competitive advantage. only global leaders possess a core competence. 131 . a core competence is sustainable even in the long-term.
In a game (similar to a business) one players win is always another's loss. This is known as a zero-sum game. However. In fact there are no. A game is a contest involving two or more players. Subsequent work on game theory by John Nash led him to win the Nobel prize in 1994.GAME THEORY The game theory was developed in 1944 by Oscar Morgenstern. 132 . illustrations depicting a win-win situation. each of whom wants to win. Here the magnitude of gain offsets the magnitude of loss equally. the stringent assumptions of game theory and difficulty in ascertaining of pay-offs makes game theory application difficult in business.
BIASED AND UNBIASED GAME A game is said to be biased when one of the players have a disproportionate chance of winning. Firm Y’s Strategy Use Radio Use Radio +2 +6 Use Newspaper +7 -4 133 Firm X’s Strategy Use Newspaper Firm X’s Pay-Off Matrix . An unbiased game is one where both the players have equal chances of winning.
Firm Y’s Strategy Use Radio +3 +1 Use Newspaper +7 -2 134 Firm X’s Strategy Saddle Point Use Radio Use Newspaper Firm X’s Pay-Off Matrix . A saddle point is a situation where both the players are facing pure strategies.PURE STRATEGY GAME The strategy each player follows will always be the same regardless of the other players strategy.
Coke Vs Pepsi). Yahoo Vs Microsoft). there is likely to be temptation by any of the players to try to steal the advantage over the other by breaking the rules of the game (Eg. This is usually through learning by “experience or observation” (i.g. 135 . iteration) rather than through collusion (E. However.TYPES OF GAMES Simultaneous Games – This is a situation where the players have an option to choose to cooperate or not through collusion. Repeated Games – In this situation the players interact repeatedly with each other sub-optimizing the outcome possibilities. collaboration or cooption. It represents the classical “prisoner’s dilemma”.e.
– Building incentives for customer loyalty. Game theory relies on the principle of rationality. – Making pricing more transparent. It results in a shift in the productivity frontier.CHANGING THE RULES OF THE GAME In a situation where a player is unable to compete with the existing rules of the game may attempt to change the rules of the game altogether. In a market dominated by price-based differentiation one may attempt to change the rules of the game by/when – – Bases of differentiation dependent on clear identification of what customer wants or value. . but 136 players do not always behave rationally.
DELTA MODEL & LOCK-IN
Its a systematic approach where-in two or more industry majors, who by default has achieved a proprietary position (Microsoft – Software / IBM – Computers) which are not necessarily best-products in the industry, co-opt to create a lock-in. A lock-in implies that other players has to conform or relate to that standard in order to prosper. Becoming the industry standard requires – strong brand, causal ambiguity, and close relationship with other companies offering complimentary services. Lock-in is self reinforcing and escalating (i.e. accelerating effect).
THE THREE STRATEGIC POSITIONS
System Economics Market Dominance Complementary Share
Enabled through effective use of technology
Total Customer Solutions
Customer Economics Cooperation Customer Share
Product Economics Rivalry Product Share 138
Bill Gates is the richest man in the world not necessarily because he has developed the world’s best software's or excels at customer satisfaction; but he has got an army of people working for him who are not on his payroll – all the application software providers who are writing programs based on “Windows” compatible operating platform. Once you create the lock-in it is sustainable because of the “network effects”; which creates the proverbial “virtuous cycle” – customers want to buy the computer with largest set of applications and software developers want to write programs for the computers with the largest installed base.
The proponents (Hax & Wilde) believe that every organization has the ability to create and sustain a “lock-in” positioning (though in varying degree). This “system lock-in” is referred to as “delta” – delta being the Greek letter that stands for transformation and change amongst the players. The lock-in once created becomes very difficult for a firm to penetrate, and becomes a distinct entry barrier. The model is based on the belief that it compliments Porter’s differentiation model and RBV framework instead of contradicting them. In a lock-in strategy the performance outcomes are dependent on the success of another.
It relates to translating strategy formulations into practice. Performance realization of a strategy depends on the implementation effort. Successful implementation also depends on the appropriateness of the strategy. Since strategy implementation is a time bound process, alignment (i.e. strategic fit) is a key variable during times of radical change. Some of the other levers of successful strategy implementation are – Transformational leadership and motivating power. Resource allocation; its stretching and leveraging. Compatible organization structure & control systems. Inertia & resistance to change.
IMPORTANCE OF STRATEGIC FIT Strategic fit has a central role to play in strategic management. – Better strategic and operational control. 143 . – Changing the rules of the game. internal strategic fit (strategy – dominant logic) is critical to strategy implementation. A high strategic fit (co alignment) is useful because it enables – – Appropriate and timely response. – Resource commitment from top management. While external strategic fit (strategy – environment) is relevant for strategy formulation. – Unlearning & learning of new skill sets. – Development of capabilities & competencies.
In fact. In such a situation.FORMULATION Vs IMPLEMENTATION Traditionally. In such a situation. learning levels are very low. emergent strategy vis-à-vis intended & realized). at the cost of sacrificing a lesser degree of control. 144 . effective strategies are better crafted when there is a subtle overlapping between the two (i. Some of the key strategic learning's exists at the contact point between the organization and its customer. According to Mintzberg. learning levels are very high. formulation & implementation can occur simultaneously. while control is very effective.e. strategy formulation and implementation has been perceived to be distinct & independent.
In contrast. 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.ROLE OF TOP MANAGEMENT To bring about change and to implement strategies successfully. He should be an agent of change. A transactional leader is usually confined to allocating tasks & responsibilities and extracting performance. bring about transparency. 145 . shift from compliance to commitment. Pragmatism is the ability to make things happen. Install a system of shared beliefs and values.
146 .e. patents. minimum requirement). labour. Performance Budget – SBU managers need to justify the distinctive resources in terms of the opportunity it is pursuing yields the highest possible pay-offs. Intangible resources (Eg. The various methods of resource allocation includes Historical Budget – The budgets framed by HQ for a particular SBU keeping in mind past trends. brands.RESOURCE ALLOCATION Resources allocation includes tangible resources (Eg. skills) also includes complex resources like capabilities and competencies. land. Zero Based Budget – In this case the budget of a SBU has to be worked out right from the scratch. machines) referred to as threshold resources (i.
Distinctive capabilities helps in stretching and leveraging resources thereby overcoming two major constraints involved in strategy implementation – times & costs. Due to causal ambiguity (complexity). convergence of multiple streams of technologies at the product – market level is becoming increasingly evident (Eg. these capabilities are sustainable even in the medium to long term. Flat Screen Displays. Distinctive capabilities are complex set of skills woven around technologies. 147 . Mobiles).CAPABILITIES & COMPETENCIES Technology and business are slowly becoming in – separable. Moreover. though not necessarily in the case of emerging markets.
The level of centralization and decentralization is decisive. A firm in several unrelated businesses usually employs a SBU structure. A single product or a dominant business firm usually employs a functional structure. Once the structure is in place. A firm in several related businesses usually employs a divisional structure. processes become people independent. 148 . An appropriate organization structure & adequate control systems are essential to implement strategies and achieve stated goals.STRATEGY & STRUCTURE It is a framework within which individual efforts are coordinated to bring synergy.
disbanded subsequently. Inputs . Marketing. Divisional Structure – Units grouped together in terms of products. 149 . Project / Matrix Structure – A formal but temporary framework initiated for the completion of a particular project/crisis. Finance). Virtual Structure – A boundary less or hollow organization. SBU Structure – Businesses segregated in terms of strategic dissimilarities (Eg. Team Structure – An informal group formed for a crisis. processes. based on skills and competencies. with team members having dual line of control.TYPES OF STRUCTURES Functional Structure – Activities grouped together by a common function (Eg.Technology. Output). or geographical locations.
structures are becoming flatter and more simpler. 150 . It includes the desire for independence. Environment & People – Economic and political conditions have a major bearing on structure coupled with the attitude and aspirations of the people in the organization. facing challenges & crises. leading to a tall structure.FACTORS INFLUENCING STRUCTURE Size – As an organizations size increases there is more specialization and differentiation leading to the top management moving away from operational issues and control. as span is broader. assuming responsibility. Technology – With more and more convergence of technologies in business.
irrespective whether it is from worse to good or good to worse. Inertia is a characteristic of a firm that endures status quo (i. Top managers resist change. Inertia acts as an impediment in strategy implementation. co0ntinuity). there is a tendency to continue along the same lines. Common sources of 151 inertia – complacency with past successes. Changes in top management and unlearning helps overcome inertia. Most firms undergo periods of strategic continuity rather than strategic discontinuity.e.INERTIA When a firm has been operating in a certain fashion for a long time. .
However. .STRATEGY EVALUATION Strategy evaluation centers around assessment of strategic fit. firms should move beyond financial performance to strategic performance as organization systems are becoming complex. certain authors propose misfit as a source of superior 152 performance. strategies need to be evaluated on an ongoing basis to prevent deviations of fit. Since the internal and external environment is in a state of continuous flux. To prevent deviation of fit. Deviation of fit is detrimental to performance and may lead to strategic failure.
competitive advantages becoming disadvantages? Has the company acquired any new competency? Has the company been able to overcome the 153 environmental threats. 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.STRATEGY CONTROL It is concerned with trafficking a strategy as it is being implemented.
checking every premise is costly as well as difficult. Premise Control – Checking the validity of the assumptions on which a strategy was based. Special Alert Control – It intends to uncover unanticipated information having critical impact 154 on strategies.STRATEGY CONTROL IMPLEMENTATION It involves steering the company towards its original growth trajectory & stated goals. It involves assessing – strategic thrusts and milestones. However. Implementation Control – It aims at assessing whether key activities are proceeding as per schedule. It is open-ended as well as .
Strategy not linked to resource allocation & capabilities – Lacking commitment of top management. difficult to translate into practice. Performance measures are defective – What to evaluate against? How to measure the 155 construct? As a saying goes. Strategy intent not linked with goals and objectives – Lack of coordination at lower levels leading to negative synergy.BARRIERS TO STRATEGY EXECUTION Vision and strategy not actionable – Utopian ideas. “If you cannot . low strategic fit due to consultants intervention.
156 . so if one fails to pay proper attention to one of them. to be sure of successful implementation of a strategy.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. important or not they're all interdependent. Together these factors determine the way in which a corporation operates. Large or small. Today it is considered one of the most powerful tools for strategy implementation determining success or failure. this may effect all others as well. Managers should take into account all seven of these factors. the relative importance of each factor may vary over time and context. On top of that.
157 . 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.BACKGROUND & ORIGIN The 7-S Framework was first mentioned in "The Art Of Japanese Management" by Richard Pascale and Anthony Athos in 1981. Since then it is known as their 7-S model and is extensively used by corporations worldwide to implement their strategies. and was taken up as a basic tool by the global management consultancy company McKinsey. 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.
Skills – An organizations capabilities and competencies. Structure – The way in which the organization's units relate to each other in terms of their commonalities. over time. Systems – The procedures. Strategy – Trade-offs for the allocation of a firms scarce resources. 158 . processes and routines that characterize how work should be done. Staff – Human inter-relationships. formal & informal .THE 7’S Shared Values – It represents what the organization stands for and what the top management believes in. Style – The way in which the top management influences the functioning of an organization. to reach identified & stated goals.
STRATEGIC FIT Strategy Structure Shared Values Systems Skills Staff Style 1st Order Fit 2nd Order Fit 3rd Order Fit 159 .
While the American co’s focuses on the hard S’s. Ineffective in case of a virtual company. their Japanese counterparts focus more on the soft S’s for their early success and sustainability. because most often they are culturally embedded and often neglected. 160 . structure. systems) are comparatively easy to identify and influence.A CRITIC OF THE 7S MODEL While the hard S’s (strategy. In contrast. A choice of an alphabet often limits the scope and skews the interpretation of a model. staff. style. the soft S’s (skill. shared values) are very malleable and comparatively more difficult to identify & influence. Consider the 4P’s of marketing or 3R’s of SCM.
Low Take Overs 161 .STRATEGY IMPLEMENTATION ROUTES Strategic Fit .High Organic Growth Strategic Alliance Joint Venture Mergers & Acquisition Strategic Fit .
concessions are available for green-field projects. soft loans. the entire value chain. tax holidays. 162 Risk of cost and time overruns. . green-field projects. i. The entire infra-structural facilities are set up afresh having its own gestation and break-even. subsidized power). (Eg.e. SEZ’s. technologies. i. (Eg. and markets.ORGANIC GROWTH Here a firm builds up its facilities right from the scratch and continues to do so without any external participation.e. Long gestation leads to delayed market entry. It has complete control over inputs. Reliance Industries). Govt.
STRATEGIC ALLIANCE It involves a pro-active collaboration between two or more firms on a particular domain or function for mutual gain. It has limited intervention power and usually lacks holistic commitment from the alliance partner. It touches upon a limited aspects of a firms value chain. There is no funding or equity participation from the alliance partner & both the firms continue to operate independently. Alliances are usually short-lived and disbanded once the purpose is achieved. Alliances are usually in the areas of technologies or markets (Eg. 163 It is a form of competitive collaboration. Tata Motors & Fiat). .
Honda). (Eg. leaving minimum scope of overlapping. Degree and extent of management control must be clearly 164 laid down. Tata – AIG. A comprehensive MOU is essential.JOINT VENTURES A joint venture involves an equivalent equity participation between two firms usually of similar strategic intent and comparable size to enter a particular market through a newly formed entity. Selecting the right partner is critical for success. It is a win-win situation for both the companies. Hero . . Dominant logic of both the companies should be complimentary.
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. . Coca Cola – Thums Up). Acquisition is an outright purchase of a firm assets by another independent entity (Eg. Integration of assets and other financial resources. Integrated distribution channel leads to better market penetration and overall synergy. Economies in scale leading to lowering of costs. ITC Tribeni Tissues. Brooke Bond & Lipton). Revival of a sick-unit through better management practices is a major motive behind an acquisition 165 strategy.
TAKE OVERS It refers to the acquisition of significant management control by buying out majority stake in a firm through due diligence or hostility (Eg. Integration of organization structure & cultures is difficult. Larger geo-graphical diversity. Tata Steel . Inform SEBI / Stock Exchange after 5% stake is 166 acquired. Consolidation in a fragmented industry. Make a public offer of not less than . often the new firm is “left alone”. Instant access to capacities and markets.Corus). Most countries have stringent laws that prevents hostile take over.
MANAGEMENT TOOLS IN STRATEGY 167 .
or better still create next practices Reengineering – Redesigning work processes right from the scratch. 168 . TQM – Doing the right thing the first time. The past is ceasing to be an indication of the future.WHY MANAGEMENT TOOLS? Change is becoming pertinent in the business environment. Radical change is superseding incremental change. Change provides enormous opportunities. Some tools to ensure that – Benchmarking – Adopt certain best practices. every time. Balanced Scorecard – Tracking strategy 3600. it is also a source of potential threat. Companies therefore need to ensure competitive advantages doesn’t become competitive disadvantages.
A best practice is defined as an activity performed by a company in a particular domain or function which distinguishes it from others and making them world-class. These exemplary practices involves the stakeholders of the company and helps achieve its strategic intent. Best practices centers around looking at a different way to satisfy various stakeholders. Benchmarking involves the identification, understanding and adapting of certain best practices and implementing them to enhance performance. Firms are moving towards next practices as best practices make firms look more and more homogeneous.
SOME BEST PRACTICES
Dell: Customized configuration of computers. Caterpillar: 48 hours delivery anywhere in the world. Citi Bank : Priority banking services. Maruti: Certified “true value” pre-owned cars. Microsoft: ESOP to employees. Infosys: Customized work-stations. TCS: Referencing potential new recruits. ITC: Shareholders factory visit. AmEx: Outsourcing data warehousing mining. MARG: Set-top box to study viewing patterns. Honda: CEO’s visit to dealers.
TYPES OF BENCHMARKING
Functional – Used by companies to improve a particular management activity. Eg. Motorola learnt delivery scheduling from Domino’s. Process – Improving specific key processes and operations from experiences in similar businesses. Eg. Ford adopting assembly lay-out plan of Toyota. Competitive – It involves assessing the sources of competitive advantage and imitating them. Eg. Samsung leveraging miniaturization skills of Sony. Strategic – It involves assessing business models and replicating them in a different market. Eg. Reliance replicating AT&T business model.
HOW TO BENCHMARK?
Phase 1: Planning – What to benchmark? Whom to benchmark? – Identify key performance indicators & Data source. Phase 2: Analysis – Assessment of performance gaps. – Predict future performance levels. Phase 3: Integration – Communicate findings and gain acceptance. – Establish functional goals and its implementation. Phase 4: Action – Implement and monitor progress. – Measure results against stakeholder wants and needs. – Recalibrate or outperform benchmarks.
WHOM TO BENCHMARK?
Selecting the benchmarking partner is critical to solving the problem. Firms should generally avoid selecting the industry leader, because it may not always adopt the best practices for every process or activity. Benchmarking partners may also be from different industries. Types – – Internal – It involves benchmarking against its own branches, divisions, SBU’s. Proximity to data and cooperation is taken care of automatically. – External – It involves benchmarking against firms that succeeded on account of their best practices. It may also involve benchmarking against world-class firms. Friction may arise due to presence in competing industries.
BENCHMARKING - ADVANTAGES
Finding better ways of meeting stakeholder needs. Organizational learning comes from internal as well as external sources. Establishing goals based on formal assessment of external conditions. Defining effective measure of indicators, facilitate comparison, adopt from other organizations. Ensuring a continuous learning organization. Reducing competitive disadvantage. Organizational turnaround, especially effective in case of a wide strategic drift when differentiation strategies fail to work. 174
While strategy is all about differentiation and not looking alike.BENCHMARKING . . clustering). It does not shifts the growth 175 trajectory of the industry as a whole. Strategy is more of creating best practices rather than copying them. It can at best complement it.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. Benchmarking merely reorients profits in the hands of few to profits in the hands in the hands of many (i.e. the more similar they end up looking.
Windows 95 to 97).RE-ENGINEERING Redesigning leads to identification of superfluous activities or product features (i.e. clean sheet). process mapping) and eliminating or improving them (E.g. . Re-engineering involves complete reconstruction and overhauling of job descriptions from the scratch (i. DOS to Windows).g. Re-engineering attempts to radically change an organizational products or process by challenging the basic assumptions surrounding it. for achieving performance improvement (E.e. The task demands a total change in organisational 176 culture and mindset.
REENGINEERING – KEY TENETS Ambition Focus Attitude Enabler Performance Large scale improvement by questioning basic assumptions about how work is done Micro Vs Macro Business Processes Vs Organisational Processes Starting right from the scratch Not historical More IT driven. than people driven Innovative Vs Traditional Customer centric Vs Organisational centric 177 .
BPR). structures. Strategic – It looks into the process of strategic planning. 178 .e.e. processes.REENGINEERING . etc) and supports the organization for the present. . products. Business – It looks into markets.LEVELS Reengineering can be successfully leveraged at all levels of an organization with varying degree of results. resource allocation and prepares the organization for the future through a reorientation of the entire strategic architecture. It can be of the following types – Functional – It looks into the flow of operations (i. customers and suppliers and protects the organization from the future (i.
reverse engineering is a top-bottom approach. 179 . protection can be had in the following ways – – Patenting. learning curve advantage. However. It generally acts as a threat to innovation. While traditional manufacturing is a bottom-up approach. Cheaper versions of Intel chips and mother-boards manufactured in Taiwan. – Early entry advantages. Indonesia). with an intention to copy it (Eg. – Causal Ambiguity.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. – High cost and time acts as a deterrent.
Introduction – Launching the product in the market. Actualization – Obtaining and dismantling of the product to assess how it functions. Inaccurate assessment at this stage may lead to a failure of the entire project.STAGES IN REVERSE ENGINEERING Awareness – Recognizing whether the product is found to be worth the time. cost and effort necessary for the purpose of reverse engineering. 180 . designing facilities. Implementation – Developing of a prototype.e. machine tools to convert ideas into a marketable product (i. Usually in such cases segmentation and pricing is different from the original innovator. nano-technology).
181 . of service stations. Air bags. – Conformance – Emission standards . It has eight dimensions (Eg.WHAT IS QUALITY? It involves the totality of a product or service in meeting certain stated or implied needs. – Aesthetics – Appeal in design. – Perception – Customer notions. Car) – – Performance – Mileage of 14 kms to a litre of fuel. – Features – Anti-lock braking systems. – Durability – 1980 manufactured cars still on road. More and more companies are moving towards meeting implied rather than stated needs.Euro IV. – Serviceability – Large no. – Reliability – Consistency in mileage.
. which ensures good market standing. Management of quality was traditionally inspect it . touching upon a limited aspect of a value chain. It is deeply embedded as an aspect of 182 organisational life & culture.fix it in nature. TQM is a way of creating an organization culture committed to the continuous improvement of work processes – Deming. It had little impact on improving overall productivity. zero defects.TOTAL QUALITY MANAGEMENT Objective – Management of quality ensures conformance to certain pre-set standards.
TQM – KEY TENETS Do it right. Empowerment – It takes place when employees are properly trained. Be customer centric – Generate the concept of internal customer (Ishikawa). fully involved in decision-making and fairly rewarded for results. the first time – From reactively fixing error in products to proactively preventing errors from occurring at the first place (Juran). provided with all relevant information and best possible tools. 183 . not a final destination. Kaizen – Make continuous improvement a way of life. Looking at quality as an endless journey.
e. 6-Sigma). SQC – It is a process used to determine how many units of a product should be inspected to calculate a probability that the total no. equal participation).STRATEGIES Outsourcing – It is the process of self-contracting services and operations which are routine and mundane. saving precious top management time. 184 . enabling the firm to concentrate on core activities essential to customer satisfaction.TQM . Quality Circles – It a small group of shop-floor employees who meet periodically to take decisions regarding operational problems and crises. of units meet preset standards (Eg. It is based on the principles of MBO (i.
– In the majority of failures – we estimate 70% – the real problem isn’t (bad strategy) .BALANCED SCORE CARD Some interesting comments ... Source: Fortune Magazine Why CEO’s fail? 185 . – Efficiency and effectiveness is passé.... – Less than 10% of strategies effectively formulated are effectively executed... strategy implementation has never been more important...... it’s bad execution.
BSC . In today’s context when organizational systems have become complex and multi-directional we need to have a holistic view of performance to cut the lag effects. Organizations need to move from financial to strategic performance. These measures worked well when organizational systems were simple and unidirectional and more importantly the environment was static. Focus more on causes.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. rather than effects. 186 .
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. because they have too many. 187 .BSC – KAPLAN & NORTON (1992) A BSC helps a manager to track and communicate the different elements of company’s strategy. and distinguish strategic problems from operational ones.
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. ageing schedule) % of key customer transactions Ranking of key customer accounts No.
of times covered in media No. of new product launches Vs competition Product pricing Vs competition 189 .BUSINESS PERSPECTIVE GOALS Skills Excellence Exposure Introduction MEASURES New capabilities and competencies Implementation & gestation period Bank and supplier credit limits & PLR Unit Costs / Conversion Ratio / Defect Ratio No.
of new patents registered Time to develop next generation products Average and spread in operating cycle % of products that equal 2/3 sales No. of product innovations 190 .LEARNING PERSPECTIVE GOALS Technology Manufacturing Focus Timing MEASURES No.
FINANCIAL PERSPECTIVE GOALS Survival Success Prosper Divestment MEASURES Cash flows Growth in Sales and Profits EPS. Return on Investment Market Capitalization / PE ratio 191 .
STRATEGY MAPPING 192 .
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 .
BSC . Shift from control to strategy (i. sharing of vision). 194 performance will automatically follow. Seek excellence. It helps translating strategy into practice (i.e.what they don’t know. Modern managers should be poised to ask the right questions. As a result. doing right things instead of doing things right).ADVANTAGES Most often top managers face information overload.e. The BSC brings together the different elements of a company’s strategy at a glance. they don’t know . . Focus on cause not effects.
EFFICIENCY Vs EFFECTIVENESS Ineffective Effective Inefficient Goes out of Business quickly Survives Efficient Dies Slowly Thrives 195 .
EFFECTIVENESS + STRATEGY A company which is effective as well as strategic. .Michael E. but also sustains it. Porter 196 . not only thrives.
CORPORATE RESTRUCTURING 197 .
Radical change brings about strategic variety. Tata Group)..... firms use restructuring strategies..” 198 . Restructuring involves consciously driving significant changes in the way an organizations thinks and looks (Eg. As Peter Drucker pointed out.CORPORATE RESTRUCTURING The only thing constant in today's business environment is change.. Strategic variety may be caused by changes in the as external well as internal environment. To adapt to the changing environment. Strategic variety brings paradigm shift. “every organization must be prepared to abandon everything it does. from survival of the fittest . to survival of the most adaptable.
downsizing or rightsizing). and dividing the core businesses into SBU’s (i. . Fax. Walkman. ATM. downscoping).e.RESTRUCTURING – BASIC TENETS Customer Focus – Restructuring ideally begins and ends with the customer. Company’s should go beyond just asking what he expects. etc). Internal customers should also not be neglected.e. Core Business – Company’s should introspect – What business are we in? Business evolved out of opportunism or myopia should be divested. 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. Instead.
. Kumar Birla today is more dependent on professionals... .) The Aditya Birla group typically relied on the “marwari” community for key management positions .... the Tatas were considered a benevolent and charitable organization. During the times of JRD.. Ratan Tata now drives the point the group means business. 200 .RESTRUCTURING – BASIC TENETS Cultural Changes – A culture represents the values and beliefs of the people about the organization.. Restructuring also requires cultural reorientation... started focusing on their capabilities.. It is created and institutionalized by the top management.) Reliance dismantled their industrial embassies ..
MOVING CLOSER TO THE CUSTOMER As companies evolve. they tend to move away from the customer. Getting feedback & addressing customer complaints.” 201 . “ … one reason our customers are satisfied is that we aren’t. Publicizing welfare projects to demonstrate CSR. Restructuring provides a platform to close this gap. Honda’s ad says. Use the reach of networking technologies. Organizing customer and supplier meets. Communicating to the media about organization efforts to deliver quality products. Carry out PR campaigns.
Mittal – Arcelor) and can take various forms.ASSET RESTRUCTURING Asset Restructuring – The asset composition of a firm undergoes a major change. Tata – Corus) or hostile (Eg. Asset Swaps – It entails divesting and acquisition simultaneously by two companies. or conglo-merate. spin-off and equity carve. Further. 202 . horizontal. it may be smooth (Eg. Hive Off – It involves siphoning of assets under control. It may include brands as well. Further spin-off can be classified as split-off and split-up. Glaxo – Heinz). including its intangibles – Mergers – It may be vertical. It can have two forms. where the difference in valuation is settled off through cash or equity (Eg.
Reliance Ent). Equity Carve – It involves selling a minority stake to a third party while retaining control (Eg. – Split-Up – In a split-up. the existing shareholders receive equity in the subsidiary in exchange for the stocks of the parent company. 203 . the entire parent company loses its identity after being split into a number of subsidiaries. in which the equity is allotted amongst the existing shareholders on a pro-rata basis (Eg. – Split-Off – In a split-off. Most of these practices are not in consonance with Indian laws.HIVE OFF Spin-Off – A spin off is the creation of a new entity. Tata Industries selling 20% stake to Jardine Matheson).
repay long-term debts. Generic motives include – – Raise working capital. 204 . for a specified market or in general with full management control. In 1995. A complete sell-out is known as divestment (TOMCO). strategic misfit. Selling out in phases is called disinvestment (IPCL). L&T sold its cements division to Aditya Birla group. In 2005. but retained its engineering division. Parle sold its Thums Up brand to Coke for $40 million apprehending fierce competition. – Poor performance.DIVESTITURE It involves the sale of a brand or a division of a company to a third party.
205 . Tatas take-over of Corus for US $11. It provides greater leverage as well as management control.3 billion. Conversion – Replacing debt with equity or vice-versa or costlier with cheaper debt or cross currency debt.CAPITAL RESTRUCTURING Capital Restructuring . Wipro). involving 608 pence per share). Share Buyback – It is a process of cancellation of shares out of free reserves to the extent of 25% of paid-up capital (Eg.The internal & external liability composition undergoes a major change – LBO – Acquiring control over a substantially larger company through borrowed funds (Eg.
1170 cr Goodlass Nerolac – Rs. 42 cr Voltas . 1890 cr CMC – Rs. 950 cr Merind .Rs. 1700 cr Trent – Rs. 230 cr Diversifications Tata Motors – Rs. 150 cr VSNL – Rs. 250 cr Tata Tetley – Rs. 120 cr Tata AIG – Rs.Rs. 256 cr ACC – Rs.BUSINESS RESTRUCTURING – TATAS Divestments Lakme – Rs. 1439 cr 206 Tata Timken – Rs 120 cr Tata Telecom – Rs. 1860 cr . 99 cr Tata Power – Rs.
keeping the composition of business intact (Jet Airways). of a firm’s employees and sometimes in the no.ORGANIZATIONAL RESTRUCTURING Organizational structure and systems calls for a change when strategic variety is apparent. Downscoping – It involves reducing the business and/or geographical scope of a firm (Aditya Birla group). of operating units. 207 . usually as a result external turbulence. Survival is the primary motive. Rightsizing – It is phasing of excess and redundant employees resulted out of faulty internal planning (SAIL). Turnaround is the primary motive. It can be carried out in the following ways – Downsizing – It is a systematic one-time reduction in the no.
Strategy change is unviable without a preceding change in its dominant logics. Dominant logic becomes deep-rooted in organizational contexts depending on the period it is in place (tenure of the CEO). The dominant logic represents the perceptions and biases (i. 208 .e. the more difficult it becomes to uproot the paradigm (i. thumb rules) of the top management. The longer the period.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. as strategies are based on such beliefs and biases. inertia).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. 209 .FORCES AGAINST STRATEGIC CHANGE The problem with strategic change is that the whole burden typically rests on few people (i. In most organizations. 20% of the people carry out 80% of the changes). Companies achieve real agility only when people at every level rise above the ordinary to face the challenges – revitalization or transformation.e.
process ownership. never take no for an answer.SUCCESSFUL TRANSFORMATION Build an intricate understanding of the business model at all levels of the organization. Promote inventive accountability. Manage from the future. The best way is to alter the institutional point of view. Harness setbacks. Questioning every basic action of the organization. Encourage uncompromising straight talk. it is not about winning but about learning. 210 . Create relentless discomfort with the status quo. Understand and deliver the quid pro quo.
Aspects of current culture which needs to be overcome. It involves identifying – Aspects of current culture which needs to be reinforced. that can be both enablers and blockages to change and restructuring. It involves diagnosing a change situation – systems & structures. Identify and implement facilitators of cultural change. Culture and style of management are two main impediments in force-field analysis.FORCE-FIELD ANALYSIS A force-field analysis provides an initial overview of change problems that needs to tackled. 211 . also known as cultural-web. by identifying forces for and against change.
Term Reduced labour costs Reduced debt costs Emphasis on strategic control Business High debt costs Higher risk 212 Long .Term Loss of human capital Lower performance Higher performance Capital .OUTCOMES Alternatives Organizational Short .RESTRUCTURING .
NUMERATOR & DENOMINATOR MGT Most firms across emerging markets undergo strategic discontinuity and as a result are forced to restructure their businesses. 213 . While the first strategy produces results instantaneously. Numerator – It assumes that turnover is not a barrier or constraint. focuses on reengineering. down-scoping or asset stripping. In order to put back the company on the right track they are resort to – Denominator – It assumes that turnover cannot be increased. reverse engineering and regenerating. the second one is a more viable strategy and sustainable option in the long run. hence go in for downsizing.
TURNAROUND MANAGEMENT 214 .
and that the thirty-two of the country’s largest business groups in 1969 are no longer among the top fifty today.. . still exist as on 2005. – Less than 10% of the Fortune 500 companies as first published in 1955..WHY TURN AROUND MANAGEMENT? Some interesting insights . Source: Why do firms atrophy? (Business Today. 215 (Govindarajan and Trimble... January 1997)... – Only seven of the first fifty Indian business groups in 1947 were even in business by the turn of this century.
and capabilities. A category of underlying principles and concepts. While content focuses on endogenous and exogenous variables. As a sequence of events describing how things change and why they change (i. systems.TURN AROUND MANAGEMENT A turnaround is said to occur when a firm perseveres through an existence threatening performance decline.e. 216 . Both content (what) and process (how) are equally important for a successful turnaround. and achieves sustainable performance recovery. process focuses on – A logic to explain a causal relationship between intervening variables. Stage Theory). skills. ends the threat with a combination of strategies.
Some indicators Continuous cash flow crises as a result of dwindling market-share and profits. Substantial shifts in consumer preferences. 217 . especially in key positions. suppliers and bankers. Uncompetitive products or services. unavailability or radical lowering of substitute costs or technological obsolescence.TURNAROUND INDICATORS Most firms atrophy simply because they fail to diagnose the indicators that acts as threat to organizational existence. Low stakeholder confidence. Rising input costs. Low employee morale leading to high employee attrition at all levels. leading to lack of acceptability from distributors and customers.
218 . Hence. which most top managers fail to appreciate. consider extension.TURNAROUND ILLUSION The first step to a successful turnaround is the basic acceptance of the fact that …. prune work-force. be more customer centric. based on elasticity. Recalibrate prices. liquidating dead assets. Extending work hours. “all is not well”. Revamp product portfolio. Common approaches adopted Change in key positions.. focus on power brands. they adopt surface level measures (disprin popping) which most often fail. Product redesigning or reengineering. Emphasis on advertising and market penetration.
TURNAROUND STAGE THEORY Stage 1 Decline Stage 2 Stage 3 Stage 4 Outcome Response Transition Performance Equilibrium Line Success Failure Indeterminate Nadir Time 219 .
Identification of the stimulus leads to the arrest of the downfall.DECLINE Decline is the first stage in the turnaround process. primarily dwindling resources and capabilities are responsible for decline. R-Extinction – It suggests that organization factors. It involves the identification of the theoretical perspectives that explains performance decline – K-Extinction – It suggests that macro economic and industry wide factors are responsible for decline. It has its origin in “resource led stretch” and subscribes to the view that a firm has substantial power to override the context. 220 . It has its origin in “environment led fit” that subscribes to the view that a firm has little control over external factors.
the response should be operational. 221 .RESPONSE INITIATION Turnaround responses are typically categorized as operating or strategic. the response should be strategic. The response must match the cause of the decline. If the decline stems from structural shifts. asset reduction. Strategic responses focus on changing or adjusting the business the firm is engaged in through long term moves such as – integration. diversification. Operating responses typically focuses on the way the firm conducts business and involves tactics geared towards – cost cutting and process redesigning (BPR). If the underlying cause is internal efficiency. new market initiatives.
which may be unavailable to a focused firm.RESPONSE DICHOTOMY The response initiation is somewhat dichotomous and cannot be universally applicable. Scope – A diversified conglomerate may acquire a distressed business to turn it around and gain valuable synergies. 222 . Untangling this question brings into focus three events – Domain – Many of the strategic cures have limited applicability for an affiliated firm. when decline deepens shifts in strategic position becomes essential. Contour – It is easier to reverse decline in the earlier stages through operational measures. Similarly new market initiatives is feasible only for multi-product firms.
many a times early signs of recovery fades out. substantial amount of time usually passes before results begin to show (i. Effective levers of transition. participative management (i.TRANSITION Transition usually reflects the first signs of recovery. The top management has a key role to play through empowerment. lead – lag). Sustenance is the key factor in this stage. consensus).e. transparency.7 years with a range of (4-16) years. 223 . Support from all the stake holders through resource commitment. However. However.e. role model. confidence building measures. Empirical studies show that average time is 7.
Cut off points must be unequivocal. 224 . Commanding a premium in the market. Revival of key customers and new product launches. Failure is an indication that initial momentum was not sustainable characterized by irreversibility. Supplier and banker confidence. Share price indications and media coverage.OUTCOME Outcome is said to be successful when a firm breaches the equilibrium performance level. Regaining lost market share and distributor confidence. it should adopt a holistic approach. Instead of focusing on financial parameters alone.
COOPERATIVE STRATEGIES & ALLIANCES 225 .
licensing. strategic alliance. supply-chain partnership. and globalization . In the cooperative strategy continuum as firms move up the value order. the commitment and the involvement between the firms increases manifold. technology. or joint venture. 226 . Any cooperative strategy maybe between firms within the same country or cross border as well.COOPERATIVE STRATEGIES Cooperative strategies are a logical and timely response to changes in business dynamics. It can assume any of the following forms – franchising. More and more companies worldwide are moving away from competition to co-option to leverage their resources and enhance bargaining power. consortia.
owners of the brand Monginis allows its franchisees to sell its confectionary products. Titan Inds. Branding is critical to franchising. owners of the brand Tanishq allows its franchisees to sell its jewellery products.FRANCHISING Franchising – It is a contractual agreement between two legally independent firms whereby the franchiser grants the right to the franchisee to sell the franchisor’s product or service or do business under its brand-name in a given location for a specified period of time for a consideration. It is an effective strategy to penetrate markets in a shortest possible time at a minimum cost. 227 . Switz Foods.
Different levels of licensing Manufacturing without embracing any technology (CBU). as in Tata Indica. 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. HM manufacturing GM range of cars in India with a buy-back arrangement is a perfect example of CBU. Become a systems integrator (CKD). Develop a product through its crude stage. refine processes and adopt necessary technologies (SKD).
Cross Holdings – A maze of equity holdings through centralised control to ensure earnings stability & threshold resources for critical mass (Eg. Collusion – Few firms in a matured industry collude to reduce industry output below the equilibrium level. leverage upon size to preempt competition by escalating entry barriers (Eg. Tata. It can be of the following types – Multipartner – Intends to share an underlying technology or asset. Coke – Pepsi). 229 . Hyundai).CONSORTIA Consortia – They are defined as large inter-locking relationships & cross holdings between businesses in a similar industry. Airbus – Boeing). enabling them to increase prices (Eg.
Continuous sharing of knowledge is critical to the success of a supply chain partnership. link their capabilities to create value for end users. otherwise it 230 becomes routine outsourcing. . It usually provides a platform to sort out differences between conceptualization and implementation to suit local market needs. Companies in different industries with different but complimentary skills.SUPPLY CHAIN PARTNERSHIP It is a pro-active & collaborative arrangement between supplier and customer aimed at achieving better control over the value chain (Eg. Tata Motors – IDEA).
effective R&D management. 231 . to gain knowledge and to obtain access to new markets (Eg. instead of hurrying into a relationship. enhance credibility. Generic motives involved are . design next generation products.STRATEGIC ALLIANCE It is an short to medium term understanding between two or more firms to share knowledge and risk. Reliance – Du Pont). Despite their popularity (50-60)% of the alliances fail to accomplish their stated objectives. Partner selection is one of the critical success factors. Tata Motors – Fiat. Firm’s should undertake a long courtship with potential partners. enter newer markets.learning organization. preempt competition.
TYPES Collusion – Tacit top management understanding to neutralize price wars (Eg. Airbus – Boeing). Whirlpool – Tide. 232 .STRATEGIC ALLIANCE . Alliances of the Weak – An alliance is entered into to preempt competition (Eg. Backward – An alliance (quasi or tapered) with a supplier of critical components seeking commitment (Eg. Maruti). Coke – Pepsi). Bajaj – Castrol). Bootstrap – An alliance between a weak and a strong company with an intention to acquire it. Complementary Equals – Two firms mutually promoting each others complimentary products (Eg.
Too much stress on financials & structure be avoided. Firms from developed markets seek access to markets and firms from emerging markets seeking access to technology. – Japan Vs US). Differences in level of economic development can produce differences in alliances motives.PARTNER SELECTION CRITERIA It is likely that partners will not have complete consent on alliance objectives because the institutional context in which the alliance embedded varies from country to country. 233 . Cultural orientation has been found to have a profound effect on top management’s strategic orientation (Eg.
Partner’s ability to acquire fresh skills. Dominant Logic’s – Similarity in beliefs & biases. including ability to provide quality products and services.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. Willingness to share knowledge and skills. Intangible Assets – Move beyond the financials of the firm. Experience related to previous alliances. 234 . Managerial capabilities.
Learning to collaborate – strategic. operational & cultural integration. degree of compatibility. partners should nurture it. vows to include commitment to expand the relationship. incorporating clear signs of continuing independence for all partners. the value chain. Setting up the housekeeping. understanding the chemistry. Getting Engaged – It should incorporate a specific joint activity. Changing within. Selection & Courtship – It involves self analyzing.MANAGING ALLIANCES Alliances are more than just a deal. instead of focusing controlling the relationship. 235 . differences not anticipated earlier.
It lasts till the vision is reached. Conceptually.JOINT VENTURE A joint venture is a long term association between two equal partners to create an independent firm (SPV) by complementing their resources and capabilities to explore newer businesses or markets for achieving a shared vision. synergy) rather than mere exchange (i. a joint venture is a selection among modes by which two or more firms can transact. whilst the partners continue to operate independently. It aims at creating new value (i. .e. There are substantial linkages in the value-chain.e. combining parts). separation is very 236 bitter.
Strategic Behaviour – Firms may override transaction costs. in addition to a high degree of asset specificity. Organizational Learning – It is a means through which a firm learns or seeks to retain their capabilities. The market fails as sellers are unwilling to reveal their technology and buyers are unwilling to purchase in the absence of inspection. though more profitable alternative to other choices. 237 . It may also be linked to deterring entry or eroding competitors position.JOINT VENTURE – GENERIC MOTIVES Transaction Cost – The situational characteristics best suited for a JV are high performance uncertainty.
OTHER MOTIVES Entry into newer markets. TVS – Suzuki (4-Stroke Engines) Fill gaps in existing product lines. Learning new technologies. Sharing of resources. Eli Lily – Ranbaxy. Renault – Nissan (Minivans – Cars). – Eg. Daimler – Chrysler (Premium Cars) 238 . Essar – Hutch (Vodafone). Endorsement from government authorities. – Eg. – Eg. Yamaha – Escorts. Maruti – Suzuki. – Eg. – Eg. Define future industry standards. – Eg.
Risk of over dependence. – Maruti – Suzuki. Century . – Eg. technology) drain. Tata – Aditya Birla in Idea Cellular 239 . LML – Piaggio Differences in size and resource base.e. – Godrej – Procter & Gamble. Modi – Telstra What after exit (parenting disadvantage)? – Eg. – Eg. Risk of brain (i. PAL – Fiat If the cost of continuing exceeds the exit costs? – Eg.RISKS INVOLVED Incompatibility – Differences in cultural background.Enka.
Partner – Avoid duplication of skills and capabilities. 240 . Inertia – Differences in age and evolution patterns. Culture – Reconcile gaps.PRE-REQUISITES FOR SUCCESS Commitment – Mutual trust. respect. Equality – Lack of dominance. Focus – Avoid strategic myopia. time sharing. Flexibility – Sufficient space to breathe and adjust. Costs – Other modes of transaction becomes cheaper. Incompatibility – Performance expectations. Objectives – Shared vision. Agreement – Clarity on operational control.
MERGERS & ACQUISITION 241 .
Brooke Bond – Lipton). The larger objective is to leverage on size. An acquisition is said be smooth if it is with the consent of the management (Eg.MERGERS & ACQUISITION A merger is a mutually beneficial consent between two or more firms (usually of similar size) to form a newly evolved entity by absolving their individual entities to preempt competition (Eg. reverses are also taking place through LBO) with a view to acquire conglomerate power and induce synergy (Eg. 2002). HLL – Tomco). SEBI Takeover Code. Mittal Arcelor). Most countries have stringent laws that prevents hostile takeovers (Eg. Ranbaxy . An acquisition is the purchase of a firm by a firm (of larger size. 242 .Daichi) and hostile if it is without the consent of the management (Eg. however.
.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. creeping acquisition). Hike – An acquirer who has already picked up a 5% has to make a mandatory disclosure for every additional 1% stake that it acquires. Acquirer – Someone (individual or firm) who picks up an atleast 5% stake without mandatory disclosure having an intention to wrest management control (i.e. Control – A special resolution of 75% of the share 243 holders approving the change of guard. Preferential – A preferential allottee ending up acquiring 5% stake also comes under its purview.
whichever is higher as an exit route (Eg. the SEBI can intervene and block share transfers if: the acquirer has ulterior motives (i. credentials or track record is at stake.SEBI TAKEOVER CODE. Grasim – L&T Cement. 2002 Pricing – Acquirers will have to offer minority shareholders (at least 20%) the past 26 weeks or past 2 weeks average price. and/or does not enjoy the confidence of the different stake holders. 244 . Gujarat Ambuja – ACC). asset stripping). SEBI – In case of a hostile take over.e. 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.
Horizontal – It involves integration of two highly related businesses (Eg. Electrolux .Kelvinator). ITC). Reliance). usually opportunistic (Eg. Vertical – It involves complimentarily (partially related) in terms of supply of inputs or marketing activities (Eg. 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. Conglomerate – It involves integration of two distinctly unrelated businesses. Godrej. The type of merger is depends on the degree of relatedness (strategic) between the two businesses.
e. Economies of size. Acquiring assets or capabilities (Eg. Reduced gestation (i. Tata Steel – Corus). Asset Stripping – Shaw Wallace). scale and scope. Mittal – Arcelor). Reduction in risk. Tax benefits (Eg. 246 . Ulterior motives – (Eg. quick access). Global image (Eg. Coinsurance effect – Higher debt raising capability. Overcoming entry barriers (Eg. Ranbaxy – Crosslands). ICICI –ITC Classic). Access to newer segments (Eg. Avoiding risk of new product development.MERGERS & ACQUISITION . ITC Bhadrachalam).MOTIVES Increased market / conglomerate power.
Managing over-diversification. while the ultimate acquisition was made at 607 pence/share). Inability to achieve synergy. their initial offer was around 420 pence/share. 247 . Overvaluation is often as a result of an ego drive and substantially affects future returns. Top management overtly focused on due diligence exercise and negotiations. Merging of organisational structures. Tata – Corus). When Tata Steel started negotiations with Corus.MERGERS & ACQUISITIONS PITFALLS Cultural differences (Eg. Managing size. neglecting core business. Overvaluation of buying firms (Eg.
vertical to save transactions costs. Brooke Bond – Lipton).MERGER TYPE & PLC Introduction – A larger firm may acquire a newly formed entity with an objective to preempt new competition or acquire its license (Eg. Kingfisher – Air Deccan). Growth – This stage may witness parallel merger of two firms of similar size. 248 . Decline – Horizontal mergers are undertaken to ensure survival. Tata Steel – Corus). with an objective to reinforce its growth trajectory or to take on the might of a comparatively larger player (Eg. Maturity – A larger firm acquires a smaller firm with an objective to achieve economies of scale and experience curve effects (Eg.
Immediate attempts to super impose structure and culture may cause bottle necks. An acquisition just for the sake of it or reputation yields very little value in the long term. Strong differences may stifle plans and its execution. 249 . A concern of respect and trust for the business of the acquired company. Blanket promotions across entities and confidence building exercises needs to be practiced. active top management intervention in phases.INTERNATIONAL M&A . A common shared vision. Left alone syndrome.FRAMEWORK Positive contribution to the acquired company.
Decide upon management control systems. Shift attention from business portfolio to people and processes. It will enable focus on customers and key people. Redefine responsibilities and authority. 250 Do not ignore the “people factor”. Decide on the new hierarchy. Determine business strategy. . They can carry the message to the various stake holders.INTEGRATION . Integrating work processes.BLUEPRINT Take the media into confidence. promptly.
– Market for corporate control.e. operational & financial). over valuation can become a curse. – Synergy – Potential value gain from combining operations (i.VALUATION The process of valuation is central to M&A. Financial motives – Undervaluation relative to true value. 251 . – Unstated reasons – Personal self interest and hubris. Valuation decisions are arrived through a due diligence process when the prospective acquirer gets access to the books of accounts of acquiring company.M&A . The process takes (6-12) months. While under valuation may be a significant opportunity.
– Vertical Synergy – Gains come from controlling the supplychain and savings in transaction costs. 252 . Innovative product – Good distribution network). or from increased market power which increases sales and margins. – Conglomerate Synergy – Gains come when one firm complements the resources or capabilities of another (Eg. Sources of operational synergy – Horizontal Synergy – Gains come from economies of scale which reduces costs. when the “fit” between the two entities is very poor.VALUING OPERATIONAL SYNERGY Synergy – It refers to the potential value gain where the whole is greater than the sum of the parts. Synergy can be negative as well.
Hotmail). shareholders can accomplish the same at a much lesser cost. However. but availed after being merged with a profitable firm (Eg. and without paying take-over premiums. Synergy comes from projects which would not have been undertaken if the two firms stayed apart (Eg. 253 . Tax Benefits – Tax benefits may accrue from tax entitlements and depreciation benefits unutilized by a loss making firm. Cash Slack – It reduces asymmetry between cash starved firms with deserving projects and cash cows with no investment opportunities.VALUING FINANCIAL SYNERGY Diversification – Reduce variability in earnings by diversifying into unrelated industries. ITC – Bhadrachalam Paper).
254 .VALUING FINANCIAL SYNERGY Co-Insurance Effect – If the cash flows of the two firms are less than perfectly correlated. This will induce higher debt capacity. – Coupon rates may also be negotiated at lower rates. the cash flow the merged firm will be less variable than the individual firms. higher leverage. – Default risk comes down and credit rating improves. It relates to the concept of diversification. hence better performance. The likelihood of default decreases when two firms' assets and liabilities are combined through a M&A compared to the likelihood of default in the individual companies. as risky debt is spread across the new firm's operations.
– – Value of Control = Value of firm after restructuring Value of firm before restructuring. The value of wrestling control is inversely proportional to the perceived quality of that management. since a restructuring can lead to significant increase in value. Assessment of perceived quality is critical. While value of corporate control is negligible for firms that are operating close to their optimal value. The value of control can be substantial for firms that are operating well below optimal value. 255 .VALUING CORPORATE CONTROL Premium of M&A are often justified to control the management of the firm.
LBO facilitates a relatively smaller firm to bid for a comparatively larger firm in the bid for management control.LEVERAGE BUYOUT (LBO) The basic difference between a take-over and a LBO is the high inherent leverage (i. 256 .e. sometimes in combination with the assets of the acquiring company. It is a very costly and risky proposition. The assets of the acquired company are used as collateral for the borrowed capital. debt component) at the time of buyout and rapid changes in capital structure over time. Confidence of investment bankers and the international financial community is essential.
However. The increased benefit showed in the following way – reduced costs and increased revenue. – The need to satisfy analysts and shareholders. the advantages of going public includes . liquidity.TO GO PUBLIC OR NOT? However. 257 . on-going valuation. off-late many publicly traded firms have gone private keeping in mind the following – – The fear of LBO. A research study showed that 30% of the publicly listed firms reported above average returns after going private.access to financial markets. – Separation of ownership from management. – Increased information needs.
which disappears once assets are liquidated and significant portion of debt is paid off. – Cash trapped company unable to utilize opportunities. – It is a temporary phenomenon.e. co-insurance effect). – Cost of debt coming down (i. – Debts repaid off from increased value after successful restructuring and wresting management control.RATIONALE FOR HIGH LEVERAGE The high leverage in a LBO can be justified by – – If the target firm has too little debt (relative to its optimal capital structure). – Managers cannot be trusted to invest free cash flows wisely. 258 .
As the firm liquidates / pledges assets and pays off debt. Lack of sufficient cash flows to repay costly debts resulting in a possible debt trap. A LBO has to pass two tests to be viable – – Restructuring to pay-off increased debt.EFFECT OF HIGH LEVERAGE Increases the riskiness of dividend flows to shareholders by increasing the interest cost to debt holders. leverage is expected to decrease over time. – Increase equity valuation. Any discounting has to reflect these changing cost of capital. 259 . initial rise in leverage is anticipated. Therefore.
or costly. – Facilitates better valuation and forthcoming offerings. small in size but having a promising business. – Tax shelter. shell company) by a private company. Objectives – – Traditional route of filing prospectus and undergoing an IPO is costly. – Prevents dilution of equity. 260 .e. allowing the private company to bypass the usually lengthy and complex process of going public.REVERSE MERGER Reverse Merger – The acquisition of a public company. time-barred. – Automatic listing in major exchanges. which has discontinued its operations (i.
and 35% during bullish periods. takeover failures have only initial negative effects on stock prices.EFFECT OF TAKE-OVER ANNOUNCEMENT The shareholders of target firms are the clear winners. 261 . – Takeover announcements reported 30% excess returns. Initial anomaly in stock prices usually normalizes over a period of time (6-12) months. – Merger announcements reported 20% excess returns. During bearish periods excess returns were 19%. Most target firms are taken over within (6090) days. However. Excess returns also vary across time periods.
and Netter. – However. Desai. and Kim. 1988 . 262 Jarrel. 1983. – Most studies reported insignificant excess returns around take-over offers or merger announcements. Brickley. in the event of take-over failure negative returns to the extent of 5% on bidder firm stock prices is reflected. as stock markets become more and more perfect such anomalies would reduce Source: Jensen and Ruback. over time.EFFECT OF TAKE-OVER ANNOUNCEMENT The effect of take-over announcement on bidder firm’s stock prices are not clear cut. Bradley. 1983. – However.
Rights). Poison Put – Premature retirement of bonds at attractive rates to pour surplus cash and make target investment unattractive. Poison Pill – An offer to existing shareholders to buy shares at a substantial discount to increase their voting rights (Eg. Asset Stripping – The targeted company hives off its key assets to another subsidiary. 263 .DEFENSIVE STRATEGIES Golden Parachute – An employment contract that compensates top managers for loss of jobs as a result of change in management control. so that nothing is left for the raider to strip off.
Green Mail – The targeted company buys large blocks from holders either through premium or through pressure tactics (Eg. Pac Man – The target company makes a counter bid to take over the raider company. East India Hotels – Reliance Industries – ITC). thus thwarting the raider company’s attention. Shapoorji Pallonji). Gray Knight – The target company takes the help of friendly company to buy the shares of the raiding company. But often the White Knight turns a betrayer himself (Eg. 264 .DEFENSIVE STRATEGIES White Knight – It is the placing of stocks to a cash rich investor and bargaining for protection in return.
COMPETING FOR THE FUTURE 265 .
The reverse was true for the companies overpowering. Most companies were too preoccupied with the present than the future? 99% of the companies overpowered. were spending 99% of their precious time dealing with present. Honda overpowering Volkswagen. Compaq overpowering IBM. What went wrong???? What were they doing with the present? What were they pre-occupied with? 266 . Hitachi overpowering Westinghouse. Honda overpowering GM.GETTING OFF THE TREADMILL Canon overpowering Xerox. Wal-Mart overpowering Sears. Nokia overpowering Motorola. British Air overpowering Pan Am.
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 . Thus efficiency was grievously hurt. declining margins. decluttering. falling market share). downsizing). Not knowing when to stop.THE PAST OF COMPETITION Beyond Restructuring – When a competitiveness become inescapable problem (stagnant growth. CEO’s brutally pick up the knife and ruthlessly carve away layers of corporate flab (delayering. most often they ended up cutting corporate muscle as well and became anorexic.
However. but not of the future. incrementalism or nominal innovation has almost reached a plateau. but forging ahead in competition. ensuring only survival of the present. The future is not about catching up with competition. 268 .S.THE PRESENT OF COMPETITION Beyond Reengineering – Numerator based managers (innovation) at least offers some hope. On the contrary only 20% of Japanese managers believed that quality will be a source of competitive advantage of the future. top 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.
It involves Dream about the company’s future. 269 . they are not enough to get a company to the future. Create a potential gap. demographics and lifestyles. It is based on deep insights into trends in technology. faster. reinvent its industry. better. not just the organization. and regenerate its strategies (breaking its – managerial frames).THE FUTURE OF COMPETITION Regenerating – Leaner. not the other way. aspirations and resources. Companies need to fundamentally reconcieve itself. Creating the future requires industry foresight. don’t predict. Transform the industry. Empower from bottom to top. as important as these may be.
ABOUT THE DREAM Which customers will you be serving? What will the potential customer look like? Who will be your future competitors? What will be the basis of your competitive advantage? Where would your margins come from? What will be your future competencies? Which end product markets would you cater? 270 .
Successful companies have a complete grip over the industry. 271 . Redraw the boundaries between industries. blue oceans). It drives a hunger and a passion to transform.e. hence do not fall sick in the first place. Therefore. they do not need to restructure. by converging technologies complex. It is about deliberately creating a strategic misfit.ABOUT THE TRANSFORMATION The future does not belong to those who take the industry for granted. Change in at least one fundamental way the rules of engagement in an industry. Create entirely new industries (i.
Transformational leaders merely lead the way. Such a process is called institutionalization (from people centric to organisational centric). A revolution that is thrust upon from the top seldom sustains. More importantly. 272 . Most successful revolutions (Gandhi to Mandela) rose from the dispossessed. The middle management plays a strong moderating role.ABOUT THE EMPOWERMENT Bring about a revolution (a paradigm shift) in the organization. the revolution must start at the bottom and spread in all directions of the organization.
Apply the 40 – 30 – 20 principle.THE FUTURE OF STRATEGY A company must get to the future not only first but also for less. An ability to energize the company. South West Airlines – LCC. What does it take to get to the future first? Understanding how competition for the future is different. Get to the future first. Apple – iphone). 273 . It requires a lot of common sense and a little bit of out of the box thinking. Toshiba – LCD. Companies need to strategize (think ahead of times). without taking undue risk. A process for finding and gaining insight into tomorrows opportunities (Eg.
as on their aspirations. the farther it will be away from competition. What distinguishes a leader from a laggard. but hundreds. each point in space represents a unique business opportunity. As there is no one future. The farther one can see in this endless space.HOW DOES THE FUTURE LOOK LIKE? There is no rule which says that for every leader there will be a follower. We are in the midst of a 3600 vacuum. Companies of the future will be not based so much on the strength of their resources. is the ability to imagine in a different way what the future could be. 274 . greatness from mediocrity.
THE EMERGING STRATEGY PARADIGM Not Only Reengineering Processes But Also Regenerating Strategy The Competitive Challenge Organizational Transformation Industry Transformation Competing for Market Share Competing for Opportunity Share Finding the Future Strategy as Learning Strategy as Positioning Strategy as Engineering Strategy as Unlearning Strategy as Dream Strategy as Architecture 275 .
THE EMERGING STRATEGY PARADIGM Not Only But Also Mobilising for the Future Strategic Fit Resource Allocation Strategic Misfit Resource Stretch & Leverage Getting to the Future First Existing Industry Structure Product Leadership Single Entity Product Hits & Timing Future Industry Structure Competency Leadership Dominant Coalitions / Co-option Market Learning & Preemption 276 .
Degree of Learning Unlearning Curve P2: Unlearning in previous period does not necessarily ensure learning in the current period. Learning Curve t1 t2 t3 Time t4 t5 277 .LEARNING TO FORGET P1: The degree of learning in current period is directly proportional to the degree of unlearning in the previous period.
Leverage – They are the gateways to future markets. It cannot be matched even by its closest competitors. 278 . 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. It is characterized by the following – Unique – It provides unimaginable customer value ahead of its times. Inimitable & Insubstitutable – A high degree causal ambiguity between these skills yield sustainable competitive advantage.
A core competency cannot be outsourced. Canon – imaging. it is deeply embedded in the heart of the organization. Coca Cola – brand. Wal-Mart – logistics. Although a core competence may lose value over time. Most companies around the world do not possess one. Honda – engines. SKF – antifriction and precision. Toyota – lean manufacturing. at the most three to four. 279 .MORE ABOUT CORE COMPETENCE Sony – miniaturization. it gets more refined and valuable through use. leaders have one. Core competencies are the roots of the organization. Intel – nano-electronics. Nike – designing. Toshiba – flat screen displays.
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 .
Diversified groups in operating in emerging markets therefore benefit from unrelated diversification. Korea. China.e. institutional gaps. and high transaction costs. high levels of market imperfection). Emerging markets are characterised by infrastructural bottlenecks. Therefore. Therefore focused strategies based on core competence may not be suitable for emerging markets (Khanna & Palepu.EMERGING MARKETS Emerging markets (India. 288 . 1997). strategies suited for the developed markets may not be appropriate for emerging markets. Chile) provide a different context (i.
(2000) 289 .DIVERSITY . Size & Scale. subsequently negatively related across developed markets. Concentric. Synergy. Optimum level of diversification Performance Diversity is initially positively related with performance.PERFORMANCE (I) Diversity attempts to measure the degree and extent of diversification (Herfindahl. Entropy). Experience Strategic Fit Diversity Palich. et al.
subsequently positively related across emerging markets. 2001) 290 . brand building Risk diversification.PERFORMANCE (II) Diversity is initially negatively related with performance. conglomerate power Threshold level of diversification Performance Diversity (Khanna & Palepu. Huge initial investment.DIVERSITY .
It should have a spread of manufacturing facilities. Characteristics – It should have a spread of affiliates or subsidiaries. revenues and profits. HSBC). It should have a spread of interest groups / stake holders. 291 . It should think globally. act locally (Eg. It should have a spread of assets.INTERNATIONAL IDENTITY MNC’s consciously engage in FDI in different parts of the globe to forge resource diversity as a distinct competitive advantage.
Risk Profile – It reflects the risk attitude of the top management (Eg.It reflects the disparities in women in workforce (Eg. Group Scale .It reflects the relative role of team building (Eg.GLOBAL BUSINESS ENVIRONMENT Power Distance – It reflects the disparities in income and intellectual development (Eg. Feminity Index . 292 . low risk profile in developed markets and vice versa for emerging markets). high feminity index in developed markets and vice versa for emerging markets). low group scale in developed markets and vice versa for emerging markets). low power distance in developed markets and vice versa for emerging markets).
flexibility (Eg. high cultural adaptability in developed markets and vice versa for emerging markets). judiciary) of doing business in a particular country (Eg. FOREX reserves. inflation. credit rating. way of life. time value.GLOBAL BUSINESS ENVIRONMENT Cultural Adaptability – It reflects the adaptive ability to a changing environment . 293 . low country risk in developed markets and vice versa for emerging markets). currency. customs. terrorism (9/11). code of conduct.culture. corruption. Country Risk – It reflects the political and economic risk (Eg. political stability. interest rates. dress sense. attitude.
294 . in most emerging markets meetings are delayed and lasts unusually long. Language Barriers – Developed country managers expect foreign partners to communicate in their languages. and vice-versa. time-zones. in most emerging markets use of an interpreter may be a standard protocol.GLOBAL BUSINESS ENVIRONMENT Time Sensitiveness – Developed country managers regard time as precious. High levels of ethnocentrism usually has a negative effect on business. Ethnocentrism – Developed country managers tend to regard their own culture as superior. Other factors – local celebrations. however.
In 1995 (Uruguay Round) GATT was renamed to WTO. The 2001 (Doha Round) focused on power blocks (NAFTA. copyrights. trademarks). It also initiated provisions on anti-dumping. ASEAN. It a multi-lateral treaty with 143 (as on 2002) member countries to reduce tariff and non-tariff (quota) barriers. 295 . BRIC).GATT GATT was a bi-lateral treaty initiated between US and some member countries in 1947 to promote free trade. The 1999 (Seattle Round) saw a lot of protest amidst bringing agriculture under the purview of TRIPS. It also highlighted the nexus between US & WTO. It focused largely on TRIPS (patents.
However with current recession in the US 2002 onwards. However. The Euro was significantly devalued against the Dollar till 2002. The notable exception was Great Britain which still continues with its local currency (i. Euro).Pound).e. 296 . Sterling .EURO – SINGLE CURRENCY In 1999 twelve member countries in Europe joined hands to move over to a single currency (i. primarily the OPEC countries. the Euro slowly started outperforming the Dollar. the Dollar still remains the most preferred currency globally. three countries joined in 2002 increasing it to fifteen members as of 2008.e.
Rate Uncertainty – A single currency eliminates the risk of competitive devaluations. 297 . Transparency – A single currency is transparent and competitive.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. However. Trade Block – It will strengthen the EU identity which would not have been possible otherwise. but it may have spill-over effects. a multiple currency is preferable where the business cycles of member nations are different.
– FDI (transfer of tangible resources) is slow but steady for the purpose of economic growth.e. It is short-medium term with comparatively low levels of commitment. the gain of one country is loss of another). It is long term with high levels of commitment. 298 .e. Neo classical economists believe that foreign investment may in fact be a win-win game.FII Vs FDI INVESTMENT Classical economists believed that foreign investment (in any form) is basically a zero sum game (i. – FII (transfer of intangible resources) is fast but may have strong repercussions (i. hot money).
customer awareness (microwaves). technology (microchip). Pricing – It depends on the competitive structure (PLC – Kellogg's).culture (food habits). usage (talk time). promotion (surrogate advertising). Distribution – It depends on the market characteristics (fragmented – concentrated). . lifestyle (petroleum 299 outlets – departmental stores). economic (middle class buying power). buying patterns (spread).INTERNATION MARKETING Product – The various attributes of a product may receive different degrees of emphasis depending on differences in .
Accounting Norms – The accounting norms of one country (AS . equity is cheap in India). Leverage – The leverage may vary across countries depending upon money and capital market conditions (Eg.INTERNATION FINANCE Currency Risk – Many Indian IT companies (Rs) having business in US (Dollar) are asking for quotes in (Euro) or are shifting bases out of US to avoid risk of devaluation of Dollar.India) may be different from that another trading country (US – GAAP or IRS). debt is cheap in US. Cost Structure – Companies in India need to investment in fixed costs due to poor infra-structure 300 compared to developed markets. .
skills are more important that cultural fit and vice-versa. double taxation. technology (convergence. and cultural barriers (language) vis-à-vis emerging markets. 301 . in most cases it is not desirable nor practiced.INTERNATIONAL HR An uniform HR policy is idealistic to enable parity in performance appraisal. Training – It is a pre-requisite for international business to reduce language. however. Compensation – Differential pay packages exists because of differences in purchasing power. shortened life cycles). labour laws. Recruitment – In local recruitment. social security.
reduce power costs) vis-à-vis infrastructural bottlenecks. Bosch spark plugs are used by car manufacturers worldwide). SCM – Use of ERP to network the extended enterprise 302 across the globe. Outsourcing – A company having a core competence may be the source of global outsourcing (Eg. .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).
CONTEMPORARY TOPICS 303 .
innovation is the first attempt to carry it out in practice. Innovations typically paves the way for more secured and improved lifestyle for consumers in general. Innovation is all about staying ahead of competition. but has inherent risks involved as well. 304 . Innovation is the most preferred strategy today to maintain competitive advantage in the present turbulent business environment. While innovation typically adds value for organizations.INNOVATION An invention is the first occurrence of an idea for a new product or process. it has destructive effects as well.
TYPES OF INNOVATION A key challenge is maintaining a balance between process and product innovations. process innovation is necessary to sustain the competitive advantage of product innovation. Process innovation usually follows product innovation. process innovations are organizational driven. 305 . While product innovations are typically customer driven. However. Strategic innovation has the potential to change the rules of the game. Tangible impact of product innovation on performance is significantly higher than process innovation.
Telecom (CDMA Technology). Drug Development (Bio Chemicals).BUSINESS MODEL It is a simplified description and representation of a complex real world.e. Data Storage (Pen Drives). a paradigm shift). about how an organization makes money (i. putting an idea into practice). It leads to a shift in the price – performance envelope. Disruptive business models brings in a new frame of reference (i. Processors (Pentium). 306 . Medical Surgery (Lasik).e. Innovations are the back-bone of successful business models .
The revenue streams generated by the activities. The segment(s) of clients to be addressed. The proposed relationships established with clients. The key activities / processes necessary for execution. 307 . The channels to reach out to the clients.NINE BUILDING BLOCKS Value proposition offered to the market. The cost structure resulting from the business model. The key resources and capabilities required. The key partners involved in the activities.
BUSINESS MODEL FRAMEWORK 308 .
Real Estate) companies need to untangle and understand the intricacies of their business model. The revenue model described here are the means to generate revenues. 309 . It is just one piece of the puzzle. innovative companies to carve out unique business models to fend off competition.REVENUE MODEL Positioning is just not sufficient. With the rapid erosion of certain industries (IT. It involves – Product Visualization – Product Prototype – Product Test – Capacity – Pricing – Distribution. Investment Banking.
310 . Promote the grape-vine. Promote the culture of experimentation. Allow the workforce idiosyncrasies for their errors. Have a lean and a flat organization structure.HOW TO MAKE INNOVATIVE CO’S Innovative company’s are a matter of culture and aspirations rather than tangible resources. Provide reasonable incentives (not necessarily monetary). A favourable intellectual property (IP) climate. Allow the management sufficient slack to be future oriented.
Collusion with the judiciary is also another distinct possibility in emerging markets. The most preferred strategy of internal protection includes imbibing “causal ambiguity” in the production process to make reverse engineering difficult. In most emerging markets where the IP climate is not so favorable.HOW TO PROTECT INNOVATION? Without adequate protection (external or otherwise) the effects of innovation does not translate to performance. however that possibility is slowly atrophying. 311 311 . companies are increasingly relying on internal protection to sustain innovation effects.
312 312 . In fact the principles of corporate governance implies that managers go beyond in satisfying the stated and unstated needs of the multiple stakeholders. Corporate governance aims to reduce the principal-agent problem present in most professional managed organizations through appropriate forms of accountability and control mechanisms.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.
AGENCY THEORY The root of Corporate Governance goes back to the Agency Theory. shareholders can diversify their portfolio at a much lesser risk and cost. also known as the principal-agent problem or agency dilemma. This exposes the shareholders to additional risks and higher costs. According to the agency theory top managers and shareholders interests are usually conflicting in nature and tend to pull in opposite directions. not present in portfolio diversifications. 313 . From the strategic point of view managers tend to diversify into unrelated businesses as it provides higher returns hence a more favourable appraisal. However.
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. SEBI Report – 2005. After the Enron downfall. 2002 to restore public confidence in corporate governance. .ORIGIN & CONTEXT Since the early 20th century since a large part of public funds were held by publicly traded firms in the US. the US government passed the Sarbanes – Oxley Act.
The key roles of chairperson and CEO should not be held by the same person and their offices be clearly separated. 315 . Interests of other stakeholders: Recognize the legal and other obligations of all legitimate stakeholders.GOVERNANCE PRINCIPLES Rights and equitable treatment of shareholders: Help shareholders exercise their rights by effectively communicating information in transparent ways that is understandable and accessible and encouraging shareholders to participate in general meetings. including the society at large. Role and responsibilities of the board: It deals with issues about an appropriate mix of executive and nonexecutive directors.
assessment and mitigation of risks and retirement by rotation over a fixed period of time.. Disclosure and transparency: Disclosure of information should be timely and balanced to ensure that investors have clear access to data and facts. They should also implement systems to independently verify and safeguard the integrity of the company's financial reporting. 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. Independence of the entity's auditors: Identification.
317 . with its legal authority to hire. they should provide no mechanism or scope for opportunistic behaviour.GOVERNANCE STRATEGIES Monitoring by the board of directors: The board of directors. fire and compensate top management. a person benefitting from a decision should abstain from it. Remuneration: Performance-based remuneration is designed to relate some proportion of salary to individual performance. However. discussed and resolved. Regular board meetings allow potential problems to be identified. Balance of power: The simplest balance of power is very common. safeguards invested capital.
and was responsive to investors' requests for information on governance issues. McKinsey found that 80% of the respondents would pay a premium for wellgoverned companies. Egypt and Russia) to around 40% for Canadian & European companies. 318 .GOVERNANCE & PERFORMANCE In its “Global Investor Opinion Survey” of over 200 institutional investors in 2002. who had no management ties. The size of the premium varied by market. They defined a well-governed company as one that had mostly out-side directors. undertook formal evaluation of its directors. from 10% for companies where the regulatory backdrop was least certain (those in Morocco.
the short-term view of profit maximisation gave way to a more broader and mediumterm view wealth maximisation of the shareholders. The basic premise is that firms cannot exist in vacuum. Therefore. corporate philanthropy should be a part of every corporate mission. 319 . Over a period of time. However. today economic institutions are considered as a major drivers of improvement in quality of life in general and therefore needs to include multiple stakeholders.SHAREHODER – STAKE HOLDER THEORY Till the early part of the 20th the basic objective of modern organizations was to provide goods and services for public consumption for profit maximisation.
in fact a large part of it is significantly overlapping. the debate on CRS still continues whether firms should detract its focus from its business? 320 . However. “an enterprises decisions and actions being taken for reasons at least partially beyond its immediate economic interests”. CSR can be defined as. giving a very important message that one cannot exist without the other. Therefore. “a healthy business cannot exist in a sick and impoverished society”. Therefore.CORPORATE SOCIAL RESPONSIBILITY As Peter Drucker rightly pointed out that. economic and social responsibilities cannot be mutually exclusive.
Fear of government interference: Excessive quench for profits may lead to build up of adverse public opinion compelling the government to intervene (Eg. MRTP). people are becoming increasingly aware of their right to a decent and healthy life.GROWING CONCERN FOR CSR Awareness due to education: With growing literacy. 321 . 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.
Education. Cement . 322 . Literacy & Training Programs – (Eg. Health & Hygiene – Attending the health hazards due to wastes and by-products to employees and society in proximity (Eg. Aditya Birla Research Centre – LBS). Tata Steel – Life Line Express). and extended producer responsibility (Eg. Exide – Product take back).Paper packaging.CSR STRATEGIES Green Supply Chain Management: It includes environmentally preferable purchasing. eco efficiency. Refrigerators – CFC. designing eco-friendly products.
323 . Prahalad notes that future markets exist collectively. K. 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.BOTTOM OF THE PYRAMID With the market across most developed markets including the US getting saturated. they're helping millions of the world's poorest people to escape poverty. C. across the world's billions of poor people having immense untapped buying power.
BLUE OCEAN STRATEGY 324 .
TWO WORLDS 325 .MARKETSPACE .
In today’s red oceans. profitable growth.WHAT IS RED OCEAN? Companies have long engaged in head-to-head competition in search of sustained. Yet in today’s overcrowded industries. where most industries are saturated. . They have fought for profits. competing head on results in nothing but a bloody red ocean of rivals fighting over a shrinking profit pool. one companies gain is always at the 326 cost of another companies loss. battled over market-share. and struggled for differentiation (cost or product).
it will exist 327 in the future as well. Blue Ocean’s have existed in the past.WHAT IS BLUE OCEAN? Tomorrow’s leading companies will succeed not by battling in red oceans. It helps in creating powerful leaps in value for both the firm and its buyers. rendering rivals obsolete and unleashing new demand. Such strategic moves are possible through the pursuit of product differentiation and low cost simultaneously. but by creating blue oceans of uncontested market space ripe for growth . It 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 .
. Demand across developed markets reaching a plateau. of European nations. information imperfections atrophy instantly. Technological advances have substantially 329 improved industrial productivity. Niche markets & monopoly havens are continuing to disappear.BLUE OCEAN STRATEGY IMPERATIVES Prospects in most established market spaces – red oceans – are shrinking steadily. Population shrinkage across a no. As trade barriers between nations & regions fall.
. They are not necessarily about technology. History indicates that blue oceans exist in three basic industries – automobiles (how people get to work) – computers (what people use at work) – entertainment (what people do after work).CONCEPTUAL UNDERPINNINGS Blue oceans have existed in the past and will exist in the future as well. Incumbents often create blue oceans within the ambit of their core business. Company & industry are the wrong units of 330 strategic analysis. managerial moves are. the underlying technology was often already in existence.
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 .
Citibank – Automated teller machines & credit 333 cards.SOME GLARING EXAMPLES In the last century authors Kim and Mauborgne have documented the creation of more than 150 blue ocean creations across 30 industries – Virgin Atlantic: Fractional jet ownership or travel to space. . Sony Play Station: Redefining machine-human interface in entertainment and targeting an altogether new user base. Southwest Airlines: Pioneering the concept of LCC.
greater than themselves. companies & managers are largely at the mercy of economic forces. All they need to do is change their managerial frames. 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. 334 .WHAT THEN IS THE HANDICAP? Most of the traditional views in strategy having its origin in (Economic Theory) led to what is called the – structuralist paradigm. According to this view managers need not be constrained to act within the confines of their industry.
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