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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 about adaptation and response to the same. 7 . It is all about creativity and innovation.STRATEGIC MANAGEMENT . It involves substantial resource outlay. It is irreversible. It provides broad guidelines. It requires full commitment of the top management. It is a holistic and integrated approach. It is long-term in nature.FEATURES It forms the core activity of the top management.
It involves only the top management. It involves nitty-gritty's. It brings instant success. It is rocket science. It about mere data and facts. It a bundle of techniques or even tricks. It is about a definite formula. It is about forecasting. 8 . It is fool-proof in nature.STRATEGIC MANAGEMENT – MYTHS It involves short-cuts. It attempts to minimize risk.
To be future oriented. To be insulated against environmental threats. To innovate. To generate large resource pool. To tap markets across boundaries. To gain expertise in technologies. To assimilate change faster. To be proactive. 9 To develop core–competencies. scale and scope. . again and again …….STRATEGIC MANAGEMENT IMPERATIVES To be continuously alert. To leverage size. rather than reactive.
In the ancient days battles were won not by virtue of size of the army or armory. 10 . but by virtue of their courage.STRATEGY . In contrast. It is an old wine in a new bottle. today's battles are fought over markets. but with a lot a rigour and robustness. Even in today’s markets. whose origin can be traced to some of the greatest battles fought in the ancient days.strategies. obsession. In the ancient days battles were fought over land.ORIGIN The word strategy has its origin from the Greek word strategia meaning Military Commander. and more importantly . battles fought on the market front are won by companies by virtue of their obsession & strategies.
11 . challenging GM and Ford. – Reliance’s entry into telecom. Napoleon’s attack on Russia – Strategy: Waiting for the right time. Allied Forces Vs Germany (WW-II) – Strategy: Forging alliances. – Yahoo and Microsoft challenging Google.SOME PARALLELS Japan’s attack on Pearl Harbour – Strategy: Attack where it hurts the most. US attack of Morocco to capture Germany – Strategy: Pin-hole strategy – Wal-Mart challenging Sears by entering small towns. – Toyota’s entry in the US.
12 . a radical change in the business environment brings about discontinuity. – Mass Production Organization Size – Complicated Processes – Complex Structures Evolving of an emerging paradigm – survival of the fittest (Fayol & Taylor. 1910).Industrial Revolution. The first major discontinuity in the history of global business environment was the . The things happening around the firm when totally disconnected from the past leads to a paradigm shift. A paradigm is a dominant belief about how the business and its environment operates.EVOLUTION OF MANAGEMENT As Peter Drucker refers to it.
– Affluence of the new customer (i. – Global market place. – Changes in the technology fore-front. – Homogeneous to heterogeneous products. From uniform performance. push to pull). performance across firms became differentiated. 13 .EVOLUTION OF STRATEGIC MANAGEMENT The second major discontinuity in the history of global economic environment – World War II. Survival of the most adaptable becomes a new management paradigm (Ansoff.e. The question of outperforming the benchmark became the new buzzword. 1960). Efficiency and effectiveness are no longer sufficient.
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 .
– It is primarily the top management’s prerogative.APPROACHES TO STRATEGY Analytical Approach – Igor H. – The choice of product-market mix is based on conscious evaluation of risk – return factors. 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. – The choice of strategy is primarily concerned with external ones rather than internal ones. 15 . – Biases and prejudices has a very little role to play in strategic choices pursued by managers.
– Management control systems has a dominating role in influencing firm performance. how it will compete. Successful organizations align authority and responsibility of various departments in way to reach overall objectives. – Organization structure will precede and cause changes in strategy. who will be the top managers. everything else follows. – The top managers then decide on the type of organization structure & systems to be in place.APPROACHES TO STRATEGY Design Approach – Alfred Chandler (1970) – Structure follows strategy. The organization initially decides which industry to enter. Once the control systems are in place. 16 .
APPROACHES TO STRATEGY Positioning Approach – Michael E. customer. competitors. – A firms performance is inversely related with the bargaining power of environmental forces to which it is exposed. 17 . new entrant. – An organization is seldom in a position to influence the larger business environment. – The environmental forces comprises of – supplier. – The organization will outperform the industry where environmental forces are weak and vice-versa. Porter (1980) – Choose a consumer segment and position your product accordingly. substitutes.
18 . but exploiting the resource differences among them.APPROACHES TO STRATEGY Core Competence – C. Prahalad (1990) – The key to superior performance is not doing the same as other organizations. K. locating in most attractive industries and pursuing the same strategy. They are complex resources and undermines a firms competitive advantage. – It enables a firm to deliver unimaginable value ahead of time. – Organizations can significantly alter the way an industry functions. – Core competencies are a set of skills that are unique and can be leveraged.
STRATEGIC MANAGEMENT PROCESS Strategic Intent Strategic Planning Strategic Gap – Environmental Scanning – Internal Appraisal of the Firm Strategy Formulation – Corporate Strategy – Business Strategy Strategic Choices – Functional Strategy Strategy Implementation Strategy Performance Strategy Evaluation & Control 19 .
TOP MANAGEMENT PERSPECTIVE 20 .
It involves an obsession to be the best or outperform the best. A substantial gap between its resources and aspirations. 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. you cannot reach there. A gap that consciously manages between stagnation and atrophy. It implies a significant stretch.STRATEGIC INTENT If you cannot see the future. 21 . A strategic intent is a statement of purpose of existence. It’s a philosophy that distinguishes it from its competitors.
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 is core to the strategic intent of the firm.DOMINANT LOGIC A dominant logic can be defined as the way in which the top management team conceptualizes its various businesses and make critical resource allocation decisions. it can be perceived as a set of working rules (similar to thumb rules) that enables the top management to decide what can be done and more importantly what cannot be done. 23 . Dominant logic changes. when radical changes in the internal and external environment (i. To put it more simply.e. strategic variety) is apparent.
24 . but achievable aspirations. It is a combination of three basic elements – – An organizations fundamental reason for existence. It ensures that the company does not wander off into unrelated zones or fall into an activity trap.VISION It is a dream (not a forecast) about what the company wants to become in the foreseeable future. – It represents the company’s audacious. beyond just making money. It enables the top management to remain focused. – It stands for the unchanging core values of the company. It provides an unity of purpose amidst diversity of personal goals.
Brevity – It should be short. Sharing – The company across all hierarchies should have faith in it. 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. Reachable – It should be within a reasonable target in the known future. clear. 25 . In Reliance when a new project becomes operational top managers hand over charge to the SBU heads and move on to a new project. not an utopian dream.CHARACTERISTICS Reliance – Where growth is a way of life.VISION .
VISION . It gives a shared platform. To prevent the fall in a activity trap. It fosters risk taking and experimentation. It gives enlightment. 26 . It makes strategic alignment easier. It lends integrity and genuineness. It gives the impression of a forward-looking organisation.ADVANTAGES To stay focused on the right track. It facilitates development of skills & capabilities. It provides a holistic picture.
It enables the firm to define its business landscape and identify its competitive forces. 27 . A broad mission statement helps in fending competitors.MISSION Mission defines the space that a business wants to create for itself in a competitive terrain. It is intuitive for managers to conceive their business in terms of the customer needs they are serving – What business are we in? – Which customer needs are we serving? It should be broad based and relevant to all stake-holders. Although the purpose may change over time. its reason for existence. It serves as a road map to reach the vision.
MISSION – SOME IDEAS Reliance – We are in the business of integration. – We do not offer insurance. All the businesses of the company are strongly integrated with their main business. – We do not offer software's. …………………. though some may seem unrelated in nature. We offer comfort. We offer strength. …………………. Some other examples – We do not offer shoes. …………………. We offer security. …………………. 28 . – We do not offer steel. We offer solutions.
– It adds legitimacy and motivation. – It helps identifying key success factors. 29 . – It lends direction – time frame in the medium term.100K crore company by the year 2005. It provides a quantitative feel to an abstract proposition.GOALS & OBJECTIVES Reliance – We want to become a Rs. – It provides a benchmark for evaluation. – It prevents deviation. – It keeps the mid management pre-occupied. It is an end result (quantifiable) something a firm aims and tries to reach in a time bound frame. – It is based on Management by Objectives (MBO).
30 . – Leverage economies of size and scale.PLANS Reliance – Desire to invest 25K crore in telecom business by circa 2010. – Use price-elasticity to break market barriers. It is specific to a particular business. The details of the plan Reliance Telecom adopted were – Backward integrate process technologies. It is the process of garnering necessary inputs. – Compress project times. – Acquire a market share of indomitable position. coordinating appropriate technologies. and gaining access to desired markets to achieve the desired goals and objectives.
It often leads to an organizational crisis. equilibrium is maintained. However. This tendency to restore continuity is known as inertia (resistance to change). This state of affairs is known as strategic drift. 31 .STRATEGIC DRIFT Due to top management commitment. When changes in the environment is incremental. past strategies tend to have a bearing on future strategies. In such a context. radical change may lead to disequilibrium. Historical studies have shown that most organizations tend to continue with their existing strategies. strategies lose touch with the emerging realities.
STRATEGIC DRIFT FRAMEWORK Environmental Change Degree of change Strategic Change Radical Change Incremental Change State of Flux Continuity Stage of Transformation Strategic Drift Stage of Atrophy Time 32 .
– Creating a favourable image. – Using covert tactics to pursue self interests. – Creating obligations of reciprocity. Organizational politics involves intentional acts of influence to enhance or protect the self-interest of individuals or groups over organizational goals. – Hiding vulnerability. – Developing a platform of support. 33 .ORGANIZATIONAL POLITICS Strategic drift often leads to organizational politics. Some instances of organizational politics – Formation of powerful groups or coteries. – Distorting information to gain mileage.
A realized strategy is what the top management actually translates into practice. – Persons responsible for strategy conceptualization and implementation are34 divergent. .INTENDED & REALISED STRATEGIES An intended strategy is an expression of interest of a desired strategic direction. Usually there is wide gap between the two when organizational politics is evident. – Influential stake-holders back out. – The environment context has changed. Other causes – – The plans are unworkable and utopian.
this is not to be treated as “muddling”. 35 . but as a defensible response to the complexities of a large organization that mitigate against publicizing goals.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. They simply unfold the particulars of the sub-system in stages. Strategy formulation and implementation are linked together in a continuous improvement cycle. Learning is an integral part of logical incrementalism. However. but the master scheme of the rational comprehensive scheme is not apparent.
Leveraging Crisis – A sudden crisis or an opportunity should be used as a trigger to facilitate acceptance and implementation of change. Agent of Change – Formal ratification of a change plan through MBO. The broader objective should serve the overall interest of the organization.IMPLEMENTING INCREMENTALISM General Concern – A vaguely felt awareness of an issue or opportunity. Adaptation – As implementation progresses. Macro Broadcasting – The broad idea is floated without details to invite pros and cons leading to finer refinements. 36 .
Dominant logic’s are the cornerstones of change when strategic transformation is apparent. Tampering with surface level factors often leads to atrophy.STRATEGIC TRANSFORMATION Strategic transformation (a complete overhauling of the strategic architecture) becomes inevitable whenever a strategic drift takes place. . It creates blinders. As it brings 37 with it a different dominant logic. Dominant logic’s are very rigid and sticky and prone to inertia. Strategic transformation becomes smooth through a change in top leadership.
Factors that fosters a learning organization – Pluralistic – An environment where different and even conflicting ideas are welcome. – Organisational Slack – Enough free space. It helps prevent a strategic drift from occurring at the first place. and skills that fosters experimentation and questioning and challenge around a shared purpose. – Experimentation – Fosters a culture of risk taking. – Constructive Bargaining – Agree to disagree. 38 . A learning organization must continuously focus on unlearning as well. – Informal Networks – Emerging of new ideas.LEARNING ORGANIZATION A learning organization is capable of continual regeneration from knowledge. experience.
ENVIRONMENTAL CONDITIONS Dynamic Scenario Planning Learning Organization Static Forecasting Decentralization Simple Complex 39 .
ANALYZING BUSINESS ENVIRONMENT 40 .
It requires a quantum leap (i. It is based on the assumption of incremental change.e. It points to a position of superiority with relation to competition.PLANNING & STRATEGIC PLANNING Formal planning is a function of extrapolating the past. Strategic gap basically points towards a vacuum of where the organisation wants to be and where it is. It is pro-active in nature. It is based on the assumption of radical change. It is reactive in nature. Strategic planning is a function of discounting the future. 41 . Competitive advantage provides the surest way to fulfill the strategic gap. gap analysis).
A manager has to continuously scan the environment to ensure alignment of the strategies with the radically changing environment. The world is flat. Environmental factors can be external as well as internal to the organization. 42 . not guided by any boundaries.ENVIRONMENTAL SCANNING The environment is defined as the aggregate of conditions. Environmental scanning is very important component of strategic planning. It is exploratory in nature. and influences that affect an organizations way of doing things. resources and ideas move unhindered. events. The segments of the environment a top manager scans selectively depends upon his dominant logics.
43 . It is important not only to identify the structural drivers of change. It is particularly important that PESTEL be used to look at the future impact of environmental factors. for which a holistic picture is required. but also to analyze the complex linkages across them. which may be different from the past impact.PESTEL PESTEL attempts to provide a broad framework on how the broader environmental forces affects an organization and influences the way it practices strategy. It is not intended to be used as an exhaustive list. Understanding the composite effect is critical.
Social Values. Language Barriers. Literacy Levels. Government Attitude. Subsidies & Protection. Social – Population Diversity. Economic – GDP. 44 . Infra-Structural Investments. Religious Sentiments. Economic Cycles. Monsoon & Food Grains Reserves. FDI Inflows. Fiscal Deficit. Savings & Investment. Economic Model. Income & Age Distribution. Central – State Co-alignment. Licensing & Quotas.PESTEL FRAMEWORK Political – Government Stability. Inflation & Interest Rates. Capital Market & Forex Reserves. Currency Stability.
45 . Pollution Control Laws. Research & Development. Waste Disposal & Emissions. Extended Producer Responsibility. Patent Laws. Patents. Environmentally Preferable Purchasing. Environmental – Global Warming & CSR. Employment Laws.PESTEL FRAMEWORK Technological – Innovation. ERP. Legal – Monopolies Legislation. Non-Fossil & Alternative Fuels. Consumer Protection Laws. Obsolescence Rate. Direct & Indirect Taxes. Product Design. Product Safety & Health Hazards. Carbon Credits. Technological Convergence.
Rupee convertibility. FERA Liberalization.ECONOMIC LIBERALISATION New Industrial Policy (NIP) – Liberalizing industrial licensing. Encouraging FDI. Dismantling price controls. PSU Disinvestments. Exit Policy.VRS. Curtailment of PSU’s. Banking Sector Reforms. MRTP Liberalization. New Trade Policy (NTP) – Lowering import tariffs. Abolition of import licenses. Capital Market Reforms. Economic Reforms – Fiscal & Monetary Reforms. Structural Adjustments – Phasing out subsidies. 46 . Encouraging exports.
Mergers & Acquisitions 47 .DISCONTINUITY Destabilization due to entrepreneurial freedom – Cocoon of protection disappears – Diversification spree – Existing notions of size shaken – Industry structures change radically – Economic Darwinism .Survival of the fittest MNC Onslaught – Enhancing stakes – Power Equation – Joint Ventures – Technological Alliances – Take-over threat.
Consumerism Challenges on the technology front – Competencies become technology based – Investment in R&D become inescapable 48 .DISCONTINUITY Hyper Competition – MNC’s .Globalization – Cheap Imports & Dumping – Push to Pull Marketing Buyers exacting demands – Shortage to surplus – Price competition – Life-style changes – Stress on quality.
DISCONTINUITY Compulsion to find export markets – Identifying competitive advantage – Technological gap – Global presence – Depreciating currency – Exports Corporate vulnerability – It is no longer business as usual – Capital inadequacy – Lack of product clout and brand power – One product syndrome – Loss of monopoly 49 .
PORTER Threat of New Entrants Bargainin g power of Suppliers Competition from Existing Players Bargainin gBargainin power g of power of Suppliers Customer s Threat of Substitutes 50 .FIVE FORCES MODEL .
e. It should not only be used to understand the forces.FIVE FORCES MODEL ASSUMPTIONS The model is to be used at the SBU level and not at the industry level. It depicts the attractiveness of an industry (i. The five forces have strong cross-linkages. incremental or otherwise. but also used to understand how they can be countered and overcome. The model should not be used as a snapshot in time. 51 . It is even wiser to apply the same at the product – market level. profit potential) per se. the forces are subject to changes.
Industry stagnation. Access to distribution channels. High switching costs. Presence of substitutes or unorganized sector. Resource profile & fear of retaliation. Scope for backward integration. Low customer switching costs. Product differentiation through proprietary technology or brand power. Undifferentiated product. 52 .PORTERS FIVE FORCES ANALYSIS Threat to Entry – Economies of size and scale. Learning curve advantages. Low relative importance of the segment. Threat of Customers – Buyer concentration and volumes. Unimportance of product quality. Low margins & stagnancy. Government policy. Capital requirements.
Piracy and counterfeits. Scope for forward integration. Produced by industries earning high profits. Jockeying for position – Fragmented market. Low level of differentiation. Threat of Substitutes – Improvement in price -performance trade-off. Intermittent overcapacity. High exit barriers. Diversity of players. Product perishability. High customer switching costs. Differentiated inputs.PORTERS FIVE FORCES ANALYSIS Threat of Suppliers – Supplier monopoly. Lack of substitute inputs. Low relative importance of the segment. 53 . Unorganised sector. Industry stagnancy. Buyer’s propensity to substitute.
FIRM ENVIRONMENT Size and Scale of Operations – It is a very important component of competitiveness in today's global context (Bharti – MTN. Tata). Business Scope – The intention whether the firm wants to be in a single. Resource Profile – It highlights the capabilities (generic) or competencies (business specific) of the firm. Reliance). Cohesiveness – Degree of bonding existing across affiliated firms. dominant or related diversified or unrelated diversified businesses (Infosys. 54 . Inertia – Excessive commitment to past strategies prevents firms from tapping emerging opportunities.
leverage it as a competitive advantage.EXPERIENCE CURVE The cost of performing an activity declines on per-unit basis as a firm becomes more efficient. With lower costs. which further reduces costs. it can price its products more competitively. Experience curve has strong linkages with performance. Matured firms will always be positioned advantageously on the ECurve than new entrants. 55 . However. an E-Curve can prove to be futile during discontinuity. experience teaches better and more effective way of doing things. The E-Curve thus enables organisations to build entry barriers. and with lower prices it can increase its sales volume.
EXPERIENCE CURVE Cost per unit of output Decreases at an increasing rate Point of inflexion Decreases at a constant rate Decreases at a decreasing rate Production / Volume 56 .
EXPERIENCE CURVE .TRADITIONAL VIEW Efficiency = Lower Costs 2 3 1 Experience = Efficiency Lower Costs = Higher Sales Entry Barrier = Better Performance 4 6 5 Higher Sales = Lower Costs Lower Costs = Entry Barrier 57 .
STRATEGIC VIEW Inertia = Limited Growth Experience = Inertia 2 3 1 Limited Growth = Diversification Strategic Failure = Poor Performance 6 5 4 Diversification = New Experience New Experience ≠ Old Experience 58 .EXPERIENCE CURVE .
Interviews. Press Clippings & Interviews.SWOT The framework was originally conceptualized by Kenneth Andrews in 1970. Websites. Case Studies – Structured Questionnaires. Suppliers. Business Intelligence – Bankers. 59 Analysts. . It helps an organisation to capitalize on the opportunities by maximizing its strengths and neutralizing the threats minimizing the weaknesses. Acronym for Strengths – Weaknesses – Opportunities – Threats. Observation. Customers. Competitors. It is one of the earliest models in environmental scanning.VULNERABILITY ANALYSIS . A SWOT audit involves – Company Records – Annual Reports.
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 .
Volkswagen.SOURCES OF STRENGTH Strong brand identity – Eg. High quality products – Eg. Excellent penetration – Eg. Sony. Aditya Birla. Large resource pool – Eg. Dr. Good credit rating – Eg. Tata Steel. Infosys. Engineering Skills – Eg. Strong R&D base – Eg. Strong after sales & service network – Eg. Toyota. Economies of scale – Eg. Infosys. ITC. Biocon. Reddy’s. Honda. Ranbaxy. Siemens. Tata. 61 . Reliance. HUL. Caterpillar. Motivated employees & cordial industrial relations – Eg. Reliance. SBI.
K. Excess manpower – Eg.Raymond. Modi Group. J. SAIL. Inefficient top management – Eg. Group . Single product syndrome – Eg. B. Inertia – Eg. Excessive diversification – Eg. Narrow business scope – Eg. Lack of product / brand clout – Eg. Nirma. Tatas. Ballarpur Inds. CESC. CMC (Tata Group) 62 .SOURCES OF WEAKNESSES Outdated technology – Eg. Organizational Politics – Eg. Lacking experimentation culture – Eg. K. Bijoligrill. Procter & Gamble. Hindustan Motors. Strategic myopia – Eg.
VRS. Telecom. Sugar. Middle-class buying power. Retailing. Fertilizers.SOURCES OF OPPORTUNITIES Delicensing of Industries – Eg. Capital market reforms – Eg. Collaborations & Joint Ventures – Bharti & WalMart. Abolishing MRTP – Eg. Exit Policy – Eg. Maruti. Free pricing – Eg. Growing population – Eg. Globalization – Eg. Banking. Market driven Pricing – Eg. 63 . Insurance. Abolishing CCI. Fertilizer.Tata Motors. ECB’s. Sugar. Market driven Interest rates – Eg. GDR’s. Life style changes – Eg.
Import relaxation – Eg. Land acquisition .Social activism – Eg. Foreign Direct Investment (FDI) – Eg. Bajoria – Bombay Dyeing. Onida. Dumping from China. Tata Steel. (1985–1990). 26/11. (2008). Satyam. Singur SEZ. Nationalisation – Eg. Economic recession – Eg. 64 . Hostile take-over – Eg. Reliance. 11/9. Group disintegration – Eg. Terrorist attacks – Eg. Tsunami. Earth Quake.SOURCES OF THREATS Political instability – Eg. Lack of Corporate Governance – Eg. Natural disaster – Eg.
scenario analysis).ETOP Acronym for Environment – Threat – Opportunity – Profile. It represents a summary picture of the external environmental factors and their likely impact on the organization. Forecasting – Predict the future (i. Stages in ETOP analysis – List the aspects of the environment that has a bearing on the organization.e. Strategic responses (including adaptation) to opportunities and threats is critical for survival and success. Assess the extent of impact of the factors. Delphi's technique. 65 . Holistic view – Prepare a complete overall picture. time series.
.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. High investment intensity acts as a drag. Relative attractiveness of the market. selectively. It is also a form of assessing vulnerability through longitudinal analysis. 66 Vertical integration is a powerful strategy. Some key findings on major performance drivers that explains 75% deviations in performance – Product quality and relative market share. An organization can draw upon the experience of its peers in similar situations.
therefore 67 validity may be a question.LIMITATIONS The analysis is based on historical data and it does not take care of future challenges. . As every organization is unique in its own way. Authenticity of data is of prime importance – Contexts drawn across one organization may not be applicable to another. – Contexts may vary over time. when radical changes in the economy takes place. Managers should be particularly cautious while referring to such data during times of discontinuity as it makes past patterns futile. – Contexts may vary across countries.PIMS .
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 . It enables the top management to draw focus. KSF helps organizations spot early opportunities and convert them into value adding business propositions.
IDENTIFYING ALTERNATIVE STRATEGIES 69 .
global) of a firm and deals with choices of allocating resources across them. national. related. It provides broad direction to the groups vision and mission. It indicates the quality of growth an organization is looking for.CORPORATE . A corporate strategy identifies and fixes the strategic gap it proposes to fill. It determines the locus a firm encounters with internal and external environment.GRAND STRATEGY It is concerned with the overall business scope (single. dominant. 70 . unrelated) and geographical scope (local. It reflects the customer needs it intends to satisfy.
CORPORATE STRATEGY MATRIX Corporate Strategy Stability Stability Growth Growth Combination Diversification Divestment Intensification Market Penetration Related Vertical Market Development Product Development Unrelated Horizontal 71 .
Hindustan Motors). (Eg. does not relate to do-nothing (Eg.STABILITY It involves maintaining status-quo or growing in a slow and selective manner. Stability however. The scale and scope of present operations remains almost intact. – Why disturb the existing equilibrium set up? – Limited resource position. Citibank). Even during adverse times firms need to adopt a strategy to sustain current performance levels. erosion of capabilities. The reasons for stability strategy – – Lack of attractive opportunities. – The firm may not be willing to take additional risk associated with new projects. – To stop for a while and assess past records. 72 .
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 .
convert competitors customers. – The company carries a risk of product obsolescence. Market penetration can be achieved by – increasing sales to current customers. Nirma. – Helps firms which are not comfortable with unfamiliar terrain. direct non-users to users. within a well defined market segment. 74 . – Elongated product life-cycle.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. Britannia). Ujjala. – Suitable for industries where scope for technological breakthrough is limited. (Eg.
– Unconventional and flexible distribution channels. (Eg. 75 . – Stretches product life cycles.…… or Teflon: aircraft technologies to cutlery to paints or Raytheon Corp – Microwaves: radars to kitchen appliances).MARKET DEVELOPMENT It is a strategy where a firm tries to achieve growth by finding new uses of existing products or its close variants and tap a new potential customer base altogether. carpets. Du Pont – Nylon: parachutes. upholstery. fabrics. socks & stockings. – Moves across geographical boundaries. – Immense customer reach & flexible advertising. tyres. – Creativity and innovation – thinking out of the box.
aesthetics. perception. conformance.Strolleys). – Deliverable through – redesigning or reengineering. durability. – Leverage on customer and brand loyalty. reliability. – Areas of product improvement – performance.PRODUCT DEVELOPMENT It is a strategy where a firm tries to achieve growth through a radical new product (Eg. serviceability. Refills) 76 . – Leveraging through – innovation. Close Up: Fluoride – Gel toothpaste or VIP . – Substitutes that serve the same needs (Eg. Microsoft: DOS to Windows) or a substantial improved version (incremental) of an existing product to repeatedly enter the same market (Eg. features.
77 .DIVERSIFICATION It marks the entry of a firm into newer markets with new products. licenses (i. From the traditional point of view. From the modern point of view they are strategically dissimilar. dominance).e. the new business is distinct from the existing business in terms of – inputs – technologies – markets. industrial embassies). – High transaction costs and institutional gaps. Why do firms diversify in the Indian context? – Shift the growth trajectory or opportunistic. – Internal capital market. – Permits: quotas. – Risk reduction. – Conglomerate or market power (i.e. thereby creating a new business.
either of which is equally likely to prevail. ice-cream business would register a return of 10%. If on the other hand. If the hot wave dominates the planet. cold wave dominates the planet. while the coffee business would register a return of 30%. the ice-cream business would register a return of 30%. What would be your ideal diversification strategy through optimization? 78 . in which a given year is either under hot or cold wave.HOW DIVERSIFICATION REDUCES RISK? Consider a hypothetical planet. while the coffee business would register a return of 10%. Let us assume that there are two businesses constituting the entire market – coffee and icecream.
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.
Quasi-integration . Ranbaxy. Reddy’s).A firm produces part of its own requirements and buys the rest from outside suppliers with a variable degree of ownership and control. and out-sources the noncore activities (Eg. 85 . Usually the firm concentrates on its core activities. Dr. Tapered integration . Reliance).QUASI & TAPERED INTEGRATION Full Integration .A firm gets most of its requirements from one or more outside suppliers that is under its partial control through value chain partnerships (Eg. Maruti – Sona Steering).Where one firm has full ownership and control over all the stages of a value-chain in the manufacturing of a product (Eg.
A CASE OF TAPERED INTEGRATION Partial Ownershi p Transmission Engine Design Electricals Steering 86 Seats & Carpets Windscreen Ordinary Components Zero Ownership Very Critical Component s Full Ownership Critical Component s .
Drawbacks of unrelated diversification – – Cost of failure (i. synergies pulling in opposite directions). – Cost of dysynergy (i. myopia). core business). and are also strategically dissimilar.e. lack of strategic intent.CONGLOMERATE DIVERSIFICATION It relates to entry of firms into businesses which are distinct in terms of – inputs – technologies – markets. 87 . – Cost of ignorance (i. Firms usually engage in conglomerate diversification when emerging opportunities are very attractive and offers potential growth opportunities.e.e.e. – Cost of neglect (i. lack of knowledge of competitive forces).
CONGLOMERATE DIVERSIFICATION Paper & Packaging Edible Oils Tobacco Hotels Food & Confectionary 88 .
ACC) in full to an independent entity. reactive) and survival is at stake and the firm does not have resources to fend off competitive forces. Tata Press). Glaxo’s “Glucon-D” to Heinz). It may also involve a SBU (Eg.e. (Eg.DIVESTMENT Divestment is a defensive strategy involving the sale of entire stake (Eg. In strategy there is no scope for sentimentality with divestment. Tata Pharma. where a company simply exits because the business no longer contribute to or fit its dominant logic. It taken into account when performance is disappointing (i. L&TCement Division to Aditya Birla Group) technically known as divestiture or a product (Eg. 89 . Tatas sale of Goodlass Nerolac. It is may also be a pro-active strategy.
Tatas buy-out of Corus for US $ 11.DIVESTMENT . Leveraged Buy-Out (LBO) – Here the company’s shareholders are bought out through a negotiated deal using borrowed funds.ROUTES Outright Sale – Popularly known as the asset route. 1956 does not permit this mode. Hive-Off – A hive off is the creation of a new entity followed by transfer of assets. (Eg. Sale of Diamond Beverages to Coca-Cola for US $ 40 million). where the equity is allotted amongst the existing shareholders on a pro-rata basis. 90 . involving 608 pence per share). (Eg. However. the Companies Act. where 100% of the assets (including intangibles) are valued and paid for.3 billion.
and divestment strategies applied simultaneously or sequentially for a portfolio of businesses. joint ventures). A combination strategy can be implemented through green-field projects (i. because every business has its own unique external and internal environment.e.COMBINATION STRATEGY It is a mixture of stability. 91 . There can be no ideal strategy for every business.e. mergers and acquisition. developing facilities right from the scratch) or through brown-field projects (i. It is usually pursued by a business group with diverse interests across multiple industries. growth.
STRATEGY CHOICE & PORTFOLIO ANALYSIS 92 .
Dominant logic enables top managers to selectively scan the environment and make trade-offs. In most cases the trade-off is between resources and opportunities.STRATEGIC CHOICE A strategic choice seeks to determine the alternative courses of action available before top managers to achieve its strategic intent. It attempts to answer the following questions – How effective has the existing strategy been? How effective will that strategy be in the future? What will be the effectiveness of alternative strategies? It is impossible for a manager to assess all the alternatives. What then is the magical number? 93 .
The key task before a top manager is to identify the right problems. For an optimal choice the following four issues need to be resolved – Is the strategy clearly identifiable? Is it consistent with the resources of the firm? Will it be able to exploit the opportunities in full? Is it in tune with the values and beliefs of the firm? 94 . will help the firm achieve its intent. 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.SELECTIVITY IS THE KEY The role of a top manager is not to solve a problem. if addressed. nor is to a define a problem for others to solve.
Resource sharing. keiretsus in Japan. embassies). 95 Succession planning is critical to continuity.e. Managing Agency). formal and informal ties. Licenses & Quotas. Their roots can be traced to a single family or clan and share broad similarities. chaebols in Korea. Their origins can be traced back to market imperfections existing in an economy (MRTP Laws. .BUSINESS GROUP . Proximity to the corridors of power (i. High degree of centralized control (GEO. BRC). business houses in India.DEFINITION A business group is known by various names in various countries – guanxique in China.
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 .
Rules of the game are different. 99 . sometimes impossible. Why? Businesses are not about liquid assets.PORTFOLIO ANALYSIS Resource allocation across a portfolio of businesses is an important strategic choice. therefore. Power and resources often goes hand in hand. there are high costs associated with entry and exit. Redeployment of resources upsets the established power bases of a group. next only to choice of business. Investing in emerging businesses may not actually be so simple as it appears to be. Relatedness across resources are difficult to realize.
BCG GROWTH MODEL Relative Market Share (%) Industry Growth (%) Low High High Low Stars Question Mark ? Cash Cow Dogs 100 .
Stars – They achievers in the near term. TCS. market development. These businesses are also net users of resources (Eg. provided the industry growth rate continues and the company is able to maintain its growth (i. and their risk profile is high (Eg. Trent. 101 . Tata Telecom. which remains a big? These businesses are net users of resources. provided the company is able to build up on its market-share (i.e.BUSINESS ANALYSIS – TATA GROUP Question Marks – They have potentials in the long term. but to larger extent than a question mark. Tata Steel). market penetration.e. diversification). Tata-AIG). product development).
Dogs – They are a drag on the group.BUSINESS ANALYSIS – TATA GROUP Cash Cow – These are matured businesses. stability). Nelco. cash cows may also need to invest provided the industry takes an upswing (Eg. Given that the growth potential in the business is low.e. Tata Motors. divest) as achieving a dominant position in these businesses is a difficult task. harvest.e. Tata Tea. Tata Pharma. Tata Press). and the company dominates the industry ahead of competition (i. Indian Hotels. they are generators of resources. Groups prefer to dispose off such businesses (i. However. Tata Chemicals). 102 . and they lack on competencies to take on competition and are basically cash traps (Eg.
Certain businesses in the low market share category may be the result of a conscious strategy (i. Cartier. The terminologies used are somewhat prohibitive. HUL). factors are limited.e. Data may be prohibitive. Armani).BCG . Mercedes Benz.LIMITATIONS It does not address the concerns of a business which is in the average category (usually the majority). niche – Rolex. The model does not provide specific solutions within a particular category. 103 . Cash cows may actually need substantial investments to retain their market position (Eg. neither in high or low.
GE .MATRIX Distinctive Capabilities Strong High Medium Weak Stability Industry Attractiveness Diversify (++) Intensify (+) Med Intensify(+) Stability Harvest (-) Low Stability Harvest (-) Divest (.-) 104 .
ARTHUR’ D. LITTLE Inception Dominant Strong Favourable Tenable Weak Growth Maturity Decline Improve Selective Niche Abandon Industry Life-Cycle Divest Harvest 105 Competitive Position Invest Consolidate Hold .
SHELL – DIRECTIONAL POLICY MATRIX Business Sector Prospects Attractive Average Unattractive Generate Cash Phased Withdrawal Distinctive Capabilities Strong Market Leadership Try Harder Double Or Quit Growth Average Custodial Weak Phased Expand Withdrawal Divest 106 .
BCG – Boston Consulting Group. SBU – A business unit which is strategically different from another and also shares a different SIC code. Gap Analysis – It emphasizes what a firm wants to achieve.TERMINOLOGIES Harvest – It entails minimizing investments while trying to maximize short-run profits and cash flow with the intention to exit the business in the near future. Portfolio – An organization is perceived as a portfolio of businesses. 107 . Divest – Selling a part or the entire business at one go. Disinvestment involves selling in phases.
BUSINESS STRATEGY & COMPETITION 108 .
building market-share. The principal focus is on meeting competition. 109 .COMPETITIVE STRATEGY A competitive strategy deals with how a firm competes in a particular business or product-market segment.e. Such resources or activities should be distinctive and sustainable over time. and earning super-normal profits (i. The strength of a firm in a particular business usually stems from its competitive advantage. rent). Competitive advantage refers to a firms resources or activities in which it is way ahead of competition. Competitive advantage is the back-bone of strategy.
involving harmonizing and integrating multiple streams of technologies. Delta Lock In – Two dominant players co-opt to selfreinforce and create or escalate an entry barrier. developing competitive advantage (Porter). 110 . preventing new entry and/or competition (Hax & Wilde). leveraging (Prahalad). identifying critical success factors. Blue Ocean – Consciously moving away from overcrowded industries to uncharted territories and making competition irrelevant (Kim & Mauborgne).BUSINESS STRATEGY FRAMEWORKS How to be distinctive and yet sustainable – Differentiation – Understanding of the dynamics of competition. Resource Based View – Obsession with competence building.
Reliance) or may pass it to customers to increase market-share (Eg. Compress project duration through crashing. backward integration. proprietary technology. Ayur. The firm may retain the benefits of cost advantage by enjoying higher margins (Eg. Steep experience curve effects. T-Series). preferential access to raw materials. 111 .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. Nirma. Locational or early entry advantage. Sources of cost advantage are varied and depends on the structure of the industry – Economies of size.
Intel. avoiding brand dilution.PORTERS – PRODUCT DIFFERENTIATION Product Differentiation – It is a strategy that attempts to provide products or services that are differentiated from competitive products in terms of its value proposition and uniqueness. Creativity. innovation and out of the box thinking. Focus on brand loyalty. Successful product differentiation is often followed by premium pricing. Rayban). (Eg. It selects one or more attributes that buyers perceive as important. Feeling the pulse of the customer. 112 . Sony. Culture of experimentation. Means of product differentiation are peculiar to each industry. undeterred attention to quality. and sufficient slack.
though it may not possess an overall competitive advantage. coupled with fear of structural erosion. Mont-Blanc.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. Rolex. Maybach. The target segment must have unusual needs or the delivery system catering to this segment must be unique. They are poorly served by mainstream players. 113 . Sub optimization alone may not be a source of superior performance. Armani). Cartier. A focuser seeks to achieve a competitive advantage in its target segment.
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 .
and usually outperforms a stand alone generic strategy. Tata Nano). Firms focusing on a hybrid strategy typically aim at shifting the productivity frontier and recreating a new product-market segment altogether (Eg. in a hyper competitive context the two strategies need not be mutually exclusive. jugaad or frugal engineering). Though cost leadership and differentiation are inconsistent. Reducing cost does not always involve a sacrifice in differentiation.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. 115 .
but achieves none. It will have a competitive disadvantage vis-à-vis a clearly positioned generic player. It is usually the result of a firm not willing to make trade offs. 116 .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 . unless such a player is capable of discovering a profitable segment. leading to what is called – straddling. Industry maturity will usually widen the gap. It tries to compete through every means. The positioning therefore gets – blurred.
Consumer behaviour pattern unstable and evolving. First-time buyers. Eg. coupled with low penetration levels. Market segmentation not well defined. It is characterized by – High level of technological uncertainty. Artificial intelligence). (Eg. There is a lot of scope to define the rules of competition.radical environmental changes. leading to a blurred productivity frontier and steep learning curve. ending in a differential cost economics. changing customer needs. Speech recognition software's. technological innovations.) Excessive turbulence in the dynamics of the environment. 3D imaging.EMERGING INDUSTRY Emerging Industry – An evolving industry characterized by . Nano technology. 117 .
leading to clear fragmentation. IT. Scope for players to change the rules of the game. because of lack of economies of size and scale. 118 . Paints. High exit barriers because of huge investment in CAPEX. Eg. 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). Retail and telecom. Eg. Consumer durables. Diverse customer needs. Air Conditioning. It is characterized by – Low entry barriers. MRTP may also cause fragmentation. Government regulations in the form Eg.
Strong entry barriers. Firms are rule takers in the segment as productivity frontier is well defined. technological maturity. established industry dynamics. Cartel among existing players through collusion.MATURED INDUSTRY Matured Industry – An industry characterized by saturation in growth rates.technological maturity. collaboration and co-option. well defined consumer behavioral patterns and imperfect competition leading to near monopoly. 119 . Limited scope for innovation . because of economies of size and learning curve effects. early entry and location advantages. distribution networks.
Firms facing a declining phase are characterized by inertia and slow to react to environmental changes. scooters. Exit barriers are extremely high because of limited prospective buyers. Typewriters. Nature of competition extremely high. (Eg. backed by corporate espionage. dot-matrix printers). Learning abilities have been stunted and firms adverse to investment in R&D and make fresh investments. 120 . with little or no signs of recovery.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. and costly price wars.
mergers and acquisition. process innovation. Matured Industry – Sophisticated cost analysis. move beyond boundaries. strictly product differentiation and not standardization. 121 . increasing scope. strictly cost differentiation. branding and promotion.COMPETITIVE STRATEGIES Emerging Industry – Set benchmarks. Locate a defendable position. or else exit the segment. aggressive building of distribution networks. Fragmented Industry – Identify. reengineer. recreate new markets. strike alliances. regenerate. assess and overcome fragmentation. focus more on product differentiation or even a hybrid one. Declining Industry – Redesign. premium pricing.
Intangible – These refer to goodwill.RESOURCE BASED VIEW Differentiation based on cost or products saturates and ceases to exist beyond the medium term. hence very rarely confer competitive advantage as can be easily acquired or replicated. brands. patents. However. and complex learning experiences in integrating and harmonizing technologies (distinctive capabilities) that play an important role in delivering competitive advantage through “causal ambiguity”. positions based on resources which are unique and inimitable are far more sustainable even in the long term. They are a standard in nature. 122 . A firms resources can be classified into – Tangible – These refer to real assets.
Typically. but not necessarily. Capabilities can be generic (i. There is a high degree of internal and external causal ambiguity involved in it.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. differentiation based on capabilities can be sustained even in the long run.e. Hence. they are woven around technologies. Therefore firms should concentrate on developing complex resources that forms the very basis of differentiation. can be leveraged across businesses) or specific to a particular business. 123 .
COMPETITIVE ADVANTAGE 124 .
e. competitive advantage subsequently becomes the back bone for a competitive strategy. Success of a strategy critically depends on SAP. not absolute) to competition. A portfolio of competitive advantage comprises strategic advantage profile (SAP). Strategy drives competitive advantage.COMPETITIVE ADVANTAGE A competitive advantage is a position of superiority relative (i. It results in a distinct differentiation advantage or a cost advantage or hybrid as well. 125 . It enlarges the scope of an organization. and results in well springs of new business development.
Most successful organizations around the world have a well balanced SAP.STRATEGIC ADVANTAGE PROFILE (SAP) Organizations have to systematically and continuously conduct exercises to identify its SAP. Internal strategic fit between its strategy and dominant logics is essential for the top management to stretch and leverage SAP. In most cases SAP is hidden and dormant. Identification of SAP is critical for and stretching and leveraging of resources. 126 . SAP changes from time to time. In today's world of discontinuity.
and enhanced customer tracking – higher market share. kaizen or internal customer). VC pay-offs: better product availability. Today SCM is integrated with greening the environment as CSR practices. Inventory Mgt to Logistics Mgt to Supply Chain Mgt (SCM).e. each of the players need to be efficient backed by sufficient coordination at the contact points (i. Substantial cost reductions also follow.VALUE CHAIN ANALYSIS A value-chain segregates a firm into strategically relevant activities to understand its composite behaviour. 127 . Competitive advantage arises not from an individual activity but a stream of inter-related activities. A VC is often compared with a relay team. faster product launches.
THE VALUE CHAIN Support Infrastructure n gi ar M Human Resource Management Technology Development Procurement Out Logistics Mktg & Sales In Logistics Operations Primary Service M ar gi n 128 .
Fit is important because discrete activities result in negative synergy and can also be easily copied by competitors. – First order fit refers to simple consistency between each activity and the overall strategy. 129 . A high fit involving a complex chain of activities drives both competitive advantage and its sustainability. A learning organization helps create strategic fit. – Second order fit occurs when activities are reinforcing amongst them. Operational effectiveness is not strategy.STRATEGIC FIT – THE PORTER WAY The sustainability of the value chain depends on the degree of fit between the activities. – Third order fit refers to optimization of effort.
It forms the very basis of competitive advantage.CORE COMPETENCE A core competence represents the collective learning's of an organization around diverse streams of technologies. – Can be leveraged across businesses. – Cannot be easily imitated or substituted. It should satisfy the following conditions – Contributes significantly to customer benefits. but not necessarily. Core competence has a high degree of external and 130 internal causal ambiguity embedded in it. . These skills results in distinctive activities and processes. – Can be sustained even in the long run. A core competence usually has its roots in technology.
CORE COMPETENCE A competitive advantage does not necessarily imply a core competence. a core competence always implies a competitive advantage. 131 . Majority of the firms have competitive advantage. a core competence has its roots in a set of skills. a core competence is sustainable even in the long-term. only global leaders possess a core competence. A competitive advantage manifests from a function. A competitive advantage is sustainable in the shortmedium term. A competitive advantage may or may not lead to superior performance. a core competence usually does.
In a game (similar to a business) one players win is always another's loss. However.GAME THEORY The game theory was developed in 1944 by Oscar Morgenstern. Here the magnitude of gain offsets the magnitude of loss equally. In fact there are no. illustrations depicting a win-win situation. the stringent assumptions of game theory and difficulty in ascertaining of pay-offs makes game theory application difficult in business. each of whom wants to win. This is known as a zero-sum game. 132 . Subsequent work on game theory by John Nash led him to win the Nobel prize in 1994. A game is a contest involving two or more players.
An unbiased game is one where both the players have equal chances 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 .BIASED AND UNBIASED GAME A game is said to be biased when one of the players have a disproportionate chance of winning.
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. 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 .
TYPES OF GAMES Simultaneous Games – This is a situation where the players have an option to choose to cooperate or not through collusion. However. 135 . This is usually through learning by “experience or observation” (i. iteration) rather than through collusion (E. Repeated Games – In this situation the players interact repeatedly with each other sub-optimizing the outcome possibilities.e. Yahoo Vs Microsoft). collaboration or cooption. Coke Vs Pepsi). 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. It represents the classical “prisoner’s dilemma”.g.
– Making pricing more transparent. . – Building incentives for customer loyalty. but 136 players do not always behave rationally. Game theory relies on the principle of rationality. It results in a shift in the productivity frontier. In a market dominated by price-based differentiation one may attempt to change the rules of the game by/when – – Bases of differentiation dependent on clear identification of what customer wants or value.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.
DELTA MODEL & LOCK-IN
Its a systematic approach where-in two or more industry majors, who by default has achieved a proprietary position (Microsoft – Software / IBM – Computers) which are not necessarily best-products in the industry, co-opt to create a lock-in. A lock-in implies that other players has to conform or relate to that standard in order to prosper. Becoming the industry standard requires – strong brand, causal ambiguity, and close relationship with other companies offering complimentary services. Lock-in is self reinforcing and escalating (i.e. accelerating effect).
THE THREE STRATEGIC POSITIONS
System Economics Market Dominance Complementary Share
Enabled through effective use of technology
Total Customer Solutions
Customer Economics Cooperation Customer Share
Product Economics Rivalry Product Share 138
Bill Gates is the richest man in the world not necessarily because he has developed the world’s best software's or excels at customer satisfaction; but he has got an army of people working for him who are not on his payroll – all the application software providers who are writing programs based on “Windows” compatible operating platform. Once you create the lock-in it is sustainable because of the “network effects”; which creates the proverbial “virtuous cycle” – customers want to buy the computer with largest set of applications and software developers want to write programs for the computers with the largest installed base.
The proponents (Hax & Wilde) believe that every organization has the ability to create and sustain a “lock-in” positioning (though in varying degree). This “system lock-in” is referred to as “delta” – delta being the Greek letter that stands for transformation and change amongst the players. The lock-in once created becomes very difficult for a firm to penetrate, and becomes a distinct entry barrier. The model is based on the belief that it compliments Porter’s differentiation model and RBV framework instead of contradicting them. In a lock-in strategy the performance outcomes are dependent on the success of another.
It relates to translating strategy formulations into practice. Performance realization of a strategy depends on the implementation effort. Successful implementation also depends on the appropriateness of the strategy. Since strategy implementation is a time bound process, alignment (i.e. strategic fit) is a key variable during times of radical change. Some of the other levers of successful strategy implementation are – Transformational leadership and motivating power. Resource allocation; its stretching and leveraging. Compatible organization structure & control systems. Inertia & resistance to change.
– Resource commitment from top management. A high strategic fit (co alignment) is useful because it enables – – Appropriate and timely response. – Better strategic and operational control.IMPORTANCE OF STRATEGIC FIT Strategic fit has a central role to play in strategic management. While external strategic fit (strategy – environment) is relevant for strategy formulation. 143 . – Unlearning & learning of new skill sets. – Changing the rules of the game. – Development of capabilities & competencies. internal strategic fit (strategy – dominant logic) is critical to strategy implementation.
Some of the key strategic learning's exists at the contact point between the organization and its customer. learning levels are very high. at the cost of sacrificing a lesser degree of control. emergent strategy vis-à-vis intended & realized).FORMULATION Vs IMPLEMENTATION Traditionally. In fact. learning levels are very low.e. while control is very effective. effective strategies are better crafted when there is a subtle overlapping between the two (i. In such a situation. strategy formulation and implementation has been perceived to be distinct & independent. According to Mintzberg. formulation & implementation can occur simultaneously. 144 . In such a situation.
He should be an agent of change. companies depend more on transformational leaders than transactional leaders. Pragmatism is the ability to make things happen. A transactional leader is usually confined to allocating tasks & responsibilities and extracting performance. transformational leaders go one step beyond – Design a well crafted and designed strategic intent of the organization. bring about transparency.ROLE OF TOP MANAGEMENT To bring about change and to implement strategies successfully. 145 . In contrast. Install a system of shared beliefs and values. shift from compliance to commitment.
patents.e. brands.RESOURCE ALLOCATION Resources allocation includes tangible resources (Eg. skills) also includes complex resources like capabilities and competencies. 146 . machines) referred to as threshold resources (i. labour. The various methods of resource allocation includes Historical Budget – The budgets framed by HQ for a particular SBU keeping in mind past trends. Performance Budget – SBU managers need to justify the distinctive resources in terms of the opportunity it is pursuing yields the highest possible pay-offs. Zero Based Budget – In this case the budget of a SBU has to be worked out right from the scratch. land. Intangible resources (Eg. minimum requirement).
Due to causal ambiguity (complexity). Mobiles). Moreover. Distinctive capabilities helps in stretching and leveraging resources thereby overcoming two major constraints involved in strategy implementation – times & costs. 147 . these capabilities are sustainable even in the medium to long term. convergence of multiple streams of technologies at the product – market level is becoming increasingly evident (Eg. Distinctive capabilities are complex set of skills woven around technologies. Flat Screen Displays. though not necessarily in the case of emerging markets.CAPABILITIES & COMPETENCIES Technology and business are slowly becoming in – separable.
The level of centralization and decentralization is decisive. 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. A single product or a dominant business firm usually employs a functional structure. processes become people independent. A firm in several related businesses usually employs a divisional structure. 148 . A firm in several unrelated businesses usually employs a SBU structure. Once the structure is in place.
Divisional Structure – Units grouped together in terms of products. Inputs . with team members having dual line of control. SBU Structure – Businesses segregated in terms of strategic dissimilarities (Eg. Marketing.TYPES OF STRUCTURES Functional Structure – Activities grouped together by a common function (Eg. Output). 149 . based on skills and competencies. Team Structure – An informal group formed for a crisis. or geographical locations. disbanded subsequently.Technology. Virtual Structure – A boundary less or hollow organization. Finance). processes. Project / Matrix Structure – A formal but temporary framework initiated for the completion of a particular project/crisis.
Environment & People – Economic and political conditions have a major bearing on structure coupled with the attitude and aspirations of the people in the organization. leading to a tall structure. It includes the desire for independence.FACTORS INFLUENCING STRUCTURE Size – As an organizations size increases there is more specialization and differentiation leading to the top management moving away from operational issues and control. facing challenges & crises. assuming responsibility. structures are becoming flatter and more simpler. Technology – With more and more convergence of technologies in business. as span is broader. 150 .
e.INERTIA When a firm has been operating in a certain fashion for a long time. Changes in top management and unlearning helps overcome inertia. Common sources of 151 inertia – complacency with past successes. Inertia is a characteristic of a firm that endures status quo (i. . co0ntinuity). irrespective whether it is from worse to good or good to worse. there is a tendency to continue along the same lines. Top managers resist change. Inertia acts as an impediment in strategy implementation. Most firms undergo periods of strategic continuity rather than strategic discontinuity.
To prevent deviation of 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. However. Since the internal and external environment is in a state of continuous flux. strategies need to be evaluated on an ongoing basis to prevent deviations of fit.STRATEGY EVALUATION Strategy evaluation centers around assessment of strategic fit. . Deviation of fit is detrimental to performance and may lead to strategic failure.
STRATEGY CONTROL It is concerned with trafficking a strategy as it is being implemented. . It attempts to answer the following questions – Is the strategic intent appropriate to the changing context? Are the organizations capabilities still holding good. 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.
However. It is open-ended as well as . It involves assessing – strategic thrusts and milestones. checking every premise is costly as well as difficult.STRATEGY CONTROL IMPLEMENTATION It involves steering the company towards its original growth trajectory & stated goals. Special Alert Control – It intends to uncover unanticipated information having critical impact 154 on strategies. Implementation Control – It aims at assessing whether key activities are proceeding as per schedule. Premise Control – Checking the validity of the assumptions on which a strategy was based.
difficult to translate into practice. low strategic fit due to consultants intervention. Performance measures are defective – What to evaluate against? How to measure the 155 construct? As a saying goes. “If you cannot . Strategy not linked to resource allocation & capabilities – Lacking commitment of top management. 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.
Together these factors determine the way in which a corporation operates. Managers should take into account all seven of these factors. On top of that. the relative importance of each factor may vary over time and context. Large or small. Today it is considered one of the most powerful tools for strategy implementation determining success or failure. to be sure of successful implementation of a strategy. so if one fails to pay proper attention to one of them. important or not they're all interdependent. 156 .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. this may effect all others as well.
At around the same time in the US Tom Peters and Robert Waterman were exploring what made a company excellent. 157 . It appeared also in "In Search of Excellence" by Peters and Waterman. The 7-S model was born at a meeting of these four authors in 1982. Since then it is known as their 7-S model and is extensively used by corporations worldwide to implement their strategies. They had been investigating how Japanese industry had been so successful. and was taken up as a basic tool by the global management consultancy company McKinsey.BACKGROUND & ORIGIN The 7-S Framework was first mentioned in "The Art Of Japanese Management" by Richard Pascale and Anthony Athos in 1981.
to reach identified & stated goals. 158 . Style – The way in which the top management influences the functioning of an organization. Strategy – Trade-offs for the allocation of a firms scarce resources. formal & informal . processes and routines that characterize how work should be done. Skills – An organizations capabilities and competencies.THE 7’S Shared Values – It represents what the organization stands for and what the top management believes in. Structure – The way in which the organization's units relate to each other in terms of their commonalities. Staff – Human inter-relationships. Systems – The procedures. over time.
STRATEGIC FIT Strategy Structure Shared Values Systems Skills Staff Style 1st Order Fit 2nd Order Fit 3rd Order Fit 159 .
In contrast. A choice of an alphabet often limits the scope and skews the interpretation of a model.A CRITIC OF THE 7S MODEL While the hard S’s (strategy. Consider the 4P’s of marketing or 3R’s of SCM. because most often they are culturally embedded and often neglected. their Japanese counterparts focus more on the soft S’s for their early success and sustainability. structure. 160 . the soft S’s (skill. staff. shared values) are very malleable and comparatively more difficult to identify & influence. Ineffective in case of a virtual company. systems) are comparatively easy to identify and influence. style. While the American co’s focuses on the hard S’s.
Low Take Overs 161 .STRATEGY IMPLEMENTATION ROUTES Strategic Fit .High Organic Growth Strategic Alliance Joint Venture Mergers & Acquisition Strategic Fit .
(Eg. . Reliance Industries). the entire value chain. (Eg. tax holidays. subsidized power). i. Govt. It has complete control over inputs.e. and markets.e. soft loans.ORGANIC GROWTH Here a firm builds up its facilities right from the scratch and continues to do so without any external participation. i. The entire infra-structural facilities are set up afresh having its own gestation and break-even. 162 Risk of cost and time overruns. SEZ’s. green-field projects. Long gestation leads to delayed market entry. technologies. concessions are available for green-field projects.
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. 163 It is a form of competitive collaboration. Tata Motors & Fiat).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. Alliances are usually in the areas of technologies or markets (Eg. It touches upon a limited aspects of a firms value chain. .
(Eg. Degree and extent of management control must be clearly 164 laid down.Honda). It is a win-win situation for both the companies. Selecting the right partner is critical for success. .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. Dominant logic of both the companies should be complimentary. A comprehensive MOU is essential. Hero . Tata – AIG. leaving minimum scope of overlapping.
with the individual firms ceasing to exist any more (Eg. Integration of assets and other financial resources. Brooke Bond & Lipton).MERGERS & ACQUISITION It refers to the fusion of two or more firms into a single entity. ITC Tribeni Tissues. . Coca Cola – Thums Up). Integrated distribution channel leads to better market penetration and overall synergy. Economies in scale leading to lowering of costs. Revival of a sick-unit through better management practices is a major motive behind an acquisition 165 strategy. Acquisition is an outright purchase of a firm assets by another independent entity (Eg.
Larger geo-graphical diversity. Make a public offer of not less than .Corus). Instant access to capacities and markets. Tata Steel . Most countries have stringent laws that prevents hostile take over. Consolidation in a fragmented industry. Inform SEBI / Stock Exchange after 5% stake is 166 acquired.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. often the new firm is “left alone”. Integration of organization structure & cultures is difficult.
MANAGEMENT TOOLS IN STRATEGY 167 .
168 . Change provides enormous opportunities. Some tools to ensure that – Benchmarking – Adopt certain best practices. or better still create next practices Reengineering – Redesigning work processes right from the scratch. it is also a source of potential threat. TQM – Doing the right thing the first time. every time. The past is ceasing to be an indication of the future. Companies therefore need to ensure competitive advantages doesn’t become competitive disadvantages.WHY MANAGEMENT TOOLS? Change is becoming pertinent in the business environment. Radical change is superseding incremental change. Balanced Scorecard – Tracking strategy 3600.
A best practice is defined as an activity performed by a company in a particular domain or function which distinguishes it from others and making them world-class. These exemplary practices involves the stakeholders of the company and helps achieve its strategic intent. Best practices centers around looking at a different way to satisfy various stakeholders. Benchmarking involves the identification, understanding and adapting of certain best practices and implementing them to enhance performance. Firms are moving towards next practices as best practices make firms look more and more homogeneous.
SOME BEST PRACTICES
Dell: Customized configuration of computers. Caterpillar: 48 hours delivery anywhere in the world. Citi Bank : Priority banking services. Maruti: Certified “true value” pre-owned cars. Microsoft: ESOP to employees. Infosys: Customized work-stations. TCS: Referencing potential new recruits. ITC: Shareholders factory visit. AmEx: Outsourcing data warehousing mining. MARG: Set-top box to study viewing patterns. Honda: CEO’s visit to dealers.
TYPES OF BENCHMARKING
Functional – Used by companies to improve a particular management activity. Eg. Motorola learnt delivery scheduling from Domino’s. Process – Improving specific key processes and operations from experiences in similar businesses. Eg. Ford adopting assembly lay-out plan of Toyota. Competitive – It involves assessing the sources of competitive advantage and imitating them. Eg. Samsung leveraging miniaturization skills of Sony. Strategic – It involves assessing business models and replicating them in a different market. Eg. Reliance replicating AT&T business model.
HOW TO BENCHMARK?
Phase 1: Planning – What to benchmark? Whom to benchmark? – Identify key performance indicators & Data source. Phase 2: Analysis – Assessment of performance gaps. – Predict future performance levels. Phase 3: Integration – Communicate findings and gain acceptance. – Establish functional goals and its implementation. Phase 4: Action – Implement and monitor progress. – Measure results against stakeholder wants and needs. – Recalibrate or outperform benchmarks.
WHOM TO BENCHMARK?
Selecting the benchmarking partner is critical to solving the problem. Firms should generally avoid selecting the industry leader, because it may not always adopt the best practices for every process or activity. Benchmarking partners may also be from different industries. Types – – Internal – It involves benchmarking against its own branches, divisions, SBU’s. Proximity to data and cooperation is taken care of automatically. – External – It involves benchmarking against firms that succeeded on account of their best practices. It may also involve benchmarking against world-class firms. Friction may arise due to presence in competing industries.
BENCHMARKING - ADVANTAGES
Finding better ways of meeting stakeholder needs. Organizational learning comes from internal as well as external sources. Establishing goals based on formal assessment of external conditions. Defining effective measure of indicators, facilitate comparison, adopt from other organizations. Ensuring a continuous learning organization. Reducing competitive disadvantage. Organizational turnaround, especially effective in case of a wide strategic drift when differentiation strategies fail to work. 174
e. While strategy is all about differentiation and not looking alike. Strategy is more of creating best practices rather than copying them. Benchmarking is useful for bringing about operational efficiency. . clustering). but it cannot be used as a strategic decision making tool. It does not shifts the growth 175 trajectory of the industry as a whole.BENCHMARKING .LIMITATIONS More and more companies benchmark. It can at best complement it. the more similar they end up looking. Benchmarking merely reorients profits in the hands of few to profits in the hands in the hands of many (i.
g.e. Re-engineering attempts to radically change an organizational products or process by challenging the basic assumptions surrounding it. for achieving performance improvement (E.RE-ENGINEERING Redesigning leads to identification of superfluous activities or product features (i. DOS to Windows). The task demands a total change in organisational 176 culture and mindset. clean sheet). Windows 95 to 97).g.e. Re-engineering involves complete reconstruction and overhauling of job descriptions from the scratch (i. process mapping) and eliminating or improving them (E. .
than people driven Innovative Vs Traditional Customer centric Vs Organisational centric 177 .REENGINEERING – KEY TENETS Ambition Focus Attitude Enabler Performance Large scale improvement by questioning basic assumptions about how work is done Micro Vs Macro Business Processes Vs Organisational Processes Starting right from the scratch Not historical More IT driven.
customers and suppliers and protects the organization from the future (i. 178 .e. Strategic – It looks into the process of strategic planning. structures. etc) and supports the organization for the present. .e. resource allocation and prepares the organization for the future through a reorientation of the entire strategic architecture. products.LEVELS Reengineering can be successfully leveraged at all levels of an organization with varying degree of results.REENGINEERING . Business – It looks into markets. It can be of the following types – Functional – It looks into the flow of operations (i. BPR). processes.
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. learning curve advantage. – Causal Ambiguity. Indonesia). – High cost and time acts as a deterrent. However. with an intention to copy it (Eg. protection can be had in the following ways – – Patenting. Cheaper versions of Intel chips and mother-boards manufactured in Taiwan. It generally acts as a threat to innovation. 179 . reverse engineering is a top-bottom approach. While traditional manufacturing is a bottom-up approach. – Early entry advantages.
designing facilities. cost and effort necessary for the purpose of reverse engineering. machine tools to convert ideas into a marketable product (i.STAGES IN REVERSE ENGINEERING Awareness – Recognizing whether the product is found to be worth the time.e. Actualization – Obtaining and dismantling of the product to assess how it functions. Implementation – Developing of a prototype. Introduction – Launching the product in the market. Usually in such cases segmentation and pricing is different from the original innovator. Inaccurate assessment at this stage may lead to a failure of the entire project. nano-technology). 180 .
– Conformance – Emission standards . – Aesthetics – Appeal in design. 181 . – Perception – Customer notions. It has eight dimensions (Eg. Car) – – Performance – Mileage of 14 kms to a litre of fuel. – Reliability – Consistency in mileage. – Features – Anti-lock braking systems.Euro IV. – Serviceability – Large no. – Durability – 1980 manufactured cars still on road.WHAT IS QUALITY? It involves the totality of a product or service in meeting certain stated or implied needs. of service stations. More and more companies are moving towards meeting implied rather than stated needs. Air bags.
which ensures good market standing. TQM is a way of creating an organization culture committed to the continuous improvement of work processes – Deming. .TOTAL QUALITY MANAGEMENT Objective – Management of quality ensures conformance to certain pre-set standards. touching upon a limited aspect of a value chain. Management of quality was traditionally inspect it . It had little impact on improving overall productivity. zero defects. It is deeply embedded as an aspect of 182 organisational life & culture.fix it in nature.
not a final destination. the first time – From reactively fixing error in products to proactively preventing errors from occurring at the first place (Juran). Empowerment – It takes place when employees are properly trained. Looking at quality as an endless journey. Kaizen – Make continuous improvement a way of life. provided with all relevant information and best possible tools. Be customer centric – Generate the concept of internal customer (Ishikawa). fully involved in decision-making and fairly rewarded for results.TQM – KEY TENETS Do it right. 183 .
saving precious top management time.e. SQC – It is a process used to determine how many units of a product should be inspected to calculate a probability that the total no. 184 . Quality Circles – It a small group of shop-floor employees who meet periodically to take decisions regarding operational problems and crises. enabling the firm to concentrate on core activities essential to customer satisfaction. of units meet preset standards (Eg. It is based on the principles of MBO (i. 6-Sigma).STRATEGIES Outsourcing – It is the process of self-contracting services and operations which are routine and mundane.TQM . equal participation).
..BALANCED SCORE CARD Some interesting comments ....... – Efficiency and effectiveness is passé. Source: Fortune Magazine Why CEO’s fail? 185 ... – In the majority of failures – we estimate 70% – the real problem isn’t (bad strategy) . it’s bad execution. – Less than 10% of strategies effectively formulated are effectively executed. strategy implementation has never been more important...
These measures worked well when organizational systems were simple and unidirectional and more importantly the environment was static. Most managers tend to rely on traditional measures of performance having its origin in finance as they are well tried and tested. 186 . Focus more on causes. rather than effects. In today’s context when organizational systems have become complex and multi-directional we need to have a holistic view of performance to cut the lag effects.CONCEPTUALISATION A company’s performance depends on how it measures performance. Organizations need to move from financial to strategic performance.BSC .
BSC – KAPLAN & NORTON (1992) A BSC helps a manager to track and communicate the different elements of company’s strategy. 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. 187 . The most critical element of a BSC is to measure these four dimensions. because they have too many. and distinguish strategic problems from operational ones.
e. ageing schedule) % of key customer transactions Ranking of key customer accounts No. of visits or calls made % of NPA’s 188 .CUSTOMER PERSPECTIVE GOALS Products Supply Preference Relationship MEASURES Relative market share (%) % of sales from new Vs proprietary products Timely deliveries and service Customer credit analysis (i.
of times covered in media No.BUSINESS PERSPECTIVE GOALS Skills Excellence Exposure Introduction MEASURES New capabilities and competencies Implementation & gestation period Bank and supplier credit limits & PLR Unit Costs / Conversion Ratio / Defect Ratio No. of new product launches Vs competition Product pricing Vs competition 189 .
LEARNING PERSPECTIVE GOALS Technology Manufacturing Focus Timing MEASURES No. of product innovations 190 . of new patents registered Time to develop next generation products Average and spread in operating cycle % of products that equal 2/3 sales No.
Return on Investment Market Capitalization / PE ratio 191 .FINANCIAL PERSPECTIVE GOALS Survival Success Prosper Divestment MEASURES Cash flows Growth in Sales and Profits EPS.
STRATEGY MAPPING 192 .
BSC .IMPLEMENTATION 2 Translate strategy into operational terms 1 Mobilize change through effective leadership 5 STRATEGY Make strategy a continual process 3 Align the organization to the strategy 4 Make strategy everyone’s job 193 .
doing right things instead of doing things right). The BSC brings together the different elements of a company’s strategy at a glance. Seek excellence.e. As a result. sharing of vision).what they don’t know. Shift from control to strategy (i. .e. 194 performance will automatically follow. It helps translating strategy into practice (i.ADVANTAGES Most often top managers face information overload. Focus on cause not effects. Modern managers should be poised to ask the right questions. they don’t know .BSC .
EFFICIENCY Vs EFFECTIVENESS Ineffective Effective Inefficient Goes out of Business quickly Survives Efficient Dies Slowly Thrives 195 .
Michael E. but also sustains it. not only thrives. Porter 196 .EFFECTIVENESS + STRATEGY A company which is effective as well as strategic. .
CORPORATE RESTRUCTURING 197 .
... firms use restructuring strategies. Strategic variety brings paradigm shift.” 198 . Strategic variety may be caused by changes in the as external well as internal environment.. To adapt to the changing environment. to survival of the most adaptable. Radical change brings about strategic variety. from survival of the fittest . Tata Group)..CORPORATE RESTRUCTURING The only thing constant in today's business environment is change. Restructuring involves consciously driving significant changes in the way an organizations thinks and looks (Eg. As Peter Drucker pointed out.. “every organization must be prepared to abandon everything it does.
downscoping). downsizing or rightsizing).e.e. Instead. etc). Fax. they should strive to provide unimaginable value ahead of its time (Eg. and dividing the core businesses into SBU’s (i. . Structural Changes – Conventional hierarchical structures should be disbanded in favour of more 199 flexible ones (i. Company’s should go beyond just asking what he expects. Core Business – Company’s should introspect – What business are we in? Business evolved out of opportunism or myopia should be divested.RESTRUCTURING – BASIC TENETS Customer Focus – Restructuring ideally begins and ends with the customer. Internal customers should also not be neglected. ATM. Walkman.
. Kumar Birla today is more dependent on professionals.RESTRUCTURING – BASIC TENETS Cultural Changes – A culture represents the values and beliefs of the people about the organization.. It is created and institutionalized by the top management.. 200 .. started focusing on their capabilities. Restructuring also requires cultural reorientation..) Reliance dismantled their industrial embassies .... the Tatas were considered a benevolent and charitable organization.... .. During the times of JRD. Ratan Tata now drives the point the group means business.) The Aditya Birla group typically relied on the “marwari” community for key management positions .
Publicizing welfare projects to demonstrate CSR.” 201 . Carry out PR campaigns. Getting feedback & addressing customer complaints. “ … one reason our customers are satisfied is that we aren’t.MOVING CLOSER TO THE CUSTOMER As companies evolve. they tend to move away from the customer. Communicating to the media about organization efforts to deliver quality products. Organizing customer and supplier meets. Restructuring provides a platform to close this gap. Honda’s ad says. Use the reach of networking technologies.
Further. It may include brands as well. 202 . horizontal. Glaxo – Heinz). Hive Off – It involves siphoning of assets under control.ASSET RESTRUCTURING Asset Restructuring – The asset composition of a firm undergoes a major change. It can have two forms. Asset Swaps – It entails divesting and acquisition simultaneously by two companies. Mittal – Arcelor) and can take various forms. where the difference in valuation is settled off through cash or equity (Eg. it may be smooth (Eg. including its intangibles – Mergers – It may be vertical. Further spin-off can be classified as split-off and split-up. Tata – Corus) or hostile (Eg. or conglo-merate. spin-off and equity carve.
Tata Industries selling 20% stake to Jardine Matheson). in which the equity is allotted amongst the existing shareholders on a pro-rata basis (Eg. – Split-Off – In a split-off.HIVE OFF Spin-Off – A spin off is the creation of a new entity. Equity Carve – It involves selling a minority stake to a third party while retaining control (Eg. – Split-Up – In a split-up. Reliance Ent). 203 . the existing shareholders receive equity in the subsidiary in exchange for the stocks of the parent company. Most of these practices are not in consonance with Indian laws. the entire parent company loses its identity after being split into a number of subsidiaries.
204 . Selling out in phases is called disinvestment (IPCL). repay long-term debts. for a specified market or in general with full management control. but retained its engineering division. Generic motives include – – Raise working capital. strategic misfit.DIVESTITURE It involves the sale of a brand or a division of a company to a third party. L&T sold its cements division to Aditya Birla group. Parle sold its Thums Up brand to Coke for $40 million apprehending fierce competition. A complete sell-out is known as divestment (TOMCO). In 2005. – Poor performance. In 1995.
205 .CAPITAL RESTRUCTURING Capital Restructuring . Conversion – Replacing debt with equity or vice-versa or costlier with cheaper debt or cross currency debt. It provides greater leverage as well as management control. Share Buyback – It is a process of cancellation of shares out of free reserves to the extent of 25% of paid-up capital (Eg. Tatas take-over of Corus for US $11. Wipro). involving 608 pence per share).The internal & external liability composition undergoes a major change – LBO – Acquiring control over a substantially larger company through borrowed funds (Eg.3 billion.
950 cr Merind . 1439 cr 206 Tata Timken – Rs 120 cr Tata Telecom – Rs. 250 cr Tata Tetley – Rs.Rs. 1170 cr Goodlass Nerolac – Rs. 99 cr Tata Power – Rs. 230 cr Diversifications Tata Motors – Rs. 256 cr ACC – Rs. 120 cr Tata AIG – Rs. 1860 cr . 42 cr Voltas . 1700 cr Trent – Rs.Rs. 150 cr VSNL – Rs. 1890 cr CMC – Rs.BUSINESS RESTRUCTURING – TATAS Divestments Lakme – Rs.
of operating units. Survival is the primary motive.ORGANIZATIONAL RESTRUCTURING Organizational structure and systems calls for a change when strategic variety is apparent. Turnaround is the primary motive. keeping the composition of business intact (Jet Airways). It can be carried out in the following ways – Downsizing – It is a systematic one-time reduction in the no. usually as a result external turbulence. of a firm’s employees and sometimes in the no. 207 . Rightsizing – It is phasing of excess and redundant employees resulted out of faulty internal planning (SAIL). Downscoping – It involves reducing the business and/or geographical scope of a firm (Aditya Birla group).
e. 208 . Strategy change is unviable without a preceding change in its dominant logics.e. Dominant logic becomes deep-rooted in organizational contexts depending on the period it is in place (tenure of the CEO).STRATEGIC CHANGE One of the most difficult components of organization restructuring is the mindset of the top management represented through its dominant logic and its shared values reflected in cultural orientation. The longer the period. the more difficult it becomes to uproot the paradigm (i. The dominant logic represents the perceptions and biases (i. inertia). thumb rules) of the top management. as strategies are based on such beliefs and biases.
Companies achieve real agility only when people at every level rise above the ordinary to face the challenges – revitalization or transformation. the factor that stifled change & performance was – culture.FORCES AGAINST STRATEGIC CHANGE The problem with strategic change is that the whole burden typically rests on few people (i.e. 20% of the people carry out 80% of the changes). In most organizations. Successful transformation requires – incorporating employees fully into the process – leading from a different place so as to maintain employee involvement – instill mental disciplines that will enable employees to behave differently. 209 .
210 . Questioning every basic action of the organization. process ownership. Understand and deliver the quid pro quo.SUCCESSFUL TRANSFORMATION Build an intricate understanding of the business model at all levels of the organization. Encourage uncompromising straight talk. it is not about winning but about learning. Promote inventive accountability. Harness setbacks. The best way is to alter the institutional point of view. Create relentless discomfort with the status quo. never take no for an answer. Manage from the future.
It involves diagnosing a change situation – systems & structures. Identify and implement facilitators of cultural change. It involves identifying – Aspects of current culture which needs to be reinforced. 211 . also known as cultural-web. by identifying forces for and against change. that can be both enablers and blockages to change and restructuring. Aspects of current culture which needs to be overcome. 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.
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 .RESTRUCTURING .OUTCOMES Alternatives Organizational Short .
While the first strategy produces results instantaneously. 213 . hence go in for downsizing. Numerator – It assumes that turnover is not a barrier or constraint.NUMERATOR & DENOMINATOR MGT Most firms across emerging markets undergo strategic discontinuity and as a result are forced to restructure their businesses. reverse engineering and regenerating. In order to put back the company on the right track they are resort to – Denominator – It assumes that turnover cannot be increased. down-scoping or asset stripping. the second one is a more viable strategy and sustainable option in the long run. focuses on reengineering.
TURNAROUND MANAGEMENT 214 .
– Less than 10% of the Fortune 500 companies as first published in 1955... and that the thirty-two of the country’s largest business groups in 1969 are no longer among the top fifty today.. 215 (Govindarajan and Trimble. – Only seven of the first fifty Indian business groups in 1947 were even in business by the turn of this century.. January 1997).WHY TURN AROUND MANAGEMENT? Some interesting insights .. still exist as on 2005. .. Source: Why do firms atrophy? (Business Today.
e. ends the threat with a combination of strategies. and achieves sustainable performance recovery. As a sequence of events describing how things change and why they change (i. Both content (what) and process (how) are equally important for a successful turnaround.TURN AROUND MANAGEMENT A turnaround is said to occur when a firm perseveres through an existence threatening performance decline. and capabilities. While content focuses on endogenous and exogenous variables. process focuses on – A logic to explain a causal relationship between intervening variables. skills. 216 . A category of underlying principles and concepts. systems. Stage Theory).
Uncompetitive products or services. especially in key positions. Low stakeholder confidence. Low employee morale leading to high employee attrition at all levels. suppliers and bankers. unavailability or radical lowering of substitute costs or technological obsolescence. leading to lack of acceptability from distributors and customers. Rising input costs. Substantial shifts in consumer preferences. Some indicators Continuous cash flow crises as a result of dwindling market-share and profits.TURNAROUND INDICATORS Most firms atrophy simply because they fail to diagnose the indicators that acts as threat to organizational existence. 217 .
which most top managers fail to appreciate. Common approaches adopted Change in key positions.TURNAROUND ILLUSION The first step to a successful turnaround is the basic acceptance of the fact that …. consider extension. Recalibrate prices. Extending work hours. prune work-force. liquidating dead assets. Revamp product portfolio.. they adopt surface level measures (disprin popping) which most often fail. based on elasticity. Hence. Product redesigning or reengineering. Emphasis on advertising and market penetration. be more customer centric. “all is not well”. focus on power brands. 218 .
TURNAROUND STAGE THEORY Stage 1 Decline Stage 2 Stage 3 Stage 4 Outcome Response Transition Performance Equilibrium Line Success Failure Indeterminate Nadir Time 219 .
It 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. R-Extinction – It suggests that organization factors. 220 . Identification of the stimulus leads to the arrest of the downfall. It has its origin in “resource led stretch” and subscribes to the view that a firm has substantial power to override the context.DECLINE Decline is the first stage in the turnaround process. It has its origin in “environment led fit” that subscribes to the view that a firm has little control over external factors. primarily dwindling resources and capabilities are responsible for decline.
asset reduction. diversification. new market initiatives. the response should be operational. If the underlying cause is internal efficiency. If the decline stems from structural shifts. The response must match the cause of the decline. Strategic responses focus on changing or adjusting the business the firm is engaged in through long term moves such as – integration. 221 . the response should be strategic.RESPONSE INITIATION Turnaround responses are typically categorized as operating or strategic. Operating responses typically focuses on the way the firm conducts business and involves tactics geared towards – cost cutting and process redesigning (BPR).
which may be unavailable to a focused firm. Contour – It is easier to reverse decline in the earlier stages through operational measures. 222 . Scope – A diversified conglomerate may acquire a distressed business to turn it around and gain valuable synergies. 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.RESPONSE DICHOTOMY The response initiation is somewhat dichotomous and cannot be universally applicable. Similarly new market initiatives is feasible only for multi-product firms.
role model. many a times early signs of recovery fades out. However. transparency. lead – lag). 223 . participative management (i. The top management has a key role to play through empowerment.7 years with a range of (4-16) years. confidence building measures. Support from all the stake holders through resource commitment. However. Sustenance is the key factor in this stage. substantial amount of time usually passes before results begin to show (i. Effective levers of transition. consensus).e.TRANSITION Transition usually reflects the first signs of recovery.e. Empirical studies show that average time is 7.
Instead of focusing on financial parameters alone.OUTCOME Outcome is said to be successful when a firm breaches the equilibrium performance level. Cut off points must be unequivocal. Regaining lost market share and distributor confidence. 224 . it should adopt a holistic approach. Share price indications and media coverage. Failure is an indication that initial momentum was not sustainable characterized by irreversibility. Supplier and banker confidence. Revival of key customers and new product launches. Commanding a premium in the market.
COOPERATIVE STRATEGIES & ALLIANCES 225 .
It can assume any of the following forms – franchising. In the cooperative strategy continuum as firms move up the value order. More and more companies worldwide are moving away from competition to co-option to leverage their resources and enhance bargaining power. the commitment and the involvement between the firms increases manifold.COOPERATIVE STRATEGIES Cooperative strategies are a logical and timely response to changes in business dynamics. strategic alliance. licensing. and globalization . Any cooperative strategy maybe between firms within the same country or cross border as well. technology. consortia. supply-chain partnership. 226 . or joint venture.
Titan Inds. owners of the brand Tanishq allows its franchisees to sell its jewellery products. It is an effective strategy to penetrate markets in a shortest possible time at a minimum cost. owners of the brand Monginis allows its franchisees to sell its confectionary products. 227 .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. Switz Foods. Branding is critical to franchising.
refine processes and adopt necessary technologies (SKD). 228 . HM manufacturing GM range of cars in India with a buy-back arrangement is a perfect example of CBU. Become a systems integrator (CKD). as in Tata Indica. Develop a product through its crude stage.LICENSING Licensing – It is a contractual agreement between two legally independent firms whereby the licensor grants the right to the licensee to manufacture the licensor’s product and do business under its brand-name in a given location for a specified period of time for a consideration. Different levels of licensing Manufacturing without embracing any technology (CBU).
229 . Collusion – Few firms in a matured industry collude to reduce industry output below the equilibrium level. It can be of the following types – Multipartner – Intends to share an underlying technology or asset. Cross Holdings – A maze of equity holdings through centralised control to ensure earnings stability & threshold resources for critical mass (Eg. Airbus – Boeing). Hyundai). enabling them to increase prices (Eg. Tata.CONSORTIA Consortia – They are defined as large inter-locking relationships & cross holdings between businesses in a similar industry. leverage upon size to preempt competition by escalating entry barriers (Eg. Coke – Pepsi).
Continuous sharing of knowledge is critical to the success of a supply chain partnership. Tata Motors – IDEA). otherwise it 230 becomes routine outsourcing. link their capabilities to create value for end users.SUPPLY CHAIN PARTNERSHIP It is a pro-active & collaborative arrangement between supplier and customer aimed at achieving better control over the value chain (Eg. . Companies in different industries with different but complimentary skills. It usually provides a platform to sort out differences between conceptualization and implementation to suit local market needs.
Despite their popularity (50-60)% of the alliances fail to accomplish their stated objectives. instead of hurrying into a relationship. to gain knowledge and to obtain access to new markets (Eg. Tata Motors – Fiat. Reliance – Du Pont). Generic motives involved are . Firm’s should undertake a long courtship with potential partners. enter newer markets. 231 .learning organization. effective R&D management. design next generation products. preempt competition. Partner selection is one of the critical success factors.STRATEGIC ALLIANCE It is an short to medium term understanding between two or more firms to share knowledge and risk. enhance credibility.
Coke – Pepsi). Bajaj – Castrol). Airbus – Boeing). 232 .TYPES Collusion – Tacit top management understanding to neutralize price wars (Eg. Whirlpool – Tide. Bootstrap – An alliance between a weak and a strong company with an intention to acquire it. Maruti).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. Complementary Equals – Two firms mutually promoting each others complimentary products (Eg.
PARTNER SELECTION CRITERIA It is likely that partners will not have complete consent on alliance objectives because the institutional context in which the alliance embedded varies from country to country. – Japan Vs US). Cultural orientation has been found to have a profound effect on top management’s strategic orientation (Eg. Too much stress on financials & structure be avoided. Differences in level of economic development can produce differences in alliances motives. Firms from developed markets seek access to markets and firms from emerging markets seeking access to technology. 233 .
Dominant Logic’s – Similarity in beliefs & biases. Willingness to share knowledge and skills. including ability to provide quality products and services. 234 . Partner’s ability to acquire fresh skills. Managerial capabilities. Unique Resources – Abilities or skills which cannot be easily duplicated.PARTNER CHARACTERISTICS Complimentarity of Capabilities – The degree to which partners resources can be used in conjunction. Experience related to previous alliances. Intangible Assets – Move beyond the financials of the firm.
differences not anticipated earlier. Changing within. operational & cultural integration. incorporating clear signs of continuing independence for all partners. Selection & Courtship – It involves self analyzing. partners should nurture it. Setting up the housekeeping. degree of compatibility. Learning to collaborate – strategic. 235 . instead of focusing controlling the relationship. Getting Engaged – It should incorporate a specific joint activity. understanding the chemistry. the value chain. vows to include commitment to expand the relationship.MANAGING ALLIANCES Alliances are more than just a deal.
a joint venture is a selection among modes by which two or more firms can transact. There are substantial linkages in the value-chain. synergy) rather than mere exchange (i. whilst the partners continue to operate independently. It lasts till the vision is reached. It aims at creating new value (i. . separation is very 236 bitter.e. 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. combining parts).e.
237 . though more profitable alternative to other choices.JOINT VENTURE – GENERIC MOTIVES Transaction Cost – The situational characteristics best suited for a JV are high performance uncertainty. in addition to a high degree of asset specificity. The market fails as sellers are unwilling to reveal their technology and buyers are unwilling to purchase in the absence of inspection. Strategic Behaviour – Firms may override transaction costs. It may also be linked to deterring entry or eroding competitors position. Organizational Learning – It is a means through which a firm learns or seeks to retain their capabilities.
Sharing of resources. Daimler – Chrysler (Premium Cars) 238 . – Eg. Maruti – Suzuki.OTHER MOTIVES Entry into newer markets. – Eg. – Eg. – Eg. – Eg. Eli Lily – Ranbaxy. Learning new technologies. TVS – Suzuki (4-Stroke Engines) Fill gaps in existing product lines. Endorsement from government authorities. Essar – Hutch (Vodafone). Renault – Nissan (Minivans – Cars). Yamaha – Escorts. – Eg. Define future industry standards.
PAL – Fiat If the cost of continuing exceeds the exit costs? – Eg. – Eg. Century . LML – Piaggio Differences in size and resource base. Risk of brain (i. – Godrej – Procter & Gamble. Risk of over dependence. Modi – Telstra What after exit (parenting disadvantage)? – Eg. – Maruti – Suzuki. Tata – Aditya Birla in Idea Cellular 239 .Enka.e.RISKS INVOLVED Incompatibility – Differences in cultural background. technology) drain. – Eg.
Equality – Lack of dominance. Culture – Reconcile gaps. time sharing. Costs – Other modes of transaction becomes cheaper. Focus – Avoid strategic myopia. Flexibility – Sufficient space to breathe and adjust. Agreement – Clarity on operational control. respect. Objectives – Shared vision. 240 . Inertia – Differences in age and evolution patterns. Incompatibility – Performance expectations.PRE-REQUISITES FOR SUCCESS Commitment – Mutual trust. Partner – Avoid duplication of skills and capabilities.
MERGERS & ACQUISITION 241 .
however. Most countries have stringent laws that prevents hostile takeovers (Eg. HLL – Tomco). Mittal Arcelor). reverses are also taking place through LBO) with a view to acquire conglomerate power and induce synergy (Eg.MERGERS & ACQUISITION A merger is a mutually beneficial consent between two or more firms (usually of similar size) to form a newly evolved entity by absolving their individual entities to preempt competition (Eg. 2002). 242 . An acquisition is the purchase of a firm by a firm (of larger size. Brooke Bond – Lipton). An acquisition is said be smooth if it is with the consent of the management (Eg.Daichi) and hostile if it is without the consent of the management (Eg. SEBI Takeover Code. Ranbaxy . The larger objective is to leverage on size.
Preferential – A preferential allottee ending up acquiring 5% stake also comes under its purview. creeping acquisition).SEBI TAKEOVER CODE. 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. . 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.
Gujarat Ambuja – ACC). 2002 Pricing – Acquirers will have to offer minority shareholders (at least 20%) the past 26 weeks or past 2 weeks average price. whichever is higher as an exit route (Eg. 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. SEBI – In case of a hostile take over.e.SEBI TAKEOVER CODE. Grasim – L&T Cement. the SEBI can intervene and block share transfers if: the acquirer has ulterior motives (i. 244 . and/or does not enjoy the confidence of the different stake holders. asset stripping). credentials or track record is at stake.
Electrolux .TYPES OF MERGERS A business is an activity that involves procuring of desired inputs to transform it to an output by using appropriate technologies and thereby creating value for its stake holders in the process. 245 . Vertical – It involves complimentarily (partially related) in terms of supply of inputs or marketing activities (Eg. Reliance). Horizontal – It involves integration of two highly related businesses (Eg.Kelvinator). ITC). Conglomerate – It involves integration of two distinctly unrelated businesses. usually opportunistic (Eg. Godrej. The type of merger is depends on the degree of relatedness (strategic) between the two businesses.
quick access). Reduction in risk. Coinsurance effect – Higher debt raising capability. Tata Steel – Corus). Access to newer segments (Eg. ITC Bhadrachalam).MERGERS & ACQUISITION . Economies of size. Global image (Eg. Reduced gestation (i. Ranbaxy – Crosslands). scale and scope. 246 . Acquiring assets or capabilities (Eg. ICICI –ITC Classic). Mittal – Arcelor). Tax benefits (Eg. Avoiding risk of new product development.MOTIVES Increased market / conglomerate power. Ulterior motives – (Eg. Asset Stripping – Shaw Wallace). Overcoming entry barriers (Eg.e.
Overvaluation is often as a result of an ego drive and substantially affects future returns. Managing over-diversification. Top management overtly focused on due diligence exercise and negotiations. Tata – Corus). Merging of organisational structures. their initial offer was around 420 pence/share. Overvaluation of buying firms (Eg. neglecting core business. Inability to achieve synergy. When Tata Steel started negotiations with Corus.MERGERS & ACQUISITIONS PITFALLS Cultural differences (Eg. while the ultimate acquisition was made at 607 pence/share). 247 . Managing size.
248 .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. vertical to save transactions costs. 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. Decline – Horizontal mergers are undertaken to ensure survival. Tata Steel – Corus). Brooke Bond – Lipton). Kingfisher – Air Deccan). Growth – This stage may witness parallel merger of two firms of similar size.
INTERNATIONAL M&A . Left alone syndrome. An acquisition just for the sake of it or reputation yields very little value in the long term. A concern of respect and trust for the business of the acquired company. active top management intervention in phases. A common shared vision. 249 . Blanket promotions across entities and confidence building exercises needs to be practiced.FRAMEWORK Positive contribution to the acquired company. Strong differences may stifle plans and its execution. Immediate attempts to super impose structure and culture may cause bottle necks.
Shift attention from business portfolio to people and processes. Decide on the new hierarchy.INTEGRATION . 250 Do not ignore the “people factor”. It will enable focus on customers and key people. Redefine responsibilities and authority.BLUEPRINT Take the media into confidence. Integrating work processes. Determine business strategy. . Decide upon management control systems. promptly. They can carry the message to the various stake holders.
The process takes (6-12) months. Financial motives – Undervaluation relative to true value. While under valuation may be a significant opportunity. over valuation can become a curse. – Unstated reasons – Personal self interest and hubris.VALUATION The process of valuation is central to M&A.M&A . – Synergy – Potential value gain from combining operations (i. – Market for corporate control. Valuation decisions are arrived through a due diligence process when the prospective acquirer gets access to the books of accounts of acquiring company.e. 251 . operational & financial).
when the “fit” between the two entities is very poor. or from increased market power which increases sales and margins. – Vertical Synergy – Gains come from controlling the supplychain and savings in transaction costs. Sources of operational synergy – Horizontal Synergy – Gains come from economies of scale which reduces costs. 252 . Innovative product – Good distribution network). Synergy can be negative as well. – Conglomerate Synergy – Gains come when one firm complements the resources or capabilities of another (Eg.VALUING OPERATIONAL SYNERGY Synergy – It refers to the potential value gain where the whole is greater than the sum of the parts.
and without paying take-over premiums. Hotmail). 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. 253 . but availed after being merged with a profitable firm (Eg. However. shareholders can accomplish the same at a much lesser cost. ITC – Bhadrachalam Paper). Synergy comes from projects which would not have been undertaken if the two firms stayed apart (Eg.VALUING FINANCIAL SYNERGY Diversification – Reduce variability in earnings by diversifying into unrelated industries.
hence better performance. This will induce higher debt capacity. 254 . – Default risk comes down and credit rating improves. It relates to the concept of diversification.VALUING FINANCIAL SYNERGY Co-Insurance Effect – If the cash flows of the two firms are less than perfectly correlated. The likelihood of default decreases when two firms' assets and liabilities are combined through a M&A compared to the likelihood of default in the individual companies. as risky debt is spread across the new firm's operations. the cash flow the merged firm will be less variable than the individual firms. – Coupon rates may also be negotiated at lower rates. higher leverage.
– – 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. While value of corporate control is negligible for firms that are operating close to their optimal value.VALUING CORPORATE CONTROL Premium of M&A are often justified to control the management of the firm. since a restructuring can lead to significant increase in value. 255 . Assessment of perceived quality is critical. The value of control can be substantial for firms that are operating well below optimal value.
The assets of the acquired company are used as collateral for the borrowed capital.LEVERAGE BUYOUT (LBO) The basic difference between a take-over and a LBO is the high inherent leverage (i. debt component) at the time of buyout and rapid changes in capital structure over time. sometimes in combination with the assets of the acquiring company. LBO facilitates a relatively smaller firm to bid for a comparatively larger firm in the bid for management control. Confidence of investment bankers and the international financial community is essential. It is a very costly and risky proposition.e. 256 .
However. A research study showed that 30% of the publicly listed firms reported above average returns after going private. the advantages of going public includes . – Separation of ownership from management. The increased benefit showed in the following way – reduced costs and increased revenue.access to financial markets. 257 . – The need to satisfy analysts and shareholders.TO GO PUBLIC OR NOT? However. liquidity. off-late many publicly traded firms have gone private keeping in mind the following – – The fear of LBO. – Increased information needs. on-going valuation.
co-insurance effect). 258 . which disappears once assets are liquidated and significant portion of debt is paid off. – Cost of debt coming down (i.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).e. – Managers cannot be trusted to invest free cash flows wisely. – Cash trapped company unable to utilize opportunities. – It is a temporary phenomenon. – Debts repaid off from increased value after successful restructuring and wresting management control.
– Increase equity valuation. Therefore. Any discounting has to reflect these changing cost of capital. A LBO has to pass two tests to be viable – – Restructuring to pay-off increased debt. Lack of sufficient cash flows to repay costly debts resulting in a possible debt trap.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. initial rise in leverage is anticipated. As the firm liquidates / pledges assets and pays off debt. 259 .
shell company) by a private company. or costly. which has discontinued its operations (i. – Automatic listing in major exchanges. small in size but having a promising business. – Tax shelter.REVERSE MERGER Reverse Merger – The acquisition of a public company.e. allowing the private company to bypass the usually lengthy and complex process of going public. 260 . time-barred. – Prevents dilution of equity. Objectives – – Traditional route of filing prospectus and undergoing an IPO is costly. – Facilitates better valuation and forthcoming offerings.
Initial anomaly in stock prices usually normalizes over a period of time (6-12) months. During bearish periods excess returns were 19%. 261 . However. – Merger announcements reported 20% excess returns. and 35% during bullish periods. Excess returns also vary across time periods. – Takeover announcements reported 30% excess returns. Most target firms are taken over within (6090) days. takeover failures have only initial negative effects on stock prices.EFFECT OF TAKE-OVER ANNOUNCEMENT The shareholders of target firms are the clear winners.
1988 . Brickley. 262 Jarrel. in the event of take-over failure negative returns to the extent of 5% on bidder firm stock prices is reflected. over time. Bradley. – However.EFFECT OF TAKE-OVER ANNOUNCEMENT The effect of take-over announcement on bidder firm’s stock prices are not clear cut. as stock markets become more and more perfect such anomalies would reduce Source: Jensen and Ruback. 1983. and Netter. Desai. 1983. and Kim. – Most studies reported insignificant excess returns around take-over offers or merger announcements. – However.
263 . Poison Pill – An offer to existing shareholders to buy shares at a substantial discount to increase their voting rights (Eg.DEFENSIVE STRATEGIES Golden Parachute – An employment contract that compensates top managers for loss of jobs as a result of change in management control. Rights). so that nothing is left for the raider to strip off. Poison Put – Premature retirement of bonds at attractive rates to pour surplus cash and make target investment unattractive. Asset Stripping – The targeted company hives off its key assets to another subsidiary.
Shapoorji Pallonji). Green Mail – The targeted company buys large blocks from holders either through premium or through pressure tactics (Eg. thus thwarting the raider company’s attention. East India Hotels – Reliance Industries – ITC). But often the White Knight turns a betrayer himself (Eg. 264 . Gray Knight – The target company takes the help of friendly company to buy the shares of the raiding company.DEFENSIVE STRATEGIES White Knight – It is the placing of stocks to a cash rich investor and bargaining for protection in return. Pac Man – The target company makes a counter bid to take over the raider company.
COMPETING FOR THE FUTURE 265 .
Wal-Mart overpowering Sears. Compaq overpowering IBM. Most companies were too preoccupied with the present than the future? 99% of the companies overpowered. British Air overpowering Pan Am. were spending 99% of their precious time dealing with present. Honda overpowering GM. Nokia overpowering Motorola. What went wrong???? What were they doing with the present? What were they pre-occupied with? 266 . Honda overpowering Volkswagen.GETTING OFF THE TREADMILL Canon overpowering Xerox. Hitachi overpowering Westinghouse. The reverse was true for the companies overpowering.
most often they ended up cutting corporate muscle as well and became anorexic. falling market share). These denominator based managers stuck to their restructuring strategies (like building pyramids) and didn't know what to do next? Thus they became history? (like the pharaohs) 267 . CEO’s brutally pick up the knife and ruthlessly carve away layers of corporate flab (delayering.THE PAST OF COMPETITION Beyond Restructuring – When a competitiveness become inescapable problem (stagnant growth. Thus efficiency was grievously hurt. Not knowing when to stop. decluttering. downsizing). declining margins.
S. but forging ahead in competition. 268 . 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. incrementalism or nominal innovation has almost reached a plateau. On the contrary only 20% of Japanese managers believed that quality will be a source of competitive advantage of the future. but not of the future. However. The future is not about catching up with competition. ensuring only survival of the present.THE PRESENT OF COMPETITION Beyond Reengineering – Numerator based managers (innovation) at least offers some hope.
Companies need to fundamentally reconcieve itself. aspirations and resources. Empower from bottom to top. demographics and lifestyles. 269 . they are not enough to get a company to the future. better. It is based on deep insights into trends in technology. as important as these may be. faster. don’t predict. Creating the future requires industry foresight. and regenerate its strategies (breaking its – managerial frames). reinvent its industry. not just the organization.THE FUTURE OF COMPETITION Regenerating – Leaner. It involves Dream about the company’s future. not the other way. Create a potential gap. Transform the industry.
ABOUT THE DREAM Which customers will you be serving? What will the potential customer look like? Who will be your future competitors? What will be the basis of your competitive advantage? Where would your margins come from? What will be your future competencies? Which end product markets would you cater? 270 .
Change in at least one fundamental way the rules of engagement in an industry. Redraw the boundaries between industries.e. Therefore. they do not need to restructure. It drives a hunger and a passion to transform. 271 . Successful companies have a complete grip over the industry. It is about deliberately creating a strategic misfit.ABOUT THE TRANSFORMATION The future does not belong to those who take the industry for granted. Create entirely new industries (i. hence do not fall sick in the first place. blue oceans). by converging technologies complex.
272 . A revolution that is thrust upon from the top seldom sustains. The middle management plays a strong moderating role. the revolution must start at the bottom and spread in all directions of the organization.ABOUT THE EMPOWERMENT Bring about a revolution (a paradigm shift) in the organization. Transformational leaders merely lead the way. More importantly. Most successful revolutions (Gandhi to Mandela) rose from the dispossessed. Such a process is called institutionalization (from people centric to organisational centric).
without taking undue risk. It requires a lot of common sense and a little bit of out of the box thinking.THE FUTURE OF STRATEGY A company must get to the future not only first but also for less. A process for finding and gaining insight into tomorrows opportunities (Eg. South West Airlines – LCC. Companies need to strategize (think ahead of times). What does it take to get to the future first? Understanding how competition for the future is different. Apply the 40 – 30 – 20 principle. Get to the future first. 273 . Toshiba – LCD. An ability to energize the company. Apple – iphone).
We are in the midst of a 3600 vacuum.HOW DOES THE FUTURE LOOK LIKE? There is no rule which says that for every leader there will be a follower. each point in space represents a unique business opportunity. is the ability to imagine in a different way what the future could be. Companies of the future will be not based so much on the strength of their resources. but hundreds. the farther it will be away from competition. 274 . as on their aspirations. What distinguishes a leader from a laggard. As there is no one future. The farther one can see in this endless space. 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 .
Learning Curve t1 t2 t3 Time t4 t5 277 .LEARNING TO FORGET P1: The degree of learning in current period is directly proportional to the degree of unlearning in the previous period. Degree of Learning Unlearning Curve P2: Unlearning in previous period does not necessarily ensure learning in the current period.
It cannot be matched even by its closest competitors. Leverage – They are the gateways to future markets.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 represents the collective learning's of an organization centering around diverse streams of technologies. 278 . 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.
Toshiba – flat screen displays. it is deeply embedded in the heart of the organization.MORE ABOUT CORE COMPETENCE Sony – miniaturization. Although a core competence may lose value over time. at the most three to four. Honda – engines. 279 . SKF – antifriction and precision. Intel – nano-electronics. it gets more refined and valuable through use. Wal-Mart – logistics. Most companies around the world do not possess one. leaders have one. Toyota – lean manufacturing. Nike – designing. Canon – imaging. A core competency cannot be outsourced. Core competencies are the roots of the organization. Coca Cola – brand.
ROOTS OF COMPETITIVENESS End Products 1 2 3 4 5 6 7 8 9 10 Core Businesses Core Business 1 Core Business 2 Core Business 3 Core Business 4 Core Product 2 Core Products Core Competencies Core Product 1 Competence 1 Competence 2 Competence 3 Competence 4 280 .
RESOURCE STRETCH & LEVERAGE
Initial resource position is a very poor indicator of future performance. It leads to atrophy and stagnation. Successful companies consciously create a potential gap between aspirations and resources. Resource crunch is a common factor among firms that faces a wealthy rival, and outperforms them. Leveraging what a company already has, rather than allocating it is a more creative response to scarcity. – By concentrating existing resources. – By accumulating existing resources. – By complementing existing resources. – By conserving existing resources. – By recovering existing resources.
Concentrating – It involves effectively directing portfolio of resources on key strategic goals in which individual efforts converge over time. It is a balance between individual mediocrity and collective brilliance. It is achieved through – Converging – Redirecting multiple diverging (i.e. fragmented) short term goals into one long term goal. It is then resources can be stretched over time. Focusing – Making trade-offs and preventing dilution of resources at a particular point of time. Targeting – Focusing on the right innovations that are likely to have the biggest impact on customer value.
Accumulating – Using existing reservoir of resources to build new resources. Each and every individual is a rich & potential source of learning, discover better ways of doing things. It is achieved through Mining – Extracting learning experiences from existing body of each additional experience (i.e. success or failure). It is an attitude that can be acquired, but never learnt. It leads to a substantial jump in the experience curve. Borrowing – Utilizing resources outside the firm through licensing, alliances, joint ventures. A firms absorptive capacity is as important as its inventive capacity.
Complementing – Using resources of one type with another that aligns smoothly to create higher order value. In a way it produces an accelerating effect on each individual resource. It is achieved through – Blending – Interweaving discrete capabilities to create world class technologies (GM – Honda) through integration and imagination. Different functional skills can also be blended to create a world class end products (Yamaha – Keyboard). Balancing – An ability to exploit excellence in one area is never imperiled by mediocrity in another (GE acquiring the CT scanning rights from EMI because of its inadequate market reach).
Conserving – Sustaining competencies over time through frequent usage. Resources are never abandoned; they are always preserved for future use. Recycling – Increasing the velocity of use of a competencies over time. As a result core competencies can be leveraged across an array of products (Sony - Betamax). It includes brand extensions as well. Co-Opting – Enticing resources of potential competitors to exercise influence in an industry (Fujitsu – IBM). Shielding – It involves identifying competitors blind spots and then attacking without having the fear of retaliation.
Recovering - It is the process of reducing the elapsed time between investing in resources and the recovery of those resources in the form of revenues via the market. Speeding – Prior to the 1980’s Detroit’s majors took an average of 8 years to develop an entirely new model; the Japanese reduced it to less than 4.5 years, with major new variants in 2 years. This envisaged Japanese players in giving customers more opportunities to switch allegiance and loyalty (Toyota). Protecting – It uses competitors strength to one’s own advantage, by deflecting it, rather than absorbing it as practiced in Judo.
INTERNATIONAL BUSINESS ENVIRONMENT 287 .
Emerging markets are characterised by infrastructural bottlenecks. institutional gaps.EMERGING MARKETS Emerging markets (India.e. 1997). Therefore. Diversified groups in operating in emerging markets therefore benefit from unrelated diversification. strategies suited for the developed markets may not be appropriate for emerging markets. 288 . Korea. China. Therefore focused strategies based on core competence may not be suitable for emerging markets (Khanna & Palepu. Chile) provide a different context (i. and high transaction costs. high levels of market imperfection).
Size & Scale. (2000) 289 . Concentric. Synergy. et al. subsequently negatively related across developed markets. Experience Strategic Fit Diversity Palich. Optimum level of diversification Performance Diversity is initially positively related with performance.DIVERSITY . Entropy).PERFORMANCE (I) Diversity attempts to measure the degree and extent of diversification (Herfindahl.
DIVERSITY .PERFORMANCE (II) Diversity is initially negatively related with performance. 2001) 290 . brand building Risk diversification. Huge initial investment. subsequently positively related across emerging markets. conglomerate power Threshold level of diversification Performance Diversity (Khanna & Palepu.
Characteristics – It should have a spread of affiliates or subsidiaries. It should have a spread of interest groups / stake holders. revenues and profits.INTERNATIONAL IDENTITY MNC’s consciously engage in FDI in different parts of the globe to forge resource diversity as a distinct competitive advantage. It should have a spread of manufacturing facilities. HSBC). 291 . act locally (Eg. It should have a spread of assets. It should think globally.
low power distance in developed markets and vice versa for emerging markets).It reflects the relative role of team building (Eg. 292 . low group scale in developed markets and vice versa for emerging markets). high feminity index in developed markets and vice versa for emerging markets). Risk Profile – It reflects the risk attitude of the top management (Eg. Group Scale .It reflects the disparities in women in workforce (Eg. low risk profile in developed markets and vice versa for emerging markets).GLOBAL BUSINESS ENVIRONMENT Power Distance – It reflects the disparities in income and intellectual development (Eg. Feminity Index .
currency.GLOBAL BUSINESS ENVIRONMENT Cultural Adaptability – It reflects the adaptive ability to a changing environment . 293 . interest rates. political stability. dress sense. terrorism (9/11). code of conduct. judiciary) of doing business in a particular country (Eg. customs. way of life. low country risk in developed markets and vice versa for emerging markets). credit rating. FOREX reserves. high cultural adaptability in developed markets and vice versa for emerging markets). corruption. inflation.culture. Country Risk – It reflects the political and economic risk (Eg. flexibility (Eg. attitude. time value.
in most emerging markets meetings are delayed and lasts unusually long. however. Other factors – local celebrations. 294 .GLOBAL BUSINESS ENVIRONMENT Time Sensitiveness – Developed country managers regard time as precious. time-zones. Ethnocentrism – Developed country managers tend to regard their own culture as superior. and vice-versa. in most emerging markets use of an interpreter may be a standard protocol. High levels of ethnocentrism usually has a negative effect on business. Language Barriers – Developed country managers expect foreign partners to communicate in their languages.
It also highlighted the nexus between US & WTO. It focused largely on TRIPS (patents. copyrights. In 1995 (Uruguay Round) GATT was renamed to WTO.GATT GATT was a bi-lateral treaty initiated between US and some member countries in 1947 to promote free trade. 295 . BRIC). The 2001 (Doha Round) focused on power blocks (NAFTA. trademarks). It also initiated provisions on anti-dumping. It a multi-lateral treaty with 143 (as on 2002) member countries to reduce tariff and non-tariff (quota) barriers. ASEAN. The 1999 (Seattle Round) saw a lot of protest amidst bringing agriculture under the purview of TRIPS.
primarily the OPEC countries. the Dollar still remains the most preferred currency globally. However. 296 .EURO – SINGLE CURRENCY In 1999 twelve member countries in Europe joined hands to move over to a single currency (i.Pound). the Euro slowly started outperforming the Dollar. Sterling .e. three countries joined in 2002 increasing it to fifteen members as of 2008.e. However with current recession in the US 2002 onwards. The notable exception was Great Britain which still continues with its local currency (i. Euro). The Euro was significantly devalued against the Dollar till 2002.
but it may have spill-over effects. Transparency – A single currency is transparent and competitive. Rate Uncertainty – A single currency eliminates the risk of competitive devaluations. a multiple currency is preferable where the business cycles of member nations are different. it helps avoiding transaction costs associated with a multiple currency. Trade Block – It will strengthen the EU identity which would not have been possible otherwise.SINGLE Vs MULTIPLE CURRENCY Transaction Costs – Though the initial cost of introduction of a single currency is very complicated and costly. 297 . However.
It is short-medium term with comparatively low levels of commitment.e. – FDI (transfer of tangible resources) is slow but steady for the purpose of economic growth.e.FII Vs FDI INVESTMENT Classical economists believed that foreign investment (in any form) is basically a zero sum game (i. It is long term with high levels of commitment. – FII (transfer of intangible resources) is fast but may have strong repercussions (i. 298 . Neo classical economists believe that foreign investment may in fact be a win-win game. hot money). the gain of one country is loss of another).
lifestyle (petroleum 299 outlets – departmental stores). Distribution – It depends on the market characteristics (fragmented – concentrated). buying patterns (spread).INTERNATION MARKETING Product – The various attributes of a product may receive different degrees of emphasis depending on differences in . customer awareness (microwaves). technology (microchip). promotion (surrogate advertising).culture (food habits). usage (talk time). Pricing – It depends on the competitive structure (PLC – Kellogg's). . economic (middle class buying power).
India) may be different from that another trading country (US – GAAP or IRS). debt is cheap in US. . Leverage – The leverage may vary across countries depending upon money and capital market conditions (Eg. Accounting Norms – The accounting norms of one country (AS . equity is cheap in India).INTERNATION FINANCE Currency Risk – Many Indian IT companies (Rs) having business in US (Dollar) are asking for quotes in (Euro) or are shifting bases out of US to avoid risk of devaluation of Dollar. Cost Structure – Companies in India need to investment in fixed costs due to poor infra-structure 300 compared to developed markets.
Recruitment – In local recruitment. in most cases it is not desirable nor practiced.INTERNATIONAL HR An uniform HR policy is idealistic to enable parity in performance appraisal. technology (convergence. skills are more important that cultural fit and vice-versa. double taxation. shortened life cycles). labour laws. Compensation – Differential pay packages exists because of differences in purchasing power. and cultural barriers (language) vis-à-vis emerging markets. social security. 301 . however. Training – It is a pre-requisite for international business to reduce language.
Technology – The cost to be evaluated in terms of latest technology (Euro VI) vis-à-vis effective cost of appropriate technology (Euro II). Outsourcing – A company having a core competence may be the source of global outsourcing (Eg. reduce power costs) vis-à-vis infrastructural bottlenecks. SCM – Use of ERP to network the extended enterprise 302 across the globe.INTERNATIONAL OPERATIONS Location Incentives – FDI in emerging markets should explore options for SEZ’s to explore benefits (tax holidays. . Bosch spark plugs are used by car manufacturers worldwide).
CONTEMPORARY TOPICS 303 .
it has destructive effects as well. innovation is the first attempt to carry it out in practice. Innovation is all about staying ahead of competition. but has inherent risks involved as well. While innovation typically adds value for organizations. Innovations typically paves the way for more secured and improved lifestyle for consumers in general. 304 .INNOVATION An invention is the first occurrence of an idea for a new product or process. Innovation is the most preferred strategy today to maintain competitive advantage in the present turbulent business environment.
305 . Process innovation usually follows product innovation.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. However. While product innovations are typically customer driven. 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. process innovations are organizational driven.
e. Drug Development (Bio Chemicals). Innovations are the back-bone of successful business models . Data Storage (Pen Drives). Medical Surgery (Lasik). Processors (Pentium).BUSINESS MODEL It is a simplified description and representation of a complex real world.e. It leads to a shift in the price – performance envelope. a paradigm shift). Disruptive business models brings in a new frame of reference (i. putting an idea into practice). Telecom (CDMA Technology). 306 . about how an organization makes money (i.
307 .NINE BUILDING BLOCKS Value proposition offered to the market. The revenue streams generated by the activities. The key activities / processes necessary for execution. The proposed relationships established with clients. The channels to reach out to the clients. The key resources and capabilities required. The key partners involved in the activities. The cost structure resulting from the business model. The segment(s) of clients to be addressed.
BUSINESS MODEL FRAMEWORK 308 .
With the rapid erosion of certain industries (IT. Real Estate) companies need to untangle and understand the intricacies of their business model. 309 . The revenue model described here are the means to generate revenues. It is just one piece of the puzzle.REVENUE MODEL Positioning is just not sufficient. Investment Banking. innovative companies to carve out unique business models to fend off competition. It involves – Product Visualization – Product Prototype – Product Test – Capacity – Pricing – Distribution.
Provide reasonable incentives (not necessarily monetary). 310 . Allow the workforce idiosyncrasies for their errors.HOW TO MAKE INNOVATIVE CO’S Innovative company’s are a matter of culture and aspirations rather than tangible resources. Allow the management sufficient slack to be future oriented. Promote the grape-vine. Promote the culture of experimentation. A favourable intellectual property (IP) climate. Have a lean and a flat organization structure.
311 311 .HOW TO PROTECT INNOVATION? Without adequate protection (external or otherwise) the effects of innovation does not translate to performance. In most emerging markets where the IP climate is not so favorable. The most preferred strategy of internal protection includes imbibing “causal ambiguity” in the production process to make reverse engineering difficult. Collusion with the judiciary is also another distinct possibility in emerging markets. however that possibility is slowly atrophying. companies are increasingly relying on internal protection to sustain innovation effects.
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. 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.
also known as the principal-agent problem or agency dilemma. According to the agency theory top managers and shareholders interests are usually conflicting in nature and tend to pull in opposite directions. shareholders can diversify their portfolio at a much lesser risk and cost. This exposes the shareholders to additional risks and higher costs. not present in portfolio diversifications.AGENCY THEORY The root of Corporate Governance goes back to the Agency Theory. However. From the strategic point of view managers tend to diversify into unrelated businesses as it provides higher returns hence a more favourable appraisal. 313 .
. SEBI Report – 2005. defines corporate governance (headed by Kumar Mangalam Birla) as the acceptance by management of the inalienable rights of shareholders as the true owners of the corporation and of their own role as trustees on behalf of the 314 shareholders. the US government passed the Sarbanes – Oxley Act. 2002 to restore public confidence in corporate governance.ORIGIN & CONTEXT Since the early 20th century since a large part of public funds were held by publicly traded firms in the US. various laws were enacted to ensure proper usage of these funds. After the Enron downfall.
The key roles of chairperson and CEO should not be held by the same person and their offices be clearly separated. 315 .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. Interests of other stakeholders: Recognize the legal and other obligations of all legitimate stakeholders. 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.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. 316 316 .
a person benefitting from a decision should abstain from it. 317 . they should provide no mechanism or scope for opportunistic behaviour. However. Regular board meetings allow potential problems to be identified. Balance of power: The simplest balance of power is very common. with its legal authority to hire. safeguards invested capital. fire and compensate top management.GOVERNANCE STRATEGIES Monitoring by the board of directors: The board of directors. discussed and resolved. Remuneration: Performance-based remuneration is designed to relate some proportion of salary to individual performance.
from 10% for companies where the regulatory backdrop was least certain (those in Morocco. The size of the premium varied by market. who had no management ties. undertook formal evaluation of its directors. Egypt and Russia) to around 40% for Canadian & European companies. 318 . McKinsey found that 80% of the respondents would pay a premium for wellgoverned companies. and was responsive to investors' requests for information on governance issues.GOVERNANCE & PERFORMANCE In its “Global Investor Opinion Survey” of over 200 institutional investors in 2002. They defined a well-governed company as one that had mostly out-side directors.
Therefore.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. Over a period of time. corporate philanthropy should be a part of every corporate mission. 319 . today economic institutions are considered as a major drivers of improvement in quality of life in general and therefore needs to include multiple stakeholders. the short-term view of profit maximisation gave way to a more broader and mediumterm view wealth maximisation of the shareholders. However. The basic premise is that firms cannot exist in vacuum.
CSR can be defined as. the debate on CRS still continues whether firms should detract its focus from its business? 320 . “an enterprises decisions and actions being taken for reasons at least partially beyond its immediate economic interests”. “a healthy business cannot exist in a sick and impoverished society”. economic and social responsibilities cannot be mutually exclusive. Therefore. in fact a large part of it is significantly overlapping.CORPORATE SOCIAL RESPONSIBILITY As Peter Drucker rightly pointed out that. Therefore. giving a very important message that one cannot exist without the other. However.
Fear of government interference: Excessive quench for profits may lead to build up of adverse public opinion compelling the government to intervene (Eg. 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. 321 . 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. MRTP).
CSR STRATEGIES Green Supply Chain Management: It includes environmentally preferable purchasing. 322 . Exide – Product take back). eco efficiency. and extended producer responsibility (Eg. Education. Tata Steel – Life Line Express).Paper packaging. Health & Hygiene – Attending the health hazards due to wastes and by-products to employees and society in proximity (Eg. designing eco-friendly products. Aditya Birla Research Centre – LBS). Refrigerators – CFC. Cement . Literacy & Training Programs – (Eg.
K. they're helping millions of the world's poorest people to escape poverty. They represent an enormous opportunity for companies who learn how to serve them. Strategic innovations leading to disruptive business models can show the way out. across the world's billions of poor people having immense untapped buying power. Prahalad notes that future markets exist collectively. In turn companies by serving these markets. C.BOTTOM OF THE PYRAMID With the market across most developed markets including the US getting saturated. 323 .
BLUE OCEAN STRATEGY 324 .
TWO WORLDS 325 .MARKETSPACE .
one companies gain is always at the 326 cost of another companies loss. competing head on results in nothing but a bloody red ocean of rivals fighting over a shrinking profit pool. Yet in today’s overcrowded industries. where most industries are saturated. and struggled for differentiation (cost or product). .WHAT IS RED OCEAN? Companies have long engaged in head-to-head competition in search of sustained. In today’s red oceans. They have fought for profits. profitable growth. battled over market-share.
WHAT IS BLUE OCEAN? Tomorrow’s leading companies will succeed not by battling in red oceans. but by creating blue oceans of uncontested market space ripe for growth . rendering rivals obsolete and unleashing new demand. It is only the frames of the . it will exist 327 in the future as well. Such strategic moves are possible through the pursuit of product differentiation and low cost simultaneously. Blue Ocean’s have existed in the past. It helps in creating powerful leaps in value for both the firm and its buyers.
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 .
Population shrinkage across a no. information imperfections atrophy instantly. of European nations. Demand across developed markets reaching a plateau. Technological advances have substantially 329 improved industrial productivity.BLUE OCEAN STRATEGY IMPERATIVES Prospects in most established market spaces – red oceans – are shrinking steadily. As trade barriers between nations & regions fall. . Niche markets & monopoly havens are continuing to disappear.
the underlying technology was often already in existence. Company & industry are the wrong units of 330 strategic analysis. They are not necessarily about technology. Incumbents often create blue oceans within the ambit of their core business. managerial moves are. .CONCEPTUAL UNDERPINNINGS Blue oceans have existed in the past and will exist in the future as well. 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).
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. Southwest Airlines: Pioneering the concept of LCC. Sony Play Station: Redefining machine-human interface in entertainment and targeting an altogether new user base. .SOME GLARING EXAMPLES In the last century authors Kim and Mauborgne have documented the creation of more than 150 blue ocean creations across 30 industries – Virgin Atlantic: Fractional jet ownership or travel to space.
WHAT THEN IS THE HANDICAP? Most of the traditional views in strategy having its origin in (Economic Theory) led to what is called the – structuralist paradigm. 334 . companies & managers are largely at the mercy of economic forces. All they need to do is change their managerial frames. According to this view. According to this view managers need not be constrained to act within the confines of their industry. greater than themselves. Off late emerging views in strategy having its origin in (Organization Theory) led to a paradigm shift to what is called the – reconstructionist view.
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